Devaluation as a Policy Instrument for Caricom Countries

Abstract

Caribbean Community (Caricom) governments are being urged to devalue their currencies in order to correct their balance of trade deficits and stimulate the industrial sector. This advice rests on the assumptions that the sum of the elasticities of demand and supply in Caricom countries is greater than one, that free trade prevails, and that the pass-through effects following the devaluation are complete. However, useful as the theory of devaluation may be for the industrial countries where it was developed, it is not necessarily an effective policy instrument within the context of most less developed countries because, in addition to other things, it ignores their colonial social and economic structures. I hypothesize that the colonial social and economic structures, which have persisted into the period of their political independence, help to render devaluation an ineffective policy instrument for Caricom countries.