Benefits of trade to the OECS

By Brian M. Francis (Ph.D)


The economics literature is absolutely clear on the advantages and disadvantages of fixed exchange rate regimes.  One of the major benefits of such an economic system, especially in the context of a monetary union, as is the case with the member countries of the OECS, is the absence of risks and uncertainty about the value of the domestic currency.  Hence, financial transactions among the countries are easier to facilitate.  For that reason, trade in goods and services among the participating countries can flourish.

Well, it doesn’t require rocket science for anyone in the OECS to figure out that there is relatively little trade taking place among our countries, quite contrary to normal expectations based on economic theory.  To figure that out, just pick up any economic report from the OECS Secretariat, CARICOM, or international organisations such as the IMF and World Bank, and the evidence is there for all to see.  

Against that backdrop, the million dollar questions for us in the OECS have to be: What exactly has gone wrong so much so that trade among our countries is virtually nonexistent even in the presence of a fixed exchange rate for the common currency we have been sharing for decades?  Don’t we as a people understand and appreciate the benefits of trade to our countries?

To shed some light on these two questions, let me refer you to an article written by Stephen Kosack and Jennifer L. Tobin, entitled: “Which Countries’ Citizens Are Better Off With Trade?”  That 2015 article is published in World Development.

In the study, the authors ask: “What are the consequences of international trade for average citizen well-being?”  They answered: “On the one hand, increasing trade and government policies that encourage it might increase economic growth and the returns to productive human capital, thereby increasing both the incentives for governments and households to invest in productivity-enhancing human capital, as well as the resources for such investments. But on the other hand, these efforts to lower barriers to trade may erode important sources of tax revenue that governments can spend on social services, and may also lock in existing comparative advantages, increase wage instability, and decrease labour bargaining power—all dynamics that may decrease the incentives for governments to provide social services, as well as the resources that both households and governments have to increase citizen well-being. A generation of scholarship has provided a convincing case, both conceptually and empirically, for both perspectives.”

To this writer, the reason for the failure of member countries of the OECS to raise the level of trade among them is more closely related to the latter scenario described in the article.  And what is fascinating about that inference is that all of the concerns identified in relation to; for example, losses of important revenue to government, can easily be overcome with regional integration—a goal that we have set for ourselves a long time back!

Going forward, the benefits of trade to the OECS are quite obvious: higher rates of economic growth, greater returns to “productive capital”, reduction in poverty and overall improvements in the quality of life of the citizens of the sub-region. Why delay these potential benefits any further?


The great democratic delusion

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