Expert warns of dangers of devaluation
An international financial expert today warned that Barbados could be hit by a flight of foreign investment, if it decides to adopt some of the economic policies of the United States.
Associate Professor of Economics at New College of Florida Tarron Khemraj specifically cautioned that while the US would benefit from devaluing its currency so as to stimulate direct foreign investment, a similar move by this island would create major economic fallout.
“When America weakened its dollar, very rich people from other countries bought up American assets because they found it cheaper. So rich Russians, rich Brazilians, rich Venezuelans, rich Chinese, rich Europeans. Now if you [Barbados] devalue your currency, you would find that rich people would not be bringing their money,” Professor Khemraj told Barbados TODAY on the sidelines of a three-day seminar on monetary policy at the Grande Salle of the Central Bank of Barbados this morning.
The top global economist, who is the facilitator of the seminar, maintained that any lowering of Barbados’ currency peg of two to one against the US dollar, would worsen inflation and result in capital flight as existing investors move their money out of the island.
“So you would have the opposite effect, which is contrary to what the text books are predicting. So the purpose of this presentation is to think about the unique structures of our economies and develop knowledge based on those structures, rather than completely depending on the literature and the text books of the advanced world,” he explained.
Professor Khemraj, who is also Research Associate at the Caribbean Centre for Money and Finance of the University of the West Indies (UWI), further pointed out that devaluation would work for the US because it had a very large high-value manufacturing sector.
“So when the US dollar weakens . . . Caterpillar for example, did really, really well. Caterpillar exports [and] profitability increased. I don’t think there is a Caterpillar here.
Another thing you would find in the US is that Americans don’t need to go abroad for vacation and for studies. Americans don’t really need to buy foreign goods,” he stressed.
The economics professor stressed that consumption in the US remains at home, despite what happens to its dollar. “That is not the same in a country like Barbados, where your exports to GDP ratio . . . export plus GDP is over 100 per cent. So you would have fundamental differences in outcome if you pursued the same policies.”
He also said even though Barbados did not have as wide enough “wriggle room” as the US to run large deficits, he was optimistic about this country’s long-term future.
“I am optimistic. Barbados has done pretty well. . . . I think there is a general understanding that in academic literature Barbados has done better than it should have done in the last 40 years; so that’s a good thing.”
Professor Khemraj also gave the thumbs up to this island’s long-term trends.
“There is a lot to celebrate. We are actually in academia, studying Barbados as a model. I have not looked at the very short-term projections. I am looking at very long-term trends, 30 years for example. The trends in the long-term are on the right track,” the financial expert said.
He suggested that Barbados had a lot going for it, particularly with regards to its institutional structure.
In his brief welcoming remarks, Governor of the Central Bank of Barbados Dr Delisle Worrell drew largely on the academic works of various economic scholars, including Professor Khemraj to show that his insitution should always pursue policies to protect the value of the local currency.
Dr Worrell also noted that excess reserves did not encourage commercial banks to lend more money.
The seminar, which is being facilitated by the professor and attended by economists from across the region, will examine issues such as stylized facts relating to the financial systems of small, very open economies, short-term interest rates, imperfect competition in the foreign exchange market and future research projects for young economists.