Export-Led Growth, Global Integration, and the External Balance of Small Island Developing States

Abstract

Small, open developing economies in general, and small island developing states (SIDS) in particular, have specific macroeconomic characteristics due both to their openness and their small size. Small size means they can never have fully independent capital-intensive domestic economies, so to raise incomes they must become thoroughly integrated into the global economy. The export sector thus becomes the engine of growth; it provides domestic income, which is spent on domestic goods and imports, driving overall economic output through a multiplier effect. Building on work within the Caribbean structuralist tradition, this paper presents a demand-driven model that includes capital accumulation and external debt. Given the limited data available for many small island states, the model explicitly represents the external macroeconomic balance. An aggregate representation of the national economy is derived formally from a two-sector model, following models of a petroleum exporting country developed Seers and Bruce and Girvan. The model’s performance was evaluated against the historical performance of the Caribbean countries of Barbados, Jamaica and Trinidad and Tobago.

Keywords

• open economy
• small island
• export led growth
• Caribbean
• structuralist