Grenada has been hit hard by the global economic slowdown with the two mainstays of the economy – tourism and foreign direct investment (FDI) – weakening significantly. Real gross domestic product is estimated to have declined by 7.7 percent in 2009, after 2.2 percent growth in 2008. Tourism dropped by about 13 percent year-on-year and FDI-related construction is estimated to have contracted by about 50 percent for the year, although the pace of decline slowed in the last quarter of 2009, reflecting an uptick in FDI inflows. Prices fell by 2.4 percent in the 12 months to December 2009, reflecting weak domestic demand and lower international food and fuel prices.
The current debt-to-gdp ratio here is 120%. On Feb.1, they put in a fifteen percent VAT. I am curious to see how long it takes them to spend that money and move back to major deficit mode. Is there a systematic empirical study of this question?
Overall, it's hard to see where future economic growth will come from. Grenada doesn't have enough night life to appeal to younger, non-yacht-owning American tourists, and wealthy British tourists and expats wonder why they should come so far, especially with such cheap European airfares and the use of English spreading globally. The island doesn't seem to have much in the way of factories or light manufacturing. Nutmeg is fine but doesn't hold a huge future and in the meantime the trees still have to recover from the hurricane. One option would be to encourage more Indian and Chinese immigration. Yet it seems to me the place is just well off enough that they don't feel compelled to make big changes and they will experience slow deterioration of their relative standing.
“Yet it seems to me the place is just well off enough that they don’t feel compelled to make big changes and they will experience slow deterioration of their relative standing.”
I wonder what other countries would fit in that category. France? The United States? Greece?
The country’s name is misspelled in the title.
Okay lets try.
At what point will we be willing to accept a VAT? If a default is a week away?
Fine, lets fork the situation into two parts:
1) We accept a VAT – short-term crisis is averted. Whats likely to happen long term? My bet: VAT keeps going up, reaches mid-teens at least. Income taxes stay put…Greece in 50 yrs without any spending cuts.
2) No VAT – debt-default – interest rates rise – financial crisis – possible steep recession. Government now is lot more likely to actually cut spending.
Your strongest argument I believe is the one on quality of economic thinking in a crisis. However, I think thats highly contingent on the institutional setup. Anti-market demagoguery is easily accepted when wall street banks fail. This is not so easy when a majority of citizens (polls say so) recognize the problem of GOVERNMENT SPENDING today. When a government debt default occurs, my guess is that anti-market bad thinking will be drowned out.
Another point in favor of my guess is that of generic interest-group dynamic. For example in Greece where the public sector is outrageously bloated, there is hardly any strong interest group in favor of budget cuts and reform. This will not be the case here in the US. Majority of citizens will be in favor of spending cuts rather than atrocious tax increases AT THAT MOMENT (if not now). Also public sector unions are fast losing ground across the states, and voters already see the mess in California, NJ and NY as the fault of the public sector union + politics dynamic. NJ Governor Christie has come out forcefully against it, and is being supported by a majority in that blue state!
So, in short…spending cuts will become lot more likely, and bad anti-market economic thinking that will result from any crisis will not likely find as many backers when its the government defaulting, and not wall street banks.
Spelling is corrected, thanks!
@Ed – you’re generally right, but a minor quibble – emigration to the UK is hardly “easy”. It’s not the 50s anymore. Much like moving to the US, you need some sort of “in” to do it legally. Illegally overstaying your visit to the UK is, of course, another matter entirely.
@Tyler – FWIW, neighbour Trinidad and Tobago has had a 15% VAT since 1990, and run surpluses for much of that time after going into horrid deficits in the 80s (though likely to run deficits in the immediate future due to the economy and some dubious spending decisions). Of course, we have pretty generous oil and natural gas reserves, but the surpluses have managed to be relatively stable even when prices dip (e.g., late 90s). Income tax is only paid by a small percentage of the population, and is a 25% flat tax on income over a certain threshold (about 8K USD/yr, I think).
Interesting that you’ve not mentioned anything about the Bishop days and 1983… I’ve never really fully understood the events despite growing up in the region.
“I wonder what other countries would fit in that category. France? The United States? Greece?”
I was wondering how many posts would go by before someone used this simply to take a dig at the U.S. The answer, as is often the case, was 1.
Let’s start with the fact that NONE of the islands are viable economic entities.
Cuba might be given a different form of government.
Haiti and the Dominican Republic are not and they occupy the second largest island.
Jamaica is not at the 3rd largest island.
Puerto Rico is not and it is the fourth largest.
It is downhill from there.
They are doomed by:
1. logistics
2. colonial history
3. current mental attitudes
4. weather
If you think “Indian and Chinese immigration” would significantly change economic growth prospects, then you must think (perhaps subconsciously) that there’s some difference between Indians/Chinese and Grenadians. What could that be? If it’s cultural, do the Grenadians really want a new cultural minority on their island?
Something you didn’t suggest: perhaps the islanders should promote sex tourism. Seems to work for Thailand.
I have read that the imports of goods and services increased in 1984 and 1985 because of greater demand for food, fuel, and manufactured goods, which contributed to the 1985 current account deficit. The United States provided over US$20 million in direct grants to Grenada in 1984 and 1985 to offset the deficit. This aid gave Grenada a positive overall balance of payments and allowed it to make substantial repayments to the International Monetary Fund (IMF–see Glossary) and the ECCB. Grenada still maintained a foreign debt of US$48 million in 1985, which represented 92 percent of exports. Debt service payments were US$8.3 million, or 16 percent of exports.
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