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Caribbean Islands

Role of Government

The Blaize government played only an advisory role in the economy, preferring a market-oriented system to the tightly controlled economy of the previous government. The government saw its role as one of overseeing the privatization of the economy and assisting national development through public sector investment, as well as through monetary and fiscal policies.

The government's principal role as overseer of public enterprises and manager of infrastructural development was coordinated through its program of public sector investment. The purpose of this program was to coordinate private sector and public sector development efforts to maximize the potential for national economic growth. This was accomplished by providing direct assistance to the productive sectors, while also supporting them with infrastructural development. In 1985 investment in the public sector focused on three major areas: the productive sectors of agriculture, tourism, and manufacturing; physical infrastructure, such as roads; and the social sectors, principally health and education. Seventy-four percent of the funds were placed in infrastructural projects, including roads, water and sewerage, communications, and energy. Agriculture commanded 12 percent of the funds invested in productive resources, and education, health, and housing received a combined total of 7 percent of public funds.

Major improvements to communication and transportation facilities were attributed to public sector investment. Domestic and international communication systems on Grenada were considered good in the mid-1980s. The Grenada Telephone Company served all parts of the island with a 5,600-instrument automatic telephone system. Radio-relay links to neighboring islands provided highquality international telephone and telex service. St. George's had one government-owned AM radio station broadcasting on 535 kilohertz and one television station. The principal local newspaper, the Grenadian Voice, was independent and was published weekly.

Roads were the primary mode of local transportation. Grenada had approximately 900 kilometers of improved highways, 600 kilometers of which were paved. Of the two principal roads, one followed the coastline and the other bisected the island, connecting St. George's and Grenville. Municipal buses and taxis linked all areas of the island. There were two airports on the island: Point Salines International Airport in St. George's and the older Pearls Airport, located north of Grenville. Grenada had no railroads or inland waterways and was serviced by ports in Grenville and St. George's.

Future allocation of funds called for a greater emphasis on the productive and social sectors; total expenditures on infrastructure were to be reduced to approximately 47 percent of the public sector investment budget. Such allocation was expected to assist with Grenada's development over the long run, but allocation was vulnerable to regional and economic politics because it depended on the government's ability to attract sufficient foreign capital. Although financing of capital expenditures was to be accomplished using foreign funds on a matching basis, all financing of the 1985 budget came from external grants and loans.

The government's role as public enterprise manager diminished after 1986 because of its desire to see the private sector control as much of Grenada's economic assets as possible. Among the twentynine public sector enterprises existing in that year, only five were slated to remain either partially or totally controlled by the government. These included three utility companies that provided water, electricity, and telephone service.

The government's role in the economy also included the formulation of monetary and fiscal policies. In the case of monetary policy, however, the government was constrained by its reliance on the ECCB for controlling the money supply. This forced the government to rely heavily on fiscal policy to guide the economy.

Fiscal policy was a major government mechanism for encouraging economic development but became very controversial in 1987 with the introduction of the national budget. It provided for an entirely different tax structure in which a value-added tax (VAT--see Glossary) replaced virtually all other taxes, including personal income taxes, export duties, and consumption taxes. The primary purpose of the VAT was to raise funds to correct the budget imbalance, while simplifying attendant collection and oversight responsibilities. A reduction in inflation and increased domestic savings and investment were also expected to result from the new tax strategy.

These goals were to be achieved by encouraging individual production, while simultaneously discouraging immediate consumption in favor of increased personal savings. The elimination of the personal income tax would make more money available to wage earners and give them a greater incentive to work. Consumption would be penalized with a 20-percent VAT placed on all domestically produced goods. Many essential items, such as food, were exempt from taxation. The resulting increase in personal savings would then provide a resource base for domestic investment, while also reducing aggregate demand and placing a check on inflation. In early 1987, the VAT did not appear to be succeeding. A large government deficit was projected because of a decline in aggregate tax revenue, and political repercussions were also apparent.

Opponents of the VAT argued that it penalized domestically produced items that faced regional or international competition. In some cases, for example, Grenadian rum products, imported substitutes immediately became less expensive. Such a turnaround forced the government to make many concessions in the VAT, which reduced revenue needed for central government operations.

The VAT was created to correct the government's budget deficit that had persisted throughout the 1980s and had been financed by external grants. Nonetheless, it appeared that this problem would not be solved in 1987 because the VAT was not capable of generating sufficient revenue to cover government expenses. Alternative measures would have to be found, however, because continued reliance on foreign aid to solve fiscal shortfalls was not a longterm solution.

Data as of November 1987

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Caribbean Islands Table of Contents