Small economies need income from tourists, exports, and other foreign exchange to purchase imported goods, while individuals seek salaried jobs to purchase household goods. In a subsistence economy, each family or group must rely on its own resources to protect itself; The quality of life is poor. Families whose members find employment that pays enough to purchase the widest range of products needed for modern living enjoy a much higher quality of life. The same is true for Caribbean countries and other small economies.
The reason these countries need to achieve a competitive level of production and services in tourism and export is to be able to buy imported goods. If imports are significantly reduced or prolonged, the standard of living will decrease. Therefore, there is a need to earn foreign currency. Imports are as important to a small country’s prosperity as supermarket shopping is to families. More than ninety percent of the goods listed in the United Nations Standard International Trade Classification are goods that Caribbean countries do not produce. The rest of the domestic products are less expensive than the imported goods. If the local product is of comparable quality, people will willingly buy local.
If it is necessary to impose a high tariff on domestic products or a ban on imported products, it is clear evidence that domestic producers are not as efficient as their foreign competitors. Blocking inefficient domestic producers comes at a cost to domestic consumers that is higher than what they would pay in the absence of barriers to imports. The argument that imported goods are of poor quality and should therefore be kept abroad is difficult to justify. If imported products are of poor quality, people who can afford better quality domestic products will buy them even if the price is higher; No one will buy an importer if they can buy a comparable domestic product of quality.
The reality is that even with a limited selection of domestically produced goods, few can reach the level and sophistication required to compete with imported goods. The best way for local producers to succeed is to target discerning consumers and for special events customers can expect fresh produce and high value items because people are less hungry for special events. Foreign exchange flowing into a small economy does not stay in the economy except for a small percentage of cash holdings, mainly in US dollars. The amount of income that is transferred to banks and branches in the country is sold to importers and others who need to pay in foreign currency. Any surplus left over is sold to other banks or the central bank. Any surplus left for the banking system as a whole is deposited with the Federal Reserve Bank of New York if it ends up at the central bank.
Balances with commercial banks are deposited with their correspondents in the US. Other than authentic U.S. currency notes, no foreign currency is kept in the country. Just as every prudent family builds a savings pool to provide some insurance against life’s ups and downs, a prudent government provides breathing space in the event of an unexpected fall in the foreign currency. In the event of an epidemic or import inflation, the government must maintain sufficient foreign reserves to avoid a sudden drop in the supply of foreign currency. If the loss of foreign exchange continues, imports must be cut, because without it the foreign reserves will be depleted; Foreign reserves are nothing more than a temporary adjustment.
Imports support the livelihoods and lifestyles of people living in small countries. Small economies earn foreign currency for the purchase of imported goods; The foreign currency they borrow should be for investment, which will increase the ability to earn foreign currency either directly through hotels and factories or indirectly through the improvement of ports, roads, airports and hospitals. The amount of foreign currency held by the New York Fed shall not be greater than is necessary to adjust for any reduction in foreign income or reduced spending power due to inflation from abroad.