Working Paper Series: Special Edition of 2016 to 2018 Interns

1.0 Introduction It is widely believed that small open economies benefit positively from foreign direct investment (FDI) inflows and trade openness. In fact, many post-independent Caribbean islands have adapted an export-led, open economy strategy, based on attracting FDI in key sectors to spur economic growth. . Initially, attaining relatively high growth rates was seen as critical for achieving targeted economic and social objectives such as reducing unemployment and poverty. However, the focus has shifted over time away from simply attaining growth to ensuring that there is resilience and sustainability in the level of growth. This is in recognition of the reality that these small open economies are subject to great output volatility induced by their level of exposure to external shocks from global economic as well as natural disasters. Economic openness has traditionally been comprised of two dimensions: Firstly, there is the free trading of goods and services between home and foreign countries and secondly, there is the liberated flow of international capital into a host country, as noted byMarwah and Tavakoli (2004). These two dimensions are critical and there is a vast body of literature that has provided insights into their relationship with economic growth. For instance, Kakar and Khilji (2011) argued that the expansion of trade activities is likely to stimulate local demand, which may result in the establishment of large-scale industries that can result in an increased level of export. In relation to FDI, McLean and Shrestha (2002) found that in developing countries FDI plays a very important role in spurring economic growth and development. The ECCU’s growth performance in the 1980s were perhaps the best over the last 40 years, achieving an average growth rate of 12.6 per cent compared to 6.4 per cent in the 1990s and 4.6 per cent in the 2000s. These statistics have moved in synchronization with the exogenous shocks that have plagued the territories over the years. For instance, in the 1970s and 1980s the countries enjoyed preferential trading and liberated investment inflows that allowed the economies to experience robust growth performances. However, in the 1990s, such trade arrangements were disbanded and the investment flows were curtailed; this restrained growth performance. In the 21 st century, natural disasters and international crises resulted in a further downward trend in economic performance in the ECCU. Initially in the early 2000s the region’s economic performance started an upward trend, it peaked at 10.5 per cent by 2006, influenced by a favourable external environment and the positive developments associated with the hosting of

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