Higher education in one paragraph
A big lesson of economics . . .

Barbados vs. Jamaica: another cautionary tale about too much government

From a Stanford GSB summary of "Institutions versus Policies: A Tale of Two Islands" (American Economic Review, May 2009; NBER Working Paper 14604):

In spite of their legal and institutional similarities, Barbados and Jamaica experienced starkly different growth trajectories in the aftermath of independence. From 1960 to 2002, Barbados' gross domestic product, per capita, grew roughly three times as fast as Jamaica's. Consequently, the income gap between Barbados and Jamaica is now almost five times larger than at the time of independence. . . .

What specifically led to such starkly different trajectories?

The difference, Henry and Miller observe, is that in the 1970s the Jamaican government chose to respond to the nation’s economic woes by running large and persistent fiscal deficits (which it financed by printing money), nationalizing companies, erecting import barriers in the form of higher tariffs and outright bans, and intervening extensively in the economy. Barbados, on the other hand, avoided nationalization, kept state ownership to a minimum, and adopted an outward looking growth strategy while keeping government spending under control.

Eventually, Jamaica felt it had no other choice but to devalue its currency. When faced with a similar decision in 1993, Barbados was able to avoid devaluation by making other hard choices. The government negotiated with firms, unions, and workers to institute a one-time wage cut. Firms promised to moderate price increases, and all parties agreed to the creation of a national productivity board to provide better data on which to base future negotiations. . . . 

The experience of these two Caribbean nations holds lessons for governments, both large and small, grappling with the current global crisis, says Henry, the Konosuke Matsushita Professor of International Economics at the Stanford Graduate School of Business. "While there is a legitimate and helpful interim role for governments to play in restoring the financial sector back to health," he says, "extensive and ongoing government intervention in markets—along with the protectionist sentiment that it is likely to arouse—has the potential to cause many more problems than it solves."  

(I note with interest that the lead author, Peter Blair Henry, was a Morehead Scholar at UNC-Chapel Hill.)

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