delisle worrell : the search for practical economics remarks by dr delisle worrell, governor of the central bank of barbados, at the international monetary fund – central bank of barbados – university of the west indies ( imf - cbb - uwi ) conference, bridgetown, 27 january 2011. * * * i begin this morning with a quote from eric d. beinhocker of the mckinsey global institute, london, from his 2007 book the origin of wealth : “ as i write this, the field of economics is going through its most profound change in over a hundred years. i believe that this change represents a major shift in the intellectual currents of the world that will have substantial effects on our lives and the lives of generations to come. … just as biology became a true science in the twentieth century, so too will economics come into its own as a science in the twenty first century ”. 1 i am not as confident as is beinhocker that change has begun to take root ; i scan working papers from all the leading economic research institutes and university departments daily, and they are all comfortably situated in a conventional idiom of economic analysis. however, i do share his conviction that a change that goes to the foundations of our discipline appears to be needed, if economists are to have useful advice for policy makers about improving the performance of modern economies. the longer i stay in this business, the more i am disappointed by the disconnect between what economic analysis would seem to suggest, and what is practical and makes sense. 2 clearly a conference such as the one we begin today cannot address the fundamentals of our discipline, but i believe it offers an opportunity which should not be missed, to explore needed changes in our approach to economic analysis. no doubt the revolution in economic thinking will come upon us, when and from what quarter we cannot tell ; but in the meanwhile there is much that we can do, as economists, to improve our practices, approaches and techniques, so that we are able to offer usable advice on economic policy. i offer an illustration in this short address, of what might be called “ practical economics ”, meaning analysis that enlightens the decisions policy makers have to make. let me begin with an example of conventional monetary policy analysis and advice in caribbean. conventional economics, reflected for example in the imf occasional paper “ monetary policy implementation at different stages of market development ”, 3 recommends that monetary policy is the tool that should be used

open market operations, and what, if anything, has happened to bank liquidity, but they never bring the story to a conclusion, to say what effect policy actions have had on output or inflation, even in the broadest terms. we simply do not have the information we would need to make such an assessment. does that mean we are in a hopeless situation, and that we can do nothing to stabilise the economies of small open economies? i do not think so. however, the search for practical advice, advice that a policy maker can actually put into practice and measure its impact, takes us beyond conventional economics. to begin with, the policy objective of choice should be economic stabilisation, not inflation control. policy makers need to choose as target a variable over which they can have some control. we cannot target inflation at 5 percent if 80 percent of that inflation is imported from abroad, and import prices rise 10 percent. whatever our policy, domestic prices are going to rise at least 8 percent. a more useful objective, in the open economy, is to stabilise external payments and receipts, and maintain a level of foreign exchange reserves which market agents find to be adequate. that creates a stable environment for business and investment planning, and is therefore the best platform for sustained economic growth. as a result, this is an objective which resonates with the companies and households whose collective decisions will result in the outcome of whatever policy is chosen. practical policy requires us to start with this objective, and to find the economic policies that may be employed to achieve it. what might these policies be? first, are there any policies that might significantly increase foreign exchange earnings in the near term? the answer is, not really. the only way to increase foreign currency inflows in the short run is by borrowing, attracting foreign direct investment, or selling assets to foreigners. each of these implies higher commitments of foreign payments in the future, which means that the limits on capital inflows are first, the supply of foreign finance and secondly, the capacity for future debt service. the policy maker ’ s challenge then boils down to this : how can expenditures on imports and other foreign currency spending be brought down to the level of available foreign currency inflows? in economies like the us or brazil, which produce practically everything domestically, it may be possible to persuade consumers to switch from imported to domestically produced items by depreciating the exchange rate or imposing a tariff. in the caribbean, that