The Tropical Joys Of A Single Currency

ASIDE FROM SWAYING PALM TREES, white-sand beaches and turquoise waters, there doesn't seem to be much to envy these days in the Eastern Caribbean. In less than a decade, the islands stretching from Anguilla to Grenada have gone from most-coddled-nations status to most neglected. The United States, which lavished dollars (and soldiers, in Grenada's case) on the region to create an anti-communist buffer zone, turned off the spigot at the end of the cold war. It has cut most development aid, dropped trade concessions, and lobbied against preferences for the area's most vital export: bananas. Britain, the islands' former colonial master, has done little to ease their emergence into the global market. The United Nations and World Bank have turned miserly. And Mother Nature has sent devastating storms, floods and (on Montserrat) volcanic eruptions. Laments St. Kitts' Finance Secretary Wendell Lawrence: ""We've fallen off the map.''

And landed with hardly a scratch. The eight tiny members of the Organization of Eastern Caribbean States enjoy steady growth (averaging 4 to 6 percent a year), low inflation (under 3 percent) and investor confidence. What explains such stability? A common currency--the Eastern Caribbean dollar--backed by an admirably independent central bank. Long before Europeans ever came up with such a notion, the islands pooled their sovereignty and monetary policy in shared institutions. Now the rock-solid EC dollar--which has held steady at 2.7 to the U.S. dollar for an astonishing 22 years--has become a life raft in turbulent times for the 550,000 people in the currency union. ""We are so small and fragile,'' St. Kitts and Nevis Prime Minister Denzil Douglas told NEWSWEEK. ""If we were not held together by [the EC dollar], we would sink.''

The islands have turned history on its head. After they achieved independence in the 1980s--with the exception of Montserrat, which is still a British colony--their currency union was widely regarded as a vestige of colonial rule. Now it is cutting edge. The Eastern Caribbean Central Bank, formed in 1983, is clearly an extension of the British currency board that began in the early 1950s. But locals point out that the system is also based on the Federal Reserve model designed by native son (and U.S. founding father) Alexander Hamilton, who was born in Nevis. The irony is not simply that islanders feel they have something to teach their euroskeptical former colonizers. Several Caribbean nations that huffily left the old currency federation in the 1960s, calling it a constraint on their newly won sovereignty, are now pining to get back in.

Few islanders, however, want to risk letting in any potentially destabilizing factors. That caution is one reason the system works: any shift in monetary policy must be approved by all eight members, and the built-in peer pressure serves to enforce a Scrooge-like fiscal discipline. (It also helps to have small countries that share a culture, language, judicial system and history.) The pool of foreign-exchange reserves--with heavier contributions from the tourist-rich Leeward Islands in the winter, and from the banana-laden Windward Islands in the summer--helps cushion the blow of ""asymmetric shocks.'' But even in a crisis, the ECCB does no deficit financing; and while bank regulations require 60 percent of local currency to be covered by the U.S. dollar, the actual amount covered is 98 percent. Such restraint stands in stark contrast to Caribbean neighbors who tried (and failed miserably) to solve problems by printing money. The ECCB's tough-love policies have also helped the islands avoid the modern-day equivalent of colonialism: ceding economic control to the International Monetary Fund.

Not everything is so rosy. Part of what keeps the Eastern Caribbean afloat these days is drug trafficking and money laundering. That isn't what the ECCB has in mind when it exhorts the island economies to diversify into service industries. Some of that has happened, too: OECS tourism, with more than $2 billion in annual revenue, is now nearly 10 times bigger than the region's banana industry. But monetary union has not led to greater economic and political integration, even though every leader pays it elaborate lip service. At election time, they have shown that it's far easier (and more politically expedient) to protect local workers and businesses.

Political unification seems remoter still. Nevis, a tiny island of 10,000 people (and nearly as many offshore companies), is even threatening to secede from its sister island, St. Kitts. An upcoming referendum, sparked by Nevisians' frustrations with new regulations on offshore companies in St. Kitts, seems destined to give birth to one of the smallest nations in the world. ""We suffer from insularity and parochialism,'' explains one exasperated regional business leader. Even so, nothing threatens the one thing that makes even little Nevis stand out: a common currency that is worthy of envy.

© 1998