the imitation of policies which may not be appropriate to our particular environment. the challenge for us is : how do we break out of the current low output / high debt scenario and choose between the four outcomes which could confront us in the future? these are : i. failed states ii. barebones survival iii. moderate growth, and iv. socioeconomic transformation. to achieve the preferred outcome, which is socioeconomic transformation, requires a rate of growth ranging between 5 and 7 per cent which is not attainable with the current economic policies and the existing economic resource base. socioeconomic transformation requires the creation of a dynamic private sector which is export oriented and internationally competitive. this will require an efficient and effective state and a transformed financial sector as supporting and complementary institutions. of major importance however will be what we refer to at the eccb as the seven great modernizations which represent the fundamental platform for achieving our goals. the seven are as follows : 1. energy 2. transportation 3. the environment 4. education and skills training 5. research and development 6. ict and 7. governance the first three require a significant engineering input and specialization in the hard sciences. a cadre of engineers will be required to investigate and develop projects to enhance the infrastructure in these areas. the second three are the essential knowledge based areas where human capital is critical to increase productivity through innovation. the final one, that is governance, is the over - arching platform which coordinates and guides, establishing the institutional framework for making and executing policies with regard to the first six. bis central bankers ’ speeches for the oecs / eccu countries, the new treaty of basseterre is the legal framework under which governance and policy making will be organized. this, under the present constitutional arrangements, will form what can be termed a dual system of government and governance, incorporating and coordinating the policies, programmes and projects which will facilitate the development of the member countries. the creation of a single financial and economic space will provide a more conducive domain for our development. the more specific challenges relate to the nurturing of entrepreneurship and the development of an innovative outward looking private sector which is a medium to long term project, but must be started immediately. the beginning of this project involves the updating of the work done in saint lucia with the census of the private sector and continuing this work in all of the oecs countries. this would be the starting point for a diagnostic process to identify the structure of the private sector in each country,

reaction function in this theoretical model would set the short - term interest rate as it = rt * + g1 · xt + g2 · πt, where rt * denotes the natural real rate of interest. if the monetary policy authority credibly commits to follow the natural rate and to react to unfavourable situations, these situations will never occur at all. thus, following the above rule not only supports the equilibrium of full stabilisation but pins it down as the only possible one. we should further note that a simple taylor rule of the form see ecb ( 2004 ). see amato92005 ). see woodford ( 2003 ) p. 279. for the analysis of monetary policy in the simple model with and without cost - push shocks, see gali ( 2002 ). it = c + g1 · xt + g2 · πt, which does not follow the variations in the natural rate of interest would generally not be able to generate full stabilisation. to illustrate this, assume for the moment that monetary policy can nevertheless commit to ( 4 ) and at the same time completely stabilize output and inflation. in this case, the nominal interest rate and expected inflation would be constant over time. however, since the natural real rate of interest moves due to exogenous factors, the resulting interest rate gap varies. but according to demand equation ( 2 ) this would be incompatible with the assumed complete stabilisation of the output gap. this line of reasoning shows that the simple policy rule ( 4 ) is not capable of implementing complete stabilisation unless the natural rate is constant. unlike in the simple model considered so far, monetary policy will in general not be able to guarantee full stabilisation at all times. one important factor that generates a trade - off between output and inflation stabilisation is the presence of cost - push shocks. these appear as an additional disturbance term in the phillips curve, πt = β · et ( πt + 1 ) + κ · xt + et. ( 1a ) thus, a cost - push shock constitutes an additional driving force to inflation beyond those effects that operate via the output gap. the presence of such shocks can arise from time - varying market power of firms, from time - varying distortionary consumption or wage taxation, or from time - varying wage - markups in imperfectly competitive labour markets. 10 in contrast to the earlier example, where all inflationary pressures had been due to real shocks –