Grenada - Economy

Grenada - Economy

In the late 1980s, Grenada was in the midst of a lengthy economic transition following the downfall of the PRG government in October 1983. Although somewhat limited in choice by the country's economic resource base, the PRG and the parliamentary government of Blaize that followed opted for two distinct economic development strategies. The PRG's economic strategy was based on a centrally governed economy dependent on substantial Cuban assistance. The Blaize strategy was one that allowed market forces to regulate the economy, with financial assistance from the United States.

Bishop's PRG guided the economy into a phase aptly described as "foreign aid socialism," a form of socialism maintained by financial dependence on other socialist countries. Early PRG economic philosophy espoused a strong, diversified agricultural sector and government control of industry through cooperative management and nationalization. What actually developed was a program dependent on the construction industry for growth and on foreign grants for capitalization. Analyses following the removal of the PRG government suggested that the attempt at socialist transformation did not produce a revolution in economic development; there was no change in the distribution of income, and the standard of living actually declined slightly. This occurred because the PRG failed to develop a well-defined economic plan, managed economic enterprises poorly, and became overly concerned with political, rather than economic, priorities.

The Blaize government, by contrast, undertook a change in economic orientation emphasizing tourism and agriculture as the leading economic sectors. Private control of economic enterprises, attraction of both public and private foreign capital, and pursuit of a strong export trade were the fundamental elements of the development policy. This approach was in keeping with the economic realities of an island nation with natural resources limited to small amounts of arable land, natural tourist attractions, and an underutilized labor force. Because of this resource restriction, as well as limited domestic consumption, cultural and historical ties, and easy market penetration, Grenada's economy was naturally linked to the import markets of the United States, Britain, and the Caribbean Community and Common Market (Caricom--see Appendix C) countries.

Macroeconomic Overview

Aggregate economic production has increased steadily since 1983, a year in which there was an actual decline in gross domestic product (GDP--see Glossary) of 2.9 percent. GDP rose by 2 percent in 1984, 3.7 percent in 1985, and 4.3 percent in 1986. Continued growth in GDP between 4 and 5 percent is expected through 1990, provided the economy does not experience any major setbacks.

Many sectors of the economy contributed to the growth of GDP. In 1985 government services accounted for 26.6 percent of GDP, the largest share of aggregate output. Next came agriculture (16.3 percent), the wholesale and retail trade (15.5 percent), construction (7.5 percent), hotels and restaurants (6.4 percent), and manufacturing (5.8 percent).

Much of Grenada's new-found economic prosperity was attributed to the completion of the international airport at Point Salines in St. George's. In addition to boosting the construction sector, it provided an airport to support the expanding tourist and export trades. Manufacturing and agriculture, however, were also important. Preliminary figures for 1986 suggested that manufacturing actually grew for the first time since 1982, and higher prices for agricultural products more than offset slight declines in production. The rise in government services also contributed to GDP figures, registering an increase of 11.2 percent in 1985.

Government figures, although incomplete, indicated that there was a concomitant rise in employment with increased production; nearly 4,000 new jobs were created in 1986. Unemployment, however, remained high, averaging between 20 and 25 percent in 1985, but it was moving in a downward direction after peaking in 1984 at 28 percent. Government plans to reduce the public payroll by 1,500- 1,800 personnel--announced in 1987 but not yet implemented in late 1987--would further exacerbate the unemployment problem. Agriculture was the largest employer, providing between 25 and 30 percent of all jobs.

The government was counting on the continuing structural adjustment (see Glossary) in employment to absorb newly displaced government workers, as well as many of the perpetually unemployed. Tourism and manufacturing were expected to take on larger portions of the work force. This adjustment actually began shortly after World War II as the number of workers employed by the agricultural sector began to decline. The manufacturing sector experienced uneven growth after World War II; however, in 1986 it showed signs of growth. Because of strong growth in tourism, the unemployment burden was partially alleviated in 1986. Although the structural change away from agriculture as the dominant employer was Grenada's best hope for development, it did not guarantee relief from chronic unemployment, which was the direct result of high birth rates and long-term overpopulation.

Inflation was the only macroeconomic indicator that improved throughout both the Bishop and the Blaize governments. The most dramatic downward movements in consumer prices occurred after 1984. Inflation as measured by the change in consumer prices remained the same for 1980-81, at 10.6 percent. The index fell in 1982, with prices rising only 6.9 percent; this dropped to 6.5 percent, 3.6 percent, and 1.8 percent for 1983, 1984, and 1985, respectively. The government of Grenada recorded an actual decline of 0.8 percent in the general price level for 1986.

Although the government took some credit for lower inflation rates, the decline in food and fuel prices in 1985 was largely responsible for the overall reduction in inflation. Although the government was in a position to select fiscal and monetary policies designed to minimize locally produced inflation, domestic prices were very dependent on world inflation and the international prices of Grenada's primary imports.

Banking and Finance

In 1987 Grenada, as a member of the Organisation of Eastern Caribbean States (OECS--see Glossary), was a member of the Eastern Caribbean Central Bank (ECCB), which was headquartered in St. Christopher and Nevis. It was bound by the ECCB's general guidelines on money supply and bank regulation and used the Eastern Caribbean dollar, which was pegged to the United States dollar at a constant exchange rate of EC$2.70 equals US$1.00. This relationship had some unusual effects on Grenada's international transactions. Because Grenada's exports were sold to numerous nations, the strength of the United States dollar in relation to other foreign currencies affected the ease with which Grenadian exports were sold.

In the case of a strengthening dollar, the Eastern Caribbean dollar would also appreciate with respect to other world currencies. This would cause Grenadian exports to become more expensive in the world market, while imports would become less expensive and more competitive with domestically produced goods. The overall effect would be to reduce Grenada's terms of trade, negatively affecting its balance of payments position. The reverse situation would have the opposite effect, strengthening Grenadian exports abroad, which would discourage the purchase of imports and improve overall terms of trade and the balance of payments. This situation occurred in 1987 as a result of the depreciation of the United States dollar in world currency markets.

The financial needs of Grenada were served by numerous public and private institutions below the central bank level. In 1985 the commercial banking system included four financial institutions, two of which were controlled by the government. The system was a holdover from the PRG, which chose to absorb all but two commercial banks into the public sector. The Blaize government slowly returned financial intermediation (see Glossary) to the private sector and intended to solicit proposals in 1987 for the sale of the remaining two publicly controlled banks.

Credit was extended for development projects through the Caribbean Financial Services Corporation, which provided long-term funds to new businesses through AID, the Grenada Development Bank, and the Grenada Cooperative Bank. Foreign investors provided much of their own funds for capital-intensive investment. The government planned to establish a merchant bank in 1987 to facilitate lending to new small business ventures.

Role of Government

The Blaize government played only an advisory role in the economy, preferring a market-oriented system to the tightly controlled economy of the previous government. The government saw its role as one of overseeing the privatization of the economy and assisting national development through public sector investment, as well as through monetary and fiscal policies.

The government's principal role as overseer of public enterprises and manager of infrastructural development was coordinated through its program of public sector investment. The purpose of this program was to coordinate private sector and public sector development efforts to maximize the potential for national economic growth. This was accomplished by providing direct assistance to the productive sectors, while also supporting them with infrastructural development. In 1985 investment in the public sector focused on three major areas: the productive sectors of agriculture, tourism, and manufacturing; physical infrastructure, such as roads; and the social sectors, principally health and education. Seventy-four percent of the funds were placed in infrastructural projects, including roads, water and sewerage, communications, and energy. Agriculture commanded 12 percent of the funds invested in productive resources, and education, health, and housing received a combined total of 7 percent of public funds.

Major improvements to communication and transportation facilities were attributed to public sector investment. Domestic and international communication systems on Grenada were considered good in the mid-1980s. The Grenada Telephone Company served all parts of the island with a 5,600-instrument automatic telephone system. Radio-relay links to neighboring islands provided highquality international telephone and telex service. St. George's had one government-owned AM radio station broadcasting on 535 kilohertz and one television station. The principal local newspaper, the Grenadian Voice, was independent and was published weekly.

Roads were the primary mode of local transportation. Grenada had approximately 900 kilometers of improved highways, 600 kilometers of which were paved. Of the two principal roads, one followed the coastline and the other bisected the island, connecting St. George's and Grenville. Municipal buses and taxis linked all areas of the island. There were two airports on the island: Point Salines International Airport in St. George's and the older Pearls Airport, located north of Grenville. Grenada had no railroads or inland waterways and was serviced by ports in Grenville and St. George's.

Future allocation of funds called for a greater emphasis on the productive and social sectors; total expenditures on infrastructure were to be reduced to approximately 47 percent of the public sector investment budget. Such allocation was expected to assist with Grenada's development over the long run, but allocation was vulnerable to regional and economic politics because it depended on the government's ability to attract sufficient foreign capital. Although financing of capital expenditures was to be accomplished using foreign funds on a matching basis, all financing of the 1985 budget came from external grants and loans.

The government's role as public enterprise manager diminished after 1986 because of its desire to see the private sector control as much of Grenada's economic assets as possible. Among the twentynine public sector enterprises existing in that year, only five were slated to remain either partially or totally controlled by the government. These included three utility companies that provided water, electricity, and telephone service.

The government's role in the economy also included the formulation of monetary and fiscal policies. In the case of monetary policy, however, the government was constrained by its reliance on the ECCB for controlling the money supply. This forced the government to rely heavily on fiscal policy to guide the economy.

Fiscal policy was a major government mechanism for encouraging economic development but became very controversial in 1987 with the introduction of the national budget. It provided for an entirely different tax structure in which a value-added tax (VAT--see Glossary) replaced virtually all other taxes, including personal income taxes, export duties, and consumption taxes. The primary purpose of the VAT was to raise funds to correct the budget imbalance, while simplifying attendant collection and oversight responsibilities. A reduction in inflation and increased domestic savings and investment were also expected to result from the new tax strategy.

These goals were to be achieved by encouraging individual production, while simultaneously discouraging immediate consumption in favor of increased personal savings. The elimination of the personal income tax would make more money available to wage earners and give them a greater incentive to work. Consumption would be penalized with a 20-percent VAT placed on all domestically produced goods. Many essential items, such as food, were exempt from taxation. The resulting increase in personal savings would then provide a resource base for domestic investment, while also reducing aggregate demand and placing a check on inflation. In early 1987, the VAT did not appear to be succeeding. A large government deficit was projected because of a decline in aggregate tax revenue, and political repercussions were also apparent.

Opponents of the VAT argued that it penalized domestically produced items that faced regional or international competition. In some cases, for example, Grenadian rum products, imported substitutes immediately became less expensive. Such a turnaround forced the government to make many concessions in the VAT, which reduced revenue needed for central government operations.

The VAT was created to correct the government's budget deficit that had persisted throughout the 1980s and had been financed by external grants. Nonetheless, it appeared that this problem would not be solved in 1987 because the VAT was not capable of generating sufficient revenue to cover government expenses. Alternative measures would have to be found, however, because continued reliance on foreign aid to solve fiscal shortfalls was not a longterm solution.

Foreign Trade and Balance of Payments

Grenada's exports of goods and services grew rapidly after 1983. The primary foreign exchange earners were agricultural products and tourism, which together accounted for 85 percent of all goods and services sold to foreigners in 1985. Revenue from tourism was US$23.8 million, slightly higher than earnings from agriculture, which reached US$20.1 million; clothing and other exports amounted to US$1.8 million.

Leading agricultural exports were fresh fruits and cocoa, which accounted for 52 percent of total merchandise exports. Nutmeg, bananas, and mace followed, capturing a total of 40 percent of total goods exported. Textiles accounted for only 3 percent of merchandise sent abroad. Miscellaneous items composed the remaining 5 percent.

Grenada's chief export markets were Western Europe, Caricom, the United States, and Canada. Western Europe accounted for 52 percent of Grenada's exports in 1984, most of which went to Britain. Caribbean countries provided markets for approximately one-third of Grenada's exports; Trinidad and Tobago imported the most. The United States and Canada absorbed 6 percent and 2 percent, respectively.

Food consistently composed 25 to 30 percent of the island's imports from 1979 to 1983. Other significant items purchased abroad during this period were machinery (15 to 20 percent), fuel (10 to 15 percent), manufactured goods (10 percent), and other miscellaneous manufactures (10 percent).

The principal sources of imports were the Caricom countries, Britain, the United States, Canada, and, more recently, Japan. Caricom economies provided nearly one-third of Grenada's imports during the 1980s; oil from Trinidad and Tobago accounted for twothirds of Caricom imports. Manufactured goods and machinery generally came from the United States and Britain, whereas Japan furnished many of Grenada's automobiles.

Imports of goods and services exceeded exports in 1985, causing a deficit in the current account of US$29.4 million. Historically, Grenada has had a nearly offsetting surplus in the capital account in the form of public borrowing or official foreign government grants.

Imports of goods and services increased in 1984 and 1985 because of greater demand for food, fuel, and manufactured goods, which contributed to the 1985 current account deficit. The United States provided over US$20 million in direct grants to Grenada in 1984 and 1985 to offset the deficit. This aid gave Grenada a positive overall balance of payments and allowed it to make substantial repayments to the International Monetary Fund (IMF--see Glossary) and the ECCB. Grenada still maintained a foreign debt of US$48 million in 1985, which represented 92 percent of exports. Debt service payments were US$8.3 million, or 16 percent of exports.

Informed observers expected Grenada's current account deficit to hover around US$30 million at least through 1990, in spite of the expectation that exports would more than double in this period. Plans called for Grenada to replace foreign grants with private investment to maintain a positive overall balance of payments, provided that tourism and agriculture continued to grow at anticipated levels.

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