I wish to acknowledge the assistance of Mr Oral Martin, Economic Adviser, Ministry of Finance & Economic Development and Miss Ann Marie Dewar, Permanent Secretary, Agriculture, Lands, Housing and the Environment for their invaluable assistance in producing this Paper. Their comments and suggestions helped to guide the analysis of the issues.
Any errors and omissions are however those of the author.
I wish to commence my discussion by outlining a scenario - a reality check of the situation then as opposed to the situation now. To outline my scenario, I will draw on a line from one my of favourite television sitcoms:
"Picture this" Montserrat, July 17, 1995, a small island economy with realistic prospects of social and economic transformation in the next five years. The picture portrays:
- Positive economic growth of 5.26% in 1994 after the sharp decline following the post Hugo rehabilitation
- Per capita GDP of $14,165 (US$5,200) (GDP $147.32m; population 10,400)
- A vibrant and growing tourist sector contributing over 30% of GDP
- Good economic infrastructure with plans for further expansion in the air transport sector
- Balanced recurrent budget with small surpluses
- Good educational infrastructure with 99% access to education
- Excellent modern health facilities
- A fully functioning off-shore medical school
That positive picture was dramatically altered following the start of volcanic activity on July 18, 1995, which impacted the island physically, economically, and socially. The devastating effects of the volcanic eruption have been widely discussed in a variety of fora. Now, seven years later, here is a current snapshot of the island.
- Erratic economic growth
- Per capita GDP of $15,383 (US$5,661) (GDP $75.96m; population 4,938)
- A struggling tourism sector contributing approximately 10% to GDP
- Poor economic infrastructure with severe limitations in air and sea transport
- Large budget deficits financed by budgetary aid from the United Kingdom
- Reduced educational facilities with limitations on access to tertiary education
- Minimum standard health facilities
- Hardship
- Social welfare programme
- No major private sector investment
I will not dwell on the picture itself, and the factors that led to the dramatic demise of the Montserrat social and economic fabric, but will concentrate instead on the challenges that we have faced and continue to face in our attempts to steer the economy on the path of sustainable growth and development.
To fully appreciate the challenges that are present, it is necessary to set the framework for the analysis by reflecting on the concept of sustainable development and to identify a model or elements of a model that may be relevant to the Montserrat situation. Section 1 of the Paper will therefore propose a broad concept for sustainable development and briefly reflect on relevant practicing approaches to development. Section 2 will then analyze the development challenges that Montserrat has faced over the period under review. Section 3 proposes some actions that may be relevant in overcoming these challenges.
Sustainable development is a very broad term that tends to be used loosely. The term 'development' itself tends to be synonymous with some degree of transformation. In recent times, the addition of the word sustainable has occurred in an attempt to reflect the need to the transformation process to be long lasting. For me the definition is simple. I define it as a process in which a society becomes self-sufficient, with the ability to provide for its people the opportunities and basic necessities of life within a framework of a stable and vibrant economy ensuring social equity and national self-determination for future generations.
To apply the concept above, one would need to develop visible indicators that could be used to determine whether development was being achieved. These can be broken down into groups as follows:
It is not the intention here to undertake an analysis of the development theories that abound. Rather it is necessary to highlight the fact that there are small open economies that have achieved a level of sustained development that can be emulated. For this discussion, the "Barbados model" is chosen as the most suitable model to derive some lessons, being historically and culturally similar in many respects to Montserrat.
Other examples were sought in terms of similar population and physical land size, but apart from Tuvalu and Nauru, there appears to be little information on other small island economies that have achieved some level of success in their development efforts.
Within the Caribbean Region, Barbados has been the most stable politically and economically with a high per capita income, a stable macro economic environment and a sound social development policy record. In summarizing the performance of Barbados over the past four decades, an ECLAC study found that:
Barbados has made significant economic and social progress. It is now regarded as an upper middle-income developing country by the World Bank and is ranked in the mid twenties by the United Nations Development Programme (UNDP) according to its human development index. Barbados has now been viewed as a template for many small developing countries.1
Even though Barbados has limited natural resources, it has been able to achieve a level of sustained economic and social progress through careful planning which facilitated the transformation of the economy from an agricultural mono-crop base to a service-oriented economy based on tourism and financial services with a modest role for manufacturing. This development has taken place with emphasis on human resource development and social infrastructure.
The "lessons learned" from the Barbados experience have been very instructive in developing a suitable framework for the development process.
Having generally reviewed the relevance of certain development strategies, we can then briefly examine the very basic requirements that would need to be in place for any degree of development to be achieved.
It is generally agreed that a stable macro-economic environment is a prerequisite for any sustained development. The Economic Commission for Latin America in analyzing the Barbados Strategy as a model for SIDS asserts that:
A fifth lesson from the Barbadian experience which can be followed by other SIDS is that careful macro-economic management is vital to the success of the long term development process.2
The macro-economic environment must feature sound fiscal policies resulting in low fiscal deficits, low inflation rates and stable exchange rates. This environment must provide the basis for adequate financing to meet the needs of the society. This element is specifically highlighted since it is possible to deliberately maintain low fiscal deficits by not providing basic necessities, but in so doing fail to invest within the economy. If the economy is unable to generate the finances that are required for the development process, then there must be a mechanism for accessing additional financial resources externally.
Associated with the stable macro-economic environment must be the need for a stable environment generally, indicating not only the need for transparency and good governance, but also a healthy respect for the environment.
Secondly a population base with a skilled and/or trainable labour force seems to be also a necessary prerequisite both in terms of its contribution to output and providing a market base.
Sound development planning which caters appropriately for the needs of the community appears to be a useful method of providing some vision for the country. It provides the framework for assessment and forward planning, which is essential in a dynamic world environment. This view is supported by William Demas, former President of the Caribbean Development Bank who states that
A higher level of national economic management and planning than in other developing countries is required to overcome the many disadvantages of very small size of both population and land area and so realize the full production potential of these islands3
The planning framework should be internally generated with realistic goals and targets. This then would be a third requirement for development.
A Social Policy framework is now recognized as an essential ingredient in the planning process. Empirical evidence suggests that Official Development Assistance to developing countries has not trickled down to the masses. This has led to a greater emphasis on techniques that involve marginalized and vulnerable groups in the planning process.
The Montserrat economy has experienced and continues to experience a debilitating shock to its development since 1995. The uncertainty of the time frame to the ending to the volcanic activity has been by far the main challenge which then has knock on effects to the decision making process in a number of areas. There are many aspects of the experience over the past six years that have been challenging, some to the point where the development process has been frustrated.
There are quite a number of areas that can be identified, but this discourse will concentrate on six areas, which are considered to be of significance. I must also point out that many of these areas are interlinked and have created what may be defined as "the vicious cycle syndrome". These are as follows:
The issue of viability is often raised in association with the level of financing that is required to rehabilitate the country. A figure of £200 million has been quoted in official circles as the level of aid allocated to Montserrat up to about the year 2000. When one computes that amount of aid against the population size,4 it really raises the question of viability and whether it is worth spending these sums of money on a country that may not be viable financially.
Government's revenue generation is heavily dependent on taxation, both direct and indirect. The local revenue base was literally halved with the onset of the crisis, decreasing from approximately $42 million in 1994 to over $28 million in 2001. At the same time, expenditure patterns changed in response to the crisis with increased requirements for emergency response, social welfare programmes and subsidized provision of utilities and transport services. The monitoring of the volcano is also a major expenditure item. This increase in expenditure, coupled with a corresponding decrease in revenue led to recurrent deficits starting at EC$20.7 million in 1996, rising to a high of EC$36 million in 1997, and decreasing thereafter before rising again to EC$29 million in 2001.
Table 1 - Budget Deficit 1996-2001 (EC$ millions)
| 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | |
| Recurrent Expenditure | 55.01 | 63.5 | 58.7 | 59.3 | 50.0 | 55.5 |
| Recurrent Revenue | 33.50 | 27.4 | 23.2 | 26.2 | 27.4 | 26.5 |
| Budget Deficit | 21.51 | 36.1 | 35.5 | 33.1 | 22.6 | 29.0 |
Source: Estimates of Revenue & Expenditure Government of Montserrat 1998-2001
The budgetary deficit has been financed by grants from the United Kingdom Government as a part of its overall package of assistance.
In 2000, the UK Government introduced a policy of reducing budgetary aid, mainly in an attempt to curb recurrent expenditure. In this regard, the Government of Montserrat was allocated a reducing aid framework commencing with £24.4 million in 2001/02 UK financial year, reducing to £7.5 in 2005/06 UK financial year. It was expected that during this period, government would increase its revenue earning capacity to the point where budgetary aid would be eliminated.
This will prove to be a real challenge since Government revenue is highly dependent on tax revenue. In 2000, tax revenue accounted for 84% of local revenue. The capacity to expand collections in this area is severely limited because:
The taxable capacity, which gives an indication of the ability of the population to pay taxes was estimated at 22.5% in 1994. The resulting is a tax effort of 0.9, suggests that the avenues for increasing tax revenue are limited.5The situation would have worsened since 1994 since the working population has decreased significantly along with an increase in the level of dependent population.
We are told that
Fiscal policy refers to the government's use of its authority to tax its citizens in order to raise revenue to finance expenditure, and this is expected to influence the trend in economic and social activities.6
Taxation then is government's mechanism for obtaining most of its revenue. If there are limitations within the tax base, where then is the scope to raise additional revenue?
Additional revenue should flow from private sector activity within the economy. The funds that are available can only cover basic expenditure and a few necessary capital projects. It does not give the scope for investing in development prospects that can spawn new economic activity to generate revenue.
It is therefore apparent that the level of financing that is being provided is inadequate to facilitate the necessary regeneration of economic activity that will allow the central government to increase its revenue earning capacity. Government will therefore depend on budgetary aid for the foreseeable future until enough financing is available to facilitate productive and regeneration activities that will lead to real economic stimulation. This creates a continued level of dependence on the United Kingdom, a vicious circle with little scope for breaking through. The question is how to break this circle with limited resources?
The lack of financial resources has also had an impact on the private sector, where concessionary finance needed for re-establishment in the northern area was not readily available. Problems relating to the provision of collateral and existing indebtedness inhibited borrowing capabilities.
Furthermore it is difficult for the sector to be viable with the constraints imposed on it by the small size of the market. This sector too has been caught up with the "vicious circle syndrome" since access to concessionary financing is constrained, limiting its capacity to provide adequately for the market, which is too small anyway to really force changes.
The inability of the local economy to generate enough revenue to cover its operational expenses has led to the loss of autonomy in many spheres of decision-making. As a consequence of being in budgetary aid, many crucial policies were externally driven. Current expenditure decisions had to be agreed by external technocrats who were not necessarily au fait with the traditions and cultures of the society.
Aid resources, while appearing significant in terms of figures, were hampered by an extensive approval process, and often inappropriately allocated, frequently against local wishes. An evaluation of HMG's Response to the crisis in Montserrat bear these points out by stating:
The evaluation identified a number of delays which reduced the impact and cost effectiveness of emergency measures/capital investment.7
and
The response to the economic and private financial consequences of the volcanic emergency has been ineffective, apart from the planning-for-recovery aspects of the SDP and CPP, which were only agreed between October 1998 and January 1999.8
Decisions on certain investments were difficult to agree at times because of differences in standards and location. For example, important housing provisions were delayed because there were disagreements between GOM and DFID over the use of prefabricated units versus block and concrete houses. In the final analysis, a combination of these was provided. It has now been proven that the prefabricated units were not cost effective, since GOM has had to use local resources to effect substantial repairs to them.
A considerable amount of the resources provided was dedicated to technical assistance. If a project idea was put forward, it had to be "proven worthy" by an external consultant. An in-house analysis of DFID expenditure over the 1998-2001 period found that 26.5% of the total aid resources during that period was allocated to non-project expenditure. The following table shows the full picture.
Table 2 - Analysis of DFID Expenditure 1998-2001
| Item of Expenditure | Total Exp 1998-2001* | Total as a % of Expenditure |
| Budgetary Aid | 22,808,000 | 26.5 |
| Non-Project Expenditure | 22,942,000 | 26.5 |
| Project Expenditure | 40,593,000 | 47 |
| TOTAL | 86,343,000 | 100 |
*Exact expenditure undertaken directly by DFID is estimated
Source: Government of Montserrat Development Unit - In-house research
Many decisions were therefore taken based on recommendations from the various external consultancies, ignoring local expertise and technical advice. This has had a high impact on the replacement of key infrastructure, with the re-establishment of external air transport facilities being the most controversial. The location, size and appropriateness of an airport have been the subject of many studies. Suffice it to say that seven years after the crisis has started, no earth has turned for the re-establishment of this very important facility which is key to the long term survival and development of the economy.
This highlights what I shall refer to as a "Development Challenge" - that is, how to ensure the stimulation, development, utilization and effective management of local human resources, while operating within an imposed aid policy framework still encumbered by a heavy legacy of colonialism. Aid programmes are expected to benefit both the recipient country as well as the economy of the donor country. There is, therefore, room for conflict in determining the ratio of benefit to each. This is often played out in difficult negotiations over the use of local knowledge and involvement in project design, the extent to which consultancies and foreign experts are genuinely needed, and how much aid funds could be saved or put to alternative use for the intended recipient.
The vicious circle syndrome here is the fact that until Government generates enough resources to finance at least its operational expenses, policy decisions will continue to be dictated externally, limiting the authority of the central government to take the actions it considers necessary to stimulate growth within the economy.
Prior to 1995, the population was approximately 11,000. Fear of the volcanic activity along with evacuations and the resulting hardships mainly in terms of inadequate housing provision and loss of jobs, forced a mass exodus resulting in a loss of about half of the population. It is estimated that over 5,000 persons emigrated, mainly to the United Kingdom where resettlement opportunities were offered. Small numbers have returned, but these are often confronted by problems of housing and finding suitable jobs.
The population now stands at approximately 4,500. This cannot be described as a satisfactory size under any circumstances, certainly not if one wants to achieve development. Furthermore the structure of the population, as outlined below, seriously inhibits its ability to assist with the development process.
Firstly there is the issue of the working population - numbering no more than a third of the overall population. This therefore poses limitations in terms of the quantity and quality of the labour force. The potential for an adequate supply of skilled labour to support the service sector and manufacturing entities is very limited. This has an impact on the opportunities for economic activity. The prospects are consequently limited to very small operations, generating small-scale revenue that has no significant impact on the overall economic activity.
Secondly the demographic structure shows an ageing population with the average age nearing 40 years. A greater proportion of the population is now more dependent on Government for their very existence. This has led to the expansion of formal social welfare programmes, hitherto not a significant feature of Government expenditure.
Furthermore, the population's small market size inhibits the numbers of business ventures that can maintain any degree of viability. The consumer therefore has to contend with high prices and limited product choice. Many have resorted to shopping in nearby islands, leading to leakages from the economy. This in turn leads to a further contraction in the market size, offering no real stimulation for economic activity. It is a vicious circle with merchants complaining of low levels of sale, while consumers complain about the high prices and lack of product choice. The merchants are forced to further contract their activities as a result of the low sales resulting in less imports and therefore less customs duties and fees to Government, further reducing the revenue intake.
There is no doubt that the population needs to be increased, but questions then arise in terms of how this increased population will be supported on island. For example the inadequacy of housing provision - funds are inadequate to cover those displaced who have remained on island; the lack of job opportunities - government is unable to expand its operations and the private sector is not in a position to respond. Again, this points to the vicious circle and the inability of Government to find a breaking point.
One of the major challenges is the inability to attract long term meaningful investment while the volcanic activity persists. Investor confidence is severely hampered by the very negative press reports that portray only the negative elements of the volcanic activity, giving the perception of a non-functioning society. Even if that doesn't turn off the potential investor, the limitations in terms of availability of adequate insurance coverage, the small labour force, small market size, inadequate transportation infrastructure can thwart even the most entrepreneurial person.
It therefore results in a vicious circle again because no new investment means that there is no scope for increased value added economic activity, additional revenue generation, no means of gaining wealth.
Economic activity is inextricably linked to government's investment programme. Empirical evidence shows that Government's public investment programme has a stimulating effect on the economy. The rehabilitation process after Hurricane Hugo stimulated high rates of growth for the 1989/90 period jumping from 7.8% growth in 1989 to 14.29% in 1990.
The contribution of Government services to GDP has necessarily increased in importance with the contraction of the private sector, jumping from approximately 18% in 1995 to over 33% in 2000. Government services, coupled with construction are now the leading sectors within the economy, with government's investment programme providing the fuel for the construction sector.
Any reduction in Government expenditure through its investment programme, without a corresponding increase in economic activity in other areas will necessarily lead to contractions in the economy. Further contractions will lead to less money in circulation, therefore no multiplier effect for economic regeneration. Again the "vicious circle" syndrome is created since there is no apparent scope to generate "new money".
Prior to 1995, the mining and quarrying sector contributed a little above 1% of GDP, not significant by any means but the presence of quarrying facilities on island was directly linked to the construction sector, which was a major contributor to GDP, averaging 10% annually.
The main natural resource of the island now is the volcano and its emissions. However in its present state of activity it is difficult to tap this resource. There is scope for this sector to become a major revenue earner with the volume of material that is available. Current attempts to exploit this resource have however been continually thwarted by increased volcanic activity. So whereas this sector may offer some means of breaking free of the "vicious circle", the timeframe within which this can occur is uncertain.
The 1995 activity effectively put on hold the plans for expansion of W. H. Bramble airport in the eastern section of the island. The loss of adequate air transport had a debilitating effect on the major industry, tourism. A Helicopter service was introduced but it carries a high element of subsidy.
Once it was finally accepted that an airport facility was a necessary ingredient for the survival of Montserrat the debate concentrated on an appropriate location and size. The cost of putting in new airport facilities is a huge component of government's investment programme, effectively crowding out other essential activities, but is necessary if the vicious circle is to be broken.
The issue of "size" has been a recurring theme throughout this discussion. Arguably "size", in terms of the level of financial resources, population, and domestic market has had an impact on the development process in Montserrat, especially over the past seven years. "Size" in terms of physical land space has also had an impact, but only in so far as the undeveloped and underdeveloped nature of the northern areas prevented rapid resettlement when the crisis initially started.
"Size" cannot be considered a deterrent to development. In fact, again using the Barbados example, the following statement was made:
Perhaps the first and most obvious lesson one can learn from the development experience of Barbados is that small size and a narrow physical resource base do not necessarily preclude the possibility of substantial social and economic development.9
Montserrat is unique in many ways and therefore has to come up with its own development strategy. The question is how can Montserrat position itself to exhibit some of the indicators of development that are put forward in Section 1? It can emulate some of the strategies that have been pursued by successful small island states with similar characteristics, but in so doing, must recognize its own peculiarity and so choose a development strategy that is peculiar to its own needs. This may mean using the volcanic activity as an opportunity rather than a threat. How this can be achieved will take careful planning with proper links to the other areas of focus such as tourism and small-scale manufacturing. Evidence shows that there is value in having a sound economic base which one can use as a catalyst for the other aspects of sustainable development to be evident.
How does one go about establishing that sound economic base when the very fabric of the economy has been destroyed? A planning framework, which sets the vision and targets, is a good starting point. The Barbados experience highlights the success that has been achieved by focusing on one or two focal sectors and using the available resources to develop these. Government of Montserrat has recently agreed a framework for developing a long term plan, setting six main strategic objectives to guide policy action in the various sectors. (See Appendix 1 for details).
The planning framework must also be guided by social development principles that ensure the inclusion of vulnerable and marginalized groups in the development process. Much work has been undertaken in this area, but there is room for further development in terms of developing a monitoring framework to ensure that the principles are being applied.
To establish that sound economic base though in Montserrat seem to have two basic requirements that need to be resolved in the short term, finance and people.
The development of these sectors will increase their contribution to GDP and so lessen the dependence on Government as the economic stimulant and gradually with additional resources circulating in the economy, the means will be found to break out of the vicious circle.
The critical question then to consider is the source of the appropriate level of financing? What is the role of the United Kingdom Government, as the current colonial power, in providing the appropriate level of financing to facilitate Montserrat's development? It is HMG's stated policy that "the reasonable needs of the Overseas Territories" will be met. However, the interpretation of "reasonable needs" is open to question. Should the United Nations, through its Decolonization Committee insist that modern day colonialist powers provide standards of living in territories equivalent to that of theirs? These are some of the very issues that we have grappled with over the past few years with limited success in attracting the levels of financing from the UK Government that is considered the minimum requirements for development.
What then are the options facing Montserrat in terms of attracting the finance it needs to facilitate the development process? Several options seem possible, but whether they are appropriate under the current circumstances would need to be reviewed. I will put forward a few suggestions:
There may be constraints on increasing population rapidly, but by setting appropriate goals and offering incentives may in fact encourage a small proportion of the population to return. Associated with this would be the issue of retention of the existing population, especially those in the working age group. This points to the value of investing in one's people. This is a resource that can be developed for the benefit of the country.
Alongside the increase in population, job opportunities have to be provided or be on the horizon to ensure that the population level is sustained. This is therefore related to the initiatives in the private sector, where it will be necessary to focus on job creation initiatives as well as those that generate wealth.
It is clear that the challenges experienced in Montserrat over the past 7 years have effectively frustrated any possibilities for sustained development to occur alongside the emergency response.
The reality of the situation is that Montserrat has been in "recovery and rehabilitation" mode since 1989 following the impact of Hurricane Hugo. The rehabilitation process was just nearing completion when the seismic activity commenced. The difference with the Hugo experience and the current one is that Hugo had an ending. The volcanic activity has no specific end in sight, yet.
It has therefore been a challenge to respond to a growing emergency whilst attempting to facilitate the development process. Emergency response dictates quick action without necessarily paying close attention to the long-term impacts of those actions. Development on the other hand dictates careful review of long-term impact. The two strategies therefore conflict each other.
However the need for emergency response is now greatly diminished in the case of Montserrat and time can be more effectively spent on setting the framework for development. An adequate level of financial resources must support this framework, along with an appropriate population, or it will be difficult for Montserrat to break out of the "vicious circle" which has created a level of dependency within the country. It remains to be seen whether the type of support that is needed is indeed available out there somewhere.
Draft Strategic Objectives
CIA Fact book - World Wide Web
Demas, William - "The Viability of the Organization of East Caribbean States" taken from the Bulletin of Eastern Caribbean Affairs Vol 8 No 1 March/April 1982
DFID - Evaluation Report EV635- An Evaluation of HMG's Response to the Montserrat Volcanic Emergency
Easterly, William - The Quest for Growth - How we wandered the tropics trying to figure out how to make poor countries rich
Eastern Caribbean Central Bank (ECCB) - Montserrat Fiscal Policy Review and A Framework for the Pricing of Government Services - March 1998
Eastern Caribbean Central Bank (ECCB) - National Accounts Statistics 1997, 2000 and 2001
ECLAC - An Analysis of Economic and Social Development in Barbados: A model for Small Island States
Government of Montserrat - Estimates of Revenue and Expenditure 1996 - 2001
Ocampo, Jos‚ Antonio - "Small Economies in the Phase of Globalization" Speech delivered in Cayman Islands 14th May, 2002
The Foundation for Development Corporation - South Pacific and Caribbean Island Economies: A Comparative Study
World Bank - World Development Reports 1991 and 1995
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Analysis of Economic and Social Development of Barbados: A model for SIDS - ECLAC4
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© Angela Greenaway, 2003
HTML last revised 11 February, 2003.
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