It is no coincidence that economists and policymakers have long preoccupied themselves with the subject of economic growth, Nobel prize-winning economist Robert Lucas opined ‘The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them, it is hard to think about anything else[1].  The implications of economic growth, whether for better or worse, are enormous.  Since the late 1800s, the global economy has expanded at a steady pace and has become appreciably interdependent.  The increase in economic progress has brought with it many positives such as improved living conditions for masses of people across the world, life expectancy has risen, health standards, the quality of food and housing have all seen dramatic improvements.  Human capital and knowledge have increased, and the average person now has luxuries that early civilizations could not have dreamed of.  Therefore, economists and policymakers have preoccupied themselves with the subject of economic growth.  At the same time, economic progress has often been accompanied by externalities such as environmental degradation and social breakdown with negative implications for measures of national wealth.

The eight small island countries of the Eastern Caribbean Currency Union (ECCU) are among of the world’s smallest and belong to the longest-running currency board/monetary union in the modern epoch.  The Treaty of Basseterre 1983 established the ECCU.  The countries share a single currency and central bank.  Since 1978 (see Chapter XX for a discussion on exchange rate arrangements in the ECCU), the EC Dollar has been pegged to the US dollar providing a stable anchor for prices, economic and financial stability. 

The ECCU consists of eight countries, six of which are independent, two, Anguilla and Montserrat, are UK overseas territories.  The six independent countries gained their independence from the UK over the period 1974 to 1983, Grenada the first and St Kitts and Nevis the last.  The countries share many of the features of small island states, small size, openness, vulnerability to natural disasters, limited or no natural resources, and a very narrow economic base.  The region’s total population is roughly 620,000 persons, with a total landmass of approximately 1,200 square miles.  The Commonwealth of Dominica and St Lucia are the two largest countries at 290 and 239 square miles respectively, and Anguilla and Montserrat are the smallest at roughly 40 square miles.   Altogether the countries could fit comfortably into Trinidad and Tobago (1,981 sq mi).  On a population basis, St Lucia is the most densely populated at 184,000 persons with Anguilla and Montserrat having the smallest populations, approximately 15,000 and 5,000 persons, respectively.  In 2010 the countries deepened the integration process by creating a single financial space to allow for the free movement of capital in addition to the free movement of labour and goods.  Despite this, intra-regional trade is small, and labour tends to move to more prosperous countries.  The countries also share many functional areas of cooperation that lie beyond the scope of this paper.

Despite their challenges, the countries have experienced tremendous economic and social progress since the 1980s.  Per capita income and metrics such as the Human Development Index (HDI) are amongst the best globally, and rates of economic growth, though slowing, still outperform many other Caribbean countries.  The countries have also undergone significant structural change, transitioning from agriculture-based economies to more service-oriented economies, albeit some more successfully than others.  Since the collapse of preferential market access, the countries have transitioned to more service-based activities. Tourism, education and offshore financial services are just some of the areas the countries have embarked on.

The causes for the lacklustre economic performance over the last two decades can be attributed to a secular deficiency in aggregate demand, market frictions, low and slowing innovation, adverse demographics, lingering policy uncertainty, poor competitiveness and institutions, debt overhang, debt deleveraging, and some mix of all the above.  Naturally, these economies will face structural issues as they are extremely small, physically and demographically, which gives rise to diseconomies of scale and drives up the cost of doing business, ultimately weighing negatively on economic activity.  However, this prolonged period of weak growth weighs heavily on economic and social indicators in these countries. Moreover, policymakers remain concerned about weak growth outturns and the prospects for development of the region.

Thus, the paring of economic growth portends negative consequences for the region if not addressed with some urgency.  Against this background, businesses, governments and households can only be rendered sustainable via a return to steady, higher real GDP growth rates.  Much of the dialogue in policy circles reflects this thinking with an ongoing focus from organisations such as the OECS Commission, the ECCB, the IMF, and the World Bank on the need for growth-enhancing structural reforms and policies to raise competitiveness and ultimately boost long-term economic prospects for the region.

In this chapter, we set out to investigate the pattern of economic growth in the ECCU over the last 30 years and discuss policy priorities to boost and sustain economic growth over the long run.  Fundamentally, we ask what are the sources of growth in the ECCU? How have patterns of economic output changed over the last 30 years?  What factors account for the differences in observed growth rates between the ECCU countries and other small island states.

The structure of the chapter is as follows.  After presenting a descriptive overview of sectoral productivity patterns and the role of structural transformation in the ECCU in Section 2. We explain the two empirical frameworks for productivity growth in Section 3.  The results based on both frameworks are displayed and described in Section 4.  Finally, we discuss the results and draw conclusions and outline policy implications in Section 5.

Before progressing, it is necessary to present some definitions to fix ideas throughout the paper.  We define gross domestic product (GDP) as a measure of the value of all the goods and services produced in a country in a year.  GDP can be calculated as either the value of the output produced in a country or equivalently as the total income, in the form of wages, rents, interest, and profits earned in a country.

In this paper we borrow Kuznets definition of economic growth which he defines as,

“A country’s economic growth may be defined as a long-term rise in capacity to supply increasingly diverse economic goods to its population, this growing capacity based on advancing technology and the institutional and ideological adjustments that it demands. All three components of the definition are important.”  Immediately from this definition we notice that, unlike our usual perception of economic growth being the change in economic output between years, this definition focuses on how economic progress delivers increased economic goods to its populace. This definition somewhat overtakes our modern understanding of the term since we usually tend to focus on the change rather than the components or substance of the growth as Kuznets did early on.

As economies grow and develop, they pass through different stages of growth, whereby the sectoral composition and labour composition of growth changes. The causes of sectoral shifts in growth over epochs are a major concern for economists as they seek to design growth enhancing reforms.

Using GDP to measure a country’s well-being is not without its problems. Many aspects of economic well-being are not measured by GDP, and there are serious conceptual and practical problems in measuring and comparing GDP across countries or in a single country over time. Despite these drawbacks, however, GDP remains a rough measure of the standard of living.

[1] “On the Mechanics of Economic Development.” Journal of Monetary Economics. 22 July 1988, pp. 5

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