Balance of Payments Adjustment in Guyana: Is There a Role for Informal Institutions?
SMALL ECONOMIES AND GLOBAL ECONOMICS, J. R. Pillarisetti, J. S. Y. Teo, eds., Nova Science Publishers, 2008
16 Pages Posted: 3 Sep 2008
Date Written: July 2008
This paper examines the role of institutions in balance of payments adjustment. Economic outcomes are ultimately determined by the incentives, constraints and opportunities created for rational agents by formal or informal institutions. Of the formal institutions that influence adjustment, only the government - as represented by the fiscal deficit - is usually discussed as an institution, one that creates the incentives and opportunities for fiscal indiscipline and chronic fiscal deficits. The question of whether governments are responsible for current account deficits is an open one. There are other formal institutions that have a bearing on the adjustment that is required, the process by which adjustment takes place and the adjustment outcomes themselves. These include the rules governing resource allocation, the exchange rate, savings and investment.
The theory of optimum currency areas implies that balance of payments adjustment also involves the institutions and regulations that govern labour migration. Recent controls on labour migration have reduced its efficacy as an adjustment mechanism when a policy of exchange rate stability is combined with rigidity in wages and prices. The phenomenal increase in remittances in recent times suggests that the informal institutions which increase the propensity of migrants to remit and which incline migrants to want to send remittances in the first place, might have since emerged as an important mechanism of adjustment that compensates for the vitiation of the other adjustment mechanisms. Guyana is used as a case study for developing this hypothesis.
Keywords: Budget Decifits, Current Account Deficits, Adjustment Mechanisms, Remittances, Informal Institutions
JEL Classification: D02, F24, F32, H61, N96
Suggested Citation: Suggested Citation