Full transcript below.

In this conversation, Rasheed and Diego sit down with Tyler Cowen to think through a question that sits quietly beneath much of today’s political noise: what actually compounds?

We begin in Spain, with a debate about regulating social media. But the real subject is not technology policy. It is institutional trajectory. How states expand. How societies adapt. And how temporary moral panics can produce permanent structural shifts.

From there, we widen the lens to the Americas. The United States and Latin America are integrating more deeply — demographically, culturally, economically — whether policymakers fully grasp it or not. Yet integration is not the same as understanding. Elites talk. Voters react. But knowledge often remains shallow, filtered through tourism, headlines, or ideological shortcuts.

A recurring tension runs through the episode: spectacle versus steadiness. Some countries produce extraordinary cultural vitality alongside recurring institutional fragility. Others appear dull but quietly accumulate gains. Growth in the low single digits may not satisfy reformers or revolutionaries, yet over decades it transforms societies more reliably than political drama ever does.

We also explore cities that are unexpectedly outperforming, the moral case for economic growth, the thinning — or perhaps evolution — of modern liberal thought, and how literature and cuisine reveal deeper structural truths about nations. Culture, in this conversation, is not an ornament. It is evidence.

If there is a shared thread between us and Tyler, it is this: Latin America is neither doomed nor destined. It is constrained in some places, underrated in others, and more dynamic than standard narratives suggest. The same may now be true of Spain.

The deeper question is not who is rising or falling this year. It is which societies have found an equilibrium that can endure — and which are still mistaking drama for progress.

Rasheed: Hi everyone, and welcome back to the podcast. Today, Diego and I are actually joined by Tyler Cowen, who needs no introduction to listeners of this podcast. So that being said, the first question. I think Diego can start with the first question this time.

Diego Sanchez de la Cruz: Well, first of all, great to have you on Tyler. And look, Spain is considering a ban on social media for minors. Our Prime Minister has written an oped at the New York Times discussing why this is a good idea, and this government is not popular, but this idea seems to be quite popular. So please walk Spanish listeners and viewers through why this idea that may sound well-meaning actually is not at all something that we should be pursuing.

Tyler: I view it as a restriction on free speech. Once government gets its hands more on the internet it won’t stop. So for instance today the day we’re recording Discord announced that to get fully on Discord you have to produce full ID or somehow prove, demonstrate who you are. So anonymous posting is going away. This is for adults also. Once you start down the road of verifying a person’s age eventually you have to do it for everyone. Now I know people are concerned about the effects of social media on the mental health of younger persons. That’s a legitimate concern. I think it is up to the parents, not the government. But also any new communications technology there’s typically an adjustment period before people figure out how to use something properly and we’re going through that with social media. So I’m less worried than many are. And furthermore if you look at the very best research designs, basically they show there’s at most small effects on mental health of say teenagers. And the smartest most accomplished teenagers, that’s what they use to meet each other and to talk and become scientists or have startups at a young age. So if you truly could keep them off social media there’s a big cost to that as well. And people are not talking about the costs So those in a nutshell would be a few of my reasons.

Diego Sanchez de la Cruz: Rasheed, I was just watching the Bad Bunny halftime show at the Super Bowl, and I know you had some questions about the US and the Hispanic influence.

Rasheed: Yes, I did have a question about that. Tyler, right now, the US is one of the largest Spanish-speaking populations in the world. By some estimates, actually more than Spain. And with someone like Mark Rubio coming to dominate national politics, some early polling for the next election kind of shows he might actually become president.

And then just now you have a Bad Bunny dominating American culture without actually speaking English at the Superbowl show. And then Miami, some people like Patrick Collison say, is most dynamic place I’ve seen in the US in sometimes. So, at what point do you think it’d be useful analytically, to refer to the US in functional terms, as a Latin American country?

Tyler: It is right now. You mentioned the number of Spanish speakers we’re becoming much more interested in what you might call Latin America. In the Democratic party AOC is a leading candidate to run for president. She has a Hispanic background. when you look at foreign policy whether you like it or not it’s an area where America can do things and has a reasonable chance of succeeding. So Venezuela, Cuba on the agenda. Plenty is gonna happen over the next few years I hope it goes better rather than worse. Mexico is our eternal neighbor and will always be important to us. So the fundamentals are on the side of people thinking and talking much more about Latin America over time. When I say people Americans, but of course in Spain too right? Your own migration streams show this.

Rasheed: That’s right. And do you think there actually has been, you know, from your perspective, a meaningful increasing good conversations regarding Latin America or just more of an elite conversation?

Tyler: I think there are many more conversations about Latin America I don’t think many of them are good. One problem is that the non-Latino North Americans typically do not know Spanish. Another is that they tend not to be widely traveled in Latin America. Large numbers of them have been to Cabo, have been to Cancun, have been to Costa Rica, maybe Buenos Aires. It’s not that they haven’t been anywhere. But those are in some ways misleading pictures. And to simply do something like go to Comayagua in Honduras which no one really thinks or talks about and you’ll learn a lot more than the trips most people take. A few days ago I was offering to take someone on a trip to El Salvador for three or four days, as indeed you and I have done with a few others Rasheed. You’re seeing real stuff when you do it that way. There are plenty of ways to see real stuff that are quite safe, and North Americans unless they’re from those places, are dreadfully behind on that score.

Diego Sanchez de la Cruz: We’ve been arguing for the need to bridge that gap and communicate more among Spanish and non-Spanish audiences in the Americas. One of the things we’ve talked about though, is how some of your writing resonates beyond demographics, of course. And some of your books that have not been translated to Spanish have had indeed some influence at the intellectual level.

I’m more specifically referring to “Average is Over” a few years ago and more recently, “Stubborn Attachments”. Now, I’m curious to know which ideas would you pour into these two books do you think still hold and still stick to this day?

Tyler: Let me first note, I think both of those have been translated into Spanish. So “Stubborn Attachments”, there’s a not very well-known Guatemalan edition.

Tyler: I believe it’s come out or is in some way available. And then “Average Is Over” I don’t remember the Spanish language title but I think that’s in Spanish language. But again a lot of the people from those countries probably just read it in English earlier on. My main argument in “Average Is Over” which is from 2013 is that artificial intelligence is going to revolutionize the world and end our productivity crisis. I think that prediction nowadays looks very good. I was one of the first people to be making that claim and I go in detail through how I think the world will work and you will need to be what I call a centaur that is very good working with AI. And the people who are very good working with AI will do incredibly well, and if you’re not you’ll have to make a lot of other adjustments. Now “Stubborn Attachments” is a book from 2018 with Stripe Press and there I argue that what’s really important for human wellbeing is economic growth. Economic growth should be a moral imperative that’s a very important point for really all of Latin America but any country. If you look at East Asia say, which to a considerable degree has realized its potential, many more countries should be trying very hard to follow in their footsteps

Diego Sanchez de la Cruz: You mentioned El Salvador, Rasheed. I know you guys went on a trip there and I know you have some questions.

Rasheed: Tyler, if El Salvador were to become a success story, what would it likely be a success at first? Manufacturing, migratory investment, investment tourism, or something more unusual? Because those typical answers feel like maybe they have missed the boat.

Tyler: I think El Salvador has turned itself into a very safe country which is great news. I think you and I both saw that when we were there. I think under all scenarios they have a very hard time becoming much richer. So I don’t think it’s manufacturing through no fault of their own. But most of the world is de-industrializing. So manufacturing is not a source of growing employment due to automation. But there’s other issues for Central America such as scale and the cost of electricity. El Salvador is not the best in Latin America for either of those compared say to Northern Mexico. So I don’t see what its relative advantage is. And it’s just a small place. I checked with ChatGPT. O

ne estimate places about third of the population, living in the United States on average. That’s probably the more ambitious, one third. So there’s considerable brain drain. I do think in terms of levels they can do much more with tourism. They have an entire Pacific Coast which is quite underdeveloped, and could be developed very fruitfully. Sell condominiums, have people do more surfing. Try to have something a bit more like the next Acapulco, but even there you’re competing against Cancun among other locations and it will boost their level but it won’t be a permanently higher rate of growth.

And that’s the case with many touristic developments. They don’t self compound forever and give you many other productivity improvements. So I expect El Salvador to do much better but I know a lot of people who read Bukele on social media and they think it’s about to be the next Singapore or something and I just don’t know how they’re gonna do that under really any scenario. I do think it will improve and they’ll get more foreign investment and more tourism.

Rasheed: How much is “much better”? That’s doing a lot of work there.

Tyler: When you look at the Pacific Coast and you and I sat right next to the water. So that could create quite a few jobs. But in the longer term steady state I think they’ll have a hard time averaging more than 2% growth. So they can attach themselves more closely to the US economy. They use the dollar and let’s just assume their governance does not go crazy. That’s another risk right? So Bukele or whoever succeeds them could overreach. The checks and balances the constitutional protections there seem quite weak. Another possible risk there that even despite his best efforts the country becomes dangerous again. You look at Costa Rica which had been quite safe and did all the right things, and is larger and has many more resources and that’s now becoming a more dangerous place because it was targeted by external, in some cases Mexican drug traffickers. And that could happen to El Salvador as well. So even if think the current campaign is gonna work forever it doesn’t mean the country stays safe forever. It’s not really in a very safe region. So that’s a side risk which will also keep down foreign an investment. I don’t know I’m I am definitely seeing the upside but not super duper optimistic there.

Diego Sanchez de la Cruz: That cycle of violence that you bring up it’s a common and very recruiting topic in many Latin American countries. You think the worst has ended. You think that things are ticking up and then boom you end up right at a bad place. Colombia comes to mind with so much advancement from the two thousands all the way up to the mid 2010s.

But the situation right now, it’s obviously worse. Ecuador also comes to mind, traditionally very safe compared to other regional standards. Right now I think it was ranked last year among the 10 countries with the highest homicide per capita rate in the world. So I think you make a very good point there.

This idea that crime is gone, well it’s gone for now, but don’t take that for granted. Rasheed has some interesting follow up.

[00:12:13] Tyler: Very few of these nations have really completed what we call nation building

[00:12:19] Tyler: You could say Uruguay has. Even Costa Rica never quite did. So Uraguay, Chile, I would say Argentina. Panama’s complicated. It’s certainly gone well but it does feel to me like about five different countries. Only parts of the Southern Cone have done that and I think that’s why violence keeps on reemerging.

[00:12:51] Rasheed: I do have some Panama questions. We’ll definitely get to that. I don’t think people talk enough about Panama. But before I do that, I do have this other question.

[00:13:03] Rasheed: Colombia we’ve mentioned a bit. Given you don’t drink coffee, Tyler, I’m curious if there is a feeling about how much cultural code you can crack in Columbia.

I mean, I could also say the same about Ethiopia, but we’re gonna ask for Colombia.

[00:13:28] Tyler: I’ve been to Colombia, I think four times. Every part of it I go to feels like a different country. If someone told me I went to a new country I just would nod my head and continue along my way. It’s not very well connected ideologically, politically, socially it’s quite scattered. There’s Bogotá that feels like its own country and they’re very pro-business, the people pro-American. Until Petro they often made some decent electoral choices but it never fell into place for them. But oddly enough in spite of all that violence for decades they had pretty steady economic growth. When you go around Colombian cities parts of them look pretty developed from a retail point of view. I’ve always been optimistic about the place, so I’m hoping that the policy retrogression under the current government is temporary and they can just keep on something like 3-4% growth. You mentioned Ecuador and there’s also Peru which is a mess. Peru is still projected to grow 3-4% this year under conditions that if you describe them no one would be happy about. Ecuador could be growing 2.5-3% under normal projections. That’s hardly spectacular or impressive. But if you can be that much of a mess and still grow and I think Colombia’s in that position, the optimistic scenario is they just keep on growing pretty steadily and eventually they can afford to clean up the whole mess. And I’m always hoping waiting It’s never come I wanna see it happen before my time on Earth is over. I’m no longer sure I will, but in my heart of hearts I say if they can grow 3-4% under these conditions ultimately they’ll cross the threshold That’s my bold case for many of these countries.

[00:15:21] Rasheed: I wanna bring back a question that you actually asked Brian Winter some many podcasts ago where you asked him “If you you, and let’s say your wife, you’re 30 years old, you had children and you were to move somewhere in Latin America. You speak Spanish also Portuguese. You have young kids. Where would you move to?”

[00:15:51] Tyler: Putting aside what my job might constrain I believe the best place to live would be Panama City. You have a lot of very good air connections to the rest of Latin America and the US. It’s safe enough. Panama City is a real city, there’s good food there, no obvious big downside. Buenos Aires is a competitor but there’s too much economic trouble and I don’t feel it’s entirely cleaned up by Milei. And there’s just more purse snatching there than say in Panama City. Chile is a contender but it feels provincial to many outsiders, in that if you’re not part of the Chilean elite circle that gets together and takes tea and eats cake together it’s a little boring. So I think I’d say Panama City. My personal love is Mexico. Where in Mexico? I’m a little stumped. I don’t think Cuernavaca is a crazy pick. And even Mexico City is much safer than it used to be. So they would deserve serious consideration. But for the time being I’ll say Panama City.

[00:16:59] Rasheed: Well, I think that’s the correct answer. I would add, Panama City has very good and not expensive private international schools for children. And that is a, I think a very big win, especially in Latin America. You have that much more cosmopolitan education. And again it’s actually a very good price. So I think it’s point that people tend to not obviously know. Diego you must have some follow up on that.

[00:17:42] Diego Sanchez de la Cruz: Panama, if you want to throw your hand in there, Rasheed because we always go back and forth about how it may be the country that gets overlooked the most whenever we just venture into the regional conversation. It has GDP per capita according to some of the most recorded measures.

But it ranks quite poorly also when you talk about, you know, corruption and good governance. So on the one hand that would seem like a concern. On the other hand, it would seem as okay, the politics are maybe not that clean, but it doesn’t seem to affect the, the overall wellbeing of the country. So, Tyler, I don’t know how you feel about that.

Is that a paradox or is it just coherent because we just have the church and state, or in this case, politics and the market separated enough, so as for corruption not to affect economics that much.

[00:18:28] Tyler: It just could be that a lot of countries in the world are becoming more corrupt, that’s bad. But in relative terms it will not militate against Panama. I think an important factor that for me would be a plus, is just that Panamanian culture is not itself that strong in a way. Your kids will not grow up as Panamanian. They’ll grow up as say American, North American if that’s what you are. Whereas if you bring your kids up in Mexico, Mexico is a huge strong vibrant intoxicating culture. There’s nothing wrong with having your kids be part culturally Mexican but it’s a choice. In Panama City it feels to me a bit like bringing your kids up in Dubai. Your kids are not gonna grow up to be Emirati per se, they’re gonna be Swiss if you’re Swiss or English if you’re English and so on. It’s an advantage and or and disadvantage of living there. It’s why I personally would prefer Mexico but I think for the kids they’d be better off in Panama.

[00:19:24] Rasheed: My husband might have some arguments to give.

[00:19:29] Tyler: He’s not really gonna contradict me is he?

[00:19:33] Rasheed: Probably not. Probably not.

[00:19:37] Tyler: You think about something like Panamanian music, cuisine cinema, there’s not that much. People talk about Mexican slang. They don’t talk about Panamanian slang. I’m sure there is some. You go to David in the north it’s just completely different, or the Caribbean coast. I think it’s a very weak national culture. That’s not true in Mexico at all. Mexico has strong regional cultures but there’s something fundamentally national about it.

[00:20:17] Tyler: I don’t go for Lucho Libre and so on but you can imagine your kid doing that.

[00:20:23] Rasheed: Diego, you want to add something there?

[00:20:25] Diego Sanchez de la Cruz: Well, my son actually loves Mexican Lucha Libre, so, and he’s not even been to Mexico yet. So obviously it is a very national and differentiated culture. And I can see how that comment that you made may actually be a limit on the growth on the appeal of Chile, which in fact is indeed a very well established economy in many areas.

It is much more developed and solid than most countries in the region, but there is that certain provincial feeling of the elites, and that can indeed be a limiting factor. We’ve argued too about how Madrid here in Spain is booming, thanks to not having such a strong of an identity as perhaps Catalonia and Barcelona, where that identity has actually proven to sort of exclude talent flocking and not make them feel at home.

But before we move on over to this side of the ocean I think Rasheed, you had some questions about coffee that you wanted to, to throw out, right? Best coffee in the region. I think it was.

[00:21:26] Tyler: I have no questions about coffee. Do you Rasheed?

[00:21:29] Rasheed: I had a question about coffee. It was the early one about Colombia. Especially this country that has a very strong coffee culture, Ethiopia is actually probably even stronger than this. Given that you don’t actually partake in coffee, do you actually lose something from understanding the actual cultural codes that are so in ingrained in detail like Colombia, parts of Brazil and Ethiopia as well?

[00:21:57] Tyler: Sure. Maybe it’s more important is that I don’t drink alcohol. I probably lose a lot more that way. Because people become more different when they drink alcohol than when they drink coffee. On the other hand I pick up things that other people don’t and in a world with division of labor if I combine my knowledge with theirs I still like my approach. If I were the only person doing it that would suggest I should drink some more.

[00:22:20] Rasheed: Yeah.

[00:22:21] Diego Sanchez de la Cruz: So you mentioned dollarization when we were speaking about El Salvador and Panama is also doing quite well thanks to that monetary stability. Argentina, should it dollarize? What do you think Milei should be doing to advance the agenda? ‘cause he’s done quite good in these first two years, but a lot of room for maneuvers still.

Still a lot of room for improvement as well. What do you think should happen with the monetary policy?

[00:22:47] Tyler: If they could dollarize that would be fine. But I saw an estimate about two years ago that it would cost them $30 billion. That number’s probably changed. It’s still a lot of money for them and I don’t see where they’d get it. So it’s a fine system for them. It’s worked well for Panama, El Salvador and Ecuador but it doesn’t solve the basic problems of those countries. And Argentina’s basic problem is fiscal. And for all the good things Milei has done, their hole is so deep and they’re still not in the clear. They rely on volatile commodity prices. They claim balanced budgets every 10-15 years. They always turn out to be wrong when commodity prices collapse. Their reserves typically are quite low compared to say Brazil per capita and they have terrible interest groups who are very willing to take to the street. And I don’t believe those problems have really gone away. I don’t blame Milei at all for them but whether he can be in there long enough and do enough to change the political culture, to truly put them on a sound fiscal footing I would say is still very much an open question.

[00:23:55] Diego Sanchez de la Cruz: You had some interesting comments about Argentina as we were preparing for the podcast, so.

[00:24:02] Rasheed: I mean, I have, I have many things one could say about Argentina. But Argentina has these extreme cycles that really revolve wrong political drama. And then I think also famously Argentina over produces psychoanalysts. It’s actually the highest per capita in the globe. I’m curious, is there some underlying trait between extreme political drama and this extreme need to psychoanalyse yourself all the time?

[00:24:35] Tyler: Absolutely. And this gets to the import of culture, the obsession with Ava. There’s something about Argentina that for a long time has been psychodrama. It helps them produce so many excellent writers and dramatists so it has an upside but the country is a soap opera. The people have a reputation for being quite narcissistic. Maybe that’s a superficial way of describing it because they also have this incredible ambition. They’ve created quite a few unicorns even if those are realized in other nations besides Argentina. But yeah drama there is high. I would say that in Mexico tragedy is high, tragic drama. Argentina is like soap opera drama. And they’re both problems when it comes to public finance. Chile drama is very low right. A sort of boring point. But it does mean they can stabilize things.They’ve gone through some terrible political events. “We’re gonna rewrite the constitution.” “We’re gonna elect all these leftists.” “Some big chunk of us are gonna pretend we’re totally woke.” But they’ve actually gotten through that okay. And none of that was ideal. But it’s remarkable that they’re now back on some other track again and still have a chance to themselves. Boring can be good.

[00:26:01] Diego Sanchez de la Cruz: Costa Rica is an another political system known for being, you know, very boring, not much going on. And Chilean Nobel Prize in literature winner, Mario Vargas Llosa, argued that they were “exercising their right to idiocy” after getting things right for many decades. The thing is they did exercise. They did not actually change their constitution and things seemed to be swinging back into more sensible policymaking. So we wanted to also bring the conversation a bit closer to Spain.

[00:26:33] Tyler: One thing on the Caribbean… Dominican Republic I think is relatively quite boring compared to say Trinidad or Cuba or Haiti. But it’s done better right? So that’s another example. But anyway back to Spain.

[00:26:46] Diego Sanchez de la Cruz: Well, before we go to Spain, let me tell you that every single socialist government scandal in Spain seems to end up in the Dominican Republic. Although we thought of it as quite a boring country, the recent developments are showing up, that might not be the case.

[00:27:05] Tyler: I wouldn’t say their politics is boring but just being in the country to me is a little flat. It’s really pleasant, I love the beans. People are super friendly, great weather, awesome beaches. But I’m way thinking “oh I wanna go to Trinidad again rather than the DR.” Or Haiti, I’ve been to Haiti five times and the DR twice. What does that tell you?

[00:27:28] Diego Sanchez de la Cruz: Yeah, well, Madrid Rashid calls it home for two years now. I moved here when I was 18. I’m 37, so more than half of my life here already. And it seems to be succeeding along several margins at once in a way that feels kind of unusual to replicate elsewhere in Europe. So I’m curious to know what’s your take on that?

Do you think Madrid is actually doing well? Did you find it a special, interesting vibe when you visited? What was the general experience that you had?

[00:27:56] Tyler: I was there less than a year ago. It was probably my fifth visit to the city. I think it’s in the running to be Europe’s best and most successful city. That’s a subjective judgment but it’s not crazy to claim that it is and that’s a first. So for cuisine, the arts, being cosmopolitan open to the world, vibrancy of walking on the street, it’s just excellent. It does not cost a fortune to be there though you can spend more if you wish to. It’s one of the very best places in the world to spend a week or two. I think it’s way into the top tier.

[00:28:37] Rasheed: Given you’ve actually been here, you know, have you had a temporal adjustment? At what point did you start to realize that? The last visit, the second last visit?

[00:28:50] Tyler: The first visit was the 1990s and then it felt somewhat moreish to me and dark, and fascinating, and sluggish and it was fun but you wondered since it was hovering between older Franco times and some unknown future. I also was there at the height of the financial crisis when things just felt awful. The streets were empty, everyone was frowning. I always thought that was temporary but it still makes an impression on you. I would say really just my very last visit, I had read plenty and I follow Spain so I wasn’t surprised by any of it. But to see it it much more real.

[00:29:45] Rasheed: Well, I agree. I think Diego would agree too.

[00:29:48] Diego Sanchez de la Cruz: Yes!

We voted with our feet and we’ve oped and written books about this. But it’s very interesting because I think that your grasp on the city and the transformation it has undergone, it reflects what’s really happened because Madrid certainly turned things around in the last 20 years or so. The financial crisis was indeed a stop-go sort of moment for Madrid, not for the rest of the country, which quite frankly, has remained stuck in that mentality and not done as well since 15 years ago, all the way up to today. But Rasheed brought to my attention while preparing for the podcast, that you have some curiosity, some interest in the, what we call the School of Salamanca, which is something that Rasheed has also done, you know, his research on.

Because, you know most people when they arrive in Spain and they start to connect with, you know, people that appreciate markets and open societies, they, they tend to think that these ideas simply emanate from other areas and just made their way here to Spain. But it’s true, we have quite a deep liberal tradition that starts with the School of Salamanca back in the 16th and 17th century.

[00:31:03] Tyler: You have las Casas writing against slavery and for the rights of the indigenous. That has been seeping through to other people. But Vitoria, Molina the ones you might call almost the economists, moral thinkers, others grossly underrated. I’m never sure how liberal they are I’m pretty sure what they wrote was liberal. But what they actually favored relative to their time I think is a bit of a mystery. But they understood what we now call marginal utility theory, laid some foundations for modern economics, were excellent on monetary economics; things like the quantity theory of money, causes of inflation, hyperinflation in Spain at the time and were good broadly moral philosophers. So they’re very impressive. And last year I visited Salamanca and got to see some of the rooms and desks even where they did their writing. This made a great impression on me. This was wonderful. Salamanca for me is one of the most beautiful smaller towns in Spain and it’s easy to get to and everyone should go there. That’s one of my plugs.

Diego Sanchez de la Cruz: A two hour trip from Madrid.

Tyler: We had rental car but there’s a direct train line, right?

Diego Sanchez de la Cruz: But trains in Spain right now. Let’s not go there.

Tyler: What’s the problem?

Diego Sanchez de la Cruz: Well just chaos, the delays and actually a few train wrecks with dozens of dead people and just very poor management of the infrastructure that was once known to be great.

[00:32:39] Tyler: What’s caused those accidents? Was it coincidence? Was it cheap construction? Because progressives were telling me for 10,15 years Spain builds train lines and infrastructure so cheaply, this is great And then I saw these three or four train crashes and I just start scratching my head like “What’s going on here?” Do any of you know?

[00:32:57] Diego Sanchez de la Cruz: Well Tyler, I think the, the fact is that a network, like the one we built for our high speed trains is actually very costly. You can choose to have a very costly, high speed train network, but you need to acknowledge that. And Spaniards have been used to not paying the full price, and originally just subsidizing the price.

And then as the bill became bigger, more expensive, the investment in the upkeep, the infrastructure started to go low and low and low, and because there was not enough capacity from the state to add more trains and put more trains in circulation it was opened up for competition in some connections.

Like for example, the one where there was this massive train wreck, which connects Madrid all the way to Sevilla and Malaga in the south in Andalucía, Suddenly you have many more trains, but no additional investment. And you have private operators competing with public operators in the service of the train transport, but you only have a state monopoly with very low investment in upkeep, that is run by the government.

So in terms of how to keep this infrastructure, the rails themselves, that unfortunately has led to worsening performance in the last few years. And this dramatic event a few weeks ago was probably the ‘aha’ moment for many people that were still not convinced that this world class infrastructure is now looking kind of third worldly in many aspects.

[00:34:29] Rasheed: Also another point to that as well. I know some of the pieces that you’re also referring to Tyler. And there is a distinction between the metro systems of different cities and then the high speed trail. High speed rail is managed by a public company Adif. That’s separate infrastructure, separate procurement, separate everything from how the Metro Madrid or the Metro Barcelona, how they, how they function, how they are managed.

So they are actually different things. So the Madrid Metro public administration management is a lot more cost efficient compared to the long route high speed train. But both things are true at the same time, when it comes to Spain which is, you know, one of the benefits of having the such strong regional autonomy for planning all these different things in the economy.

I want to still stick on the Salmanca thing. So one thing I realize, especially when talking to people here like Diego and other people that are very into liberal thinking is compared to the way how very young people now who would call themselves liberals or libertarians, how they think about the metaphors they use. They use Bitcoin, they use crypto, they use these kind of things where the older people in Spain tend to use things like, you know, the Salamanca school and go back to the Cádiz constitution from 1812 and those kind of things.

I’m curious if you think that the thinking around what you call liberalism today is as thick as the things you will have read about Salamanca or that time period in general when it comes to how they wrote about liberal thinking.

[00:36:27] Tyler: People seem to read fewer books, at least fewer books of a particular historical kind today compared to when I was younger. So that to me makes classical liberal thinking thinner, in some ways better, more future oriented, more dynamic, more flexible. But also thinner and more superficial. We’ll see how that bargain turns out, I wish everyone knew the Salamancans and when I was a kid it was actually amazing to me how many people I met who knew the Salamancans. Like you could say “what do you think of Suarez on tyrannicide?”, and they have an opinion. That’s unthinkable today unless it’s maybe you two.

[00:37:09] Diego Sanchez de la Cruz: I must say that some of the founding fathers of the US were very familiar with their work, and you can trace their their knowledge of other authors. John Adams for example, had a copy of a series of books by Juan De Mariana. But then also of course Thomas Jefferson, James Madison, all of them were acquainted with these very old authors that still today, reverberate here locally, but are quite unknown abroad. So I wanted to ask you for some also some marriage counseling. I’ve seen the pictures of your office. When I try to stress how full of books that looks. I can’t. So I just urge our listeners and viewers to just Google that and see Tyler essentially surrounded by towers of books.

So my wife complains that I have too many, and trust me, compared to you, I’m a real amateur. So what would be the best relationship advice you can give me on how to negotiate a dynamic between space for these books and domestic harmony?

[00:38:09] Tyler: It would be easy if you could just trade in marriages right? But very often you can’t, that’s the problem. I have agreed to keep most of my active book piles in one part of the house that has led to temporary peace which I hope is enduring. That’s the best I’ve managed. I would’ve preferred a more Coasean solution like “you let me do this, I’ll let you do that”. But again trade in marriage often backfires or just isn’t possible. Make a concession, admit your partner is correct and try to get as good a deal out of the concession as you can.

[00:38:48] Diego Sanchez de la Cruz: Fair enough.

[00:38:48] Tyler: When I try saying things like “it’s a privilege to live amongst all these books and when visitors come they can admire the titles”, that never works even though we have a lot of quite intellectual visitors, it does not work.

[00:39:05] Diego Sanchez de la Cruz: So we can, we had some questions for you also about culture. And both, both Rasheed and I are big on the idea that some cities, some capitals around Europe, for instance; you can see that they punch above their economic weight culturally. One that pops to mind is Berlin, for example.

Not much dynamism in terms of economics but very, very interesting cultural scene. Do you think there is other interesting examples of this? Instead of debt to GDP or tax to GDP, we could just call this the ‘vibe to GDP’ ratio of which cities are overperforming in terms of culture, although they may not be economic powerhouses.

[00:39:45] Tyler: So many German and Swiss cities do that. Maybe not Braunschweig but you could name a few dozen cities in Germany that are culturally significant. Berlin is still pretty big and all the go a lot of the government workers are there but take Kassel which puts on Documenta. That’s a small city. They have an incredible Rembrandt collection. They are significant force in the contemporary art world. Other things go on there. Somewhere like Zurich, I’m guessing population is still below half a million or it can’t be much above it, incredibly culturally important Basel, Bern and so on. So something about that part of the world, you have federalistic funding and also cultural structures in Germany and in Switzerland and it seems to quite matter. And then you have these very well educated high taste populations. Imagine Basel actually had a referendum as to whether the local museum should buy a particular painting by Picasso. And this was debated earnestly by the citizens and they ended up buying it. Can you imagine what that would be like in the United States or even many other parts of Europe?

[00:41:03] Rasheed: What about that same question in Latin America?

[00:41:09] Tyler: It’s a lot where you are. Argentina is relatively European in this regard but a lot of it is and is becoming all the more like North America. I think in many parts of Latin America, the European influences are fading.

Especially Central America, becoming more and more North Americanized. Maybe not in bad ways but you see the ties to Spain and the architecture obviously the language the history but with so many of them in the United States that’s just the dominant force.

[00:41:44] Diego Sanchez de la Cruz: I see that balancing act when I travel to Quito, my wife is from Ecuador. So when we go back home you see how the, the balance in Quito can still feel quite even between the Spanish and the North American influence. But then you venture into Guayaquil on the coast, and you can clearly see that the Spanish influence has faded and it’s just a remnant of the past.

Some relics of it, but maybe there, but just the culture, the entire of the city feels very American to me, very North American to me. And speaking of culture were discussing Rasheed, these authors that we know you’re familiar with.

[00:42:28] Rasheed: Yes. I know that you’ve said this several places, not several places, but you’ve been, you read quite a lot and you were influenced quite a lot by people like Borges or Rulfo or Cortázar, or Garcia Marquez and Neruda. And if you were choose one or one group of super important work from them to have a conversation about political economy in Latin America, what would you choose?

[00:43:03] Tyler: I’m to have a discussion with the author about political economy?

[00:43:07] Rasheed: No to, to kind of use it as a text for a group conversation, but people who are into politic economy.

[00:43:18] Tyler: I don’t know maybe Bolaño. No, Borges would be my favorite but it’s deliberately quite removed from political economy. If you want the political economy of rural Mexico then it’s Pedro Páramo for sure. But that’s not what most people mean by political economy. But it’s brilliant on rural Mexico. I think it gets at this point of Latin America never having congealed even at the level of the nation that the fiction is so disparate. There’s not a single thing you can pick that fills that bill. And Marquez of course he was a Castro fan in a bad way. It doesn’t seem he ever repudiated it. He just had terrible views on almost everything. But he’s a great writer and he has this sense of the romantic in the fiction and actually the nonfiction reporting as well. But it just leads you so badly astray in politics. Maybe that’s the lesson from him, is that the standards for good fiction and good nonfiction beliefs are almost diametrically opposed. But you only need to learn that once right?

[00:44:24] Diego Sanchez de la Cruz: Just on a side note, I live in Pablo Neruda’s former home in Madrid. He was based in Madrid for a while, and he wrote a poem to the house where he lived here inthe city. It, it was called ‘La Ca Flores’, the House of the Flowers. And that is actually where I’m sitting right here.

So Neruda used to be somewhere around. We don’t know exactly whether it was my apartment or my neighbor’s apartment, but we do know he was sitting on the last floor of my number on the street. So I won’t say the number. We don’t want, you know, people knocking on the door.

[00:45:05] Tyler: He was a Stalinist as you know. He was if anything, worse than Garcia Marquez.

[00:45:09] Diego Sanchez de la Cruz: Oh, he wrote a poem called ‘Ode to Stalin’, so I guess that says everything you need to know about his politics. But his poems certainly do pass the test. Like you said, I don’t think this diametrical opposition between what they bring forward in terms of learning the arts and then what, what leader can you learn in politics, I think is-

[00:45:34] Rasheed: But then what about Vargas Llosa? This is the point because Vargas Llosa meets the requirement of obviously a esteem author from Latin America with a very good political orientation. But I remember, Tyler, I think you mentioned at some point you didn’t really get into his work as much, or did I misremember this?

[00:45:59] Tyler: I think he’s a very good author to read. I like him very much. But on depth a smidgen below the others or maybe more than a smidgen. So “War at the End of the World” is probably his best book. It’s wonderful. I recommend it to everyone. But it doesn’t change how you think about things. Books like “Aunt Julia and the Script Writer” which is the most fun read. Again literally about a soap opera, reading It is like a soap opera. It’s almost genre fiction but doesn’t come close to the others. Maybe “Conversation in the Cathedral” is the one by him that has the greatest depth but I find it very hard to read in Spanish. It’s too hard for me English and doesn’t make that much sense. I will try it again in my life but his claim to fame might ultimately be that book and I’m just not sure how well it does. That’s my own limitation not his.

[00:46:57] Diego Sanchez de la Cruz: The journalistic approach by both Vargas Llosa and Garcia Marquez is something that is very remarkable. Of course, Garcia Marquez threw a lot of fantasy into his fiction. While Vargas Llosa kept it a bit more realistic. With time, both men who were friends became distant because of the Cuban Revolution.

Both were original supporters. Vargas Llosa quickly did his homework and checked what was really going on and became disenchanted with communism. And the Garcia Marquez actually fell in love with it and up to very late in his life, still had his own mansion available for him in Cuba. Obviously the morality of that is there. But of course for the literature no one is doubting the merits of either of them because they were very good authors.

Rasheed: I’m curious, what is it about “Conversation in the Cathedral” you find so challenging in some sense?

Tyler: My Spanish isn’t good enough is quite simply the issue that. And that also means I can’t tell you what I find so difficult in it. But it is polyphonic right?

Tyler: “Conversation in the Cathedral” which I think only has one English language version. Again if there’s another translation I’ll buy it. I’ll try it again when my Spanish is better and I hope someday my Spanish is better and just keep at it. Or maybe when I’m 83 and retired I’ll just sit down with the English and Spanish language versions and spend a full month with it and do nothing, that else might work too.

Tyler: Garcia Marquez in particular underrated, cause everyone reads “A Hundred Years of Solitude” and that was a wonderful achievement but I don’t feel it’s aged that well It’s been copied too much. It’s a bit like looking at the Mona Lisa. And I think “Noticia de un Secuestro” and “Vivir Para Contarla”, those are phenomenal works and they’re not much discussed. And then his short fiction is better to me than say the famous novels. That doesn’t translate well but that I can read in Spanish and people don’t absorb that so much in North America. So he’s considerably underrated even though I really do not like his politics.

Rasheed: Did you read the “La Fiesta del Chivo” by Vargas Llosa?

Tyler: That’s a good book. I like it and it’s fun. It’s very good, it holds up it’s anti-tyranny. but again there’s this final element of depth I don’t find in it.

Diego Sanchez de la Cruz: The element of tyranny, however, is very present in Conversation in the Cathedral too. Just all of his writings sort of take you there. I think his second to last novel, “El Sueño del Celta” was the title in Spanish. And this one is a discussion about the individual struggle within the context of nationalism. And I think that one resonates very well. It’s called The Dream of the Celt.

Tyler: I haven’t read it.

Tyler: I guess i’m suspicious of it. If I read more of Vargas Llosa other than attempting Cathedral again it’ll be the very early ones that some people say are great and to me they feel too working class. I’m not sure how interesting they still are but I would put my time into those.

Rasheed: I actually have not read it in English. But at least I can say recently I was reading kind of comparing the, remember the Houellebecq translation in English and the Houellebecq translation in Spanish. And after reading the Spanish translation of Houellebecq, the English just seems like garbage, like actual garbage.

I think the translator actually distorted substantial chunks of the book. And you realize these things. If you only read the English version, have you actually read the book? Probably not.

Tyler: It’s the same experience but in German because the book came out in German first. So I read it in German and later in English and I thought my goodness the German’s much better.

Diego Sanchez de la Cruz: Some of the action he depicts in Madrid, that Houellebecq depicts in Madrid, takes place very nearby the think tank where we’re both involved with here in the city at the Institute of Juan De Mariana headquarters. Rasheed, we have some final questions, right?

I meant to ask about movies because I like your year end suggestions. Now that the Academy Awards are in about to take place, the Golden Globes just happened. What were the best films that you have watched? I’ve seen it on Marginal Revolution, but if you just were to pick the up right now.

Tyler: Our theme is Latin America. The one major Latin American movie I saw was the Brazilian film ‘The Secret Agent’. Which I liked but I felt it was overrated. I didn’t think it was good enough or coherent enough to really count as a top movie. Something I’d recommend to get on the Latin American theme, the Hollywood version of ‘Wuthering Heights’ is coming out. The Mexican version of Wuthering Heights, I think it’s from 1953, where Buñuel is the director it’s fantastic. It’s so melodramatic and it’s such a Mexican story at its heart. It’s like it should be filmed in Mexico, of course he himself is Spanish but he takes on a Mexican sensibility in his Mexican films I find and I would recommend that to everyone that you can watch. Argentinian movies ‘Nine Queens’, ‘Nueve Reinas’ is very good. Chilean movies the one about the Pinochet referendum I think it’s just called ‘Yes’ in English. That would be a recommendation. Argentina probably has the best movies for South America if I think about it. Mexico of course has quite a bit. Many of those have become very well known and I think they’re excellent.

Rasheed: Did you watch Argentinian series called ‘Nada’? It was from 2023, I believe it was by Mariana Cohn and Gastón Duprat. It’s actually about food, it was fantastic. It’s very funny. It’s very funny.

Diego Sanchez de la Cruz: Cohn and Duprat are two extremely funny directors from Argentina. One of the few that actually completely stayed away from the national consensus of essentially pro-Peronists artists. And they’ve done shows for like Disney Plus and the most watched comedy of the year in Argentina is also by them, is called ‘Homo Argentum’, which is kind of a take on the many ways of being Argentinian. Very funny, dark humor self-critical of the Argentinian people. So check those out. Cohn and Duprat, they are making great work indeed.

Tyler: I think we’re on the verge of seeing this fantastic blossoming of Latin American culture. It’s sufficiently removed from the Anglo sphere to have stayed unique. And there’s now enough wealth in those countries that just not everything is the struggle it once was. So I think this will be a phenomenal time culturally for many of those places. The Mexican musical ‘Avant Garde’ says it’s blossoming. A lot will happen, I would be very long on Latin American culture.

Rasheed: I don’t know if you’ve noticed, or maybe I’ve just been to particular shows, but when I go to even a symphony hall in Mexico City, the audience is substantially, substantially younger than even USA. Okay. So why is that do you think?

Tyler: It’s a good sign for them. It’s young people looking to those events for enjoyment. If you go to the Kennedy Center in Washington which is like the lowest of our low. It’s very old people just trying to get out of the house or wanting to connect with each other or be seen. You’ll see a smallish number of Young East Asians. Good for them but not that many. The rest is quite depressing. So this is one reason why I am bullish on Latin culture. A lot of young people seem to still quite care about it in a way that is meaningful and they approach it with depth.

Rasheed: So I want to finish off with food. We both have some, some food questions. Lima. So Lima is a complete outlier and it comes to gastronomy in, in some ways. And I wonder what you think accounts for why you can just walk down the street, toss a stone and hit a Michelin-level restaurant in Lima and you can’t really do that as efficiently in other comparable countries?

Tyler: I would first make the point that other Andean nations have underrated food scenes like Quito would be an example or Bogotá. Not thought of as great food cities but they’re excellent and also cheaper. They’re not Michelin-type restaurants or rated at all but there’s less of a gap than it may seem. But for Peru in particular the elite really is concentrated in Lima and the elite is quite removed from the lower wage workers. So there’s enough of the elite with enough money to spend plus tourists and then the labor costs are cheap which also relate to how fresh is the supply chain. That mix of the very wealthy elites and the very poor workers and then you’re injecting this Japanese influence, all that just gives you this wonderful blend. That’s my theory of Lima.

Rasheed: What, what’s your favorite restaurant in Lima? If, if you, if you can pick one.

Tyler: Best meal I’ve ever had there I have not eaten there recently Maybe it was 8 years ago but it’s Central which as the time was a famous one, I think it still is. But the Peruvian Japanese places I’ve been to three or four of the well-known ones, they are phenomenal. It’s a great place to eat. But like even in Peru if you eat in Arequipa, which has maybe the spiciest food again it’s not Michelin pointed but it’s very good. To me it’s not so much worse than eating in Lima. So I would say these under other locations are underrated. The Lima thing cannot be coming from nowhere is another way to put it.

Rasheed: Sure that that is true. I remember at some point you had recommended people in Mexico City to go to Astrid y Gastón, the Peruvian restaurant. It’s closed in Mexico, but it’s still open in Peru.

You mentioned some, but you know Quito, so on, I’ll put Panama there as well. It’s a very under food scene. But where else would you say, “Hey, this is a remarkably underrated scene for food that is just, oh my goodness!”.

Tyler: Some of the best Latin American meals I’ve ever had are in >>cio<< Mexico. A lot of northern Mexico is amazing for beef. Things like burritos, fajitas that you turn your nose up at even in Spain, but certainly in the US. But the actual versions of those things are phenomenal.Amazonian cuisine which by the way some of which is in Peru but also Brazil other places. It’s never been like drained for its insights by other cuisines. That’s quite unusual. It’s a thing when you go eat it It’s amazing It’s not that easy to find. There’s like a place in London, a few scattered places in the major cities but go to Belem or somewhere. It’s excellent and very interesting and people don’t seem to draw from it much. Maybe the ingredients just don’t transport. Food in Chile it’s boring but it can be excellent if you’re willing to go boring. So if you go to Chile and just eat the eggs eat the mashed potatoes, the strawberries, the vanilla ice cream. Don’t try too hard. Don’t get those crummy seafood dishes with the cream sauces. But food and Chile can be excellent and I know it has a terrible reputation but it’s really quite good. The best empanadas I’ve ever had are in Salta in Northern Argentina So there’s just more and more Brazil everywhere has amazing things and beans. There’s no end to the list as far as I can tell.

Diego Sanchez de la Cruz: Some of the best regional cuisine you find just traveling around, of course, and those, those fly completely under the radar. You bring Salta, by the way, Rasheed and I met with a senator from Salta, oddly enough a few weeks ago. She was great. She’s an independent very big on growth as a driver for for her region.

She’s working with the Milei government, but she’s not ascribed to the Milei party. So she was quite an interesting meet. But back on food some of the best empanadas I’ve had come from the regional areas of Bolivia. Just like some of the best food I’ve had from Chile was from the area of Santa Cruz, which is a rural part of the of the country which is only famous for its wine culture. Then you connect that with the meat, the lamb more precisely.

That makes for a very good mix and it’s very unknown, as you said.

Tyler: Bolivia is phenomenal for food. There are food stalls the comodores. A place I think is not that great. It’s probably better now but La Paz Bolivia because of altitude has had real problems in the past. And if I’m trying to think where did not deliver for me I would say La Paz even though I love Bolivian food more generally.

Diego Sanchez de la Cruz: What about Spain?

Tyler: Spain is incredible food as far as I can tell. I haven’t been to all of Spain of course.

Diego Sanchez de la Cruz: I keep asking Rasheed to visit my hometown and apparently he’s going to do that very soon ‘cause we’re not famous for our seafood and, and meat too. But anyway Tyler, I don’t even know ‘cause we could. Keep going for hours. I don’t know, Rasheed. If we could just wrap this right now because if not, we stand to just keep Tyler on for hours here.

Rasheed: Yeah, I mean, I could discuss food for many hours indeed. I would say one thing closing, so actually tomorrow I’m going to Cairo. I’m going to get some food there for the first time.

And, it’s not easy for people to actually get bivian food, but there is actually a very good Bolivian cafeteria restaurant here in Madrid.

Very close to la Latina. And you know, literally inside of a cafeteria, areas of food stove, Bolivian food that’s actually very good. We can’t go to Bolivia. Maybe you don’t have it good access in New York or so on, but in Madrid can get some good Bolivia food also, and they are from the past.

Diego Sanchez de la Cruz: This obviously was a great honor to have Tyler with us. And please look forward to our coming episodes. We have interesting conversations, spending on many hot topics going on in the Hispanic world, but today we had the wonderful opportunity to have Tyler join us for this very fun conversation.

So yes subscribe, share, and keep following the podcast ‘cause a lot of good things are coming your way very soon.

Is the European Union now the world’s most underrated libertarian project? There is a fascinating and somewhat tragic paradox at the very center of the European integration project. If you look at the treaties of the European Union you will find what is perhaps the most robust legal framework for economic liberty that exists anywhere in the modern world. It is a system explicitly designed to dismantle the arbitrary power of the nation state to favor local industries. It was built to erode the ability of politicians to engage in protectionism. It was constructed to create a vast zone of unhampered exchange for goods, services, capital, and people.

Yet if you speak to the average classical liberal or libertarian in Europe today, you will find that they have almost entirely abdicated the courts. They view the European Union not as a tool for market liberation but as a superstate to be feared and avoided. This is a tragedy.

Inspired by Dalibor Rohac’s ‘Towards an Imperfect Union: A Conservative Case for the EU’ I will argue the case for a progress studies movement focused on EU administrative and procedural law.

While libertarians rightly value the right to exit a bad system, they have effectively exited the one arena that was most suited to defending their own values.

Consider how the Court of Justice of the European Union (CJEU) used the Cassis de Dijon ruling to invent the principle of mutual recognition, effectively smashing German protectionism by declaring that a product good enough for Paris is good enough for Berlin. Look at how it leveraged proportionality in Commission v Italy to discipline national paternalism regarding trailer bans, transforming the internal market into a zone of negative rights. Even more boldly, the Court has aggressively liberalized services where politics failed; it is the institutional force that struck down the arbitrary “1/30” ratio for “uber driver” (VTC) licenses that protects a Barcelona taxi monopoly.

Moreover, while some member states dragged their feet on social liberty, the Court’s recent Wojewoda Mazowiecki judgement obliged Member States to recognize a marriage between two Union citizens of the same sex that has been lawfully concluded in another Member State where they have exercised their freedom to move and reside. The “Open Skies” judgments broke national flagship airline monopolies to create a single aviation market. The mechanism is ruthless and procedural: almost any litigant can use the Francovich doctrine to sue their own government for damages when it fails to open a market, or invoke Simmenthal alongside Costa v ENEL to disapply national legislation entirely that conflict with the single market.

We need to frame this paradox clearly because it drives the entire argument for a new movement. Libertarians (European classical liberals) have the strongest normative case for a free internal market. We are the ones who believe most deeply in the power of competition and the moral necessity of open borders for trade. Yet we have handed the keys to the legal engine of the European Union to our ideological opponents. The legal architecture of the EU was built to eliminate national barriers, but libertarians treat it as irredeemably statist.

The idea I want to advance here is that liberalisation will not return to Europe through politics alone. We are living in an era of rising anti-institutionalist populism where the political will to deregulate is almost nonexistent. The principles of direct effect and supremacy, which allow European law to override national law, are the core tools that libertarians have generally ignored. As Alec Stone Sweet argues in The Judicial Construction of Europe the legal system is constructed by the actors who participate in it. If libertarians refuse to participate, they are effectively conceding the construction of Europe to their opponents.

Why Libertarians Abandoned EU Law

To understand how we got here we need to engage in a bit of diagnostic analysis. Why did the libertarian movement in Europe abandon the legal field? I believe there are three main reasons: an intellectual allergy to supranationalism, an institutional capture of litigation by the left, and a lack of procedural imagination.

Many libertarians have a deep skepticism of any centralized power, and they view the European Union as a project of centralization. They conflate “Brussels centralisation” with “legal integration.” They do not see that legal integration can actually be a constraint on state power. There is a difference between political federalism, which can lead to a bloated superstate, and judicial market integration, which restricts the ability of member states to fragment the market. The former is bad from a libertarian perspective, but the latter is good. By failing to make this distinction, libertarians have rejected the entire project.

Second, there is the issue of institutional capture. Litigation is a game that is played by those who show up. Over the last few decades, progressive (Leftist) NGOs have mastered the art of strategic litigation as a democratic participation tool. They have used it to worsen environmental standards, digital rights, and consumer protection. They have built sophisticated legal networks that know how to spot a test case and how to bring it all the way to CJEU in Luxembourg. Market liberal think tanks, on the other hand, have stayed in the realm of policy. They write papers arguing that the Common Agricultural Policy is inefficient, which is true but ineffective. Meanwhile, environmental groups are in court forcing governments to rewrite their laws. There is an empirical angle here that is worth exploring. If one were to quantify and qualify the kind of cases going to the Court of Justice and the General Court, I suspect one would find a massive imbalance. The demand side of the court is dominated by those who want more regulation, not less. This is outside the scope of this essay but someone should do it.

Third, there is a dire drought of procedural imagination. Libertarian networks in Europe rarely create centers to train litigators. They do not inculcate the potential ruthlessness of Article 267 of the Treaty on the Functioning of the European Union (TFEU) or the doctrines of state liability. This stands in stark contrast to the situation in the United States. In the US, the “libertarian legal movement” is robust and highly effective. Organizations like the Institute for Justice, Foundation for Individual Rights and Expression, New Civil Liberties Alliance, and the Pacific Legal Foundation have spent decades using the courts to strike down occupational licensing laws, protect property rights, and defend free speech. They understand that the constitution is a tool that can be used to limit government. European libertarians have no such infrastructure. They have no “Institute for Justice” law clinic to take on the cases of the “little guy” against the State.

Finally, we must confront the issue of cultural defeatism. There is a widespread belief among European market liberals that EU law is “too dirigiste to save.” This has become a self-fulfilling prophecy. If you believe that the court is rigged against you, you will never bring a case. If you never bring a case, the court will never have the opportunity to rule in your favor. This mindset is a form of ideological fatalism. For more on this theme you should listen to my podcast episode with Adrián Rubio.

An Engine of Liberalisation

When we overcome this defeatism, we will see that EU administrative and procedural law (granted, not the most catchy phrase) is actually a hidden engine of liberalisation. The core treaties of the EU contain provisions that are remarkably libertarian in their effect. The four market freedoms (free movement of goods, services, persons, and capital) operate as negative rights. Articles 34, 49, and 56 of the TFEU are not just policy goals; they are legally binding prohibitions on state interference. They function very much like constitutional rights to trade. Libertarians should start framing these provisions as fundamental economic rights.

Then there is the principle of proportionality that is perhaps the most underutilized tool in the libertarian arsenal. The principle is enumerated in Article 5 (4) of the Treaty on European Union (TEU) and serves as a check on both the exercise of power (ensuring actions stay within bounds) and the substance of laws (balancing private rights against public goals). Essentially, if there are multiple ways to reach the same goal, the authority must choose the method that is least intrusive or burdensome to the individual’s rights. A law is not necessary if a less restrictive alternative could achieve the same result just as effectively. Properly invoked, it can dismantle arbitrary restrictions. Libertarians can and should use proportionality to discipline national paternalism.

We must also look at the enforcement mechanisms. The doctrines of direct effect and state liability mean that EU law is not just a matter for diplomats. It is a matter for individuals. The Francovich line of cases established that a citizen can sue their own government for damages if the government fails to implement EU law. This makes liberalisation self-executing. It creates a financial incentive for states to follow the rules. And let us not forget the principle of effectiveness and procedural autonomy. These doctrines force national courts to interpret domestic procedure in a way that makes the exercise of EU rights effective. If a national procedural rule makes it impossible to enforce a market right, the national rule must yield.

The core point here is that current pro-market actors discuss “deregulation” politically but ignore the historical reality. The most successful deregulation in history was the creation of the single market. And this was not achieved merely by legislative acts approved by the Council or the Parliament. It was achieved by the CJEU enforcing the treaties against recalcitrant member states. It was a judicial deregulation.

Who Occupies the Forum

The effectiveness of this judicial strategy has been proven, but unfortunately it has been proven by the others. While libertarians have been absent, other ideological groups have occupied the forum. The environmental movement is the prime example. Through the international Aarhus Convention (implemented jointly as Directive 2003/4/EC, Directive 2003/35/EC and Aarhus Regulation (1367/2006)), environmental NGOs won wide access to the courts to challenge decisions that affect the environment. They have used this standing to great effect. In cases like Stichting Milieu v Commission, they have forced the Commission to tighten its standards. Libertarians could mirror this strategy. They could argue for pro-market procedural rights that would allow them to challenge economic restrictions with the same vigor that environmentalists challenge modern infrastructure projects.

Digital rights activists have also shown the way. The case of Digital Rights Ireland is instructive. Here, a group of activists managed to get the Data Retention Directive invalidated on privacy grounds. This demonstrates that persistence can reshape entire EU doctrines. If a group of privacy activists can strike down a major EU directive, why can’t a group of economic liberty activists strike down a protectionist one?

Consumer protection and gender equality are other areas where activists have built vast positive rights case law through incremental strategic litigation. They did not win these rights all at once. They won them case by case, chipping away at the legal order until it reflected their values. This should suggest that activism through law is ideologically neutral. The law is a tool. If you pick it up and use it, you can win. If you leave it on the ground, your opponent will pick it up and use it against you.

It is important to remember that the Court of Justice is a demand driven court. It cannot rule on cases that are not brought before it. Libertarians simply seldom file the demand.

What a Libertarian Litigation Agenda Could Look Like

So what would a libertarian litigation agenda actually look like? One obvious target is licensing and local barriers. Across Europe, local governments use zoning laws and licensing requirements to protect incumbents. We see this with ride-hailing licenses in Spain, regional caps on businesses in Italy, and retail zoning in France. These are classic examples of rent seeking. A strategic litigation campaign would argue that these restrictions constitute a disproportionate restriction on the freedom of establishment under Articles 49 and 56 TFEU. The argument is simple: these rules do not serve a valid public interest; they serve the private interest of the taxi lobby or the existing retail chains.

Another target is the “gold plating” which occurs when member states transpose an EU directive into national law but add extra requirements that go beyond what the directive requires. This creates unnecessary burdens for businesses. Future work should demonstrate how different member states transpose the same directives in light of liberalization. For example, the Planning Act in Ireland and the Ley 21/2013 in Spain differ materially in how they handle environmental assessments; while both being EU Member States. These differences can distort the market and are often challengeable.

State aid is yet another fertile ground. Article 107 TFEU unequivocally prohibits state aid that distorts competition. This is a powerful tool to attack protectionist subsidies that crowd out new private entrants, like startups. If a government is propping up a failing national airline or giving tax breaks to a specific industry, that is a violation of EU law. A libertarian litigation strategy would aggressively challenge these subsidies.

We should also focus on procedural rights for entrepreneurs that invoke principles of legitimate expectations and good administration under Article 41 of the Charter of Fundamental Rights. Businesses need certainty to invest. When governments change the rules in the middle of the game, they often violate this principle. We should also push for standing and procedural equality. We need to push national courts to apply Aarhus-style openness to economic liberty NGOs. If an environmental group has standing to challenge a bridge, an economic liberty group should have standing to challenge a licensing law.

The meta strategy here is to build a network of preliminary reference procedures coordinated across member states. The preliminary reference procedure allows a national court to ask the CJEU for a ruling on the interpretation of EU law. This is the mechanism that links the domestic judge to the European judge. We need to develop standard pleadings that show domestic lawyers “how to turn a domestic licensing dispute into a European market freedom case” for the public interests. We need to equip the pro-liberty lawyers in Warsaw and Madrid with the arguments to go to Luxembourg.

Litigation as the True Liberal Art

Tyler Cowen and Patrick Collision set the stage but to sustain this progress studies movement for EU law we need a philosophical reframing. We need to cast litigation not as a dirty business but as a true European liberal art. We need to view it as institutional entrepreneurship. The aim is not to burn down the system; but to hold it to its own highest standards.

Libertarians should view the Rule of Law as a discovery process. Just as the market is a discovery process for prices, litigation is a discovery process for justice. It uncovers the limits of legitimate coercion. Indeed, there is a parallel here with Hayek’s concept of “spontaneous order.” The common law, and to some (increasing) extent the case law of the EU, evolves through the decentralized decisions of many judges over time. Courts act as decentralized knowledge processors. By bringing cases, we are feeding information into this system.

Libertarians should learn to love administrative procedure given that procedure is what constrains discretion. It is what prevents the arbitrary exercise of power. In fact, in a recent podcast Tyler Cowen rightly argued this point to Dan Wang, that against our intuitions, lawyers are the underrated engineers of progress. When we insist on due process, we are insisting that the state justify itself. Procedure exposes contradictions. It forces the state to admit that its “public health” regulation is actually just economic protectionism.

The polycentric nature of EU law also fits libertarian institutional design. We have the CJEU, the Commission, and the national courts all interacting. This creates a competition of jurisdictions. If the national court is blocked, you go to the European court. If the Commission is inactive, you go to the judge. Yes, there are many, many, many problems with EU institutions, and these are well known. But perhaps this essay can offer an alternative mental model.

So what to do? Libertarians need to move from talking to doing. I think that an “EU Progress Studies Law” clinic should be created. This clinic would exist to train European lawyers and students in the procedural tools for liberalization. It would be a training ground for the next generation of freedom fighters. It would teach them how to identify a good test case, how to draft a preliminary reference, and how to argue proportionality. It would do the empirical work of quantifying the cases and identifying the gaps. It would be the European answer to the Institute for Justice.

Enter the Arena

Libertarians are losing the EU not because Brussels became too powerful, but because they have weakened their fight in the forum where power was contested: the courtroom. They allowed their opponents to define the rules of the game. They exited the arena when they should have been flooding it with litigants.

Every major liberalisation ruling in EU history, from Cassis de Dijon to Keck, began as a single litigant’s act of defiance. The next wave of freedom in Europe will not come from new manifestos or from pithy tweets about the Commission. It will come from new case numbers in the CJEU’s docket. It will come from a movement that understands that the Rule of Law is the ultimate safeguard of liberty, and that is willing to do the hard, boring, procedural work of defending it.

Significant attention has been paid to Chile's development using free-market principles via “Los Chicago Boys.” In this piece, I want to highlight that Panama’s large, financially integrated dollarized international banking center (and, therefore, a significant part of its economic growth) also traces its origins to the free-market principles and guidance of another “Chicago Boy” who became Panama's president.

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This post is Part 3 of a planned multi-part series explaining the benefits of Caribbean Dollarization and dissolving the relevant counterarguments. These public notes aim to compile the best arguments for a larger project. In Part 2, I explained the curious historical circumstances of how Panama dollarized in 1904. As always, comments are open.

Panama's dollarization is often said to be the basis for its high degree of financial integration. While this is true, I have never found any research answering why a small country in Central America became so financially integrated in the first place—or rather, why Panama developed a banking sector that is significantly autonomous from state control. I will explain why this result can be traced back to Nicolás Barletta, who had a short tenure as President but whose entire career shaped Panama's financial policies and intellectual foundations of economics management.

But first, some context.

Dollarzone Banking

Panama has around 4.5 million people and a GDP of $76 Billion.

In the early 1960s, Panama had just four small banks. Today, in 2024, according to the Superintendencia de Bancos de Panama (SBP), which regulates the banking sector, there are 64 registered banks. In comparison, Colombia, with a population of over 51 million, has just around 20 banks. Costa Rica has a population (of 5M) similar to Panama, but with 17 banks.

The banking sector represents around 7.3% of Panama's GDP and employs over 25,000 people directly. Total banking deposits relative to GDP for Panama are about 138%, which is substantially higher than any other country in the region (and higher than most countries globally). If you take Colombia, banking deposits are about 45% of GDP; El Salvador 35% (also dollarized); Chile is around 75%, etc.

Unlike other regional countries, Panama’s banking sector largely comprises international banks that primarily (or solely) offer services to non-Panamanian customers. Banks based in non-dollarized countries can open subsidiaries in Panama to do business back home. Panama’s regulations and completely open capital flows enable this. I’ll give a concrete example.

Banco Popular (Dominicano) is the largest bank in the Dominican Republic. It is part of the holding company Grupo Popular S.A. It is a standard commercial bank that offers both customer and institutional products. If Dominicans go to their local bank’s website, they can get a range of credit cards, mostly in Dominican Pesos (RD$, the national currency), but also a few options denominated in USD.

For example, the screenshot above shows the “Gold International” credit card billed in dollars: “No matter how far you travel, use your card at affiliated establishments, and your consumption will be billed in dollars.” This is attractive to consumers in the Dominican Republic because they mostly travel to the USA and prefer to have everything accounted for in dollars. But remember that the Dominican Republic itself uses only DR Pesos, not dollars.

To circumvent this, Banco Popular issues USD credit cards from a related Panamanian entity called Popular Bank Ltd. This is explicit in the Terms and Conditions on the Dominican website.

Like Banco Popular, Popular Bank Ltd., the Panama entity, is 100% owned by Grupo Popular S.A, located in the Dominican Republic. Dominicans assume they are simply getting a card from their local bank branch, but instead, it is issued internationally from Panama.

Panama is a dollarzone market with a regulatory environment that does not discriminate between domestic and international customers. Along with a Hispanophone workforce, it has become a banking center for Latin American countries. For other countries that are not dollarized (like the Dominican Republic), banks can still offer their domestic clients access to dollars by operating from Panama.

Many loans for large construction projects in Latin American countries are sourced from banks in Panama because they can be made in dollars rather than the volatile domestic currency. In this sense, Panama’s dollarzone international banking helps to de-risk credit portfolios across Latin America. This feature is not usually discussed. One expert informed me that the Bank of China, for example, ranks Panama as a Tier 1 liquidity center on par with New York for its global credit operations.

There is much more to explain about Panama’s banking center operations, but I want to discuss its origins in this piece. The first substantial law (Decreto 238) to kick off the current banking sector was relatively recent, enacted in 1970. This is a strange year to have a law passed with a high degree of free market principles. Why? Because in 1970, Panama was still under a military dictatorship led by Omar Torrijos.

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What Torrijos Did

In Part 2, I discussed President Arnulfo Arias Madrid, who was removed from office by a coup d'état in 1941, seven days after he tried to create a new paper currency in Panama. President Arias was elected back in 1951 and was again removed by a coup. Yet again, President Arias was elected in 1968. And yet again, he was removed by a coup on October 11, 1968, just after ten days in office. This coup was led by Lieutenant Colonel Omar Torrijos of the Panamanian National Guard. Torrijos was about 40 years old at the time.

Ironically, President Arias fired Colonel Bolivar Vallarino, the head of the National Guard, soon after he came to office to prevent another coup from taking him out. Still, this action ultimately provoked Torrijos to lead a new coup against Arias.

Torrijos led the military government (and was, therefore, the de facto leader) of Panama from 1968 until he died in a helicopter crash in 1981.

Omar Torrijos’ was laid to rest in an extravagant tomb in Panama that still receives ceremonial visits on some holidays. His son, Martin Torrijos, was democratically elected President of Panama from 2004 to 2009.

Omar Torrijos is a complicated political figure. While he was technically a military dictator, he was also unequivocally the most influential leader regarding positive economic growth.

Torrijos was the person who got the USA to give control of the Panama Canal (and the Canal Zone) over to the Panamanian government. This was confirmed in the Torrijos–Carter Treaties 1977, signed between him and President Jimmy Carter. It is not common knowledge now, but back in the 1970s, the transfer of the Canal was one of the most heated political topics in the USA.

In 1978, when Congress was about to ratify the Torrijos-Carter Treaties, there was a debate, which can be found on the C-SPAN website, between Ronald Reagan and William F. Buckley, where Reagan was in strident opposition to the handing over the Canal:

“We cannot abdicate our responsibility for the operation of the canal and the security of the western hemisphere. Let us reject these treaties…” — Ronald Reagan

Without the Carter administration, the Canal would unlikely be under Panamanian control today. Reagan was elected President the year after he gave that speech and would not have been persuaded otherwise.

But what Torrijos was able to achieve is undoubtedly miraculous. The United States funded, designed, built, and managed the most critical mega-project of the century and then just gave it away to a small country. The details of this are fascinating but outside the scope of this post—I’ll get into that topic in the future.

Revenue from the Canal and its related services are now a key pillar of the economy. Panama has Latin America's highest GDP per capita (PPP), at $32,768. Between 1990 and 2019, the annual average GDP growth was around 5.9%. However, the canal was not the only economic pillar. The liberal banking sector, which accounts for around 7% of GDP, also stems from Omar Torrijos' dictatorship.

When Torrijos took over the government, one of his main economics advisors was Nicolás Ardito Barletta Vallarino, who was around 30 at the time. Barletta returned to Panama after completing his PhD studies in Economics at the University of Chicago and joined the government of Torrijos the very next day after the coup was complete. Barletta was one of the main negotiators in the Torrijos-Carter treaties for the Panamanian side. A glimpse into his ideological framing can be seen when, later in life, he was asked what he considered to be one of his greatest achievements in those negotiations; he said:

“The creation of an autonomous Panamanian institution [to manage the canal], with a board that is renewed little by little so that it is not controlled by any politician…”

Indeed, to this day, the Autoridad del Canal de Panamá remains autonomous and technocratically managed—a feat so astounding for a Latin American country that some scholars point to this entity as an example of the puzzle of Panamanian exceptionalism. From the coup until the new constitution of 1972, legal rule in Panama was by decree. So, the Banking Law of 1970 was the direct brainchild of its designer because it need not be watered down by a deliberative process.

Nicalás Barletta oversaw the implementation and management of the law that he designed. So, it is necessary to know Barletta’s economic principles to understand why Panama’s banking sector was formed uniquely. I will come to this shortly. We need to take a slight divergence to Chile for some needed context.

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“Los Chicago Boys”

Augusto Pinochet in Chile is the most well-known Latin American military dictator who implemented free-market reforms. However, the fact that Latin America had more than one military dictator who implemented significant free-market economic reforms is a very under-discussed theme.

The best book on this topic, as recommended by Tyler Cowen, is The Chile Project: The Story of the Chicago Boys and the Downfall of Neoliberalism by Sebastian Edwards. In 1973, General Pinochet led a military coup against President Salvador Allende and his government, who were self-declared socialists.

When Pinochet consolidated his new military government’s political power, he adopted a set of economic reforms and policies designed by a group of Chilean Economists who studied at the University of Chicago. It is commonly but erroneously said that Chicago economists like Milton Friedman guided the Pinochet government directly. The actual story is more interesting. Indeed, there is a full-length documentary on this topic.

In the 1950s, a small group of graduate students from the Catholic University and the University of Chile were funded to study in the economics department of the University of Chicago. The aim was to upskill several Chileans to teach rigorous economics at those universities in Chile. At Chicago, they studied under the supervision of the leading economics scholars of the day who taught at the school. This, of course, included Friedman but also persons like Arnold Harberger (who will be 100 years old this year) and Lary Sjaastad.

The documentary clarifies that Harberger, who speaks fluent Spanish, was the key influence on the young Chileans. The Chilean students even introduced Harberger to the (Chilean) woman who eventually became his wife in 1958 until she died in 2011.

After studying in Chicago, they returned to their university in Chile to teach the style of economics they had learned. However, their teaching method was notoriously difficult for the students at the Chilean University, and the other faculty members called them “Los Chicago Boys.”

In 1969, the Chicago Boys decided to write an economic program to present to one of the candidates for the upcoming presidential election: Jorge Alessandri. Alessandri was the President of Chile from 1958 to 1964. He was from a political dynasty, and his father was also a former President of Chile. He was anti-Communist/anti-Socialist, and the Chicago Boys supported him.

They wanted to put their free market principles to work and design what they thought would enable rapid economic development in Chile, which Alessandri could use in his campaign and his administration if he won. The completed economic proposals from the Chicago Boys are known as “El Ladrillo” (the brick) because the stack of paper they were typed on was very thick and heavy (like a brick). You can read the original proposals here (in Spanish). Alessandri did not accept the proposals, but it seemed that it would not matter because he lost the election in 1970 to Allende.

Three years later, when Pinochet completed the coup and took control of the government, he decided to implement El Ladrillo and install many Chicago Boys into positions of power. Their economics program was not written directly for Pinochet; it just happened that after he read it, Pinochet thought it was the correct program to implement.

Sergio de Castro, a Chicago Boy in the above picture, became the Minister of Finance under Pinochet and led the economic program. And the “Chilean Miracle” began. It was the first wide-scale implementation of classical liberal principles by any country. In The Ascent of Money, Niall Fergusson identified Chile’s technocratic free market reforms as “far more radical than anything that has been attempted in the United States, the heartland of free market economics… Thatcher and Reagan came later.”

It went exceptionally well until recently when many free-market reformers retired or lost their seats in the erroneous favor of more left-wing government figures.

Barletta — The Other Chicago Boy

Let’s return to Panama. Nicolás Barletta completed his PhD in Economics at the University of Chicago in 1971.

I wondered if he had the same advisors and/or influences as the Chilean “Chicago Boys” while studying. But there is no information about this online. So I figured that if he did a PhD, then in his dissertation, he would mention his supervisors by name. PhD supervisors tend to have a significant influence on a student’s thinking and ideological development.

And that is precisely what I found. In Barletta’s dissertation, he wrote:

“In preparation of this study, acknowledgment is due in the first instance to Professor T.W. Schultz for having introduced me to the subject and to the importance of it in a context of economic development…”

“My deep appreciation goes also to Professors A.C. Harberger, Zvi Grilliches, D.G Johnson, and L.A. Sjaastad for their cooperation and guidance at several stages of the study.”

Barletta explicitly mentions Arnold Harberger and Larry Sjaastad, both key influences on the Chicago Boys in Chile, as discussed previously.

(Thanks to Matt Teichman for digging through the library at the University of Chicago to get me a physical copy of Barletta’s Ph.D dissertation from 1971.)

It could be argued that Panama’s banking sector can also be framed as a success story for Chicago Principles, similar to Chile. I’ll also mention that Barletta was also one of the principal negotiators in the Panama Canal handover treaties and was instrumental in setting up the frameworks to manage the canal.

In an interview with Radio Panamá, Barletta noted that when he returned to Panama after studying for his PhD at Chicago, he realized that the “system had an innate fragility” because it was governed by the laws set out by President Arias in his first administration. These laws were not conducive to the growth of banking liquidity and would constrain the economy.

He recommended that the country emulate others like Luxembourg and “take advantage of the eurodollar market to create a banking center in Panama” [my translation]. This key insight led Panama to its current status as an international banking center. I’ll explain why.

These days, the term “eurodollars” is a bit confusing because people usually think it refers to Euros (EUR), the monetary unit of the European Monetary Union. But it predates the EMU by decades. Eurodollars initially referred to USD-denominated loans and deposits originating in Europe. Over time, the term expanded to encompass any USD-denominated banking deposits outside the U.S. More recently, instead of eurodollar, you will sometimes see it referred to as “offshore dollars.”

The precise origins of eurodollars are debated, but it is generally agreed that the practice started around the late 1950s without the knowledge of the U.S. Federal Reserve or Treasury. The market for eurodollars significantly expanded in the mid-to-late 1960s because of increased US domestic regulation, which made U.S. banks seek alternative means to make foreign loans.

Starting in 1963, the U.S. government under President Kennedy and then under President Johnson attempted to curb what they thought was a deteriorating Balance of Payments position by tightening the controls on U.S. banks under the Voluntary Foreign Credit Restraint Program (VFCR). The VFCR intended to limit U.S. banks' and financial institutions' foreign lending and investment activities. Over the next few years, the controls became tighter, and the U.S. responded by creating more branches outside the U.S. to avoid compliance with the stringent domestic regulations that limited their global ambitions.

In effect, programs like VFCR led U.S. banks to rapidly globalize to meet the international demand for their services and USD-denominated products. This led to a market-driven de-linking of the supply of U.S. Dollars from U.S. Government control since an increasingly large proportion of dollar loans were being made geographically offshore from the U.S.

The Federal Reserve currently cannot have a money supply target because it cannot control the global eurodollar market, which is legally, geographically, and politically independent of the U.S., so it has to try to influence the money market via interest rate targets.

As the U.S. banks advanced their internationalization in the 1960s, some jurisdictions decided to capitalize on this by designing regulations to attract them. The City of London was a first mover here. Despite the Pound Sterling's declining relevance, London retained dominance as a financial center by becoming a hub for offshore dollars. Following this, Luxembough quickly created competitive regulations to attract international financial institutions seeking competitive taxation and a way to issue new financial products credibly in a stable jurisdiction.

In this context, Barletta thought Panama could become a competitive market. First, Panama is dollarized, so banking in USD is second nature and would be more convenient. Second, Panama is geographically close to the U.S., so business executives can easily commute to the company's branches in Panama. Thirdly, he believed that Panama could compete in terms of competitive tax policy, secrecy, and stability. Fourthly, because of the Panama Canal and Free Trade Zone, there are already natural perpetual customers for international banking products.

Barletta mentions in the interview that in designing the new banking law from Panama, he had some assistance from a banker who worked at Citi Bank and from the head of the central banking department at the International Monetary Fund. He noted that:

“we didn’t want a central bank, but we wanted to modernize the banking system to be in tune with the need for growth in the economy. So the objectives were to establish a system that could continue to nurture the growth of the economy” [my translation].

Once the law was written and approved in 1970 by the government, Barletta became the Chair of the National Banking Commission responsible for approving new banks in Panama. He also frequently traveled internationally to promote Panama as a new banking center after becoming the Minister of Economy and Planning in 1973. When asked what Omar Torrijos thought about these free-market-oriented banking laws, Barletta explained, “[Torrijos] left the economic part in our hands.”

As noted previously, before the 1970 Banking Law, Panama had very few banks, but by 1980, Panama had 125 banks because of Barletta and his teams. By 1975, International Monetary Fund economists had been signaling that Panama had risen to become a global center of eurodollars (what was then also called the “euro-currency”):

Banks active in the Euro-currency market operate from widely dispersed banking centers. London is still the main center of the offshore banking business. However, since 1970 its share in the total has declined, mainly to the advantage of the Bahamas, Singapore, Panama, and Beirut.

In a 1985 review of Panama’s international banking center, an IMF economist described the center's growth as “remarkable.” Between 1970 and 1980, foreign deposits in Panama grew at a “phenomenal” average annual rate of 65%, compared to the previous decade's 12% average annual growth rate.

This situation significantly increased the domestic exposure of commercial banks in Panama. This exposure can be seen in the sharp rise of banks' net foreign short-term liabilities. These liabilities were relatively modest in earlier decades: US$28.0 million from 1950-60 and US$66.0 million from 1961-70. However, they skyrocketed to US$933.0 million during 1971-80. This substantial influx of capital allowed Panama's banking system to expand credit to private and public sectors rapidly.

Barletta’s plan to anchor domestic credit creation via internationalization instead of using central bank discretionary policy was proven to work. This is essential to Panama’s “monetary policy” with a dollarized economy. Panama has never had a Balance of Payments crisis or general systemic liquidity crisis because of its immense excess liquidity. Moreover, since most banks have an international headquarters, they can quickly source liquidity from their headquarters or related entities if needed. Panama really became a small dollar liquidity lake tethered (without obstruction) to the giant ocean of global dollar liquidity — or what can be called absolute financial integration.

Torrijos died in 1981, and 1984 Barletta was elected the civilian President of Panama. President Barletta attempted to carry out further free-market-oriented reforms of the broader Panamanian economy, but significant popular resistance forced him to scale down the reforms. In another interview, Barletta observed that “perhaps I was too impatient” when he attempted to get through the free-market-oriented reforms.

At this time, Panama was still ultimately controlled by the military junta, now led by Manuel Noriega.

In September 1985, the military junta ordered the torture and beheading of Hugo Spadafora, a regionally well-renowned Panamanian doctor turned counter-revolutionary who was critical of Noriega and the dictatorship. After the brutal murder of Dr. Spadafora, A few days later, President Barletta, while away in NYC attending the UN General Assembly, announced that he would set up a commission to investigate the crime credibly. When he returned to Panama, Noriega summoned him and forced him to resign.

The 1980s were a turbulent decade for Panama. The global crisis of ‘82 and Barletta's expulsion in ’85 created concern for international banks, as Panama's stability and credibility became questionable. This led to the departure of several international banks. Noriega’s dictatorship intensified and worsened. This culminated in the U.S. invading Panama in December 1989 under ‘Operation Just Cause’ to remove Noriega.

The invasion was surprisingly successful, and democracy has remained stable in Panama ever since. In 1998, a new banking law was passed to modernize the banking center further and create a more sophisticated regulator—the Superindencia de Bancos de Panamá, of which Barletta was on the Board of Directors. The following year, in 1999, the Panama Canal was officially handed over to Panama's government from the U.S.

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Recap and Look Forward

Panama’s metamorphosis into a regional and global financial hub can be traced back to Nicolás Barletta’s vision for national development. His free-market-oriented economic reforms, heavily influenced by his training at the University of Chicago, laid the foundation for Panama’s international banking center in a dollarized economy.

Barletta is woefully overlooked in the economics literature on Latin American development and should be classed similarly to the other Chicago Boys from Chile.

In the next post, I plan to describe the structure of Panama’s banking system to explain how monetary policy works without a central bank. This is relevant to the dollarization debate because it is clear to me that people do not realize how active a role the National Bank of Panama (Banco Nacional) plays in monetary operations (but not monetary policy) in the country.

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As James Banner, author of The Ever-Changing Past, reminds us, “all history is revisionist history.” The past is gone forever, and we have no direct access to it. The study of history is how we try to piece together what happened. However, historians are not immune from the world they inhabit. They filter the world through all dimensions of themselves: age, sexuality, nationality, interests, politics, culture, and other endless features. As time passes, we should often revisit things we thought were settled — to take a fresh look.

Bruce Gilley does this with his book The Case for Colonialism. The gut reaction to this topic is often revulsion. But semiotic objections are unproductive. I think Gilley’s arguments are correct in substance.

At its foundation, the case for “Western colonialism,” according to Gilley, “is about rethinking the past as well as improving the future.” Contrary to the current commonly received interpretation of the past, Gilley argues that “the most serious threat to human rights and world peace was not colonialism — as the United Nations declared in the 1960s — but anti-colonialism.”

At its core, the book argues that the developing world was thrown off the path of progress by abandoning the technocratic governance of colonial administrations too quickly. For Gilley, the anti-colonial movement had little constructive thought to offer most new countries since the “purpose was not historical accuracy but contemporaneous advocacy.” In the Caribbean, this was quite evident in the dominant political economy theories of postcolonialism called the Plantation School (which I will do a detailed post on in the future.)

Gilley does not focus that much on the Caribbean in the book. But if his case is valid globally, it should also hold in the Caribbean. So, I wanted to give you some brief comments to consider from a Caribbean perspective.

In Development and Stabilization, DeLisle Worrell, former Governor of the Central Bank of Barbados, stated that in Barbados, “although gains have continued to be made in the years since Independence in 1966, the essential transformation was achieved in the 1950s and 1960s.” I.e., pre-independence at the tail end of the colonial period.

Granted, Barbados is a singular case. However, by the grace of Tyler Cowen’s Second Law, there are more systematic econometric treatments that analyze the impact of colonialism on small-state growth. In a paper by James Feyer and Bruce Sacerdote, Colonialism and Modern Income: Islands as Natural Experiments, they found that each additional hundred years that an island country spent under colonial rule resulted in a 42% higher GDP per capita.

The above chart shows that territories that spent more time under colonial rule tended to have higher economic performance today.

If “time under colonialism” (at least for islands) positively correlates with higher economic performance, then perhaps it tracks that current countries that are still colonies (effectively) should outperform independent countries of similar origins and comparable size. This appears to be true.

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In Comparing the Economic Performance of Dependent Territories and Sovereign Microstates, H.W Armstrong and Robert Read studied the extent to which dependent territories (“colonies” but a more modern name) can be said to be performing better or worse than independent microstates (population of less than 3 million) in terms of Gross National Product per capita. Think of Bermuda vs Barbados or Guadeloupe vs Jamaica. They found that dependent territories have higher GNP per capita values than their independent counterparts.

Moreover, as reported by those authors, World Bank statistics reveal that independent small states have performed considerably worse than their dependent territory counterparts. According to these data, 18% of independent small states fall within the lowest GNP per capita band, while none of the dependent territories fall into this category. Further, merely 18.6% of independent small states rise to the highest GNP per capita band, whereas over 47% of dependent territories are in this band.

On average, European colonialism has led to more economic progress. However, we can dig even deeper into the Caribbean economic history to see how colonial administration improved economic performance.

Jamaica 1865

We assume that the British Empire, in particular, was a homogenous enterprise. But it was not. Governance diverged so much in places like Bengali compared to Newfoundland or Jamaica that the Historian Jeremy Black would prefer if we referred to the British Empires - plural.

I argued in a different post on this blog that you cannot cleanly compare the colonial administration of Jamaica and Barbados simply because they can be superficially labeled as former British colonies. This is because they were managed quite differently and, as a result, developed different sets of colonial institutions even before independence in the early 1960s. To add even more nuance to this point, it is also true that often you cannot superficially compare institutions of singular Caribbean colonies to themselves in previous years.

In his 2018 Ph.D. dissertation at LSE, Junius Olivier, originally from Saint Lucia, dissects the dramatic difference in public investment in Jamaica between two different kinds of colonial administrations. He showed that the type of administration directly managed by the Crown (the kind of European political control required to meet Gilley’s definition of colonialism) increased public investments toward general economic progress.

From around 1655 until 1865, Jamaica was governed by the plantation owners who settled there and their representatives. This was called the Old Representative System (ORS). However, based on various bouts of mismanagement (to put it mildly) by the ORS leading to the Morant Bay Rebellion in 1865, the UK parliament decided to bring Jamaica under direct rule where the Governor General (who represents the UK Parliament and the Crown) would now have more significant powers.

By analyzing data from the Colonial Blue books, Olivier was able to show that after Jamaica became a Crown Colony (essentially lasting until independence in 1962), you can see a dramatic increase in public investment by the government.

In other words, the local settler planters did not care much for the economic progress of the masses. They only cared to enrich themselves. But the British colonial administration invested in enhancing Jamaica's masses. They invested extensively in health, education (shown below), infrastructure, etc.

Jamaica lagged behind Barbados because this public investment started much later. This goes to favor Gilley’s argument that European colonialism had a positive effect on development and economic progress. It was the British government that accelerated developmental spending in a country far away but within the Empire.

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The Governance Watchmen

Let’s remain on the point of better governance via direct rule. More recently, between 2009 and 2012, the UK imposed direct rule in the Turk and Caicos because of “systemic corruption” among government ministers and public officials. In 2008, a Commission of Inquiry was assembled to review the government capacity of Turks and Caicos. This review was presented to Governor Wetherell in 2009.

Among the many points, the Commission found that:

1. There is a high probability of systemic corruption in government and the legislature and among public officers in the Turks and Caicos Islands in recent years. It appears, in the main, to have consisted of bribery by overseas developers and other investors of Ministers and/or public officers, so as to secure Crown Land on favorable terms, couples with government approval for its commercial development.”

2. Over the same period, there has been serious deterioration — from an already low level — in the Territory’s systems of governance and public financial management and control.

3. This deterioration has been accompanied by extravagant and ill-judged commitments by those in public office, primarily Ministers, in public expenditure and in their private expenditure at public expense.”

Based on the investigation findings, the Commission recommended a “partial suspension of the 2006 Constitution and Interim Direct Rule from Westminster acting through the Governor.” And so it went.

Direct Rule enabled quick adjustments and the removal of corrupt politicians. The Prime Minister at the time, Michael Misick, fled to Brazil to seek asylum, but his case was denied as he was extradited to Turks and Caicos to stand trial.

Moreover, in 2022, the UK could have imposed a Direct Rule on the British Virgin Islands (BVI) after another Commission of Inquiry was published, demonstrating systemic corruption is that territory. But this was not done - though many called for it. Instead, the governor imposed other reform measures. In this case, the former BVI Premier, Andrew Fahie, was a few weeks ago found guilty in Florida courts on charges of drug trafficking.

In both cases, having the outside stabilizing effect of the UK Parliament, which is actually more transparent, less corrupt, and more accountable, means that these small countries can be put back on course when problems arise. The same cannot be said for the corrupt independent Caribbean countries. Year after year in Barbados, the Accountant General reports systemic problems with almost all government accounts, but nothing is fixed, and no one is held responsible.

A Civilizing Mission

Gilley agrees that economic progress alone is not enough. What I am calling civil progress can also be framed as moral progress and virtuous progressiveness, but those terms always seem more loaded. I think if we think about this from an unexpected modern perspective, gay rights, we can see an interesting trend.

To say that homophobia is a problem in the Caribbean would be an understatement. Granted, no Caribbean country is as coruscatingly homophobic as Uganda, but it is still a tension point. I grew up hearing songs on the radio about killing gay men. Jamaica, Saint Lucia, Saint Vincent, Guyana, and Grenada still retain laws that prohibit gay sex (anti-buggery laws). Dominica only struck down that law this week. Guyana is the only country in mainland South America to maintain this legislation. Barbados got rid of its anti-buggery laws via legislation in December 2022.

“Gay Activists” in the Caribbean often blame the region’s colonial past for current homophobic laws and tendencies. In an article that is an example of this general sentiment, it was stated that “[Caribbean countries] share a cultural legacy of colonialism that incorporates a long history of discrimination towards gender diversity and same-sex sexualities.” In some sense, this is true. These laws were all formed during various iterations of colonial administration.

But it always struck me as bizarre to claim that independent countries who are in complete control of their legislatures can still blame colonialism for why they still have specific laws. The independent governments can change the rules at any point, but they do not want to. They prefer to discriminate against a small number of people once it makes the majority happy and content. This is doubly odd because the colonizers changed their laws to accommodate homosexual relationships.

However, while gay activists in the Caribbean complain about the “legacies of colonialism” preventing the advance of gay rights in the independent countries, the actual territories that are still dependencies progressed with the push of the former Colonizer. The British dependencies in the Caribbean have all decriminalized homosexual sex. These reforms were imposed in 2001 (except for Bermuda, which chose to do it earlier) directly by the UK government, as Britain retains the right to impose legislation on its territories. The Caribbean dependencies were dragging their feet on this core tenet of modern civil society, and the UK decided to push them forward.

Moreover, a committee suggested a deadline for all British Territories to ratify gay marriage. However, the UK government has declined the proposal for now. Nonetheless, if the other English Caribbean countries were still under British colonial rule, gay rights in the Caribbean would be better respected today across the board. Gilley’s point that colonialism can lead to more civil progress, I think, is still valid even in the modern Caribbean.

The Caribbean might have been better off with more colonialism of the sort that developed in the later 1950s. Indeed, one of the last Imperial projects in the Caribbean—the short-lived 1958 British West Indies Federation—may have been the key to accelerating growth even further in the region. But it failed in 1962, leading to the British Caribbean tumbling down the hill to independence, one by one.

Gilley has written much more that is worth thinking seriously about. In The Case for Colonialism, you will find a rigorous argument that might make you uneasy. But as Gilley makes clear, the importance of colonialism does not diminish simply because it is now politically incorrect. Think about a particular Caribbean country within this context — Haiti.

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Panama has been dollarized since 1904. Its constitution prohibits the creation of non-convertible paper money. In any discussion on Caribbean Dollarization, Panama is a necessary element. But its monetary system is poorly understood — especially from a historical perspective. I’ve found it challenging to find a concrete explanation of how Panama developed its curious monetary jurisprudence or even how precisely it became dollarized so long ago. In this post, I will provide answers to both of those questions.

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This post is Part 2 of a planned multi-part series explaining the benefits of Caribbean Dollarization and dissolving the relevant counterarguments. These public notes aim to compile the best arguments for a larger project. In Part 1, I introduced the main arguments supporting the policy proposal that all Caribbean countries should retire their local currencies and adopt USD. As always, comments are open.

“If we say that taxes are excessive and must be reduced, because the people who pay them are overwhelmed by their enormous weight, we are accused of asserting an absurdity; if we say that the country has been reduced to its lowest state of impoverishment by the excessive issuance of debased coins and the massive circulation of paper currency, we are branded as impostors; if we say that the country urgently demands a wise electoral law to truly make the Republic a reality, we are called disturbers of public order; if we say that the people need schools, and that these schools should not be reduced as is currently happening, but rather increased, we are labeled as enemies of religion; and finally, if we point out that there are public officials today who began their careers in poverty, modestly compensated, yet now wield considerable power, we risk being accused of defaming invulnerable reputations.

But whatever the consequences, we shall always speak out whenever we believe it beneficial to the general interest, for those who think we should remain silent belong to the ranks of those who desire “Liberty only for themselves.”

- Carlos A. Mendoza (1888) [Mendoza was one of the drafters of Panama’s Constitution of 1904.]

Note: Most of this post's hyperlinks lead to Spanish sources.

It is generally assumed that the US thrust dollarization upon Panama because of the Panama Canal Zone. But that is not true. The real history is far more interesting. The post is divided into two broad sections:

1. Why Panama Constitutionally Prohibits Paper Currency

2. Why and How Panama Made USD Legal Tender

First Part - Why Prohibit Paper Currency

Panama separated from Colombia in November 1903. A few months later, in February 1904, the new Panamanian constitution was promulgated—with remnants of Colombian economic jurisprudence. As should be expected, you need to understand a bit of late 19th-century Colombian monetary history to understand why Panama is the way it is today.

Utopia In A Bank

In the mid-1800s, Colombia’s political landscape had (broadly) two ideological factions. The Federalists pushed for increased decentralization — the States Rights Libertarians of their time. After successive uprisings, they gained power and created the United States of Colombia in 1863. This rendition of Colombia comprised several autonomous states, Panama being one of them. However, more factional civil uprisings continued, and by 1880, Rafael Núñez, leader of the Centralists faction, won the Presidency. He was ardently opposed to federalism. Núñez led a movement known as La Regeneración (the Regeneration) under the motto of "Una Nación, un Pueblo, un Dios" (One Nation, One People, One God). It was an ideology of unification, centralization, and control.

He moved quickly to centralize the state of Colombia by transforming all previously autonomous states into departments of Colombia, managed from Bogotá (the capital). Núñez, along with Miguel Antonio Caro, his vice-president who led many government operations, wanted to institute several state-driven developmental projects. But at this time, Colombia’s economy was primarily organized around free banking principles, and the private banks did not think it was prudent to lend large sums to the Núñez government. So Congress was called upon to create a new state bank (Banco Nacional) and a national paper currency.

Many Colombians were skeptical of the new paper currency pesos. To assuage doubts, Núñez essentially went on a speaking tour to convince people to embrace the state-issued paper currency. However, business communities continued to campaign against the Banco Nacional paper currency.

In 1886, the Núñez government of Colombia instituted a monetary rule known in the literature as Dogma de los 12 Millones (Dogma of the 12 million) to instill confidence in the paper currency. This principle was intended to safeguard against excessive currency issuance, capping it at three times the national revenue. The county’s revenue at the time was 4 million pesos, so the new monetary policy stipulated that the paper currency issuance of Banco Nacional should not surpass 12 million pesos.

Of course, this monetary rule was not respected. Political factional fighting continued and intensified, culminating in the Guerra de los Mil Días (Thousand Days War) from 1899 to 1902. The printing press went burr…

As is commonly the case, the government financed the war by creating excessive money.

Colombian economic historian Enrique Caballero Escovar in Historia económica de Colombia estimated that from 1899 to 1903, over 831 million pesos were created, a blindingly high number far beyond the intended 12 million. Inflation increased to 15.2% in 1899, 66% in 1900 and 389% in 1901. It averaged 120% until 1903.

At the end of the Civil War, the new Colombian administration promulgated Decree 217, which stated the intent to abolish the issuance of paper money (“por el cual se suprimen las emisiones del papel moneda”). Monetary stability was successfully achieved after Congress eventually passed a bill based on that Decree in July 1903, officially prohibiting the issuance of paper money by the central government.

Birth Trauma

Panamanians were stridently opposed to the centralizing of the Colombian state under Núñez’a La Regeneración. Panama was the most prosperous state in the United States of Colombia since the mid-19th century, partly because of the Panama Railway Company. It served many travelers journeying from the east coast of the USA to California via Panama (which was shorter than going overland). However, when the USA built the first transcontinental railroad, the number of passengers via the Panama route dramatically reduced. Moreover, Núñez’s policy was to extract more money from the Department of the Isthmus (Panama) via increased taxes and control of its fiscal surpluses. Inevitably, this caused great discontent.

The exploitation exacerbated by the Thousand Days War (also with the USA “nudging”) led Panama to separate from Colombia in November 1903. At the birth of this new nation, the people there had inflationary trauma fresh in their minds. The new state kept Colombia's legal prohibition on state issuance of paper money.

Interestingly, Colombia’s constitution, until 1910, still prohibited issuing paper money, but it was subsequently reformed (poorly, by US money doctors—a topic for a future post). Panama has maintained the original Colombian prohibition principle to this day.

Accurately Interpreting Constitutional Terms

Now that we understand the origin of the prohibition clause in Panama’s constitution, we need to understand what it says exactly. Almost everything you read, including Panamanian journalists and politicians, gets this point wrong. This is one of the most misunderstood and abused aspects of Panama’s monetary foundations.

Let’s start with the original 1904 constitution. In it Article 117 states that there ‘shall be no obligatory tender paper currency in the Republic’ (“No podrá haber en la República papel moneda de curso forzoso”).

The term “curso forzoso” (obligatory tender) is not straightforward and needs to be explained carefully.

Firstly, Economists and the general population routinely misuse the term “legal tender.” In a short, helpful article, Dror Goldberg (whom I interviewed last year on my podcast) explains what “legal tender” really means. Legal tender laws are designed to aid the adjudication of debt contracts in cases where the medium of exchange was not mutually agreed upon.

For a basic example, suppose you live in Mexico, and you contract the services of a house maintenance company to repair your house next week. You are the Buyer, and the company is the Seller.

A week later, the service is complete, and you attempt to pay the Seller 50 Mexican Pesos, but the Seller says, “No, I wanted Filipino Pesos,” and you refuse. The Seller then sues you for not fulfilling the contract terms by discharging the debt.

In this instance, the Court will side with you, the Buyer, because the contract did not specify a medium of payment. Since all of the business was conducted in Mexico, the legal tender laws of that country will apply. This means that the Court will allow you to offer (tender) your Mexican Pesos to the Seller, which will constitute a discharge of your debt. It is up to the Seller to accept, but you are off the hook.

If, however, both the Buyer and Seller had specified in the contract that payment should be made in Filipino Pesos, then legal tender laws would not apply because the contract specified a medium of payment. The Buyer could also discharge the debt via the agreed-upon medium even though the contract was made in Mexico. Generally, a contract can be made with any media of payment once another law does not outlaw that media.

Returning to the constitutional terms of Panama. When “curso forzoso” (obligatory-tender) is correctly interpreted, it has two parts. First, it means that the currency in question has liberatory power (referred to in local jurisprudence as el poder liberatorio), which is the power granted by law to discharge debts. Second, it means that the currency is not a claim on underlying silver or gold and cannot be substituted for such. Remember that in 1904, “true” money was silver or gold metal. So, obligatory-tender paper money should be considered non-convertible paper money.

For a paper currency to be convertible means that it is backed by underlying assets (often in those times silver or/and gold), and if you wanted to, you can return the paper currency to the issuer and receive the underlying gold or silver.

So, to be absolutely clear, the constitution does not prohibit all paper currency, only non-convertible paper currency.

If Panama wanted to create a paper currency, it would need to be fully convertible into silver or gold. It cannot be backed merely by the government's good faith. In the early 20th century, most paper currencies that retained confidence were backed by gold - including the United States Dollar. These currencies were not considered “obligatory-tender paper currency” because they were fully convertible. An example of a non-convertible paper currency would be the Colombian paper pesos created during the Núñez administration, which caused extreme inflation during the Thousand Days War, as discussed above.

Also, I'd like to emphasize that the Constitution specifies paper currency. It does not prohibit the government from creating metal currency (coins). Panama has had their own silver coins from the beginning until today.

Importantly, this original Article 117 of the 1904 Constitution has been retained in every successive Panamanian Constitution, even after various military coups and dictatorships. The current constitution, which has been in force since 1972 (with amendments), retains the original principle and prohibition now under Article 262.

ARTICULO 262. No habrá en la República papel modena de curso forzoso.
1972 Constitution of Panama

Unit of Account

In Panama, there is a separation between the unit of account and the medium of exchange. The Balboa unit is another aspect of confusion that arises when learning about Panama’s monetary system.

Usually, the principle of ‘one country, one currency’ implies that all of the characteristics of monetary interaction are expressed in the same units.

That is, if USD is your country’s money (and legal tender) then the thing-that-measures-your-bank-account is USD and the thing-that-you-exchange-for-goods is also referred to as USD. This also holds if you are in France with Euros. But this need not be the case.

The “unit of account” is a standardized measurement unit similar to centimeters, kilometers, etc. Simply, it is the measurement unit of the value of your monetary account.

If someone asks you for the length of a table and you respond by merely saying “20,” that does not actually give a clear answer. You need to include a measurement unit: “20 meters,” “20 inches,” “20 centimeters,” and so on. This gives a concrete answer. Similar to money, identifying an account as “20 grams of fine gold” or “20 USD” gives a concrete answer of its value in a known unit.

In Panama, the legal unit for valuing monetary accounts is called the Balboa (with the symbol B/. or PAB). This has been the case since the country's founding, established in Law 84 of 1904. This illustrates that it does not matter what you name a measurement if the underlying parameters are concretely defined.

Historically, a Balboa was dual-defined as having a weight of fine gold and equivalent to a United States dollar (which was also defined by a gold measurement) at the time. If you travel to Panama today, you may become confused by this point. In Panama, they have local silver coins (as they always had) called Balboas. There was a linguistic shift over the century to refer to the silver coins as Balboas. But don’t let this confuse your understanding of the historical development. But curiously, if you speak to Panamanians in more rural areas, they will often still refer to the current coins as pesos.

Another point of information is that Panama’s constitution does not mention the legal tender status of the USD. Only Article 1171 of the Código Fiscal enumerates that the United States Dollars (USD) are legal tender in Panama—not the constitution. More of this later.

Artículo 1171. La unidad monetaria de la República de Panamá, será el Balboa, o sea una moneda de oro con un valor de novecientos ochenta y siete y medio miligramos (0.9875) de peso ochocientos veintinueve milésimos (0.829) de fino, divisible en centésimos (100/100). El actual dólar de los Estados Unidos de América y sus múltiplos y divisiones serán de curso legal en la República, por su valor nominal e la moneda panameña respectiva.

Article 1171 of the Tax Code of Panama

The Seven Days Bills

The curious tale of the Arias bills is instructive to underscore the point about convertibility being the correct jurisprudential interpretation. For a very brief period in 1941, Panama had its own paper currency. President Arnulfo Arias Madrid came to power in 1940 and was the quintessential jingoistic Latin American Caudillo (an appropriate English term might be Populist).

He advanced a political ideology of Panameñismo that blamed many social ills of the country on the Gringos and Jamaicanos (Americans and West Indian black people). This included the heinous policy of taking away Panamanian citizenship from the children of Chinese and West Indians whose original language was not Spanish. (You might remember the Dominican Republic's decision in 2013 to strip away citizenship from children of foreign-born parents going back to 1929(!) that affected primarily Haitians. It’s the same idea).

As part of his general Panameñismo policies, he declared that Panamá should have its own paper currency. This was made official in the Decree No. 6 of 1941, published in September of that year. Then on the 2nd of October, the first bills were issued.

This was a landmark decision in Panama's monetary history. The obvious question here is whether this issuance was constitutional. And it was! Because the paper currency issued by Arias was fully convertible.

In Article 4 of the Decree stated:

“For each balboa issued in paper currency put into circulation by the Bank, the Bank must maintain an effective reserve of nine hundred and eighty-seven and a half milligrams of gold…, or one balboa in national silver coin, or its equivalent in the currency of the United States of America…”

These bills were not “obligatory-tender” paper currency since they were fully backed essentially by gold or gold currency (USD). As the previous section's interpretation explained, they could be issued constitutionally. If they were not convertible into gold or silver or if they were not clones of USD, then that would be a more shaky territory for constitutional soundness.

However, seven days later, on October 9th, President Arias was deposed in a coup, and the new transitional regime immediately halted the circulation of the paper currency. For this reason, the Panamanian paper currency is referred to as “billetes de siete días.”

Later that year in December, the new President Adolfo ordered that all the issued Arias bills should be burned. (Some survive as collectors’ items today. You can purchase them from an art dealer I know in Panama). This episode underscores the entrenched cultural sentiment against creating and circulating local paper currency in Panama.

I’ve described why Panama does not have its own paper money today and the legal foundations of USD circulation in the country. But a question immediately follows: why USD at all and not some other sound foreign currency? To understand why Panama uses the USD, we need to know about the creation and politics of the Panama Canal Zone.

Second Part — Why and How Panama Made USD Legal Tender

Shortly after Panama separated from Colombia, the United States “acquired” the rights to a portion of Panama's territory to build a transoceanic canal. The details of this transaction are astounding and horrifying, and I will write about them soon. But for now, let’s settle with this: it happened in 1903.

A Zone of Stable Money

The Panama Canal Zone (La Zona del Canal de Panamá) was a ‘sovereign territory’ of the United States. People born in La Zona (pejoratively referred to as Zoniano or Zoneíta by Panamanians) had a direct line to become citizens of the United States. The well-known former US Senator John McCain was born in the Panama Canal Zone.

The project of building the canal and managing the Canal Zone was overseen in the US by the Isthmian Canal Commission, which was set up by the US government and formed part of the portfolio of the Secretary of War — who at the time was William Taft (yes, the future President Taft). Taft was the Governor of the Philippines (then also a US territory) from 1901 until he resigned in 1904 to take up the post of Secretary of War.

It is usually assumed that the United States government forced the Republic of Panama to make the United States dollar legal tender. The populace, academics, and literati in Panama also generally believe this. But that’s not what happened. The initial request to make dollars legal tender in Panama actually came from the Panamanians.

The usual starting point for understanding how dollarization came about is the document known as El Convenio Monetario, referenced in a Decree made by the President of Panama in 1904 (Decreto 74 de 1904). It is held up as the defining legal basis for the United States' monetary imposition on Panama.

But rather than being a detailed legal agreement, it is actually just a very short two-page memo issued by Secretary Taft in 1904, which imposes nothing. The true starting point should have been months prior. Let’s dissect this.

A Fiscal Commission Travels North

In June of 1904, Secretary Taft was notified that a Fiscal Commission from Panama was in New York on official government business, and they also wanted to meet with him. The Fiscal Commission consisted (most importantly) of two Panamanians, Ricardo Arias and Eusobio Morales, and an American lawyer, William Nelson Cromwell, their Counsel. When the US “acquired” the land rights for the Canal Zone, around $10M (1903 $) was paid to the new Panama state. The government of Panama decided to invest around $6 in US investment banks. The Fiscal Commission was in New York to find suitable institutions to invest the money into securities.

In addition to this investment mission, the Commission was also authorized by the President of Panama to meet with the U.S. government official in charge of the Panama Canal Zone to discuss monetary arrangements. And so they met with Secretary Taft.

When the Commission met with Secretary Taft, Admiral Walker (Chairman of the Isthmian Commission, which was overseeing the building operations of the canal) and Mr. Conant (a financial expert who worked with Taft in the Philippines) were also present. All of them had a conversation regarding monetary matters in Panama.

I know these details because a stenographer recorded the meeting, and later, the transcript was entered into the record at a U.S. Senate Hearing in 1906.

The conversation was revealing. The Panamanians had started creating new monetary laws as part of their state-building process. Remember that Panama had just separated from Colombia, and all the elements of a state needed to be built almost from scratch.

The stenographically recorded conversation explicitly states that the Panamanians already made this decision and are now seeking confirmation. The lawyer for the Fiscal Commission was clear on this point:

Mr. Cromwell: (speaking to Secretary Taft). This subject has been very deeply considered by these gentlemen; not only by the gentlemen present, but by distinguished men in the Isthmus. It was considered by their [Constitutional] Convention; and a bill has been prepared by the Government, submitted, and is under consideration. That bill is very intelligent. I suggest Mr. Arias read and explain to you the measure pending. The Convention is standing ready; the bill is here; if this form is acceptable it will be cabled there and probably passed. In other words, we have the measure on the table, and this conference may put it in shape where it will be adopted.

The discussion in these records is interesting for many reasons. We can see Secretary Taft as being genuinely concerned about the monetary stability in the Canal Zone and Panama, more generally.

The post-separation transitional government in Panamá wanted to avoid a situation where the economic activity of the Canal Zone placed severe pressure on the monetary capacity of the new Republic. (Remember, finite metal coins were the norm—not infinite digits on a screen.) The increased demand for metal coins to pay imported labor would put a great strain on Panama’s capacity.

This was indeed highlighted in the Taft meetings when Taft asked Admiral Walker how much money he expected to require for paying wages to the Canal workers:

Secretary Taft: Admiral Walker, how much do you suppose your going in there would add to the demand for the peso?

Admiral Walker: Well, it would add considerably. We should use it. We would pay our men with it.

The Isthmian Commission did not have the idea to create a new currency within Panama. They thought that would be wholly impractical. It was necessary that Panama's money would remain stable relative to the US gold dollar which they would need to use concurrently.

Secretary Taft: Would you pay all your men in the peso [Panama silver coins]?

Admiral Walker: Yes; we should pay in that way probably all the people we employed down there. The people sent down from here we should pay once a month in gold or in United States currency, but the laborers and the people of the Isthmus would go on the silver roll and be paid every two weeks.

To emphasize the point of the Panamanian origin of dollarization, the lawyer of the Fiscal Commission stated in the recorded transcripts that a version of the same bill was voted on in Panama a few weeks prior, but it failed because the 32 voters ended up in a tie, 16 were pro, and 16 were against. They hoped that this agreement with the US would push it over the mark to instill confidence in the plan to get it approved in Panama.

Another key feature of the monetary agreement Taft made with Panama is woefully under-examined. The Isthmian Commission (and, therefore, the US government) agreed to help stabilize the Panamanian silver currency by loaning its own money to Panama to backstock a depreciation in the exchange rate between the silver peso and US gold money. This arrangement by Taft was unprecedented in many ways. Remember that the United States Federal Reserve did not yet exist.

Moreover, it could not have been an imposition by the US government on Panama because the US government was not involved in its contemplation per se. Secretary Taft acted unilaterally.

He did not seek permission from the US Congress before agreeing to these terms. In fact, the Senate hauled Secretary Taft up for giving such strong assurances without first asking permission from Congress.

This resulted in a Congressional hearing at which most of this information was revealed. Thank you, Library of Congress digitization services! The full title being: Hearings before the Finance Committee of the United States Senate on the Monetary Agreement between the Secretary of War and the Government of Panama 1904.

The Senate questioned and challenged Taft because it was unclear if he had the power to commit the US to such terms with Panama. Again, how can it be claimed that the US government imposed the dollar on Panama if the US government questioned how Taft himself could take this action?

During the Hearings, Taft based his defense on the point that he:

“… considered in this matter that it was as if the [Isthmian] Commission were making a financial arrangement with a view to securing a proper medium in which to pay their men.”

It's a clever framing. I want to remind readers that after Taft’s Presidency, he was also appointed Chief Justice of the US Supreme Court. The only person to have held both positions. But why did Taft even do this?

The risk of a monetary crisis in Panama was clearly fresh in the minds of the Panamanians. But it was also, more surprisingly, present in the mind of Secretary Taft. In the Hearings, he recounted that monetary stability was crucial in the Canal Zone because he saw the economic and administrative harm that occurs from monetary instability firsthand when he was the Governor of the Philippines:

Secretary Taft: I ought to add on the question of motive that what led be to take this action in respect to the currency and advise the President to confirm it was our experience in the Philippines in the same matter — while I was there silver fluctuated from less than 2:1 to 165:1 — and the difficulties that we had in paying our employees and the just complaints that we met at one time when we had accounts in three different currencies.

Taft was right. I believe this historical episode could have gone differently if Taft had not been the Secretary of War in charge of the Panama Canal construction, and for that matter, if Taft had not been the Governor of the Philippines immediately prior to his appointment. He represents a precarious hinge point in the history of dollarization in Panama.

Accordingly, the monetary agreement was approved by the US Congress and President, and later, the President of Panama confirmed its contents in Dreceto 74 de 1904, in which the President officially declared, “Apruébase en todas sus partes la Convención acordada Washington…”. (Funny enough, I had to visit the National Library in Panama to find readable copies of the full documents in the Gaceta Oficial in the early 1900s.)

Recap and Look Forward

Panama did not dollarize because of a macroeconomic crisis. Dollarization was part of Panama’s initial state-building process. The state leaders' monetary ideology was based on their recent experience of an inflation spiral caused by excessive paper money creation in Colombia. They wanted to avoid this entirely in their new country, so they chose the dollarization path.

It was a coincidence that the Secretary of War at the time was William Taft, who had first-hand experience with currency mismanagement in the Philippines. Taft knew the best way forward was to agree to the idea of the Panamanians to adopt USD as a legal tender in Panama. And he entered this agreement even though he was unsure if he had the power to do so by Congress. Yet, it worked. And today, Panama has the most stable monetary system in Latin America.

In the next post, I will discuss how Panama’s financial system currently functions under dollarization, where money is primarily digital. I will also explain the beneficial macroeconomic effects of full financial integration in Panama.

Frequently, I’m asked for recommendations for developing a better mental model of the Caribbean. My instinctual response is something like, “You should spend the first 20 years of your life living in a small Caribbean country,” but that is often infeasible.

In lieu of the first-best option, I have some reading material for you here to help construct or calibrate your mental model of the English Caribbean.

Some Important Notes:

1. Not all of the books on this list are good, but they are essential.

2. Yes, there is a lot of fiction included. Can you be a regional thinker if you cannot grasp the cultural literature?

3. This list is not for casually learning about the English Caribbean. This list is for those who are up to the hard work of understanding a region where curry, carnival, and Catholic Saints are unremarkable facets of daily life.

Development and Stabilization in Small Open Economies by Delisle Worrell

Development Planning: The Essentials of Economic Policy by Sir Arthur Lewis

In the Castle of My Skin by George Lamming

V.S. Naipaul:

• A House for Mr. Biswas

• In a Free State

• A Writer’s People

• The Mimic Men

• The Middle Passage: The Caribbean Revisited

Conscripts of Modernity: The Tragedy of Colonial Enlightenment by David Scott

Caliban’s Reason: Introducing Afro-Caribbean Philosophy by Paget Henry

Orlando Patterson:

• Slavery and Social Death: A Comparative Study

• The Confounding Island: Jamaica and the Postcolonial Predicament

Island People by Joshua Jelly-Schapiro

Victor Bulmer-Thomas (both excellent!)

• The Economic History of the Caribbean Since the Napoleonic Wars

• From Slavery to Services: The Struggle for Economic Independence in the Caribbean

The Birth of the British West Indies by Morley Ayearst

Calypso Calaloo: Early Carnival Music in Trinidad by Donald R. Hill

The West Indies: The Federal Negotiations by John Mordecai

Eric Williams:

• From Columbus to Castro: The History of the Caribbean 1492-1969

• Capitalism and Slavery

Britain's Black Debt: Reparations for Caribbean Slavery and Native Genocide by Hilary McD. Beckles (my detailed critique of the extended argument)

The Undiscovered Country by Andre Bagoo

Fidel: A Critical Portrait by Tad Szulc

Imprisoned in the Caribbean: The 1942 German U-Boat Blockade by Ligia Domenech

Warning from the West Indies by W.M Macmillan

Lectures on Colonization and Colonies: Delivered Before the University of Oxford in 1839, 1840, and 1841 by Herman Merivale

Babylon East: Performing Dancehall, Roots Reggae, and Rastafari in Japan by Marvin Sterling

C.L.R. James:

• The Black Jacobins

• Beyond a Boundary (I would also recommend learning how to play Cricket)

A Small Place by Jamaica Kincaid

Eric Williams and the Making of the Modern Caribbean by Collin Palmer

An Intellectual History of the Caribbean by S. Torres-Saillant

The Growth of the Modern West Indies (1968…) by Gordon Lewis

Bacardi and the Long Fight for Cuba by Tom Gjelten

The Path Between the Seas: The Creation of the Panama Canal, 1870-1914 by David McCullough

La Historia Me Absolverá (History Will Absolve Me) by Fidel Castro (Infamous speech)

Caribbean Interests of the United States (1916) by Chester Lloyd Jones

Cuba: An American History by Ada Ferrer

Ethnopolitics and Power Sharing in Guyana: History and Discourse by David Hinds

Frantz Fanon:

• The Wretched of the Earth

• Black Skin, White Masks

Caribbean Discourse by Édouard Glissant

Caribbean Art by Veerle Poupeye

The Caribbean in Sepia: A History in Photographs, 1840-1900 by Michael Ayre

The Farming of Bones by Edwidge Danticat

Notebook of a Return to the Native Land by Aimé Césaire

Apocalypse (Boston Review) by Junot Diaz (The best essay on fiscal coordination for public infrastructure in the Caribbean)

Collected Poems, 1948-1984 by Derek Walcott (A highly referenced poet…)

The Arrivants by Kamau Brathwaite (Actually a good poet)

Nuclear Folly: A New History of the Cuban Missile Crisis by Serhii Plokhy

The U.S. Invasion of Grenada Legacy of a Flawed Victory by Philip Kukielski

Errol Walton Barrow and the Postwar Transformation of Barbados by Hilbourne Watson

Bass Culture: When Reggae Was King by Lloyd Bradley

The Dutch in the Caribbean and On the Wild Coast, 1580-1680 by Cornelis Goslinga

Open for Business: Building the New Cuban Economy by Richard Feinberg

Transcultural Pilgrim: Three Decades of Work by José Bedia by Judith Bettelheim and Janet Berlo

Focus: Music of the Caribbean by Sydney Hutchinson

Dub: Soundscapes and Shattered Songs in Jamaican Reggae by Michael Veal

History of the Caribbean by Frank Moya Pons

Jamaica: Struggle in the Periphery by Michael Manley

Transatlantic Solidarities: Irish Nationalism and Caribbean Poems by Michael Malouf

The British West Indies by W. L. Burn

How Europe Underdeveloped Africa by Walter Rodney (highly influence text written by a Guyanese academic and activist who was assassinated)

Explosion in a Cathedral by Alejo Carpentier

Beka Lamb by Zee Edgell

Time for Action: Report of the West Indian Commission (1992) by Shridath Ramphal

The Report of West Indian Royal Commission (1945) by Lord Moyne

Wide Sargasso Sea by Jean Rhys

Windrush: The Irresistible Rise of Multi-Racial Britain by Mike Phillips and Trevor Phillips

West Indians and Their Language by Peter Roberts

These texts are a good starting point. You can judge your progress by continually listening to Lee Perry's music. If you can comprehend why his music best represents English Caribbean culture, then you are on your way. This list is not meant to be exhaustive.

Glaring Omissions

There should be at least two cookbooks listed. But alas, I have not yet found a Caribbean cookbook that is worth recommending.

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Delisle Worrell is a member of the Board of Directors of CPSI and the Former Governor of the Central Bank of Barbados.

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The story of the Barbados economy in the post-World War II period is one of successful development. What was in 1946 a desperately poor society with low life expectancy, high infant mortality, crowded and poorly maintained housing, and great disparities of wealth is today an emerging market economy with a human development index that is the highest in the Caribbean, and puts the country at Number 56 in the world, in the highest category of the UNDP's classification.

The story of the economy is also one of underperformance and squandering of much of the society's potential. It is a story of missed opportunities, lack of vision, and a failure to develop a body of thought that enriches global knowledge with insights that are unique to the experiences of small societies worldwide. The consequences have been especially harmful to economic policy.

Except for a brief moment in the late 1960s and early 1970s, economic policies in Barbados and the rest of the Caribbean have imitated those in advanced countries. Unsurprisingly, that has led to disappointing performance.

Essay Structure

This essay begins with a review of economic growth and macroeconomic stability in Barbados since 1946.

Investment is the engine of growth, adding to the capacity to produce and improve productivity; investment is the subject of the second section. That is followed by an analysis of fiscal policy and its impact on macroeconomic stability.

An important question is the extent of diversity in the goods and services produced in the country. We will see to what extent all the eggs are in one basket in the next section. As is widely recognized, the objective of economic growth is development; we will spend some time on the available measures of development and what they tell us about the material well-being of Barbadians.

We then move on to a discussion of Government policies and the extent of the Government's success in stimulating growth and development.

We end with an assessment of Barbados' economic performance, a discussion of what might have been done better, and some thoughts about future economic development in Barbados and the Caribbean.

Macroeconomic growth and stability

The phases of real economic growth that may be identified in Figure 1 are summarized in Table 1. The 1950s was a period of high growth, almost five percent annually, ending in 1963; the economy contracted in 1964, 1965, and 1967. There was a weak recovery in the early 1970s, with growth a little less than three percent per year, followed by another fall in output in 1974 and 1975. The recovery in the second half of the 1970s was stronger than in the sixties, matching the five percent per annum of two decades earlier. Once again, recession overtook the economy in 1981 and 1982. The subsequent recovery lasted until the end of that decade.

The years 1990-1992 were a period of balance of payments crisis and economic contraction, as emergency fiscal measures were taken to reduce domestic spending and imports in defense of the exchange rate peg. Renewed growth in 1993 petered out in 1999. An upswing in 2002 peaked in 2006 with a growth rate of nine percent. The impact of the Global Recession saw a contraction in 2009, and on this occasion, the economy stagnated for the rest of the period up to the present.

Figure 1.

Table 1. Growth, Investment, and Productivity

Instability, in a small open economy with a fixed exchange rate like Barbados, manifests itself in a loss of foreign reserves, which depletes the Central Bank’s war chest for defending the exchange rate and provokes capital flight.

Market perceptions of what constitutes an adequate store of foreign reserves have changed over time in Barbados. Up until the late 1980s, there was no apparent market apprehension about the exchange rate, even though, from time to time, foreign reserve levels were only 50 percent of the amount required to cover three months of imports, which became the norm following the 1991 balance of payments crisis (See Figure 2; the foreign reserves line is the ratio of actual reserves to the three (3) month cover). As we argue later, that reassurance was probably a reflection of the confidence afforded the market by the soundness of fiscal policy. Perceptions changed with the balance of payments crisis of 1991, the result of three successive years of deficits in the overall balance of external payments, which almost completely exhausted the Central Bank of Barbados’ stock of external assets.

The root cause of the problem was a persistent increase in Government spending, which provoked unsustainable levels of imports; strong fiscal correction in 1991 restored foreign reserve adequacy by the following year. Reserve levels remained healthy until 2010, when a precipitate decline started, eventually driving the economy into a balance of payments crisis again in 2018. The root cause, as in 1991, was fiscal: the failure to fully correct imbalances that had emerged as a consequence of the Global Recession.

Figure 2.

Investment and growth

Table 1 shows the relationship between investment and growth during the various phases outlined earlier. In the periods of highest growth (the 1950s and 1977-80), investment was quite low, less than five percent of GDP; in the periods of highest investment (1983-89 and 2000-08), growth was only moderate, just over two percent. Investment reached almost 20 percent of GDP in the economic slumps of 1981-82 and 2009 and was recorded at 13 percent in the balance of payments crisis of 1991-92. This suggests that investment was much more productive in the first three decades from 1950 than it became thereafter. This thesis is borne out by other evidence that can be brought to bear.

Changes in productivity may indicate the efficiency of investment; productive investment in technology, skills, and organization can increase returns, creating an upward growth spiral of production and investment growth. Figure 3 captures the combined effects of growth, investment, and labour productivity for the periods where we have all the data. Investment seems to have been most efficient in this sense in the 1977-80 growth period, when growth averaged 5.2 percent, even though investment was only 8.5 percent of GDP on average; labour productivity in this period grew at an average of 1.8 percent per year. Much higher investment levels in the 1983-89 and 2000-08 growth periods yielded more modest growth rates of 2.8 percent and 2.3 percent, respectively.

That may be partly because the corresponding labour productivity growth rates were a little lower, at 1.7 percent and one percent per year for these periods. Furthermore, an average annual investment rate of 16 percent of GDP in the 1993-99 growth period was associated with an average growth rate of only 2.3 percent; that rate would probably have been higher but for the fact that labour productivity fell during that period, at an annual average of 0.3 percent. Since 2010 an investment ratio of 18 percent of GDP has contributed to anemic growth, averaging only 0.8 percent per year, with productivity increasing at an average annual rate of one percent. Labour productivity fell in all three crisis periods, by 1.9 percent in 1981-82, two percent in 1990-92, and 1.3 percent in 2009.

Other evidence of productivity growth in earlier years comes from Winston Cox, who showed that labour productivity in manufacturing grew by one-third between 1970 and 1979. In the same publication, I measured output per thousand employees at BDS$2.2 million in 1946, rising to $8 million in 1980 for the economy as a whole. A factor that would have contributed to the low productivity of investment in the 2000s was the fact that much of the surge in investment at that time was on account of a boom in foreign investment for the purchase of second homes in Barbados, in contrast to investment in manufacturing and tourism in earlier periods.

Figure 3.

Fiscal policy and macroeconomic stability

The election cycle heavily influenced Fiscal policy in Barbados: the overall deficit exceeded six percent of GDP in 1959, 1973, 1976 and 1977, 1981, 1986 and 1987, and 1990. Five of these eight large deficits occurred around the time of an election, in 1971, 1976, 1981, 1986, and 1991. In the years prior to Barbad’ first balance of payments crisis in 1991, large fiscal deficits were usually followed by corrective measures, bringing the overall deficit to four percent of GDP or less and restoring savings on the fiscal current account (Figure 4).

Figure 4.

The economy suffered a major scare in the wake of the 1991 election when the expenditure stimulated by fiscal expansion caused a surge of imports that all but exhausted the Central Bank of Barbados’ foreign reserves and brought the country to the brink of a devaluation of the exchange rate.

A programme of deep cuts in the middle of the fiscal year restored the government’s current account surplus within the year, and the associated cutback in imports brought the balance of payments back into an overall surplus by 1992.

Financial support from the IMF helped to recharge the Central Bank's foreign reserves, which were 20 percent above the minimum of three months of imports by the end of 1992. Over the next two decades, it seemed that the lessons of the 1991 crisis had implanted in the social consciousness of Barbadians the crucial importance of maintaining surpluses on the current account of government’s operations and maintaining low overall deficits. For all of the 1990s and up until 2006 surpluses were maintained on the current account, and the overall deficit was contained to four percent of GDP or less.

However, the public memory proved unexpectedly short, as evidenced by the fallout of the Global Recession in 2008. The recession caused the collapse of the booming UK property market, which had fueled investment in properties in Barbados. The construction boom in Barbados was abruptly deflated, and foreign investment and government revenues fell sharply. The fiscal deficit was eight percent of GDP in 2009, rising to almost ten percent the following year, when the sudden death of the Prime Minister and Minister of Finance, David Thompson, left a vacuum in the leadership of the country and the management of its finances.

The new Minister of Finance, Chris Sinckler, tried to bring the situation under control and succeeded in reducing the deficit to five percent in 2011. However, with elections approaching in 2013, and with an unproven leader in Freundel Stuart, the temptation to prime the fiscal pump proved irresistible. Against the odds, Stuart narrowly won the 2013 election, but the fiscal deficit ballooned to a record 12 percent of GDP.

Over the next four years, the government made efforts to reduce the deficit, but they were never of the magnitude required, and by 2016, with another election looming, the deficit was still at five percent of GDP. Even more alarming, the Government’s current account by then had been in continuous deficit since 2008, with the excess of operating and financing expenses over revenue ranging between two and as much as ten percent (Figure 5). The relentless pressure of government deficit spending fueled consumption and imports, with no investment to stimulate improvements in competitiveness and additional foreign earnings.

The governing party held on to the bitter end, but with high debt, deteriorating creditworthiness, and plunging foreign reserves, a severe risk of exchange rate devaluation loomed. The incoming administration has gained a reprieve from devaluation with the help of finance from the IMF and other international financial lenders, with an adjustment programme that involves a combination of contraction of government expenditure, increased burden of taxation, and the repayment of old privately held debt on restructured, non-market terms.

Figure 5.

A comparison between the fiscal response to the balance of payments crisis of 1991 and the prolonged struggle to restore fiscal prudence in recent years is instructive. In 1991 the cut to the fiscal deficit was swift and decisive: the deficit of seven percent of GDP in 1990 was reduced to one percent in 1991, principally utilizing deep expenditure cuts, amounting to four percentage points of GDP. They included an across-the-board wage cut, together with a reduction in employment in the public sector. In contrast, more recently, expenditure has not been brought decisively under control, and this has made it more difficult to return the fiscal accounts to sustainability.

Government expenditure burgeoned from 33 percent of GDP in 2006 to 41 percent in 2013. Budget tightening in 2013 brought expenditure back down to 33 percent of GDP in a single year. However, revenue, which had been falling as a ratio to GDP since 2003, when the ratio was 33 percent, experienced a further sharp decline in 2013 and 2014, to only 26 percent of GDP by the end of the latter year. As a result, the 2014 deficit stayed stubbornly large, at 7.5 percent of GDP, despite the expenditure cuts.

The backlash against the expenditure correction induced the Government to relax some measures and abandon the reform of state-owned companies and other measures needed to achieve the targets of the fiscal correction. The ratio of expenditure to GDP rose in 2015, resulting in a worsening deficit despite the imposition of additional taxes. Tax increases and expenditure cuts in the next two years succeeded only in reducing the deficit from nine to five percent of GDP. By the end of 2018, the new Government’s IMF-supported adjustment programme had yet to take full effect, and the impact on expenditure was not yet apparent.

The Government’s wage bill remained at eight percent of GDP in 2018, not much changed from the previous year, and transfers to public enterprises had increased slightly, also to eight percent. The bulk of the reduction of four percentage points of GDP between 2017 and 2018 was contributed by cuts in interest paid to holders of domestic Government debt (two percentage points) and arrears of interest on foreign debt (one percentage point). Additional taxation contributed about one percentage point to closing the fiscal gap. (See Figure 4 and Table 2.)

Table 2.

Growth and structural change

Over the 1946-2018 period, the Barbados economy was transformed from dependence on sugar as the main engine of economic growth, with tourism a secondary source of foreign exchange, to today's tourism-dependent economy, with international business and financial services the secondary source of foreign earnings. Along the way, manufacturing rose to a level of importance almost equal to that of tourism by 1980, but manufacturing then suffered a long decline which has left it of minor importance in the economy.

Like all small open economies, Barbados specializes in exporting a limited range of internationally competitive goods and services, earning the foreign exchange to purchase internationally the wide range of products needed to sustain the modern economy. The competitiveness of exports attracts incoming investment which increases capacity and fuels growth and employment.

In the 1940s, the sugar industry was the main export, providing 55 percent of foreign currency inflows, followed by tourism. Sugar output grew significantly in the 1950s, with sales to the UK guaranteed at remunerative prices under the Commonwealth Sugar Agreement. Output peaked in 1957, and production averaged in the region of 200,000 tonnes per year until the late 1960s. By that time rising domestic production costs were undermining profitability in the industry, and output fell precipitously. By 1974 output had been reduced by half; in that year the CSA ended, to be replaced by the sugar protocols of the newly-formed Africa-Caribbean-Pacific (ACP) Group of countries trading with the European Union. The sugar industry never returned to profitability, and over the years since output and exports have declined to insignificance. (See Figure 6).

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Figure 6.

Tourism and manufacturing both overtook sugar as the most important foreign exchange-earning activity in 1971. Tourism then entered a sustained growth period that lasted until 2004. By that time, foreign earnings from tourism were well in excess of the combined earnings from other services and manufacturing, the only other international earnings sources of any importance.

There was no overall increase in hotel accommodation in Barbados during this period; the increases in real value added in tourism were a result of the enhancement of the product, through the upgrading of hotels, the development of ancillary and support services, and the emergence of purchases of second homes as a significant source of foreign earnings.

The property market boom, which was a spillover of the UK pre-recession boom, came to an abrupt end in 2007, and tourism lost ground in this segment which it is yet to recover, over a decade later.

In the early 1980s, the Barbados economy was more diversified than it has been before or since. Tourism, the main driver, was closely followed by a manufacturing sector that exported garments, processed foods, electronics, household chemical products, and other items. The still-declining sugar industry remained a significant third pillar of the economy.

Manufacturing, which like agriculture benefited from Barbados' relatively low wages at the time, grew steadily over the preceding decades to a peak real value added in 1980. Soon thereafter, a one-third devaluation of the Trinidad and Tobago dollar against the US dollar reversed the comparative wage costs in Trinidad and Tobago and Barbados. Unskilled and semi-skilled labour was now much cheaper in that country, and Barbados lost its most important regional market for manufactured exports. This was followed, over the subsequent decades, by the loss of electronics and service suppliers to the US and other markets. Manufacturing declined until its contribution to GDP in 2018 was only one-third as large as tourism.

For about three decades, from the late 1970s, companies established in Barbados to provide business and financial services (IBFS) internationally made a significant contribution to foreign earnings and economic activity. Although incentives for the establishment of such companies were in place since the late 1960s, active promotion by the Government began only in 1976. By the early 1980s, this new sector's foreign earnings were over 40 percent of the earnings from tourism, which remained in the lead by a very wide margin.

Earnings from IBFS activities fell back to 30 percent of tourism receipts at the time of the 1991 balance of payments crisis. After slow recovery in the 1990s, the sector experienced a boom period from 2000-2010, when its contribution to foreign earnings was 50 percent of those from tourism. Sadly, the business case for locating services in Barbados has largely been eroded by tightening international regulations aimed at curbing money laundering and tax evasion by international companies; revenues from the IBFS sector have declined to one-fifth those of tourism, their level of the mid-1970s.

Development indicators

The most substantial gains in the quality of life for Barbadians were realized in the 1950s, 60s, and 70s. In the 1940s Barbados already had achieved virtually full adult literacy, but in every other regard, the country was among the most wretched in the Caribbean. In the 1946 West Indian census, the life expectancy at birth was reported as 53 years for females and 49 years for males.

The country had a tiny middle class of artisans, teachers, policemen, and public workers, and a wealthy upper class of landowners, businessmen, and colonial administrators. The majority of the population lived in poverty, working on sugar plantations and doing unskilled manual labour. For many, there was a regular source of income only during the sugar harvest, which lasted for five months of the year. The inequality of income, which resulted, is reflected in the high GINI coefficient of 0.518 recorded in 1950.

The emergence of tourism and manufacturing in the 1960s and 1970s were major factors in transforming Barbados into an essentially middle-class society by the 1980s. Wages were significantly higher in tourism than in agriculture, and even though there was large seasonal variation in tourism, the degree of price and wage uncertainty was far less than in agriculture. An important contribution of the manufacturing sector was in providing jobs for the female labour force, which previously had few options other than agriculture and domestic service.

The universal emphasis on education which was a feature of Barbadian society reinforced the beneficial impact of economic diversification. The Government devoted resources to widening educational opportunities, and there was a strong response from the population.

In 1960 only eight percent of the population had a secondary education or better; by the mid-1990s that proportion had risen to 80 percent. The result was the emergence of a vibrant middle class of business professionals and skilled service providers.

In 1950, annual incomes per head in Barbados were no more than US$168; the great wealth disparity reflected in the high GINI coefficient translated into widespread poverty. A majority of the population lived in overcrowded conditions in houses in poor repair, with poor sanitation, no running water or electricity, and in indifferent health. Infant mortality rates were among the highest in the Caribbean.

A major transformation took place in the economy in the next three decades, and by 1980 the per capita income reached US$3,474 per year. What is more, that income was far more evenly spread across the population, with a GINI coefficient that had fallen to 0.356 by 1979. Life expectancy at birth rose dramatically in the 1950s and 60s, reaching 69 years in 1970. Over two-thirds of the labour force had secondary education in that year.

The income per head grew exceptionally fast in the 1980s (Figure 7; the data is shown in logarithmic form to accurately reflect rates of growth over time), providing households and government the wherewithal to consolidate the improvements in health, housing, and nutrition which were made in the previous two decades. Education had long been seen as the best tool of social mobility, and growing incomes enabled families to invest more in the education of their children. Permanent employment opportunities afforded improved diets and non-agricultural jobs offered more time for personal and household care.

With growing tax income, the government was able to widen educational access, particularly at the secondary level, provide affordable public housing, and establish a network of public health clinics. An effective nongovernmental agency promoted family planning with official support, and this, together with the growing middle class slowed population growth despite reduced infant mortality and longer life expectancy.

After 1980, social and material improvements were harder to come by: per capita GDP, which had increased nine-fold in the 13 years between 1967 and 1980, doubled over the next 13 years. Based on international purchasing power parities, GDP per capita in 2017 was two and a half times that in 1980. That compares with a twenty-fold increase to 1980. There was also further improvement in health conditions, with life expectancy at birth, increasing from 72 years in 1980 to 75 years in 2000.

Figure 7.

The social and economic transformation in the 1950s, 60s, and 70s contrasts with incremental gains made since. In the 1940s Barbados was an agricultural economy characterized by widespread poverty, poor health and sanitation, and inadequate housing, with unstable extended family relationships and overcrowding the norm. By 1980 Barbados had a more diversified mix of foreign earnings, led by tourism and manufacturing, with the declining sugar industry still of importance. A new and vibrant middle class had emerged with the resources to improve their material well-being.

New opportunities for women in manufacturing and year-round employment in non-agricultural activities helped to raise most of the working class out of poverty, and housing, health, and sanitation were now of good quality. In the subsequent decades, gains were made incrementally in all areas of human development. The Human Development Index for Barbados, which combines measures of GDP per capita on a PPP basis with indices for health and education, rose steadily from 0.732 in 1990 to 0.813 in 2018, leaving the country at #56 in the global rankings, one of two Caribbean countries listed as having "Very High" level of human development, the highest category.

Government policy, development, and macroeconomic stability

In this section, we discuss the ways in which Government policy affected economic growth, development, and macroeconomic stability. The significant ways in which the Government influences the economy are through the provision of social services and infrastructure, tax policy, fiscal incentives, and the legal and regulatory framework.

Government expenditure on public services

The government made major contributions to the availability and quality of public services during the period of greatest development gains (Figure 8). Spending on education topped the list from the 1950s, at almost three percent of GDP; by the 1970s that increased to seven percent, mainly reflective of the successful push to provide universal secondary education. Over the same period, spending on health services rose from around two percent of GDP to almost five percent, with the building of a new general hospital and a network of free primary care clinics, distributed across the island. Substantial spending on affordable housing was a major government thrust in the 1960s, expanding greatly on the earliest efforts in the 1950s. By the late 1970s, expenditure on housing had increased almost four-fold, to about two percent of GDP. Spending on pensions, personal transfers, and other miscellaneous social services rose steadily during this period, to about three percent of GDP by the late 1970s.

Figure 8.

The Government’s rising importance in the economy appears to have had highly beneficial effects on development during this period. Government expenditure rose from about 25 percent of GDP in the early 1960s to about 35 percent in the late 1970s. Almost all of the expansion, relative to GDP, was accounted for by education, health, social services, and housing. What is equally important, the Government increased taxation relative to GDP, maintaining a small surplus on the current account, to contribute to capital expenditure. Government expenditure was productive, and prudent fiscal management maintained fiscal savings.

In contrast, Government spending since 1980 has had less obvious results. Most categories remained at around 1980 levels relative to GDP or a little lower.

The main factor pushing up education spending in the late 1990s was expenditure on the expansion of the local campus of The University of the West Indies, an effort which increased the number of persons graduating but may have adversely affected the quality of their education and the employability of their skills.

Spending on health, social services, and housing kept pace with GDP growth, more or less.

The Government’s contribution to overall economic activity declined steadily from 1990, from 16 percent to 10 percent in 2018. In contrast, already in 1990 Government provided employment for as much as 22 percent of the workforce; by 2018 the employment contribution remained the same, meaning that the share of Government jobs is now twice the Government's contribution to GDP. That disparity is even more disappointing in view of the technological revolution that has taken place over these three decades (Figure 9).

Figure 9.

Overmanning and the decline in public sector productivity have been major factors in the decline in the quality and efficiency of public administration, recorded on the World Bank's Doing Business Reports and the annual Global Competitiveness Report (GCR) of the World Economic Forum.

The Barbados public sector is rated poorly in the processes affecting the establishment and operations of businesses, including trade and taxation. Major factors negatively affecting the island's competitiveness in the past decade included declining public trust in politicians, suspicion of social decisions, legal inefficiencies, wasteful government spending, and the burden of Government regulations, according to a recent GCR.

Tax policy

The most important single change in tax policy in Barbados was the introduction of a value-added tax (VAT) in 1997, to replace some indirect taxes previously collected, and to extend consumption taxes to services, which were not previously taxed. The rationale offered was to consolidate many previously disparate consumption taxes and simplify the collection system. The VAT failed in both those objectives: for various reasons, a number of levies and excises remain on the books, and the VAT has been plagued with arrears of payment and refunds by the tax authorities, errors, and disputes in calculating the value of services, and other difficulties.

The switch to the VAT worsened the tax system's impact on income distribution, increasing the relative burden on the lowest income groups. In the 1950s, taxes on goods and services, which are more burdensome on lower incomes, contributed no more than 14 percent of revenues.

The largest contribution at that time came from import duties, at about one-third of revenues (Figure 10). The progressive personal income tax contributed about 17 percent. Tax policy contributed to the improvement in the distribution of income in the 1960s and 1970s as the contribution of the personal tax rose to 27 percent of revenue by 1978.

Figure 10

A surge in consumption taxes and levies in the 1980s marked the beginning of a reversion to a tax system that put greater burdens on lower incomes. Goods and services taxes (not including import duties) reached 30 percent of total revenue in 1987. The impact of this shift would have been tempered by the effect of the income tax: Mascoll (1991) assessed the impact of the income tax in the 1980s, concluding that although the system shifted the burden somewhat against the middle class, the income tax system remained strongly progressive.

The introduction of the VAT has given a distinctively regressive bias to the overall tax system. In 2018 VAT accounted for 31 percent of revenues, twice the contribution from the personal income tax. What is more, a study by Boamah, Byron, and Maxwell (2006) found that the redistributive impact of the income tax had decreased between 1987 and 1999. The study has not been updated, but if that remains true, it aggravates the regressive impact of the increasing bias toward indirect taxes.

Capital expenditure

Capital expenditure was above two percent per annum of GDP and as high as six percent occasionally, right up to the time of the Global Recession (Figure 11). In most years, capital expenditure was funded, to a significant extent, from surpluses on the current account. In years of fiscal difficulty (1976-77, 1981-82, 1990), the government was dis-saved, having to borrow to close gaps between the current government spending and insufficient revenue. In all those cases fiscal correction in subsequent years restored a surplus on the current account. In the years from 2008 onwards, however, capital expenditure has averaged just two percent per year, and the Government has been obliged to fund such expenditure entirely by borrowing because current account deficits have been large.

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Figure 11.

Not only has capital expenditure been lower in relation to overall activity, it has been less efficient. Maintenance of Government properties and facilities has been inadequate, and there were numerous examples of temporary closure or abandonment of schools and public buildings as a result. The partially- completed sewerage system failed in 2016, and plans for completion of the system and installation of modern sewerage treatment appear to have been abandoned. Insufficient investment in water sourcing, storage, and distribution has left parts of the island chronically short of potable water. Piecemeal and inconsistent maintenance of the road network has resulted in poor surfaces and a need for large investments in rehabilitation and upgrades.

There was also insufficient investment in the island's port and airport, critical bottlenecks in an economy where international trade, tourism, and international business are at the heart of all economic activity. Both port and airport are in need of major upgrades that would significantly reduce costs and improve throughput. What is more, Barbados may be missing out on possibilities for port and airport expansions to link to global transportation networks.

Barbados' geographic position, the easternmost of the Caribbean islands, gives it a natural advantage in providing a node for transportation links across the Atlantic, north and south to the Americas, and west to the Panama Canal. However, successive administrations in Barbados have shown no interest in partnering with international transportation companies to take advantage of this potential.

Government policy and changes in the structure of production

Government plans and policies for promoting production and economic diversification failed to bring lasting change at any time during this period. In the 1950s Government raised what for the time was a very large sterling bond to fund the construction of a deep water port, with modern facilities for the loading of sugar, then the economy's principal export. The port has proved to be an invaluable resource, except for the sugar industry, which went into decline within a decade of the port's completion. Although responsibility for the failure of the sugar industry has to remain with the lack of a practical vision and strategy on the part of industry leaders, the absence of a consistent land use policy, and the Government's wrong-headed financing of badly run farms over several decades, served to hasten sugar's demise.

The introduction of a special low-tax regime for international business and financial companies wishing to establish in Barbados to provide services worldwide was the most innovative Government policy action taken to open the way for new activities. From small beginnings in the 1970s, the IBFS sector grew rapidly in the late 1990s and early 2000s, with a contribution to foreign earnings and Government revenue second only to tourism. However, few companies established in the sector had operations in Barbados large enough to avoid the "tax haven" label, and the sector has suffered a decline under relentless pressure from EU and Canadian regulators.

The Government’s policies for improving social and public services and building infrastructure were arguably far more important for Barbados' competitiveness and attractiveness to investors than were other more targeted measures such as financing and incentives. The areas in which Barbados scores above the average for Latin America and the Caribbean in the Global Competitiveness Index are health, ICT adoption, skills, the financial system, and business dynamism, reflective of the quality of health and educational systems, and the country's open economy.

On the other hand, measures such as fiscal incentives to industry, Government funding of enterprise, and state enterprises have all failed to have a noticeable impact on what is produced and exported. My 1989 paper on the impact of tax incentives found a strong bias in favor of the purchase of agricultural machinery, at a time when agriculture was in decline; no bias in favor of tourism, the economy's mainstay; and a weak bias in favor of manufacturing, which had passed its peak.

The Barbados Development Bank and the Agricultural Development Bank both fell into insolvency. At the same time, the Barbados National Bank, the state-owned commercial bank, proved to be a less profitable and less efficient replica of the international commercial banks operating in Barbados until its eventual sale to Trinidad-Tobago's Republic Bank. The largest state-owned commercial enterprise ever attempted, a cement factory, never made a surplus and was soon sold to Caribbean investors. Miscellaneous programmes of finance, advice, and support for small and medium enterprises over many decades may have served some social purpose, but they made no impact on production or employment in the aggregate.

In the 1970s import tariffs, quotas and other restrictions were popular with Caribbean Governments, in Quixotic attempts to stimulate import substitution.

As I have shown, economies as small as those of the Caribbean have no hope of competitively supplying locally-produced vehicles, steel, fuels, staple foods, clothing, appliances, chemicals, building materials, and all the many and varied goods and services which a modern economy needs. The Barbados Government did fall for the temptation to promote domestic import substitution, and a handful of domestic companies depend on tariff protection. However, import substitution never made a significant contribution to output, and protective measures have largely been eliminated.

The quality and appropriateness of macroeconomic policy turned out to be the most influential factor with respect to the Government's impact on development outcomes. In my 1987 study of Caribbean economies, I said "Fiscal policy has been the cornerstone of programmes that maintained economic stability, and the downfall of those that aggravated disequilibria". That assessment was made on the basis of experience in the English-speaking Caribbean between 1970 and the mid-1980s. Barbados' experience since that time, discussed above, confirms that conclusion. In the 2019 GCI Barbados has fallen below the Latin America and Caribbean average for macroeconomic stability. The country ranked 59th of 141 countries in overall competitiveness but only a lowly 109th with respect to macroeconomic stability.

Government policy and economic development: an assessment

The Barbados economy suffers from a peculiar malaise: the country boasts a very high level of human development and a wealth of talent, but there is in the society a pervasive sense of lack of purpose and direction. The economy has been in the doldrums since the time of the Global Recession, and young people are looking abroad to make their lives and careers and improve their prospects. After achieving some success in diversifying sources of foreign earnings in the 1960s and 70s, the economy has reverted to depending for its dynamism solely on tourism. Agriculture has virtually crashed out as a foreign earner, the manufacturing sector is in slow long-term decline, and the international business and financial services sector is faltering.

The Government continues to burden the tourism sector, the economy’s only vibrant source of vital foreign earnings, with an ever heavier load of largely inappropriate taxation. Inconsistent policies and poor quality of regulation have deterred or delayed over US$1 billion in new hotel investment since 2016. Fiscal incentives that are poorly designed and inconsistently applied continue to distort the local tourism product away from Barbados' competitive strengths in high quality, low volume, heritage, cultural, and other niches, as opposed to high volume and cruise tourism, which carry the danger of overcrowding, environmental degradation and devaluation of the tourist experience.

Insufficient and inefficient public sector investment and maintenance is reflected in deteriorating roads, public transportation, sanitation, water supply, and other public services. Public sector performance is well below the international standards required to achieve an acceptable ranking in the Global Competitiveness Report and the Doing Business Report.

Government policy is still characterized by capricious decision-making, inconsistent regulation, poor data and statistical flows, lack of timely publication of annual reports, and failure to make good on commitments. The new economic strategy which has secured the financial support of international financial institutions has increased the tax burden and resulted in unplanned layoffs in the public sector.

The intellectual establishment, globally and in the Caribbean, has provided no new ideas for economic strategies for growth and development in small open economies like those of the region. The current recommendations, unchanged for four decades or more, are for domestic economic diversification and regional cooperation. Those recommendations fail to reflect today’s reality of a Caribbean nation and economy that transcends national boundaries and answers to no single sovereign. It comprises a network of social, familial, cultural, business, and economic connections and transactions that reach across the Caribbean and into the diaspora. The future development of the Barbadian economy depends on its contribution to the economic development of this Caribbean nation.

Barbadian prospects for material betterment appear very appealing when seen in this light. Already individuals and families, in Barbados and the rest of the Caribbean, are availing themselves of opportunities which the breadth and diversity of this Caribbean nation affords, through migration, remittances, purchase of retirement homes, charitable donations, business establishment, franchising, financial networks, working remotely, traveling for work, and in many other innovative ways. Governments, including the Government of Barbados, should reformulate national policy with a view to achieving progress in this regional context, to enhance the competitiveness and reputation of the Caribbean in the global market.

Conclusion and Recommendations

I conclude with some concrete suggestions for Government policy in Barbados that leverage the country’s competitiveness and potential, to ensure that the national space once again becomes a leading node of Caribbean development.

The Government would need to rework fiscal incentives to promote quality in tourism and discourage cruise and high-volume tourism. It would have to provide more financial support for culture, heritage, sports, and other tourism niches. All government support to private enterprise, including tourism, would be conditional on the achievement of mutually agreed performance targets.

The government would need to contract with the best international expertise to complete a three-year makeover of public services and administration, to bring government services to an acceptable international standard of performance, and to publish reports and statistics in a timely manner.

A practical, time-bound action plan for the complete replacement of fossil fuel sources of energy is essential, with an action plan and three-yearly deadlines to keep the strategy on course. Renewable energy has the potential, in time, to provide the economy with a sector that would make a contribution to GDP comparable to that of tourism.

Government incentives, legislation, and regulation would have to be used to refocus the international business and financial services sector away from tax planning, and towards providing services domestically that are directly linked into the global value chains of international companies.

The Government would need to form strategic partnerships with international transport firms for the development and management of the Bridgetown Port and the international airport, to provide major nodes in Barbados for international transport networks.

The education system would be upgraded to provide language skills from the earliest years of schooling, together with improved quality and familiarity with modern communications tools, consistent with the country’s outward orientation.

The domestic currency serves little purpose in an economy which is oriented to the outside world; it should be abolished, and the US dollar, which drives the economy both in terms of income and spending, should be used as legal tender.

Barbados’ legal and regulatory framework should be recast in support of a new regionalism that incorporates services networked across the Caribbean and the diaspora.

Barbadians and members of the Caribbean nation are securing their future and making a name for the Caribbean nation on the global scene. All told, including the diaspora, the Caribbean is a mere sliver of humanity, but the people, the culture, and the achievements of the region are legendary. The responsibility of our Governments is to find appropriate and creative ways to ensure the parallel development of regional governance through policy reform that reflects the realities of the twenty-first century and the possibilities that are opened up by new technologies.

DeLisle Worrell’s latest book, published in 2023, is titled “Development and Stabilization in Small Open Economies Theories and Evidence from Caribbean Experience”

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How Britain Underdeveloped the Caribbean: A Reparation Response to Europe’s Legacy of Plunder and Poverty by Hilary McD. Beckles, UWI Press, 2021, 256 pp.

Britain’s Black Debt: Reparations for Caribbean Slavery and Native Genocide by Hilary McD. Beckles, UWI Press, 2013, 292 pp.

Suddenly, calls for reparations are everywhere. What was once a marginal political sentiment in Britain and the Caribbean a decade ago has metastasized into one of the defining characteristics of politics. This year has been a watershed for the movement. In February, the University of the West Indies co-hosted a symposium to discuss a report they commissioned to calculate reparation payments, concluding that Britain owed the Caribbean around $2 Trillion in reparations.

In April, a group of descendants of former plantation owners in Britain formed Heirs of Slavery, a lobby organization to champion reparatory justice for the Caribbean. In August, the President of Guyana, amidst a domestic oil-fueled economic boom, called for descendants of former plantation owners to pay reparations. Soon after, the Prime Minister of Grenada echoed the same. In September, a report published by the United Nations emphasized the need to “acknowledge that truth, justice, and reparations concerning enslavement, the transatlantic trade in enslaved Africans and colonialism and their legacies contribute to non-recurrence and reconciliation and benefit all of society.”

One of the wealthiest men in Ireland, Billionaire Denis O’Brien, announced he would be funding lobbyists to work with Labour MPs on British reparations plans for the Caribbean. In October, in Britain, the All-Party Parliamentary Group for Afrikan Reparations (made up almost entirely of Labour MPs) held a conference to discuss the necessity of Britain paying reparations and providing more comprehensive reparatory justice. This month, the African Union and Caricom (the Caribbean Community) agreed to form a “united front” to persuade European nations to pay reparations for “historical mass crimes.”

In every instance above, the intellectual thrust emanates from the Caribbean reparations movement - the core figure being the famed Caribbean Historian Prof. Hilary McD. Beckles, Ph.D. (styled, Sir. Hilary). All persons lobbying for Britain to pay reparations to the Caribbean cite and reference his work for justifications.

But from a close reading of Britain’s Black Debt and How Britain Underdeveloped the Caribbean, it isn't possible to agree with Beckles that British reparations for the Caribbean are justified on historical, economic, theoretical, or even philosophical grounds.

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I first encountered Dr. Beckles (History Ph.D. from the University of Hull in the UK) while studying CSEC Caribbean History (equivalent of British GCSEs). I devoured his two-part textbook Liberties Lost: The Indigenous Caribbean and Slave Systems and Freedoms Won: Caribbean Emancipations, Ethnicities and Nationhood. They were co-authored with Dr. Verene Shepherd (History Ph.D. from the University of Cambridge in the UK) and, to my mind at the time, the gold standard of clarity on Caribbean History.

Beckles is not an obscure academic who simply captured a cottage industry of revisionist history textbooks for Caribbean children. He is the Vice-Chancellor of the University of the West Indies (UWI) - the practical head of the main tertiary education facility for the region. Beckles is also the Chairman of the Caricom Reparations Commission and founded the Center for Reparations Research at the university he leads. Notably, the Director of the Center is his co-author mentioned above - Verene Shepherd.

Beckles’ two economic history books on British reparations for the Caribbean are well-regarded as the intellectual bedrock of the contemporary reparations movement, for which he is a leading figure. With his calm, dignified, aristocratic manner of speaking, he has given lectures on reparations globally from Harvard to Oxford.

Beckles’ overarching argument for reparations rests on three sub-theses across two books:

1. The profit made by the British during the Atlantic trade of enslaved people from Africa to the Caribbean was a necessary criterion for Britain's growth during the Industrial Revolution.

2. The profit from slave-produced sugar on Caribbean plantations was a necessary criterion for the growth of Britain during the Industrial Revolution.

3. The primary cause for the current underdevelopment and persistent poverty in the Caribbean was the extractive nature of British imperialism.

The first and second are interrelated, and the third is separable. I will discuss why doubt should be cast on each of the sub-theses of his argument. In so doing, it should cause the reader to question the premise and justification for British reparations to the Caribbean.

Beckles sets the foundation for his extended arguments favoring reparations in Britain's Black Debt. He asserts that a “considerable body of historical literature speaks to the contributions of the Caribbean in the eighteenth century to the financial and economic transformation of the British economy.” Soon after, he stresses further that “the Caribbean was the ancestral home of British imperial success as an economic superpower.”

The Williams Thesis Misdirection

Beckles deploys the ‘Williams Thesis’ to bolster his arguments to justify the Caribbean’s centrality in British industrialization. The basis of this argument stems from the work of Dr. Eric Williams (History Ph.D. from the University of Oxford) in his notorious book Capitalism and Slavery, first published in 1944. Williams is one of the few to be both a perennial academic and a pivotal politician. He was the first Prime Minister of his native Trinidad and Tobago and led the country from 1956 until his abrupt death in 1981.

Beckles refers to Capitalism and Slavery as “magisterial” and claims that it “represents the most persuasive articulation of the evidence” in favor of reparations for the Caribbean. Williams declared that Britain accumulated “great wealth from the triangular trade.” He was explicit in saying that the profits earned from the trade in enslaved people from Africa to the Caribbean “fertilized the entire productive system” of Britain.

Accordingly, Beckles takes forward this thesis to assert that Britain has a debt to the Caribbean because slavery in the Caribbean “fuelled the commercial engines that propelled the country into sustained development in the eighteenth century, creating the first industrial nation.” Notably, Williams himself never called for reparations; Beckles makes that extension. Given that the bedrock of Beckles's argument rests on the Williams Thesis, we need to ask if the Williams Thesis was correct. After decades of work, economic historians, and cliometricians, the Williams Thesis is unlikely to be right - it does not pass muster when examined with rigorous economic techniques.

Nowhere in Britain’s Black Debt does Beckles seriously engage with the economic debate of whether the data and reasoning used by Williams are justified. He merely reproduces Williams's ideas and adds additional comments from subsequent fellow traveler historians who agree with Williams. Beckles instead refers to the modern counter-arguments to Williams as “a literature of scholarly denial” and essentially dismisses them as “eurocentric and sometimes with racial undertones.” But if we assess the counterarguments to Williams, we will see that Beckles does not have sufficient justification for his own thesis.

British trade with the Caribbean in the early 1770s was material. In his book Empire, Niall Ferguson explains that “trade with the Caribbean dwarfed trade with America: in 1773, the value of British imports from Jamaica was five times greater than those from all the American colonies. Nevis produced three times more British imports than New York between 1714 and 1773; Antigua three times more than New England. Sugar, not tobacco, was the biggest business of the eighteenth-century colonial empire.” But we need to assess the impact of the Caribbean economy directly on Britain relative to other industries as time went on.

In a paper in the Journal of Economic History published in 2000, David Eltis and Stanley Engerman strongly critique the Williams Thesis and its progeny. Suppose Williams is correct that the “slave trade” was a significant contributor to (or even a necessary condition for) British industrialization. In that case, we should be able to see this in these data. But from analyzing the shipping scale of the slave trade, Eltis and Engerman show that “the largest number of slave ships to leave Britain in any five years was between 1798 and 1802 - long after the beginning of the structural changes in the British economy that have been termed the Industrial Revolution.”

They demonstrate that in 1792 when the most slave ships sailed from Britain, there were just 204 ships. But that same year, according to the data, “14,334 vessels were registered in Britain, totaling 1.44 million tons.” This means that the “slave trade thus accounted for less than 1.5% of British ships and less than 3% of British shipping tonnage.” It may not seem intuitive, but the slave trade, even at its zenith, was a modest component of the British economy, according to these data.

According to estimates cited by Eltis, the income added by the Caribbean sugar sector was less than 2.5% of the British national income. Unambiguously, Caribbean sugar plantations did not contribute significantly more than other industries in Britain.

Moreover, Britain was not a mono-crop economy. Other industries were present - providing more to the overall national output than sugar. In the table above from Eltis and Engerman, the value-added by West Indian sugar was not substantially high to the British economy. In fact, the flax and linen industries in Ireland and Scotland grew from insignificance to generate revenues greater than those of the sugar industry in the Caribbean. According to Eltis, flax and linen “profits in this era of expansion was no doubt healthy, and a portion of them were certainly spent on infrastructure and industrial activity in England.” However, Historians have not argued that British industrialization could not have occurred without Scotland or Ireland being within the Kingdom’s economic realm.

Beckles does not engage with these data-driven counterarguments. Instead, he believes that evidence is an obstacle to his narrative, lamenting that “economic historians often tend not to see the role of human suffering in the enrichment of others, preferring to focus on quantitative relationships.” This is not the engagement of a scholar, but a polemicist.

Why Britain and Not Portugal? What About India?

It is unlikely that the direct trade of enslaved people from Africa to the Caribbean significantly contributed to the industrialization of Britain, as Williams proposed. However, subsequent scholars have suggested that it was the “system” of Caribbean-Atlantic slavery that provided a significant contribution. That is, not the trade but the plantation economy of slave-produced sugar in the Caribbean.

There is a rigorous debate in the economic history literature about that specific question. One path to take is to do as Niall Ferguson would and ask a counterfactual question: What if Portugal had industrialized first? Or, to think about it differently, why didn’t Portugal industrialize first? As Eltis and Engerman explain, the “Brazilian slave system comprised a far larger share of a notional Portuguese-Brazilian transatlantic economy than did the plantations produce for the British-Caribbean equivalent.”

If the Caribbean plantation system caused British industrialization, then so, too, should have been the Portuguese offshore plantation system. But, of course, this did not occur. Or you could ask the same about the more productive French Empire plantation system. Again, in Eltis and Engerman, by 1770, the “French Caribbean was producing 17 percent more sugar, nine times more coffee, and 30 times more indigo than its British counterpart”. Beckles does not engage on why Britain experienced the Industrial Revolution before France. Moreover, in 1846, when Britain enacted the Sugar Duties Act to remove taxes on sugar imports from non-British colonies like Brazil or Cuba, the Caribbean planters bitterly complained because they could not compete with those countries on price.

An important implication should now be apparent: Britain's Industrial Revolution could have occurred unencumbered without the Caribbean plantation system.

To go further, the economic historians Leigh Gardner and Tirthankar Roy argue that any assessment of the rise of Britain cannot isolate away the importance of the Indian Ocean trade. He is right. British trade in India and more comprehensive Asia (slave-based and not) concurrently with the Atlantic world throws a wrench into the workings of the Williams thesis. As Roy puts it, the “world was considerably larger and more diverse than the sugar plantations of the Caribbean.” Beckles does not attempt to parse out relative contributions to British income. He merely says that we should be enlightened by the knowledge we received from Williams - no matter how flawed.

Beckles has no interest in debate. To him, the baseline for authentic scholarship is ideological affirmations, explicitly saying that scholars with a “deep intellectual commitment to social justice tended to treat the issues raised by Williams more fairly.” This might cause unease when you realize that Beckles heads the most important university in the Caribbean.

Technology, Not Capital

Beckles’ commitment to “social justice” is just a sleight of hand for his commitment to Marxist and Socialist paradigms. In Britain’s Black Debt, Beckles reminds us that “Marx saw it clearly,” that regarding the Industrial Revolution, slavery “facilitated its rise and maturity. It nurtured it, enabling it to grow faster, become stronger.”

Like most Caribbean intellectuals, Beckles frames his mental models of the world through a Marxist lens. He (like Williams before) focuses on the potential capital contribution of slave-produced sugar and the Atlantic slave trade to explain the British Industrial Revolution. But this Capital-foundations approach needs to be amended since the Industrial Revolution was fundamentally about technology, not capital.

Joel Mokyr argues in The Holy Land of Industrialism that “it remains a difficult task to demonstrate Eric Williams’s (1944) argument that the slave economy and Atlantic trade were critical factors in the Industrial Revolution” because such a slave economy “would have done little to drive the technological breakthroughs of the Industrial Revolution had there been no prior high level of engineering competence.” He observes that “some of the more striking innovations in the Cornish copper industry occurred before the rapid expansion of sugar production in the Caribbean.” It was the presence and advancement of “Upper Tail Human Capital” (to use Mokyr’s term) coupled with other complex notions and mixes of “institutional development” and “ideological shifts.” Economic historians such as Anton Howes and Deirdre McCloskey are worth reading here.

By asserting without argument that Williams is right, that capital from the Caribbean was a necessary condition for the Industrial Revolution of Britain, Beckles has incurably damaged his conclusions. If this is all his reparations argument rests on, it fails on its merits. But there is another part to Beckles’s argument. He also says Britain is the source of the Caribbean underdevelopment even after independence. I will turn to this now.

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In How Britain Underdeveloped the Caribbean, Beckles doubles down on his earlier work to claim that Britain “thwarted the region’s ability to bring about sustainable development.” He complains of Caribbean leaders not yet “demanding” reparatory justice, resulting in them being “ushered down the dead-end track of crippling debt.” These strong assertions would require careful economic reasoning and significant data. Early on in this book on economic growth (broadly), Beckles does gesture that this may be his intent, saying that to produce the contents of the book, he has “straddled the disciplines of economic history, economics, and political science…”.

However, finding coherent economics within the book takes a lot of work. Beckles did not give any explicit definition for what he means by “underdevelopment.” I can only assume that he means it as a synonym for “impoverishment” or “poverty.” Yet, anyone who has lived in or visited the Caribbean would quickly wonder if “poverty” is the best term to describe most of the Caribbean.

Pre-Independence Progress was Good

In any case, I will take the broadest definition of “underdevelopment” to mean sub-optimal economic outcomes. Even here, this is still a relative assessment; outcomes can only be sub-optimal relative to some optimization criteria. So then, compared to what is the Caribbean underdeveloped? Beckles never provides a clear answer. This makes it very difficult to test his hypothesis. Perhaps this is why he preferred a vague premise.

His line of argument is frustrated by the fact that, according to DeLisle Worrell in his book Development and Stabilization, that in Barbados, “although gains have continued to be made in the years since Independence in 1966, the essential transformation was achieved in the 1950s and 1960s.” That is, the bulk of the growth achieved by Barbados occurred during the colonial period. Indeed, the country's sole hospital was opened in 1964 (before independence). The sole deep-water port was opened in 1961 (before independence).

Or a simple example of monetary credibility. In the colonial period, the Cayman Islands was a part of Jamaica and used the same currency. When Jamaica moved towards independence, the Cayman Islands chose to remain a dependency of Britain. When the Caymans created its currency in 1972, it was fixed at par with the then value of the Jamaica Dollar and has remained unchanged from that original exchange rate since then.

So then, these days both countries should have the same fixed exchange rate if they maintained the credibility of their monetary institutions since the 1970s. Currently, the exchange rate of $1 Cayman Dollars to USD is $1.20. But $1 USD can now be exchanged for 154 Jamaican dollars. Over the years, the money of an independent Jamaica has precipitously deteriorated in value, but in the Cayman Islands (still a British territory), the money has remained strong.

Caribbean Counterfactuals

Beckles is on a sticky wicket. The Caribbean is perhaps the worst region to attempt his argument because we can create credible counterfactuals asking: “What if Caribbean-Country-X did not become independent from Britain”? Given that some Caribbean countries are still not independent of Britain (and other empires), we have strong reason to think the currently independent countries would have been better off maintaining their links to the UK.

Dr. Worrell, the former Governor of the Central Bank of Barbados, compares the current performance of independent and dependent Caribbean countries.

Again, in Development and Stabilization, he writes:

…in a comparison of the Caribbean islands of Puerto Rico, the US Virgin Islands, Martinique, Guadeloupe, the Cayman Islands, and the Turks and Caicos islands, which are all dependencies of or integrated into the US, the UK and France, with independent Caribbean nations of similar size. The population of Jamaica, almost three million, is about the same as that of Puerto Rico, and the islands are about the same size. Puerto Rico’s GDP (US$103 billion in 2020), however, is seven times that of Jamaica (US$14 billion). Martinique, a neighbor of Barbados, about the same size and population, records a GDP of US$9 billion, twice as large as Barbados’ US$4.4 billion. The Cayman Islands, with a quarter of Barbados’ population, has a GDP which is almost 20 percent larger.”

The Caribbean countries that are still dependencies (colonies by a different name) generally outperform the independent Caribbean countries. A primary reason for this is that they have higher state capacity because their institutions can be populated with talent from the wider UK.

Even in steep institutional decay within a Caribbean dependency, the UK government can correct underlying problems. Indeed, in 2021, the British Governor General (the effective Head of State representing the King) of the British Virgin Islands ordered an audit of the BVI public sector. This followed the elected Premier of BVI being arrested in the U.S. on strong allegations of money laundering and cocaine smuggling. The extensive and rigorous audit report is almost 1000 pages, assessing the corruption in the BVI and giving recommendations for paths forward. This kind of course correction imposed on weak institutions is absent in the other equally small but independent Caribbean countries.

Global Counterfactuals Unexplored

Elsewhere, Niall Ferguson, in his book Empire, provides a different attempt at the underdevelopment comparison:

Today, for example, per capita GDP in Britain is roughly twenty-eight times what it is in Zambia... But to blame this on the legacy of colonialism is not very persuasive when the differential between British and Zambian incomes was so much less at the end of the colonial period. In 1955, British per capita GDP was just seven times greater than Zambian. It has been since independence that the gap between the colonizer and the ex-colony has become a gulf.

Or yet another example, from Nigel Biggar, in his book Colonialism, comparing Ethiopia and Southern Rhodesia (modern Zimbabwe) in 1960:

Whereas the latter had been subject to European rule for seventy years, the former had retained its independence except for a brief period of Italian occupation in 1935-41. Yet, with only one-sixth the size of the other’s population, Rhodesia outperformed Ethiopia dramatically in terms of modern development.

These examples may not provide definitive proof, but they suggest that it is more complex than Beckles gives credit to assert that British colonialism impoverished Caribbean countries leading up to the period of independence.

Sovereignty Is Not Obviously Better

In Development and Stabilization, Worrell questions whether gaining political sovereignty was economically responsible for Caribbean countries. He makes the unintuitive point that “sovereignty does not equip the small open economy with any additional economic tools and may mislead leaders into adopting policies that impair the well-being of the society, or large sections of it.” Given the lack of public sector capacity and lack of sophisticated leadership of independent Caribbean governments, Worrell argues that “all too often the internal redistribution of wealth on independence results in a decline in overall national productivity, resulting in a contraction in earnings from exports, tourism, and other traded services. In these cases, the exercise of national sovereignty has worsened the material well-being of the population of the new nation.”

This sentiment is echoed by the Trinidadian poet Andre Bagoo in his collection of essays, The Undiscovered Country. He maintains that “the concept of independence is of as little use today as it was in the 1960s”. “The idea of the sovereignty of small nation states,” Bagoo writes, “is pure fiction in a world where the economic prosperity of one country mostly depends on the prosperity of others.” To go deeper, Bagoo is skeptical of the philosophical grounds for Caribbean independence. He continues, “Independence in the 1960s had the outward semblance of inevitability. In truth, it was the least appropriate option on the table.”

At the core of the independence movement, Bagoo is correct to say, was race: “It was racism that shaped the world during the 1950s and 1960s, ensuring that the empire on which the sun never set did not become a beacon of light.” During that period, it was unthinkable that black women and Indian men would sit in Westminster to form His Majesty’s government. Bagoo argued that independence was simply a form of isolation - not freedom. The correct path forward would have been to integrate the Caribbean colonies fully into the United Kingdom, not separate away to drift aimlessly into economic stagnation.

In the House of Commons earlier this year, Labour MP Bell Ribeiro-Addy asked Prime Minister Sunak for his administration to apologize for British slavery formally. One can get a sense of the irony from that one image alone.

But to Beckles, it is “obvious” that independence was the correct path. Yet he fails to acknowledge British assistance in pre-independence Caribbean growth and neglects to discuss concrete post-independence economics.

In one instance, Beckles asserts that the Caribbean “today has one of the highest debt-to-gross-domestic product ratios in the world, standing in excess of 100 percent threshold which nullifies the potential for growth.” At best, it is tenuous to remark on current macroeconomic variables, invalid for an argument about centuries-old “exploitation.” But it becomes farcical when the particular statistic only worsened in recent years, decades into the independence of the Caribbean. World Bank data shows Barbados' debt-GDP ratio in 2016 was 146.9%. But just ten years early, in 2006, it was 62.4%. It is not responsible to assert that British exploitation in the pre-independence period caused Barbados to increase its debt-GDP ratio from 2006 to 2016.

Yet, Beckles tells us that “despite decades of heroic efforts by state and civil society,” the independent Caribbean cannot advance its economic development. Recent Caribbean governments' lack of fiscal management has caused the current lack of economic progress, not exploitation, centuries ago.

Current Fiscal Mismanagement Is the Problem

Beckles dedicates How Britain Underdeveloped the Caribbean to Mia Mottley, the current Prime Minister of Barbados. So, let’s consider Barbados.

In the most recent report of the Auditor General of Barbados, it was found that, to date, almost all state-owned enterprises do not have accurate accounting records. The Auditor General cannot locate large swaths of money in government accounts and has flagged most of the procurement processes of the public sector. It is difficult to see how Beckles can blame this on centuries-old British “exploitation.” The problems of independent Caribbean countries are fiscal mismanagement carried on by low-capacity public sectors led by unserious politicians.

The Mottley administration even unilaterally defaulted on its international commercial debt in 2018 (my podcast on this), even though many economic and financial analysts thought the move was unjustified. This has caused Barbados to lose market access to international loans, putting it in a precarious credit situation that continues today.

If Barbados' political and fiscal institutions are not mature enough to keep credible financial records of its everyday workings, I would also expect money from reparations payments to go unaccounted for and lack a viable distribution or allocation strategy. These conditions of low-capacity institutions are equally present across all independent Caribbean countries.

How Britain Underdeveloped the Caribbean does not concretely explain why and how the Caribbean’s recent sub-optimal fiscal performance developed. Instead, Beckles makes these zero-evidence assertions that “the scholarly literature and recent archival documents … also show that the institutional system of poverty bred by colonialism can be identified in socio-economic measurements.” Where are these measurements? What exactly is being measured? We are left wanting.

What we got instead of an economic argument was an ideological affirmation. Beckles says that the book aims to “recenter the history and heritage of the wealth-extraction model Britain used in [the Caribbean] for three hundred years” and to call on “Western nations that grew fat on the crimes committed against humanity in the region to settle” the debt owed to the Caribbean.

When Can Reparations Be Justified

Reparations can be justified under some conditions. A glaring omission from Beckles is an explicit schema on under what conditions reparations can be justified. We could have used this set of premises to construct a useful mental model of what can be done with arguments. However, in his book Colonialism: A Moral Reckoning, Nigel Biggar presents a schema for when reparations can be justified. From his perspective, reparations can be justified “ where it is clear that a just law or treaty was broken, what right was violated, who held the right, who are the descendants of the right-holders and who should make good the loss.” That is, the path from violation to compensation must not be nebulous. All actors and agents must be uniquely identifiable, and the legal torts must be valid and mutually agreed upon.

For concreteness, the case of Mutua & Others v Foreign and Commonwealth Office provides an example. In 2009, the British law firm Leigh Day commenced legal action against the British Government in the High Court in London, initially representing five elderly Kenyans who had been detained and tortured by the British colonial administration during the 1952-1963 “Kenyan Emergency” (often called the Mau Mau Uprising). As the courts validated the case, the class action expanded to include over 5000 victims who were also tortured and detained during that period. In June 2013, the British government and the claimants announced an out-of-court settlement. To many, this case is hailed as an “unprecedented” example of justice for victims of colonial oppression - particularly noted by Caroline Elkins in her book Legacy of Violence: A History of the British Empire.

But there were clear tort liability issues at hand (torture, negligence, abuse). There were uniquely identifiable direct victims. Of the 50,000 potential claimants in Kenya, 15,000 people were selected for one-to-one interviews, and of those, Leigh Day (the law firm) put forward 5,228 cases, which were credible cases of torture and abuse.

Now, you can be suspicious of calling this a case of reparations. And I would agree with you. This compensation path is no different from any typical tort law case usually heard by the courts. It would only be a sleight of hand to use this as a model of reparatory justice for damages to descendants of people 300 years ago.

Yet, this presents yet another risk. After this settlement was reached, the issue in Kenya became increasingly politicized. You have a larger number of supposed victims calling on the Kenyan government to extract more money from Britain. Others claim that some of the persons compensated in the original settlement should not have been because they were part of the guards committing the torture. A new case is being brought to relitigate the original from other Kenyan groups. In effect, the issue is now more chaotic, with more political backlash domestically in Kenya. I suspect any potential move towards a compensation scheme from Britain to the Caribbean would result in more, not less, political troubles.

A Straussian Plan

From a close reading of Britain’s Black Debt and How Britain Underdeveloped the Caribbean, it isn't possible to agree with Beckles that British reparations for the Caribbean are justified on historical, economic, theoretical, or even philosophical grounds. Yet, his work forms the core of the most nihilistic document ever endorsed by Caribbean leaders: the 10-Point Plan.

The 10-Point Plan of Reparatory Justice is a manifesto adopted by the Caribbean Community’s (Caricom) Reparations Commission (CRC). Caricom is the intergovernmental organization of Caribbean governments. You can think of it as a mini-United Nations of Caribbean-only countries with even less utility. According to the Reparations Commission, and by extension, Caricom, they see “European colonial rule as a persistent part of Caribbean life.” Further, the CRC asserts that European governments “defined and enforced African enslavement and native genocide as in their ‘national interests’” and “imposed for another one hundred years policies designed to perpetuate suffering upon the emancipated and survivors of genocide.”

As stated earlier, Hilary Beckles is the Chairman of the Caricom Reparations Commission. His intellectual fingerprints should already be evident in some of the quoted terms. This 10-point plan is referenced by almost every institution that lobbies for reparations in Britain. It is referenced by the Heirs of Slavery group. The 10-point plan is even supported by the Irish billionaire funding Labour MP lobbyists in Britain. It tries to take an all-encompassing view of what reparatory justice should involve beyond money transfers.

The 10 points of the plan are the following (summarised):

Full Formal Apology: “The healing process for victims and the descendants of the enslaved and enslavers requires as a precondition the offer of a sincere, formal apology by the governments of Europe.”

Repatriation: “The transatlantic slave trade is the largest forced migration in human history and has no parallel in terms of man’s inhumanity to man... The descendants of these stolen people have a legal right to return to their homeland.”

Indigenous People Development Program: “Genocide and land appropriation went hand in hand. A community of over 3,000,000 in 1700 has been reduced to less than 30,000 in 2000. Survivors remain traumatized, landless, and are the most marginalized social group within the region.”

Cultural Institutions: “European nations have invested in the development of community institutions such as museums and research centers in order to prepare their citizens for an understanding of these Crimes Against Humanity (CAH). There are no such institutions in the Caribbean where the CAH were committed.”

Public Health Crisis: “The African descended population in the Caribbean has the highest incidence in the world of chronic diseases in the forms of hypertension and type two diabetes. This pandemic is the direct result of the nutritional experience, physical and emotional brutality, and overall stress profiles associated with slavery, genocide, and apartheid.”

Illiteracy Eradication: “Caribbean governments allocate more than 70 percent of public expenditure to health and education in an effort to uproot the legacies of slavery and colonization. European governments have a responsibility to participate in this effort within the context of the CRJP.”

African Knowledge Program: “A program of action is required to build ‘bridges of belonging’. Such projects as school exchanges and culture tours, community artistic and performance programs, entrepreneurial and religious engagements, as well as political interaction, are required in order to neutralize the void created by slave voyages.”

Psychological Rehabilitation: “For over 400 years Africans and their descendants were classified in law as non-human, chattel, property, and real estate. They were denied recognition as members of the human family by laws derived from the parliaments and palaces of Europe. This history has inflicted massive psychological trauma upon African descendant populations.”

Technology Transfer: “The Caribbean was denied participation in Europe’s industrialization process, and was confined to the role of producer and exporter of raw materials. Generations of Caribbean youth, as a consequence, have been denied membership and access to the science and technology culture that is the world’s youth patrimony. Technology transfer and science sharing for development must be a part of the CRJP.”

Debt Cancellation: “The pressure of development has driven governments to carry the burden of public employment and social policies designed to confront colonial legacies. This process has resulted in states accumulating unsustainable levels of public debt that now constitute their fiscal entrapment.”

Even though these points may seem too extreme, remember that each Caribbean country has embraced and supported this CARICOM Reparatory Justice Programme (CRJP) plan.

Let’s not mince words. The barbarism of slavery is beyond restitution. But what is striking to me is how blatantly nihilistic these points are. When I read them, I see a group of governments saying, “we give up; we cannot fix our problems.” After decades of self-rule and more decades of independence, the movement says they need Britain to release them from their trauma.

You should read this plan like an enlightened Straussian. Underlying the explicit content, the implication is that Caribbean governments are saying they should have chosen something other than independence. To me, Caribbean governments are saying that real reparatory justice is rejoining Britain.

If the Caribbean countries were still territories of Britain, they would have more direct access to most of the things they requested as “reparations.” I am a Barbadian citizen. If citizenship of Britain were extended to the former colonies, I would have access to all the cultural institutions, educational facilities, health facilities, migration facilities, etc., just like anyone else born in Britain. Britain would also be involved in fiscal transfers and external debt management like for British Caribbean overseas territories.

This is the reality for the French Caribbean countries. If you are born in Martinique, you are a French (and therefore European) citizen. You can move through the world more efficiently and with more significant optionality.

This, to me, is the fatal conceit. Caribbean governments seek absolution by abrogating their responsibilities. These governments, led by the Beckles Commission, demand reparations from Britain because they do not want to do the necessary work to reform their public sectors, design and implement credible fiscal policies, and fix the long but meaningful list of sound governance strategies.

The perverse logic of the Caribbean reparations movement is to maintain a preference for discourse centered on faded historical harms instead of present-time difficult truths: that the biggest impediment to progress in the Caribbean is the current independent governments, led by black people.

If you understand this, you may need to admit that we are the ones who need to do the work at home.

You might not have heard of Anguilla, a Caribbean island that lies east of the Virgin Islands. One of Britain’s 14 overseas territories, Anguilla has a population of 15,780 (just over 3000 in its capital - The Valley) and is about 2.9 times the size of Manhattan. To the Internet Domain Name System, however, the tiny tropical island of Anguilla isn’t much different from India or Canada. It too, is entitled to a domain extension: .ai.

The AI boom created a new interest in Anguilla’s country code top-level domain, or ccTLD, as tech companies like Character.ai, Perplexity.ai, and Elon Musk’s X.ai opted for the less conventional suffix. Since the release of ChatGPT in November 2022, the total number of .ai domains has doubled. It amounted to a total of 287,432 by late August, according to Vince Cate, the technical manager for .ai. 

Domain sales are generating revenue for Anguilla’s government. Per Cate’s estimate, the domain registry is currently generating $3 million in revenue every month for the government, which is somewhere around a third of its monthly budget.

Anguilla isn’t the only micro-state with significant government revenue from domain sales, though its relative scale is unmatched. Tuvalu, an island nation in the South Pacific, famously paid for its entry to the United Nations by selling the license for .tv to a US firm at the height of the dot-com bubble; its government made close to $5 million from ccTLD sales in 2022, or 8% of its total revenue that year. Montenegro’s revenue from the .me domain amounted to 2% of total exports in 2015, with the vast majority of the registrant coming from abroad. 

These top-level domains are sold, traded, and auctioned as commodities—to be exported by small governments to foreign startups, registrars, and investors in exchange for revenue. But it hasn’t always been that way: in fact, the internet’s early pioneers had intended these digital resources to be community-run infrastructure that served a public function.

The story of domain names begins with the ARPANET. Commissioned in 1968 by the US Department of Defense for research purposes, the Internet’s precursor was reaching universities across the United States. Machines were able to communicate with each other—exchanging data and transferring files—through socket numbers. While it was customary to use specific socket numbers for certain tasks, users who weren’t aware of these common practices could potentially create confusion, if not chaos. In 1972, a computer scientist at UCLA named Jon Postel half-jokingly appointed himself as the “czar of socket numbers”—a central authority who allocated identifiers to users on the network. 

It’s easy to be a czar in a small town like the early ARPANET, where everybody knew everybody; its expansion and transition to the internet in the 1980s, however, saw two changes. First, because socket numbers (and later IP addresses) are hard to remember, the Domain Name System (DNS) was implemented to allow for access to computers by their unique text-based domain names. Second, Postel’s one-man team could no longer allocate domain names for everyone on the internet. He proposed generic top-level domains (gTLDs) like .com, .org, .gov, and .mil to be managed by their respective registrars, which oversaw all registrations under its extension. The internet becoming public also meant that it was global, so Postel and his colleague Joyce Reynolds envisioned a domain suffix for each country—a scheme that would later become known as ccTLDs. 

The first ccTLD in use was .us, originally created in 1985 and administered by Postel himself. But for other countries, he appointed local managers. The establishment of ccTLDs often predated government internet authorities, so the administrators were often university labs or computer researchers. His delegation was on a first-come, first-served basis; he suggested in ARPA’s MsgGroup that the “responsible person” for second-level domains “is generally the first person that asks for the job.”

In 1994, the California native and Berkeley libertarian Vince Cate dropped out from his PhD program at Carnegie Mellon, where he was designing the Alex filesystem. He wanted to relocate to a tax haven but couldn’t afford living in Bermuda or the Cayman Islands. He moved instead to Anguilla, where he paid $470 a month on rent to kickstart an email business. In Anguilla, he was the first to email Postel, who told him that there wasn’t anyone managing Anguilla’s TLD yet and suggested he be the first volunteer manager of .ai. 

To Postel, who passed away in 1998, domain names were nothing but identifiers; they had no economic value. Due to the low number of registrations, domains were free of charge until 1995. For years, Vince Cate gave away domain names to any Anguillan business that asked for one. In a bygone era when the web was much smaller, Postel’s vision for allocating digital resources was unabashedly communitarian. “Concerns about ‘rights’ and ‘ownership’ of domains are inappropriate. It is appropriate to be concerned about ‘responsibilities’ and ‘service’ to the community,” he wrote in 1994, after his volunteer role had been formalized into the Internet Assigned Numbers Authority (IANA). 

During the dot-com boom, however, the internet was becoming a hotbed for attention-thirsty startups and get-rich-quick schemes alike—the rosy picture of a closely-knitted community began to seem naïve. For one, ccTLDs in countries with a growing number of internet users took many volunteers to operate. Domain names were used for spam mail, online scams, and other illegal activities. Cyber-squatting—the practice of registering trademarked domain names—became tricky to regulate. Meanwhile, web addresses were increasingly recognized as valuable digital assets as domain resellers sold premium names at high prices. These circumstances soon rendered Postel’s first-come, first-served principle of ccTLD delegation unsustainable.

In the early 2000s, the IANA was swamped with requests for re-delegation. Seeing ccTLDs as a public good, some states established government bureaus to take things into their own hands; others, like Canada, incorporated not-for-profit organizations in collaboration with the private sector and academic institutions. Many registries, such as .us and .fr, introduced regulations to limit domain registrations to individuals or organizations with actual ties to the country, though they’re enforced to varying degrees. This process of formalization—the transfer of administrative power from volunteers to governments—was complete in most major countries by the early 2000s. In Anguilla, too, Cate changed the administrative contact of .ai to the government of Anguilla, which gladly kept him as the technical manager. 

But this wasn’t the case everywhere. The internet reached the world’s periphery later than its core, and some nations weren’t even aware that they were entitled to a piece of the global namespace when their domain name had been assigned to, well, randos. Before Tuvalu sold its .tv license to Verisign, the extension was managed by a programmer in the United States with no relation whatsoever to Tuvalu. Another American was given the control of .nu, reserved for the South Pacific nation of Niue.

Some, like Niue, were never able to retrieve control from foreign firms that profited off their digital assets. The island, which wrote into law that .nu was a “[n]ational resource for which the prime authority is the Government of Niue,” sued the Swedish firm that now owned the rights to its ccTLD in 2018. The claim is still being contested, and neither the Niuean government nor its people has received any profit from the domain sales, which is estimated at somewhere between $27 million and $37 million since 2013. 

Others, lacking the capacity for an in-house domain sales operation, outsourced root server management and marketing to third-party registries, often based in the United States or Europe. Tuvalu’s .tv domain is currently managed by GoDaddy, which pays a portion of the sales revenue every year to the island’s government. Countries like Tuvalu “are often getting a very bad deal,” Vince Cate said.

Consider the familiar .io, popular in the developer community (and later the cryptocurrency industry) as a shorthand for “input/output.” It was assigned to the British Indian Ocean Territory which sits on the colonized Chagos Islands. In 1968, the British forcibly expelled the native Chagossians to construct a military base. Jon Postel had delegated the rights to the suffix in 1997 to the Internet Computer Bureau (ICB)—a UK company with only a care-of (c/o) address in the territory. Refugee groups have filed a lawsuit against the .io registry, whose domain sales profits never reached the Chagossians—nor the British government, which repeatedly denied having received any payments. 

The illegitimate squatting of ccTLDs has become a clear case of digital colonialism: the exploitation of digital resources by Western capital came alongside the commodification of ccTLDs. But domain names aren’t tangible like tea leaves, labor, or land; just to what extent does their sovereignty matter? 

The 20th century witnessed the globalization of technology and communications: postal services and banking, for instance, needed a unified coding system to make sure that parcels and wire transfers were going to the right country. In 1974, the International Organization for Standardization published its first country-code standard. ISO 3166-1, which included an alphabetical abbreviation for each country, would serve as the basis for future inventions like top-level domain naming and machine-readable passports.

Whether a country can be viewed as deserving its own ISO code, however, doesn’t always have a straightforward answer. The ISO didn’t want to take a stance on territorial disputes, so it borrowed the list from the United Nations, though for practical purposes, some territories and dependencies were given their own assigned codes. (Taiwan gets its own code as a “province of China.”)

But this meant that unrecognized sovereignties in the United Nations don’t get recognition in the digital space, either. Kosovo, which Serbia claims to be part of its territory, doesn’t have its own ISO country code because it is not a member of the United Nations. Not having its own ccTLD made it difficult for residents to search for localized information and businesses to target local audiences. Similarly, the de facto independent Somaliland was never assigned a ccTLD; its government banned the use of .so domain names after the Somali government, which claims Somaliland, nationalized its registry in 2018.

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The entitlement to codification is, therefore, a political act—it establishes, negotiates, and rejects claims to autonomy and sovereignty of individuals and communities. “For any individual group or situation, classifications and standards give advantage or they give suffering,” wrote Geoffrey C. Bowker and Susan Leigh Star in their seminal work Sorting Things Out. 

The life and death of domain suffixes are products of revolutions, warfare, diplomacy, and displacement. They are born out of new regimes and die of political dissolutions. Former Yugoslavia’s ccTLD, .yu, was previously used by its successor government Serbia and Montenegro until the union’s breakup in 2006. Montenegro’s very popular domain, .me, was made possible, while Serbia was left with .rs. The Yugoslavian extension officially retired in 2010; all existing domains were phased out.

Anguilla’s road to becoming the .ai clearinghouse itself was the product of a complex set of geopolitical intrigues—for one, it didn’t start with the “AI” country code. The original ISO 3166-1 scheme in 1974 assigned “AI” to the French Territory of the Afars and the Issas, a short-lived colonial regime after the failed independence of French Somaliland; Anguilla, then under the British colony Saint Kitts–Nevis–Anguilla, was allocated “KN.” But this arrangement didn’t last long. The Afars and Issas voted for independence from the French empire in 1977 to form Djibouti; subsequently, “AI” was to be replaced with “DJ” to symbolize the birth of the new African republic. After a secessionist movement against Saint Kitts and Nevis that lasted for more than a decade, Anguilla became its own British dependency in 1980—while its neighbors became its own sovereign state in 1983. With the Union Jack back on, the ISO reassigned the two-letter code “AI” to the island.

The economy of domain names is as fragile as territories. Tuvalu is under existential threat from rising sea levels: the country might become uninhabitable by the end of the century. It’s possible that the British Indian Ocean Territory won’t exist one day—international courts have ruled against British occupation of the Chagos Islands, and the UN General Assembly called for the archipelago’s decolonization in 2019. If these names are struck off the ISO list of countries, we might be left with a world of dead links. The loss of domain names will be trivial compared to the real-world implications of lost lands and lives, yet the cultural heritage that comes with it will, too, be consequential. 

In more recent times, digital standardizations from domain names to national flag emojis—which also follow ISO 3166-1—have been used to signal sovereignty and resistance. Some Quebec nationalists are using Martinique’s 🇲🇶 drapeau aux serpents—which is no longer an official banner for the French overseas region—as a fleur-de-lis lookalike. After Catalan nationalists had preferred non-Spanish domains—such as Gibraltar’s .gi for Girona—until the sponsored TLD .cat, proposed by the Catalan non-profit puntCAT, was approved by ICANN in 2005. But ahead of Catalonia’s proposed independence referendum in 2017, the Spanish government raided puntCAT and arrested its executives.

Almost three decades later, Vince Cate is still operating the .ai registry largely by himself, occasionally with help from a few others. He gets paid for running the registry, but most of the revenue goes to Anguilla’s government. “It’s hard to find somebody else that has more than 20 years of experience single-handedly running a TLD,” said Cate. 

We’ve yet to see what Anguilla’s government will do with its newfound source of wealth. Government monopolies are easier to justify when it comes to public goods, but when domain names are commodities, it’s worth asking who benefits from these exports. Meanwhile, this income might not sustain: this current AI fad will ebb, and even if it doesn’t, .ai won’t always be a powerful brand signal—just like TikTok isn’t using .tv. 

With the current rate of growth, though, “it’s completely conceivable that we could get to where we don't need local taxes—or at least they could get rid of taxes on food or groceries,” Cate told me from his home in Anguilla. “As a libertarian, I would love to see that.”

Tianyu Fang is a fellow at the CPSI. Follow him on Twitter and Substack.

This article was originally published on Reboot.

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Above is a tl;dr audio director’s cut. A quick behind-the-scenes chat about the main points of this article.

Currencies have failed across the Americas, from Jamaica to Venezuela - taking people's livelihoods with them. If these countries all used the U.S. dollar, it would be for their benefit. But unfortunately, dollarization diplomacy has lost its glitter. Moreover, there has been a recent increase of commentators and would-be experts proclaiming a new era of "de-dollarization." Tyler Cowen recently gave an excellent short discussion of why this "de-dollarization" sugar rush does not add up to much. Yet, another curious feature of this debate needs to be more explicit: it is predominantly an English language concern in the Americas.

There are few policy debates so fragmented by language as the dollarization policy. At least in Latin America (I live in Panama), if you search "la dolarización" (or other Spanish variants, dolarizar, etc) on any social media, you will see a very different debate space. If you search "dollarization," most results will be about the poorly-reasoned impending de-dollarization of the world. If you search la dolarización, you get results about the merits of dollarization and conversations on how to dollarize the economy.

Two main factors significantly contribute to this. Firstly, three countries in Latin America have officially dollarized: Panama, Ecuador, and El Salvador - along with others in the Caribbean. There is a strong sense that dollarization can be done, and it is not an esoteric theoretic debate. Secondly, the Presidential elections in Argentina are coming up this year, and a major candidate is campaigning on the dollarization policy.

Javier Milei, a current National Deputy for Buenos Aires, is campaigning that if he wins, his first significant policy will be to close the central bank and dollarize Argentina. Argentines have been suffering from increasing inflation, estimated to have reached 104%. A recent Econtalk podcast is a good discussion of this social issue in Argentina.

Every day, Milei posts videos on TikTok, Instagram, YouTube, etc., about the benefits and mechanics of dollarization. Every day all TV news stations in Argentina host panels and debates about dollarization, and universities host seminars. Economic policy commenters across social media make analysis videos, and online influencers do street interviews on dollarization. Of course, all in Spanish.

Dollarization is a likely outcome in Argentina in 2023. In the late 90s, Argentina raised the question of dollarization amid the chaos of the Asian financial crisis, the Mexican peso crisis, and the great depression of Argentina. This potential dollarization of Argentina reignited the discussion in Washington in 1999.

With these debates raving again in Argentina and so much recent overweening chatter in the U.S. about "de-dollarization," I think it is a great time to re-open this debate in the Caribbean.

Share Caribbean Priorities

This post is Part 1 of a planned multi-part series of notes explaining the benefits of Caribbean Dollarization and dissolving the relevant counterarguments. These public notes aim to compile the best arguments for a larger project. ¿Hay que dolarizar El Caribe?

Core argument: The structure of Caribbean economies is different in quantity and quality. Caribbean economies are import dependent. This is not a value judgment or a temporary state of affairs; it is an immutable fact of the world. Even the most basic economic activity, agriculture, requires tools made from metals not found in the Caribbean - they must be imported. This has been the state of the Caribbean from the beginning.

All imports are paid for using an international currency - usually U.S. dollars. There is no advantage for Caribbean countries to have their domestic currency; all domestic currencies in small economies are anachronistic. Caribbean countries should abandon their local currencies and adopt the U.S. dollar. The region's governments have uniformly abrogated their duties to design and implement credible macro-prudential policies leading to unjustified socio-economic degradation.

Properly construed, the current state of monetary affairs is a persistent abuse of power by governments to the detriment of Caribbean citizens. If Caribbean people used U.S. dollars as their sole currency, that would significantly expand their economic freedom and opportunities.

In essence, dollarization merely makes explicit what is already true: small open economies have a hard foreign currency constraint. It is not the so-called implementation of a straitjacket. The straitjacket has already been there.

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I aim to build a wholistic case in favour of dollarization. And to do that mental models need to be constructed. In future posts in this series I will review the work done on this topic by Eric Helleiner for deeper analysis but for now let’s start from a simple position.

The Original Purpose of Local Currencies in the Caribbean

As I will repeat many times in future blogs, many characteristics of Caribbean economies have obvious colonial origins. Money, Currency, and monetary conflagrations are no exception.

Many readers will remember the Pirate of the Caribbean scene when the Brethren Court gathered to assemble the nine 'pieces of eight' originally used to bind the goddess Calypso to human form. In the film, these were nine random objects the first nine pirate lords of the first Brethren Court had on them at the time because they were "skint broke," i.e., they had no money.

The name of the objects was not chosen simply for comic relief. During this period of Caribbean history, the most common money used was the Spanish coin called 'El Real de a Ocho' (translated to English as 'Piece of Eight'). For centuries Spanish money was universally accepted in the Americas - the first universal New World currency before the British Sterling and long before the U.S. Dollar became a significant player.

A British diplomat, Baron Chalmers, in A History of Currency in the British Colonies published in 1893, wrote that "Barbados," and the West Indies (an older term for the Caribbean), "has always maintained a money of account different from that in actual circulation."

Baron Chalmers went on to explain:

“for some two centuries accounts were kept in [sterling], though the coins current were mainly Spanish; and at the present day, when sterling coins hold the field, mercantile accounts are kept in dollars and cents.”

During the early Colonial period, there was repeated political unrest concerning the state of the Currency within the Caribbean. This was because of a need for more usable Currency available for commerce in the colonies. A report from 1668 indicates a petition by the Colonists in Barbados for a mint to be established to create coins to be used on the island only "as in New England and elsewhere is practiced." Colonists and merchants in the Caribbean would often ship their coins back to the mainland for use there, leaving the islands with increasing demand for Currency but dwindling supply.

Another example is from Grenada (Colonial Act of 21st March 1787) ratifying the use of foreign coin:

Whereas by reason of the great scarcity of British silver coin in this colony, a certain foreign coin called a dollar and a certain piece of silver called a “Bitt”, like current money, have for the purpose of commerce and public convenience, been by general consent suffered to circulate and pass in payment.

Parliamentary documents during the early colonial period of the Caribbean are replete with complaints about the scarcity of Currency for commerce. The complaints decreased in the mid-1800s when merchants established banks, and these banking services fell some of the need for coins and cash as transactions could be settled with payment instruments at deposit at the bank (cheques, etc.).

But still too few people and companies had access to bank accounts.

To further alleviate the "scandal of currency," the new banks were given the right to print money on behalf of the crowns of the various Empires in the Caribbean. For example, few remember that Denmark had Caribbean colonies. The Danish West Indies islands were sold to the U.S. relatively recently, in 1917 to be renamed the U.S. Virgin Islands. The Danish West Indies National Bank still printed money with the Danish King featured until 1934.

This was a rare instance of a Danish monarch featured on the money of a U.S. territory.

Royal Bank of Canada began operations in 1864. In 1882, RBC chose the Caribbean (Bermuda) for its first international branch. At this time, the territories of what we now call Canada and the Caribbean were part of the more extensive British Empire and shared essentially the same world. RBC became a fixture of Caribbean commerce. If you visit the Bank of Canada museum, you will see currency notes from Barbados printed by the RBC on display. The one shown here is from 1938.

Surprisingly, the free banking period of the Caribbean has attracted very little attention from monetary history scholars. A lot more should be said about it, but the core point is that banking services tried to alleviate the real hindrance to commerce: the lack of available media of exchange. This was a valid reason for having local Currency fixed to Sterling.

Not even independence was sufficient to break fixed exchange rates with Sterling. DeLisle Worrell gives us a good analogy. The global currency system resembled systems of weights and measures like kilometers and kilograms. If you say 1 Meter = 100 Centimeters today and then tomorrow, say that 1 Meter = 110 Centimeters, does it change the actual physical length of the table you are measuring? No. That was the logic of fixed exchange rates of currencies.

Why the Caribbean lost its monetary credibility

In the British Caribbean, monetary policy was managed substantially by the British government in London. The British Government created special government departments called Currency Boards to manage the Currency of the colonies. Local currency notes and coins were issued with a fixed value of Sterling - creating little currency clones in the colonies.

So then, if the Currency Board issues £100 in local Currency, say in British Honduras (now called Belize), it kept an equivalent of £100 in Sterling in an account at the Bank of England. A 100% reserve of Sterling backed all local currencies. (In practice, it was slightly more than 100% reserves to withstand sudden shocks ).

The Currency Board's job was to ensure enough local media of exchange for everyday commerce and general payments. It was understood that the local Currency was merely a vehicle of trade - a convenience; it was not considered "real" money. Anything that needed to be purchased outside the local domain had to be bought in the underlying anchor currency accepted elsewhere in the Empire. These Currency Boards were highly effective. Throughout their existence, there were no balance of payments crises in the Caribbean. The technocrats in London ensured that the Empire's Caribbean colonies had stable money.

Caribbean countries continued Currency Board policy anchored to the Sterling until the 1970s. By this time, all major global currencies (including the Sterling) were measured against the U.S. Dollar, measured against a troy ounce of gold. But from the Smithsonian Agreement of 1971 (the Nixon Shock), the value of USD against gold was untethered.

By the late 1970s, the world had changed. Most of Caribbean commerce and trade was no longer tied to the U.K. Instead, the USA, and therefore dollars, became the leading trading partner. Since Sterling kept devaluing against USD, this caused economic shocks and inflationary pressure in the Caribbean. Caribbean money was still tied to the Sterling, so a devaluation of the Sterling against the USD was also a devaluation of the local currency against the USD. Caribbean countries began to switch their anchor currency to USD and abandoned the Sterling. If Currency Board-style policies with USD remained, less damage would have been done.

But we drifted into a Dark Age of monetary policy where fairy tales and fallacies displaced logic and historical facts about fixed exchange rates.

The commercial world of the Caribbean now looks different from what it did in the previous centuries. But we still talk about money as if we live in the 1800s. Most transactions are via debit/credit cards, bank wires, ACH transfers, and platforms like PayPal or Wise. We hardly use notes and coins in our daily lives; indeed, these instruments are only some of the primary means of payment.

Therefore the scarcity of these notes and coins is no longer an essential matter of national policy. We do not need to ensure sufficient notes and coins for circulation in a world where it is difficult to acquire such instruments. When people save money, they primarily save money in a bank account, not by accumulating cash notes. And that "money" in the bank account is merely a ledger entry in a digital database. This digital ledger entry can be rendered and presented in any form. You can call it Barbados Dollars, or you can call it United States Dollars, or you can call it Swiss Cheese Alpha Ten. The name you choose is immaterial to the digitally displayed numeric ledger entries.

The fact that we have banking ledger entries in the modern Caribbean denominated in anything besides a global currency like USD is an anachronism.

Why Size Matters

The idea of being resource "self-sufficient" is a nonstarter for the Caribbean. Barbados' local currency is only valid in the 166 square miles of the country. For every other square mile on earth, a foreign money has to be used - primarily USD.

I understand the urge to place all countries on equal footing globally, but this only distorts sound reasoning. It would be seen as absurd if every city in the US had its currency (with varying exchange rates) for use solely in those individual jurisdictions.

If there is no inflow of foreign currency into Barbados, then the country (and people) will be unable to acquire the means to live and strive - no medicine, no tech products, no clothes, no building materials, etc. Small economies are not import dependent because of some mismanagement by the government. They are import dependent because that is how they structurally exist.

As was pointed out by economists since the 1960s, the economic growth equation for the Caribbean can and should be restated. In a stylized way, you can proxy growth via GDP:

GDP (Y) = C (Consumer Spending) + I (Investment) + G (Government Spending) + [E(Exports) - M (Imports)]

But in small, very open economies, it is better to restate it this way:

Y + M = C + I + G + E

So important are imported goods to the growth and well-being of small open economies like the Caribbean that it cannot be an independent variable.

Why Devaluation Only Worsens Inequality

A common argument as to why small countries like those of the Caribbean should keep a local currency is the supposed benefits of potential devaluation to boost growth in the tourism sector. The original argument was that devaluation (against USD) would boost exports. But most Caribbean economies are primarily (more than 80% GDP) based on services. Since the tradable sector is so insignificant, the argument was switched to non-tradable promotion.

The idea is that devaluing the local currency against USD will attract more tourists to the country because they will see it as a "better deal."

There is a profound information asymmetry regarding how much the tourism sector (the largest non-tradable sector) is already dollarized. If you want to book almost anything in the Caribbean within the general tourist industry, you will see that all prices are already quoted in U.S Dollars.

Above are screenshots from the website of popular hotels in three Caribbean countries. The rooms are priced in USD. Even if you devalue the currency against USD, nothing will change in the prices of the tourism industry's primary consumption products/services. The plane tickets, the hotels, most restaurants, the taxis, etc., are all quoted in USD.

In reality, the only effect of devaluation is that workers will now be worse off because their wages will have a decreased purchasing power. Let me make this point more explicit.

As discussed above, even essential elements of life must be imported into the Caribbean, and the imports are invoiced and paid for in USD.

Suppose that today the exchange rate is 2 Barbados Dollars (BBD) = 1 USD, but a devaluation happens, and the rate changes to 4 BBD = 1 USD.

Wages are usually sticky because they lag (often severely by years) through abrupt economic adjustments. So a worker makes 1000 BBD per month, before and after the devaluation.

She paid 50 BBD for a weekly supermarket basket before and now pays 100 BBD for the same basket. She is absolutely worse off after the devaluation.

At the same time, the General Manager of the hotel she works at gets paid his salary in USD. After the devaluation of the local currency, he does not see an effect on his weekly shopping. Before, he would spend 100 USD on his supermarket basket; after, he also pays 100 USD. He is no worse off.

Indeed the most under-discussed element of devaluation is that it increases the inequality between the more affluent people (who usually have their money in USD) and the poorer people who work wage jobs for local currency.

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Why Small Economies Never Had Monetary Policy Autonomy

Another argument in favor of keeping local currencies is the idea that governments of small open economies should maintain the option of having an independent monetary policy. But this does not cohere with the world as it is.

Small economies are different. Caribbean countries are dependent on foreign currency for imports and for servicing foreign debt obligations. We discussed the imports part already.

If Caribbean governments need to finance large projects, they generally need to borrow the money. They could try to borrow local currency from themselves or local institutions, but that won’t work unless they can exchange it for foreign currency to purchase the imports necessary for the project.

They could try to borrow foreign currency from banks based in the country, but they often need more spare foreign capital to lend large amounts. So then, the next option is to borrow from international markets (private lenders) or a multinational agency like the World Bank or China Ex-Im.

If the money is borrowed from private lenders, this is usually done via a bond offering denominated in USD. Because the Caribbean government wants USD and because the private lenders have no interest in taking the risk of investment in the local illiquid currency of a small government.

In either case, the money is borrowed in foreign currency, typically USD. This loan must then be repaid in USD - creating a foreign currency debt obligation.

The Caribbean government must ensure a sufficient inflow and stock of foreign currency to pay its debts. And the banking institutions need to maintain an adequate float of foreign currency to finance imports, which is a delicate balancing act.

Caribbean governments cannot (should not) hold too much money in foreign currency reserves. These USD reserves are just securities purchased from the U.S. Treasury, which means that small Caribbean countries provide constant loans to the U.S. government. If those reserves are too large, then this is an unjust decision, as what would be the point of loaning money to the U.S. government instead of using that money for projects at home?

But if too little money is held in reserves, then sudden shocks could cause currency mismatch problems and lead to a Balance of Payments crisis. Unfortunately, this has occurred repeatedly in the Caribbean since Independence.

These Balance of Payments crises have been exacerbated by the fact that Caribbean governments cannot resist the urge to finance domestic projects by artificially creating excess money in the local economy. When you create excess money in local currency without a corresponding increase in foreign currency, eventually, the problem metastasizes.

Small open economies are particularly fragile to Balance of Payments crises, even from mundane origins. 

A stylized example will be helpful. 

Suppose that Sandra, an entrepreneur, starts a new bakery in Barbados. She received a loan from a local bank (banks create loans out of nothing) in local currency. Sandra then needs to import new baking equipment from Miami. To do this, she converts the new local currency into USD at the bank. But for whatever reason, the bank does not have sufficient USD to give her. That’s no problem. The bank requests some extra USD from the Central Bank to fulfill Sandra’s request. Now suppose thousands more requests like this are sent to the Central Bank. The Central Bank cannot meet all of these requests because it cannot use up all its limited USD, so it announces a restriction on how much USD you can get annually. (This is called capital control. Barbados does have capital controls on foreign currency to this day). 

Now, Sandra started her bakery and hired five new employees, all paid in local currency. These employees want to spend their salaries buying goods on Amazon. Their credit cards are denominated in local currency, so the bank needs to convert the local currency into USD to make transactions. But these employees are not earning any foreign currency, and therefore no correspondent inflow of foreign currency is occurring to match this new outflow. By starting a new business in Barbados, Sandra has become a drain on the economy. Her local bakery is not earning foreign exchange but is increasingly using it. 

This scenario is the perverse nature of small open economies with local currencies under balance of payments constraints. Either you restrict the freedom of people to consume internationally via capital controls, or you roll the dice and end up in persistent crises with ever-devaluing local currencies. Worse yet is that both can happen concurrently.

Another argument favoring local currencies is the perceived ability to target domestic inflation. But this is impossible in small, very open economies because inflation is primarily imported. Increasing the domestic interest rate has, at best, a trivial effect on inflation since the prices of most goods are not set domestically.

When economies import their energy/fuel and the vast majority of food goods from outside the country (priced in USD), they are solely a price taker of foreign suppliers. 

The small importing country has to accept whatever the price level is in the exporting country. The small economies of the Caribbean do not affect the price that suppliers in larger countries export their products for. Said differently, the prices in the Caribbean are strictly a function of the import price, and no interest rate policy can change this fact.

Moreover, inflation will also be exacerbated by the devaluation of local currencies. As stated above, the price of goods is a function of the import price. When the value of a local currency depreciates, the general price of everything increases. This is wholly undesirable and should be avoided.

The argument that small, very open economies had an independent monetary policy through the existence of local currencies does not match reality. Standard textbook macroeconomic models are often misspecified for small economies. Monetary policy could have never been used for economic adjustment, and fiscal policy is the only viable option for structural adjustment in the Caribbean.

Why Floating Rates Hurt Small Countries

At this point, it is helpful to distinguish between fixed, pegged, and floating exchange rates. Steve Hanke, a long-time champion of dollarization, wrote an instructive article explaining why most people (and indeed most Economists) misunderstand the nature of exchange rate mechanisms.

Hanke explains that most people interpret Milton Friedman's view on exchange mechanisms incorrectly - leading to the erroneous interpretation that Friedman was a dogmatic promoter of floating exchange rates. Friedman insisted that the dichotomy of fixed vs. float should be adjusted to a trichotomy: fixed vs. float vs. pegged. In his view, pegged and fixed are not synonymous as their function and results differ dramatically (as the above table summarises).

To quote Hanke at length:

“With a floating rate, a central bank sets a monetary policy but has no exchange‐​rate policy—the exchange rate is on autopilot. In consequence, the monetary base is determined domestically by a central bank. With a fixed rate, or what Friedman often referred to as a unified currency, there are two possibilities: either a currency board sets the exchange rate, but has no monetary policy—the money supply is on autopilot—or a country is “dollarized” and uses a foreign currency as its own. In consequence, under a fixed‐​rate regime, a country’s monetary base is determined by the balance of payments, moving in a one‐​to‐​one correspondence with changes in its foreign reserves.”

Continuing…

“Pegged rates. Most economists use “fixed” and “pegged” as interchangeable or nearly interchangeable terms for exchange rates. Friedman, however, saw them as “superficially similar but basically very different exchange‐​rate arrangements.“For him, pegged‐​rate systems are those where the monetary authorities are aiming for more than one target at a time. They often employ exchange controls and are not free‐​market mechanisms for international balance‐ of‐​payments adjustments. Pegged exchange rates are inherently disequilibrium systems, lacking an automatic response mechanism to produce balance‐ of‐​payments adjustments. Pegged rates require a central bank to manage both the exchange rate and monetary policy. With a pegged rate, the monetary base contains both domestic and foreign components.”

What Friedman was trying to emphasize was the idea that a country's preferred exchange rate optimizes market-oriented adjustment. Hanke quotes Friedman explicitly stating that a fixed exchange rate is often preferred for developing countries:

“The great advantage of a unified currency [fixed exchange rate] is that it limits the possibility of governmental intervention. The reason why I regard a floating rate as second best for such a country is because it leaves a much larger scope for governmental intervention … I would say you should have a unified currency as the best solution, with a floating rate as a second‐​best solution and a pegged rate as very much worse than either. - Milton Friedman (Money and Development)”

I stated above that currency clones (fixed exchange rates) have been the historical norm in the Caribbean until independence and the creation of new Central Banks. The choice of exchange rate framework was meant to be fixed, but most Caribbean countries have drifted away from this. The main reason is that governments are constantly tempted to perform monetary financing if they have local currencies. Of course, this makes short-term political sense. Spend more money now, win votes - it does not matter if it is unsustainable; that is a problem for the vague future. The world is replete with examples like this.

What was originally a system of fixed exchange rates to a global anchor became a patchwork of chaotic weak pegs. Governments and multinational agencies like the IMF try to make monetary policy do what it cannot do in small economies. This fiscal-ladenness of monetary policy has only produced ruinous results across the Caribbean.

In a recent book, Development and Stabilization in Small Open Economies (2023), DeLisle Worrell, the former Governor of the Central Bank of Barbados, rigorously examines the theoretical assumptions and empirical results of structural adjustments across the Caribbean. He states emphatically that:

“... the notion of an equilibrium value of the exchange rate which balances the demand and supply for foreign exchange, and the use of the exchange rate tool to stimulate growth, are notions which have no currency in the region. Both theory and experience attest to the difficulty of managing the rate, the dire consequences of allowing the foreign currency market to seek a rate that clears the market, and the futility of using devaluation as a tool to stimulate exports and growth in the SOE [small open economy].”

There is no rigorous theoretical, empirical, historical or practical reason for small economies in the Caribbean to prefer floating exchange rates over sound fixed exchange rates. And to go further, the optimal fixed exchange rate (or unified currency) is to adopt the U.S dollar.

Why there is no Loss of Economic Sovereignty

A persistent objection to dollarization concerns the idea that the U.S. government will have increased control of the foreign country if it dollarizes. This argument is particularly odd, especially in the Caribbean. But we need to discuss it.

There is this sense that monetary policy (even broadly conceived) is an element of sovereignty that countries can utilize at their discretion. As discussed previously, this has never been true for small countries. On the contrary, misuse and abuse of monetary policy have been one of the ways that small countries have gotten themselves into successive balance of payments crises and found themselves engulfed in IMF programs. These programs come with extensive conditionalities that, in many ways, strip sovereignty away from the country. Dollarization avoids balance of payments crises, rendering such rigid IMF programs unnecessary.

Another argument follows the line that the U.S. government can put more (vague) pressure on a country if it is dollarized. Strictly what mechanism would be used in this instance is still being determined. But suppose this can manifest in the U.S. government (potentially) pressuring a foreign country by threatening to cut it off from the U.S. banking system. The argument can proceed in that if USD is the only option a country uses, it can be swiftly cut off from the U.S. banking system. This existential threat gives the U.S. government more supposed control over the country.

However, This scenario does not consider that the U.S. government already has the ability to do this even if a country is not dollarized. In a detailed article published in Lawfare, the authors explain how the Patriot Act and the newer Anti-Money Laundering Act of 2020 “preserves the government’s ability to issue a financial “death penalty” to foreign banks … by restricting access to the U.S. financial system.” 

For this mechanism to be triggered, the foreign bank must have a correspondent banking relationship with a U.S. bank. The foreign bank need not have a branch in the U.S., need to denominate its portfolio in USD, nor does its home country have to use USD. This law was used to sanction North Korean and Hong Kong-based banks.

Moreover, even without direct government involvement, U.S. banks can unilaterally damage small economies by cutting their banks out from correspondent banking relationships (a process known as “de-risking”).

Why Caribbean Central Banks have never been Lenders of Last Resort

The most frequent objection to dollarization from more sophisticated observers is the removal of the domestic central bank's lender of last-resort function. In a crisis, the central bank should be able to provide liquidity to banks (and sometimes other financial institutions) by creating new money.

As stated explicitly by Jeanette R Semeleer, then President of the Central Bank of Aruba, in a 2009 speech:

Some of the tasks of the central bank, especially the function of lender of last resort, which is the credit line for local banks when experiencing financial stress, will disappear. This is typically linked to the ability of the central bank to print its country’s currency.

It is a seductive argument because it feels so intuitively correct. The problem, however, is that it's just not true. Even with domestic currencies, Central Banks in small open economies cannot act as lenders of last resort (LOLR).

As discussed previously, nearly all goods and most inputs to production are imported into the Caribbean, and the domestic currency is only as good as the imports it can purchase. A point often sidelined in this question of LOLR utility is that small economies usually need dollars to anchor their domestic currencies in both regular times and in times of crisis. This is why, inevitably, in small open economies (and developing countries generally), financial crises are precipitated by currency crises.

Bank runs have a different effect in countries with currencies without international value. In the U.S., for example, if there is a run on a bank, people withdraw the money to put it in another U.S. bank or try to hold the money in cash. But in a country like the Dominican Republic, the currency is what people are trying to run from. They will take the money from the bank and immediately try to convert that domestic currency into USD or another real asset. They do not hold on to the domestic currency.

The massive dash by people to sell off their domestic currency holdings often results in rapid inflation (by buying anything they think will be stable value) and dwindling of dollar reserves (by converting to USD). If the government of a small economy issues domestic currency in this situation, it will only cause a quicker spiral. Manuel Hinds said in his book, "the main fear of the population is the loss through devaluation, rather than the loss of bank failures."

As seen repeatedly, governments that get into these spirals try to prioritize currency stabilization before anything else. And the only way to do this is to borrow dollars, which usually leads these governments to the International Monetary Fund (IMF).

There is a genre of music in the Caribbean referred to as Social Commentary Calypso. Singers perform songs about issues affecting society spanning all themes from political squabbles to economic problems to the lack of religion among young people. It is a highly sophisticated genre of music that is generally unknown outside of the region. A song titled 'IMF Take Over' released in the early 1990s by a Barbadian calypso artist (stage) named Ras Iley is a splendid example of the role of the IMF during an economic crisis that occurred in Barbados at the time of the song's release.

First Verse:

We were warned,
but we didn't take heed.
Now the money gone,
all because of our greed.
Off to Washington,
scared as hell you run.
Put this blessed land,
Straight in de IMF hand …

Chorus:

Oh Mama, look what de devil do. (IMF take ova’)
Trinidad and Jamaica too. (IMF take ova’)
Their only aim is to devalue (IMF take ova’)
They don’t care about me and you (IMF take ova’)
They cut we by we throat,
We hanging on a rope,
I wonda’ when I go recover,
Because the IMF take ova’ …

Since Central Banks cannot stabilize the currency if they do not have sufficient reserves (again, usually USD), they need to borrow dollars. For a country in crisis, it is nearly impossible to borrow on international markets, so they turn to the IMF for urgent dollar liquidity injections. But the IMF only does emergency lending with strict conditionalities that the borrowing governments need to agree to perform. These involve various rigid fiscal adjustments like rapidly reducing government transfers and monetary adjustments like currency devaluations (which don’t work as previously discussed).

Ras Iley understood the reality. Washington (HQ of the IMF) is the backstop of the Caribbean economy in crisis, not the local central bank. The actual Lender of Last Resort in the Caribbean is the IMF (with dollars). Caribbean countries have been under seemingly perpetual IMF programs since the 1970s. (In a future post, I will explain why IMF programs are the real “dept traps” in the Caribbean. The problem is worse because the IMF and Caribbean governments are equally to blame.) The fact is that Caribbean countries have central banks (and therefore domestic currencies) is the raison d’etre of why the balance of payments crises occur. If the Caribbean country used dollars domestically and internationally, there would be no currency mismatch because every transaction would be in the same currency.

There would be no instance of a currency crisis precipitating a financial crisis because the currency people can access already the anchor currency. There can be no run on an anchor currency as there is nothing better to convert it into. So the advantage of having a central bank in the Caribbean to perform the lender of last resort functions is wholly illusory.

Moreover, having a central bank would make it more challenging to borrow money internationally during a liquidity crunch in the country’s banking sector. Take Panama (a fully dollarized country), for example. Bank assets and liabilities are denominated in USD. If a local bank has a liquidity constraint (actually rare in Panama), it can borrow from a bank anywhere in the world that lends in dollars by offering a more attractive interest rate. Because Panama’s financial sector is so well integrated with international financial markets (with sophisticated regulation examiners), the concept holds that liquidity can flow to where it offers the best risk-adjusted returns. This is not the case in Jamaica, where most banks are not well financially integrated and have books denominated in local currency, which presents many levels of risk for international lenders.

The elegance of a dollarized small economy with international financial integration is that in times of liquidity crunches, it is small enough that the extremely deep international dollar market can infinitely quench its borrowing thirst.

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Should Any Caribbean Countries Not Dollarize?

You may be wondering if any Caribbean countries should not dollarize. In answering the question is essential to make explicit that “dollarization” is a subset of the general concept of “currency substitution.” That is, when Estonia abandoned the kroon to join to Eurozone, it effectively “dollarized” (substituted its currency entirely for another one) but with the Euro. So there are two questions to answer in this section. First, is there any Caribbean that should not substitute its domestic currency? Second, is there any Caribbean that should substitute its domestic currency for another one besides the dollar?

The Dutch

Let’s use the Dutch Caribbean to think about these questions. Since the colonial period, The Netherlands has extended beyond continental Europe to the Caribbean. There are two groups of countries falling into this category:

1. The CAS Islands: Curaçao, Aruba, and Sint Maarten

2. The BES Islands: Bonaire, Sint Eustatius and Saba

This grouping may be confusing to wrap your head around initially. But the CAS Islands are part of the Kingdom of the Netherlands but are not part of the Netherlands (as a country). In contrast, the BES Islands are not overseas territories of the Kingdom but instead “public bodies” (think of them as municipalities) of the country of the Netherlands.

A chart should help with this explanation:

Essentially, the CAS Islands have more political and economic autonomy than the BES Islands while all remain effectively Dutch states. One other political/geographical point to note before I can move on is that the Dutch territory of Sint Maarten is one-half of a Caribbean island co-owned by France.

Both sides of the island are called St. Martin (with different spellings), and the entire island is also called St. Martin (yes, I know what you are thinking). The other similar example is the Caribbean island of Hispaniola (divided into Haiti and the Dominican Republic).

In any case, the point of making these references is understanding the odd nature of currency composition, even in this subset of the Caribbean. I said that the BES Islands (Bonaire, Sint Eustatius, and Saba) are effectively municipalities of the country of the Netherlands. For intuitive simplicity, think of them structurally as towns in the province of Holland. People born in the BES islands are European citizens. It would be intuitive to believe they used to Euro. But they do not. Since 2011 the BES islands have been using the USD as the sole currency.

The decision to dollarize was made out of convenience. Tourism is the most significant industry, primarily composed of U.S. visitors, And most of the trade is priced in USD. Also, the previous currency (before 2011) was the Netherland Antilles Guilder (1 USD = 1.72 ANG) which had a fixed exchange rate with the U.S. dollar.

With the CAS islands, it is a different matter. Curaçao and Sint Maarten share a central bank (CBCS) with a domestic currency called the Netherland Antilles Guilder (just mentioned). Curaçao, Sint Maarten, and the BES Islands were part of the Netherland Antilles political unit until 2010 when the Dutch parliament dissolved it for characteristically complicated reasons. Aruba also has its currency, the Aruban Guilder, fixed to USD. Not only did Curaçao and Sint Maarten decide to retain the Netherland Antilles Guilder, but they even planned to replace and transition it to a new currency called the Caribbean Guilder which will again be fixed to the U.S. dollar. 

There is no discussion about fixing the exchange rate to the Euro. In this case, all I have said previously applies: a fixed exchange rate is just an unnecessary increase in transaction costs. There is no added benefit beyond having an expensive symbolic trophy. There is no apparent reason why all of the Dutch Caribbean should not substitute their currencies for the dollar.

The British

You will find six of the remaining fourteen British Overseas Territories in the Caribbean. These are not independent countries but unincorporated states of the United Kingdom (though not technically part of the U.K.). While they have elected parliaments, they all have British Governors representing the King of England as the Head of State. This is not a mere ceremonial arrangement. As recently as 2009, the U.K. Parliament dissolved the elected Parliament of the Turk and Caicos Islands following a substantial report detailing rampant political corruption and abuses of power. The U.K. imposed direct rule, with the Governor being granted authority to rule until the underlying issues were reasonably addressed and a new election held.

In 2022, the Governor of the British Virgin Islands commissioned a masterfully nuanced (nearly 1000 pages) report of inquiry, which again recommended the U.K. impose a direct rule on the BVI to address the corruption scandals. (Over then, PM Liz Truss did not agree to impose direct rule in this instance). It is vital to consider all of this when considering the appropriate currency selection choice.

Like most Caribbean countries, BVI is a services-based economy and not physical goods-based. Estimates suggest that over 90% of the BVI economy is services based. The two primary service sectors are tourism and financial services. Tourism in the BVI contributes around 60% of the general economic output and about two-thirds of employment. A report to the House of Commons Foreign Affairs Committee stated that financial services accounted for 33% of the BVI GDP and 60% of its government revenue (of which this revenue primarily comes from incorporation fees).

In such a service-based economy, the relevant question is what is the currency of choice of the consumers of the services. As the report of inquiry stated, the tourism sector “is particularly sensitive to external factors such as the health of the U.S. economy and natural disasters,” and the financial services sector was “initially driven by interest from the U.S.” Unsurprisingly then, the British Virgin Islands has been officially dollarized since 1959.

Similarly, the Turks and Caicos Islands are also officially dollarized even though it is British overseas territory. Jamaican dollars were used domestically until 1973 when Turks switched to the USD. The other major British overseas territories in the Caribbean (Bermuda and the Cayman Islands) have fixed exchange rates to USD. And yet again, fixed exchange rates merely unnecessarily increase transaction costs. In such cases, there are no apparent reasons not to dollarize.

The French

There is a part of France (an overseas department) located in South America named Guyane/French Guiana. It is around the same size as Austria, one of the original five Guianas divided up in the colonial period.

While this jurisdiction is as big as Austria, it has a population of just around 300,000. And though located in South America with a geographical Caribbean orientation, it does very little trade with its region, and most of its trade is with France and Europe.

As with other Caribbean countries, a significant part of the economy is services-based. What is unique (and honestly weird) about Guyane is that the primary services industry is not tourism but space sciences and rocket launches. The Guiana Space Center - Europe’s Spaceport is located in French Guiana. Some estimates suggest that the space center and related jobs account for almost 20% of the GDP of Guyane. Many European researchers, for example, also frequent the country.

With these points in mind adopting the U.S. dollar would not be the most advantageous strategy. But it would also be unwise for Guyane to have its domestic currency given that it still needs to make most of its international purchases with euro-based economies. Prudence would dictate that Guyane should be using the Euro as its sole currency. And that is precisely the case, and Guyane adopted the Euro in 2002.

There are more aspects of the currency substitution discussion that we can assess in the Caribbean that will occur in future posts in this dollarization series.

What would be the actual cost of dollarization?

There is an argument that dollarization would be very expensive, and the one-time startup cost to switch the domestic currency supply to dollars would be significant. But that is not the case. Remember that most of the “money” in a modern economy is digital, not physical. The way you “convert” the digital money of Jamaica would be for the government to coordinate the database adjustment of banks to convert all references to USD at a specified prevailing market exchange rate.

For the physical notes in circulation, the government would set a conversion rate based on prevailing market conditions at a point in time and allow Jamaicans to exchange Jamaican cash notes for USD notes at their respective banks within a specified window of, say, three months.

The USD notes would be simple to acquire. Looking at the balance sheet (above) of the central bank of Jamaica, we see that right now, there is about JMD $226,580,371,000 (Jamaica Dollars) worth of notes in circulation. (Also, yes, Jamaica launched a Central Bank Digital Currency, CBDC — which will be discussed in detail in a future blog in this series). These JMD notes are worth the equivalent of $1,473,274,513 USD at the currency exchange rate. That means the government of Jamaica would need to acquire that amount in physical USD.

Remember that governments of Caribbean countries hold USD reserves (in the form of Treasury bills and securities) at banks in the US. These are practically equivalent to cash. Therefore, Jamaica would simply need to convert a portion of their USD reserves (already held in the US) from Treasury securities to physical cash and then have that cash shipped to Jamaica. Looking again at the balance sheet (above), it is evident that Jamaica has more than enough USD reserves (foreign assets) to perform the conversion. The decrease in USD reserves won’t be a problem as the primary reason for reserves would be to stave off balance of payments crunches - which can now be wholly avoided if USD is solely used for transactions.

The switching costs, as can be seen, are minimal. The government would need to educate the population about the process and allow enough time for the switch to occur fluidly. No one is advocating for a fiasco like in India in 2016.

The next substack entries in this series will cover more details on the dollarization process of Ecuador and El Salvador. I will also dive into more of the common semiotic objections to dollarization.

Please leave your comments or critiques in the comments!

What do you think are the strongest arguments against dollarization?

Noah Smith wrote a series on his substack about the economic trajectory of some developing countries. I genuinely enjoy reading Noah’s work. But his piece ‘Jamaica is doing OK’ is incongruent with the reality of Jamaica. I don’t think the problem is necessarily a lack of information but rather a lack of context.

In this post, I want to do two things. Firstly, I hope to persuade Noah to revise his working theory of Jamaica’s economic performance. Secondly, I want to persuade readers that a context-rich analysis of Caribbean institutional development will aid metaeconomics debates on economic growth and divergence.

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Institutions do matter

Noah repeatedly referenced a short paper from Henry and Miller which tried to show that since both Jamaica and Barbados have “virtually identical” institutions their post-independence divergence in economic performance can only be accounted for by difference in macroeconomic policies choices. Essentially, the paper tried to counter the theory that “institutions” (along the lines of Douglass North or Daron Acemoglu) are a significant deciding factor in long-run economic performance.

Before proceeding let’s set out the working definition of “institutions”:

Acemoglu quoting & annotating North

Douglass North (1990, p. 3) offers the following definition: “Institutions are the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction.” Three important features of institutions are apparent in this definition: (1) that they are “ humanly devised,” which contrasts with other potential fundamental causes, like geographic factors, which are outside human control; (2) that they are “the rules of the game” setting “constraints” on human behavior; (3) that their major effect will be through incentives.

Now the core argument of Henry and Miller can be described as follows:

1. Barbados and Jamaica are both parliamentary democracies in the Westminster-Whitehall tradition.

2. The constitutions of Barbados and Jamaica explicitly protect private property.

3. Barbados and Jamaica both adopted legal systems based on English common law.

4. Therefore: “since their initial conditions were similar at the time of independence, it stretches credulity to argue that Barbados and Jamaica diverged because of the difference in colonial origins, legal origins, geography, or some other exogenous feature of their economies.” Further: “We argue that the explanation for the divergence lies not with differences in institutions but differences in macroeconomic policy.”

However, the fallacy of the Henry and Miller argument is in the premise. The initial conditions (pre-independence institutions) of Jamaica and Barbados were not identical. Henry and Miller focus merely on the form but not the substance of the institutions of the two countries.

Additionally, they also sidestepped taking on other institutions such as culture and social norms. If you grew up in the Caribbean you know well that Barbados and Jamaica are similar in many ways but polar opposites in most social tendencies. This should give you pause when thinking they have “virtually identical” institutions. But even if Barbados made different (more prudent) macroeconomic policies than Jamaica would the question not reduce to why were Barbados’ institutions more capable of opening up space for more prudence policies?

I will use work done by Orlando Patterson and Victor Bulmer-Thomas to reaffirm the colonial origins of the institutional divergence between Jamaica and Barbados. Also, I will use this base to suggest why you should be skeptical of claims that Jamaica is doing ok.

Violence is the answer

One litmus test to assess if someone has a robust contextual intuition about Jamaica is to ask what they think about Reggae. If they respond solely with something along the lines of “peace, love, togetherness and solidarity” then they simply have the wrong context. That will only lead to the wrong intuitions. If you truly understand Reggae you know that the core themes cluster closer to “political struggle, rebellion, violence”.

You would know that there was an assassination attempt on Bob Marley. Or that one of his original band members, Peter Tosh, was actually assassinated. Or that another innovator on the Reggae/Dancehall scene, King Tubby, was brutally murdered. Or even that one of the current kings of Reggae, Vybz Kartel, was sentenced to life in prison for murder yet releases #1 Hits from behind bars. There is a bare-metal vulgarity underlying Caribbean culture in general (which I definitely appreciate too) but it is clearly evident in Jamaican culture.

Rastafari are often portrayed as mellow potheads. But even a key founder of the Rastafari movement, Leonard Howell, was jailed several times for sedition. The government often ordered police to raid his ‘church’ to stop him from preaching to his growing congregation. Later the government of Jamaica forced him into a mental asylum where he later died after a brutal attack.

The invention of Reggae in Jamaica was not accidental. In my view, Reggae could not have been invented anywhere else but in Jamaica. It is an outgrowth of the unique cultural institutions of the island stemming from unique socio-historical development.

Rabid violence continues to force Jamaica into a convulsion. As recently as December 2022 the Prime Minister of Jamaica declared a state of emergency because of the perpetual killings. According to several indices, Jamaica captures the haunting accolade of the highest homicide rate in the world.

Violence has deep roots in Jamaica. This has significant implications for thinking about Jamaica’s socio-economic institutions today. Every secondary school student who studied Caribbean History knows of the Maroons. (Nanny of the Maroons is a national hero in Jamaica and is also featured on their $500 note). Jamaica’s mountainous and rugged terrain provided refuge, especially during the years of plantation slavery. Many of the enslaved people escaped from the plantations and formed villages in the mountains. From there they constantly barraged the plantations with brutal guerrilla warfare. According to Patterson, this continued for almost the first 70 years of the slave system in Jamaica until the British colonial government signed a treaty with the Maroons to allow for a separate state within Jamaica where the formerly enslaved people would live relatively unencumbered by the British. This was a highly unusual state of affairs and had not occurred anywhere else in the British Empire. Jamaica was unique.

The plantation owners and the British elite in general bracketed Jamaica as an exceptionally dangerous place with a reputation for constant slave rebellions. It is therefore not surprising that the British elite did not have any urge to stay in the country long-term. For those familiar with Jane Austen novels you would recall that in Mansfield Park Sir. Thomas left England to visit his plantation in Antigua (in the Caribbean) because it was being mismanaged and he wanted to set the affairs in order himself. This is a prime example of absentee ownership, which was also prevalent in Jamaica.

Whereas in Barbados, there was a single slave revolt during the entire period of slavery. Barbados was much adored by the British Elite who stayed on the island long-term. A curious history that is little known in the US is that the original settlers of the original colony of Carolina came from Barbados. The usual impression is that they came directly from England but no. There is a great museum in Charleston, South Carolina that details the states origins in Barbados. This is why the plantation system there was much more like Barbados. Several of the main Carolina plantation owners also owned properties in Barbados.

One Empire, Two Systems

Moreover, the slave population of Jamaica never became self-sustaining. The extra brutality of the plantations in Jamaica is thought to be based on the fact that the plantation owners were constantly absent and the persons put to manage the estate on short-term contracts were much more vicious to the slaves compared. Consequently, the slave compliment needed to be replenished more often. Shockingly, data suggests that more slaves were brought to Jamaica than the entirety of the rest of North America.

So then, the culture that formed in colonial Jamaica was constantly infused with new African affinities situated in a hyper-brutal environment with an elite class that was almost wholly absent.

However, in Barbados, the locally-born slave population (“creoles”) exceeded the African-born population a few decades after the slave system was started. Indeed the only other place in the British Empire where this occurred was the US South. This drastic demographic difference with Jamaica would likely have a long-lasting institutional effect. The transition from colony to independent country failed to hit the “refresh” button.

Jamaica experienced no economic growth in exports per capita from the Napoleonic Wars to the end of the Second World Wars. Since there is a high correlation between exports per capita and GDP per capita, at least after 1850, Bulmer-Thomas argues that there are solid grounds for concluding that the Jamaican economy on a per capita basis experienced no growth at all for more than a century after the end of slavery.

After the abolition of slavery in 1834 conditions in Jamaica remained dismal. At this point, sugar exports were still the main revenue earner for the island. But the former slaves refused to work on the plantations so production faltered. This worsened when the British Empire effectively ended imperial preference for exports to England. That is, sugar from slave plantations in Brazil or Cuba, or sugar from India or Mauritius was imported without extra duties. Whereas previously imports from the British colonies into England had a tax advantage over imported goods from other non-British realms. Jamaican sugar became uncompetitive. Yet as the Jamaican economy continued to decay the owners of the sugar plantations refused to invest money to diversify and modernize their estates. There was an institutional void.

After further decades of poor policy management by the Jamaican Assembly (British Elites in Jamaica), the British parliament in England terminated the Assembly and placed Jamaica under direct Crown Colony rule in 1866. All of the other Caribbean possessions of the Crown were also placed under direct rule except one.

Barbados was the only colony which was allowed to have its local Assembly continue because of the active and prudent progress that was occurring to modernize the state and population (what V.S. Naipaul referred to as the movement towards a “universal civilization”). Indeed the Barbados Assembly remained in place up until the 1950s where it transitioned to a self-ruling parliament. That’s over 300 years of locally instituted legislative continuity. When the transition to independence came, the local leaders were already trained and brought into the fold of the third oldest parliament in the Americas (behind Virginia - one of the original 13 colonies in the USA, and Bermuda - still a territory of the UK).

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Moreover, by the middle of the 19th century, the black population of Barbados was the most literate in the Caribbean. By the late 19th century, the British authorities decided that Barbadians should be trained and employed in imperial expansion and management throughout the Americas and Africa. This persisted. In 1946 Barbados was 91% literate while Jamaica was 74% literate. There was only an 8-point difference between blacks and whites in Barbados, compared to a 25-point difference between blacks and whites in Jamaica.

Jamaica’s economic performance has been poor for centuries. Noah in his piece mentions that Jamaica’s GDP per capita has not materially grown since 1990. It is far worse than that.

Data compiled by Bulmer-Thomas shows that Jamaica’s GDP per capita is actually around the same level it was at independence.

When you take the long view there is cause for skepticism that that Jamaica and Barbados developed “virtually identical” institutions. Therefore the post-independence divergence was not a divergence at all. A better assessment would be that the immediate post-independence economic boom in Jamaica was a temporary aberration in the top line data.

Conclusion - Voting with your feet

A good way to determine if a country is doing ok is the net migration rate. Every year since 1952 net migration has been outwards from Jamaica. With a population of around 2.8 million in 2021 living in Jamaica, some estimates suggests an equal number are living outside the country. In 1975 Jamaica’s population reached around 2 million. This was roughly the same as Singapore in the same year. But in 2021 the population of Singapore grew to around 5.4 million.

Jamaicans are unambiguously voting with their feet to say that the country is not ok. The country ranks #2 on the Human Flight and Brain Drain Index. Given that #1 is Samoa I can claim that there is no other country on earth with as much brain drain as Jamaica.

The government has shown little to no capacity to implement credible policies to boost employment, lower crime, and propel growth. This is why I was puzzled when Noah wrote this:

And there’s one big reason to be optimistic about Jamaica: The enduring strength of its institutions. In an age of advancing autocracy, Jamaica remains resolutely democratic, scoring higher than the U.S. on some international measures. It’s an island (heh) of political stability in the region.

The political establishment is so corrupt that there is a term specifically applied to it: garrison politics. “A garrison is an area in which criminal and political activity are tightly controlled by politically affiliated gang leaders.” Paul Romer saw the situation as so dire that he even argued that the only way to inculcate the correct political incentive in Jamaica towards implementing good policies would be to allow absentee voting of Jamaicans living outside the country. As it stands only those persons living inside Jamaica can vote in elections.

Jamaica has given so much to the world. But its institutions never evolved to properly deliver sustained economic growth to its citizens. It is not sufficient look at uncontested election cycles to praise the “enduring strength of its institutions.” We should maintain higher expectations of Caribbean governments and not sidestep the underlying impediments to progress.

Share Caribbean Priorities

The most confounding feature of the Caribbean is its rapid decay into stagnation. For myriad reasons still not well-explored, the 20th century saw the emergence of intense intellectual talent within such a small place. Four Nobel Laureates (Lewis, Walcott, Naipaul, and Perse) came from the Caribbean—numerous globally famous public intellectuals, including C.L.R James, Fanon, Césaire, and Guillén. Much adored musical genres were created, ranging from Reggae to Salsa. Post-colonial economic growth was so material that Singapore’s Lee Kuan Yew considered Jamaica an early model of good governance for small states. Leadership on the world stage was ascendant. Caribbean politicians all commanded great attention at multilateral conferences, from Bilderberg Conf to Bandung Conf. The dynamism was nearly unyielding.

But all of this suddenly changed at the onset of the 21st century. The Caribbean went from a place where everything was happening to merely a place where things could have happened. Having grown up in the Caribbean, this puzzle acutely haunts me. What happened? And how do we course-correct? I believe these are the big questions that a think tank program focused on Caribbean issues should address. But none of the think tanks I know of wrestle with these ideas.

Academic institutions with "Caribbean Studies" programs primarily offer courses and research literary criticism and socialist sociology. While this could be valuable, there should be a more targeted focus on growth policy and macroprudential issues.

It's crucial to examine the Caribbean's 20th-century ascension and 21st-century fall for the region's benefit. This approach can also offer additional inputs for economic growth and development policy case studies.

An advantage of small size is that you can properly grasp variable adjustments and counterfactuals, which are often too complex to do well in large countries. Moreover, perhaps because of job market biases, academic institutions and researchers do not have sufficient incentive to explore these topics with nuance and care.

US government officials often ask me and think tank scholars for insights on enhancing the US' "Caribbean policy." Paradoxically, U.S foreign policy in the Caribbean lacks effectiveness due to a lack of receptive capacity in the Caribbean. In other words, the public and political institutions in the Caribbean are too weak to respond to US interests. Only after addressing these institutional and economic issues can US foreign policy be more effective. Some of these solutions may not be immediately obvious.

A think tank should be based on the premise of igniting and promoting dynamism and progress in the Caribbean. Here are some notes on agenda items that such an organization should prioritize and pursue. Hopefully it sparks some interest at established think tanks looking to form world-class Caribbean focused programs.

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One way to organize agenda items is to borrow a concept typically associated with the Effective Altruism movement: structural prioritization mental models. What then are Caribbean priorities?

Full Dollarization, Everywhere in the Caribbean

Caribbean governments have uniformly aboragated their duties to design and implement credible macroprudential policy. I get that it is difficult to inculcate a great energy for these categories of reforms but these are the bedrock of anything else. Without a stable fiscal-monetary environment no other policy framework can be implemented.

In my opinion, the first priority for a Caribbean think tank or program should be to advocate for the implementation of dollarization, which involves the replacement of all existing Caribbean currencies with the United States Dollar (USD) as the sole currency. This idea is based on the numerous fiscal and monetary shortcomings exhibited by Caribbean governments. The benefit of this proposal is its widespread latent approval and straightforward nature, making it easier to garner support and understanding among the Caribbean people.

While this is a seemingly bold agenda, it is actually boring. Consider this: who should be the prime stakeholder of this think tank? That is, which stakeholders’ well-being should the think tank policy recommendations optimize for? In my view it should be squarely the people of the Caribbean.

The domestic money of Caribbean countries are only useful in the tiny land area of the earth where they are issued. For example, Barbados is 166 square miles and the Barbados Dollar (BBD) only has value in that small space. Why exactly should people be forced to exchange their labour for money that has such a limited use?

You might say that they can easily exchange the Barbados Dollar (BBD) for USD. But that is untrue. Barbados maintains strict capital controls because it cannot allow people to exchange too much BBD for USD as that would cause a crisis for the fixed exchange rate. This is a kafkaesque policy since virtually everything imported into and exported from Barbados is priced and invoiced in USD.

Moreover, the government abuses its position as the issuer of money. Primarily to finance its spendthrift operations by arbitrarily creating new money. This is the evident across the region. In Trinidad & Tobago, the government limited citizens to only a $250 USD allotment for international purchases on credit cards. This forced the black market rate to unprecedented levels, with everyone desperate to acquire USD. It came to a point where some services would give discounts if you pay in USD.

Basic point: Caribbean people are severely disadvantaged by being forced to use money that has no global acceptance. Caribbean governments will perpetually mismanage their domestic money to the detriment of citizens.

Responses to common objections to full dollarization:

It would be expensive to Dollarize

Take Barbados. The exchange rate is legally fixed by the Central Bank Act at $1.00 BBD = $0.50 USD. Since most money is within commercial bank databases then the banks just have to divide everything by 2 in a coordinated time to dollarize. Estimates suggests that cash bills in circulation in the country add to around $300 million USD. You would only need to import USD cash bills and have then ready for the switch. The Central Bank already holds reserves in the US, well in excess of $300 million. Simply exchange some of those reserves for cash bills at the Federal Reserve and ship them to Barbados.

It will be a loss of sovereignty for Caribbean countries

Caribbean imports and exports are already invoiced in USD. International service sector prices are already in USD. Intra-regional trade already runs on USD. The government of the respective Caribbean country made fiscal policy before and will continue to make fiscal policy after dollarization. Keep in mind that excess USD reserves are effectively loans to the US government. Why should a small country perpetually makes loans for the US for the sole purpose of currency stabilization? Since dollarization will prevent the perpetual balance-of-payments crises in the Caribbean it will actually give the country more sovereignty, as they will not have to genuflect to outrageous IMF requirements for support loans.

Monetary policy is an important toolkit of government management

This assumes that monetary policy solely means base money creation. Central banks can continue to have reserve requirements for commercial banks (these reserve requirements are still common in the Caribbean but not in the US or UK). The only difference is that the reserves would be denominated in USD. Small countries are structurally very open economies and its not worth arguing if this is a bug or feature. It is merely a fact. In this structure you never really have pure monetary policy. Having a domestic currency is only a dangerous pretense of monetary policy. By reviewing the history of Caribbean currencies we see that their existence and use only perverted good fiscal policy in favour of perpetual balance of payments crises.

There must be a lender of last resort

The “Central Bank” need not have money creation powers to offer an overdraft facility to the government in cases of temporary fiscal budget dislocations. In terms of lending to commercial banks, the macro-prudential regulations and active reserve requirements to which these banks are obliged, means that such LOLR facility is unnecessary. Remember that Caribbean banks are also subject to foreign exchange constraints.

The Caribbean should not be the first to make such a switch

Caribbean central banks only came to prominence in the 1970s. Before then, currencies were tied to sterling (via currency boards). This is in effect a return to orthodoxy rather than a radical reform. Also other countries have and remain dollarized: Panama, El Salvador, Ecuador, Cambodia.

Caribbean central banks were born in sin. The original intent was to provide alternative financing to the newly formed post-independence governments for “nation building”. Large regional commercial banks (which are foreign owned) refused to extend credit for what they considered unsustainable projects. This profligacy of Caribbean governments only continued over the decades. It is time for these central banks to be exorcised. Dollarization is a key agenda item because it promotes economic freedom for citizens while fostering fiscal prudence for governments.

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Public Sector & Talent Internationalization

People make policy. People implement policy. People manage policy. Our public sector institutions need highly skilled, highly talented people. Since Caribbean countries are structurally small in size and population it is merely a fact that the pool of talent is not large. One undervalued feature of the British Empire was its talent acquisition and distribution program.

The British administration's influence on Hong Kong's public sector talent continues to be evident today. The Hong Kong Court of Final Appeal still maintains the presence of non-permanent judges from various Commonwealth countries. Similar trends can be observed in current overseas crown territories such as Bermuda in the Caribbean, where a significant proportion of senior public sector management comprises individuals from other Commonwealth nations.

The current population of Grenada is estimated to be 125,000 people. Why do we persist in the belief that a population of such small size has enough talent to effectively manage everything from foreign affairs to transportation in an objective, efficient manner?

A think tank focused on Caribbean issues would promote the need for public sector internationalization. The best talent should run public sector departments. Citizens should elect government officials and government officials should recruit the best talent in the world to run departments for the betterment of the citizens.

This is an essential element within the broader framework of public policy reform. The successful implementation of policy reforms necessitates the availability of qualified personnel.

As part of the wider public sector reform, starting from better talent acquisition, there needs to be a refactoring of the State Owned Enterprises throughout the region. In doing so there needs to be detailed audits of all state assets. In some countries the Auditor General reports have even commented that they cannot find account for several SOEs and government program.

A Caribbean think tank should promote these reform ideas not as standalone policies but interwoven with debt management and growth.

Here is why. Caribbean countries are small. Ideally they would be able to borrow capital from international private lenders via state bonds for most large spending projects they want to pursue. But international lenders often avoid buying government bonds because they have little evidence that the bonds will be repaid in a timely manner.

The need for financing from multilateral organizations or bilateral state lenders is prevalent in many Caribbean countries due to their inability to secure loans from open markets. However, complaints made by Caribbean borrowers at international events regarding the lack of concessionary lending from organizations such as the IMF and World Bank are misguided. To address this issue, Caribbean countries should aim to attain competitive international borrowing rates, similar to those achieved by territories such as Bermuda, rather than relying on concessionary lending.

Since the multilateral lenders are not as willing to lend to Caribbean countries on attractive terms nor can they borrow on the markets, the governments seek financing from state lenders like China. Since Chinese entities are more willing to lend on attractive terms, Caribbean governments are readily accepting of these deals.

U.S-based think tanks and state departments, for example, often conclude some kind of political reason as to why Caribbean governments are “pivoting” to China. But in my view this “pivot” is more a desperation, and an unnecessary desperation. With more talent in the public sector leading the reform implementation, the Caribbean will be able to attract more international private sector creditors.

Once this is accepted as a priority then the government should engage an American management consulting firm like McKinsey to assist.

CARICOM Foreign Policy

It is an incongruous reality that countries such as Dominica, with a limited population of 73,000, maintain a foreign policy infrastructure comparable to that of larger nations like Canada. For small nations, the effectiveness of foreign policy should be evaluated based on its practical usefulness.

In many cases, Caribbean nations establish small embassies and consulates around the world with a correspondingly small allocation of personnel and resources. For instance, several Caribbean embassies are staffed by less than five individuals, including the ambassador, and have limited funding for travel to attend only minimally significant events.

A Caribbean think tank should champion a better approach to foreign policy where most of the instrumental activities are done multilaterally through new joint CARICOM embassies.

CARICOM (Caribbean Community) is a political-economic grouping of 20 Caribbean Member States established by the Treaty of Chaguaramas in 1973. It acts more as a coordinating mechanism for institutions focused on trade, the regional university and so on with a formal Secretariat. In 2002 the regional governments revised the original treaty to establish a “single market” which aimed to have more coordinated economic policy. More can be done, but it must be argued for.

Over the decades the urge towards Caribbean unification waned. But it must remain an animating feature of policy formulation. The fundamental purpose of any foreign policy in small states should be to enhance the domestic economy. There are other legitimate purposes of foreign policy but those can carried through by larger states.

The concept of a shared embassy has a precedent in the Caribbean region. The Organization of Eastern Caribbean States (OECS), a sub-group of CARICOM, operates a joint embassy in Morocco, with a unified staff, single office, and a single ambassador. This model could be expanded to encompass the entire CARICOM community.

Real Industrial Policy

Industrial policy refers to the state's deliberate actions to drive economic transformation. The Caribbean economy is primarily centered around service sectors, with tourism serving as the dominant industry within this sector. In the case of Barbados, a substantial portion of the foreign exchange inflows, approximately two-thirds, is generated by the tourism industry. Nevertheless, the promotion of this key industry is not given the appropriate level of consideration.

Tourism

There is a general sense that we have reached Peak Tourism. I have read dozens of opinion pieces saying that there needs to be more “diversification” away from tourism as the main foreign exchange earner - saying also that it is too fragile.

This argument is weak. In the case of Barbados, the limited growth in tourism revenue over the last several decades is not a result of diminished international demand, but rather due to domestic supply constraints. Despite significant interest from international investors to establish hotels and related services, such growth has been hindered by government inefficiency in the public sector. Despite some improvements in quality, the number of hotel rooms in Barbados has remained stagnant since 1980. To address this issue, it is crucial to not simply await a higher movement upwards the demand curve for a higher equilibrium , but also to push out the supply curve itself.

There is ongoing debate regarding the expansion of the Caribbean tourism industry into new markets, such as China. However, the limitation lies in the domestic supply rather than the demand from these new markets. In order to spur growth within the tourism industry, a comprehensive industrial policy is needed which creates a favorable investment climate. This would entail the growth of infrastructure, such as hotels and globally recognized brands, as well as the development of cultural events and festivals. However, the implementation of such initiatives is impeded by suboptimal government decision-making.

Furthermore, there is an emerging opposition to tourism within international policy circles. Certain U.S.-based think tanks and multilateral organizations, such as the IMF, characterize tourism as a fragile industry. Despite this characterization, they maintain that the Caribbean must rely on tourism due to its lack of natural resources. This perspective is incorrect.

Tourism is a natural resource from the bounties of superior geography. While some regions may possess oil as a valuable natural resource, the Caribbean's geography are a unique and long-lasting asset that will persist even after those oil resources have been depleted. This highlights the importance of recognizing and valuing tourism as a crucial component of a region's natural resources.

A Caribbean think tank agenda must promote a more realistic thinking on the natural resource of tourism and advocate for more rigorous industrial policy to develop it.

Alternative Energy

It is imperative that Caribbean nations prioritize reducing their dependence on oil imports for energy production, not simply to address environmental concerns, but to optimize foreign exchange re-allocation. As previously noted, small countries heavily rely on foreign exchange, and the cost of importing oil represents a significant drain on these resources. By generating energy domestically, these nations can conserve valuable foreign exchange and redirect these funds towards other important developmental initiatives.

If the money spent on importing oil were saved, it could equal the amount of foreign exchange earned from tourism. Because the countries are so small this energy transition can already be accomplished with current technology and commercially available products.

Some estimates suggests that with a sustained, calibrated, transparent transition program it be done in as little as 15 years. Some Caribbean governments have said that want to do this kind of energy transition. But they have provided no credible plans on doing so.

A Caribbean think tank should advocate for the implementation of a transition management program towards energy independence, and provide support in developing and executing a comprehensive plan in collaboration with relevant governmental agencies.

Conceptual Matters

Counter Democratic Backsliding

In recent years, think tanks in the US and EU have paid increasing attention to the state of democracy in the Caribbean. Discussions often center on the perceived threat posed by the growing interests of China and Russia in the region. However, this focus on external factors neglects the underlying causes of democratic backsliding within the Caribbean itself.

In Barbados, the Prime Minister and her political party controls all of the parliamentary from approximately 33% of eligible voters participating in the last election. This issue is exacerbated by the concentration of power in the Prime Minister's office as stipulated by Caribbean constitutions; a legacy of post-independence decolonization efforts. The ruling Prime Minister wields immense power, with the ability to appoint and dismiss judges, senators, ministers and public sector leaders at will. With control over the legislative process and the ability to declare a state of emergency, the PM alone and her party holds sway over every fate of the nation. The current PM and her Party has transitioned Barbados to a Republic and is in the process of rewriting the constitution with virtually no meaningful parliamentary process.

This leaves Barbados in a precarious position. There is neither distribution nor separation of meaningful power. The fact that this is unknown outside of the Caribbean is a testament to the lack of information and content on these matters. Granted, the government was “fairly” elected. And if by democracy we solely mean fair elections by the electorate then everything is fine. But that has not been the working definition of democracy for some time.

In Dominica, the Prime Minister (who has been in power since 2004) vigorously labours to minimize opposition to his rule. In December last year he called a snap general election that were not even attended by the Opposition parties. Yet this is called a democratic country. Superficial democracy without credible institutions is no democracy at all.

In St. Vincent, the Prime Minister's grip on power has lasted for two decades. With a reputation for declaring ‘all roads lead to me,’ he has systematically hindered the emergence of a viable opposition in the country while refusing to push reforms for growth.

A Caribbean think tank should not shy away from calling out such remarkable examples of governance failure and advocate on the need for course-correction. It is not China causing problems of democracy.

Freer Markets

The prevalent economic ideologies in the Caribbean have a strong socialist influence, akin to that of Central America. This is a result of the post-independence modernization plan that prioritized government-led growth.

Therefore the starting point of policy discussions in the Caribbean is always what the government should do. There needs to be more championing of classical liberal ideas and ideals with Caribbean characteristics. How can our poetry and music be so libertarian (in my view all real decolonial struggle art is Libertarian) but our politics be so socialist-leaning?

Beyond the moral reasoning for more libertarian leaning ideals, there are structural benefits. It is fairly standard globally that ports of entry, though owned by a state body, are leased-operated by a private company. This is not standard in the Caribbean. Governments believe that this should be done by the state - leading to subpar services. Moreover, since it is the state that needs to finance port development and upkeep projects this adds further debt burden. If these were operated by international private companies they could acquire financing from their own network, thereby decreasing the debt burden on the state.

More libertarian thinking would inculcate better reasoning on matters like taxation. Caribbean governments have high taxes on most imports without a good reason for doing so. A typical reply is that they want to make domestic production competitive relative to international production. This is a bad argument on two fronts. First, if international products where cheaper you should not harm consumers by making them pay more because domestic suppliers are uncompetitive. Second, there are no domestic substitutes for 99% of products that are imported. Therefore, import taxes are only there so the government can collect more revenue to transfer to other public services. But in most cases these public services should be provided by private companies in the first place.

A Caribbean think tank should advocate for the consumers and show why they shouldn't continuously be drained of their money due to government excess. This issue is notably absent from the views of most Caribbean policy experts and think tanks, including those in the US and EU that work on Caribbean issues.

Concluding Remarks

A more in-depth discussion is necessary to further refine the considerations outlined above and additional issues can be explored. I believe that these notes represent the central and overarching priorities that a Caribbean think tank should focus on. This is just a sketch.

I want to emphasize yet again the structural smallness of Caribbean countries. This brings notable problems but also has its benefits. One major benefit being that information transmission can be swift and potent. Once you have a sustained message and you broadcast it in the correct tone then it is relatively easy to capture mindspace.

Any think tank focused on promoting dynamism and progress in the Caribbean should have its research staff read and digest everything written in these 10 books:

1. The Economic History of the Caribbean since the Napoleonic Wars by Victor Bulmer-Thomas (Economic Historian)

2. From Slavery to Services: The Struggle for Economic Independence in the Caribbean by Victor Bulmer-Thomas

3. The Undiscovered Country by Andre Bagoo (Poet)

4. Development and Stabilization in Small Open Economies Theories and Evidence from Caribbean Experience By DeLisle Worrell (Economist)

5. Empire: The Rise and Demise of the British World Order and the Lessons for Global Power by Niall Ferguson (Historian)

6. A Writer's People: Ways of Looking and Feeling by V.S. Naipaul (Novelist)

7. An Intellectual History of the Caribbean by S. Torres-Saillant (Literary Scholar)

8. Caliban's Reason Introducing Afro-Caribbean Philosophy By Paget Henry (Sociologist)

9. Dub In Babylon: Understanding the Evolution and Significance of Dub Reggae in Jamaica and Britain from King Tubby to Post-punk by Christopher Partridge (Religious Scholar)

10. Caribbean Art by Veerle Poupeye (Art Curator)

If you have any comments or questions about anything written above, I’d be happy to respond below in the comments section.

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