Mr Arthur told fDi that unique circumstances demanded an “unorthodox” solution, taking into account external forces – such as trade liberalisation, mandated by the World Trade Organization (WTO), and regional economic integration – that are compelling the government to take a flexible and innovative approach.

Barbados enjoys the lowest rate of poverty in the Caribbean and one of the highest per capita gross domestic products (GDP) (on a purchasing price parity basis) of $17,169.

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It is also, at number 30, the highest ranked Caribbean and Latin American country on the United Nations Human Development Index. But solid economic performance throughout the 1990s has given way to macroeconomic imbalances since 2001. The 9/11 terror attacks on the US had a particularly strong impact, severely denting the island’s mainstay tourism and financial services sectors.

In response to this, the government implemented an expansionary public investment programme designed to revive economic activity. This led to a sharp deterioration in the fiscal deficit from 2% of GDP in 2000/01 to about 13% in 2002/03. As a result, the public sector debt/GDP ratio rose from 74% in March 2001 to about 87%, a factor that prompted the country’s external credit rating to be downgraded in 2004.

Mr Arthur said Barbados had taken a double hit. In addition to 9/11, the country had been obliged to meet its WTO commitments on trade liberalisation. This had hurt the country’s small export sector and triggered a surge in imports, which had also been fuelled by strong household demand. The country’s current account had slipped further into deficit, he said.

After flatlining post 9/11, the economy has bounced back, growing by 4.4% in 2004. Economic expansion is expected to be more modest in 2005 but it is still expected to grow by about 3%. Mr Arthur said this rate was sustainable in the long term, given his country’s level of development.

However, the IMF wants the government to cut back, citing current expenditure estimates that predict the fiscal deficit will widen in the current fiscal year and the debt/GDP ratio will slip to 88%. This far exceeds the Caribbean average.

Mr Arthur argued that government spending was still necessary to transform the economy. “In a WTO-organised world and a likely open hemispheric economy, Barbados has very limited scope to expand its manufactured export base. We have to be an exporter of high quality services,” said the prime minister.

“But in a small country like ours, where the private sector is made up of a collection of small companies that are generally under-capitalised, private companies will not take on risk without government concessions or guarantees. They want the government to be with them in public-private partnerships because that is the only way they can reasonably achieve a satisfactory return on capital for the given risk. The orthodoxy that the private sector is the only engine of growth is untrue.”

Mr Arthur said Barbados must seek new, profitable niches in the service sector. One such area was health tourism, providing Caribbean residents with sophisticated, high quality medical services that were not available in their home countries, he said. Also, Barbados had long invested in education, giving it an advantage in terms of skills.

The prime minister also pointed to retirement housing as an area for potential growth, enabling Barbados to compete with Florida. Ongoing investment in traditional sectors such as tourism and international financial services was also needed to keep these industries at the cutting edge.

“Increased public spending has gone to investment rather than consumption,” said Mr Arthur, “we are realigning the productive base.”