What can we learn from Barbados?

That institutions matter is well known, empirically from many cross-country growth regressions, as well as from twin countries like North and South Korea or East and West Germany. The latter examples highlight situations where countries started roughly at equivalent levels of development and thereafter diverged massively. Could policy differences achieve the same? Zimbabwe is an obvious example, but let us exclude implosions.

Peter Blair Henry and Conrad Miller have an interesting look at Jamaica and Barbados. Both are small Caribbean islands, former British colonies with typical institutions, populated mostly by former slaves brought in for the sugar cane plantations. Jamaica was blessed by valuable bauxite deposits, yet soon after independence, the unemployment rate shot up, due to a combination of high and rigid wages and a flight to the city. The other difference is how these island states have reacted to the oil shock: Jamaica went on a spending spree financed by debt and inflation, intervening massively in markets, while Barbados had a much more moderate fiscal policy. During that period the growth rate differential was 3.5% in favor of Barbados. And nowadays, the GDP per capita in Barbados is a multiple of that in Jamaica.

In there something to learn for the current situation. Quite obviously, these are economies quite different form the large ones now looking for rescue policies. But quite obviously, Barbados benefited tremendously from having a government with foresight that was trusting markets.