Get real!
Friday January 28 2011 | 03:38 AM

Governor of the Central Bank of Barbados, Dr. DeLisle Worrell, today called for a change in the way his profession related their theories and analyses to reality.

He was speaking this morning at Hilton Barbados during the opening of a conference jointly held by his institution, the International Monetary Fund and University of the West Indies.

The economist said a daily scan of working papers from all the leading economic research institutes and university departments in the world showed they "are all comfortably situated in a conventional idiom of economic analysis".

He said there was a need for "a change that goes to the foundations of our discipline ... if economists are to have useful advice for policy makers about improving the performance of modern economies".

"The longer I stay in this business, the more I am disappointed by the disconnect between what economic analysis would seem to suggest, and what is practical and makes sense," he said.

Worrell said while the conference could not address "the fundamentals of our discipline", it still "offers an opportunity which should not be missed, to explore needed changes in our approach to economic analysis".

"No doubt the revolution in economic thinking will come upon us, when and from what quarter we cannot tell; but in the meanwhile there is much that we can do, as economists, to improve our practices, approaches and techniques, so that we are able to offer usable advice on economic policy," he stated.

The governor appealed for a practical approach to economics "based on careful measurement and observation of actual economic transactions and behaviour".

He said this was "even if that means we must rethink our prior notions". The approach, the official self would be one that "uses a variety of methodological approaches in the effort to understand better how our economies work, is sufficiently easy to understand and explain to economic agents whose decisions ultimately determine the success of policy, provides usable guidance about the magnitude of the policy adjustment that may be necessary.

Worrell said such an approach would make the lives of policy makers much easier.

"The policy maker's challenge then boils down to this: How can expenditures on imports and other foreign currency spending be brought down to the level of available foreign currency inflows? In economies like the US or Brazil, which produce practically everything domestically, it may be possible to persuade consumers to switch from imported to domestically produced items by depreciating the exchange rate or imposing a tariff," he noted.

"The Caribbean policy maker has only one option for reducing spending on foreign exchange, and that is to reduce spending on everything. To stabilise these small open economies one has to cut expenditure in the aggregate. "The tools available to reduce aggregate spending are all fiscal, and what is needed, in the end, is a reduction in the fiscal deficit. Most of us, even those who remain wedded to conventional economic analysis, will be in sympathy with this conclusion. However, the conventional story, with its armoury of money supplies, excess liquidity, real effective exchange rates, core and headline inflation, etc, obscures the fundamental link between the fiscal deficit, external balances and foreign reserve adequacy."

Worrell said it was the linkage that "makes for the success of stabilisation policy", hence the need for the best information from the experts, led by economists.