Channels of risk sharing across selected Caribbean countries

Author(s): Greenidge, Kevin C; Maxwell, John (1999)

Created 22 Jul, 1999
Categories Working Papers
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The present uncertainty prevailing in the world economy, as a result of the events in Russia and the countries of the Far East, has led to the consideration of risk sharing between Barbados and the member countries of the OECS. In addition, recent efforts at closer economic integration between the OECS and Barbados could embrace risk sharing as a focus since all these economies are very vulnerable to external shocks due to their openness. We acknowledge that, just as costs are associated with any form of integration, so will risk sharing across countries. Political risks, which make a fiscal union less likely to succeed, usually increase where there is polarization in the distribution of income. Such polarization may lead to a lack of consensus on important common policies. Thus, the issue of voting rules is important to the reduction of the political risk inherent in any risk sharing venture should the participants be able to enjoy its advantages. The paper shows that there is evidence of a significant lack of risk sharing between countries of the OECS and Barbados. Though the economic analysis falls short of quantifying the potential gains, the lack of risk sharing implies that there are gains to be made if the appropriate channels are developed. A tax-transfer policy of a federal fiscal system along credit smoothing, via lending and borrowing on national credit markets, are suggested as two possible starting points.

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