The trouble with this island, said a grinning resident of the Caribbean's smallest nation, "is that people are just too happy here."

Smiling does seem to be endemic in Greneda, with the island's 110,000 natives beaming nonstop at visitors, at one another and sometimes apparently at nothing at all. Cross words are rarely heard, and the average disposition is as sunny as the climate.

For tourists, Grenada (pronounced Gruh-nay-da) is unspoiled and nearly undiscovered in the shadow of larger neighbors such as Trinidad and Barbados, and almost too pleasant a tropical paradise to be believed.

According to some islanders, however, the result of all this local euphorla, combined with the country's obscurity, is that Grenada has stayed one of the poorest and least developed countries in the world.

By some estimates, island unemployment runs as high as 50 per cent. Raw-material exports, primarily nutmeg cocoa and bananas in amounts that are insignificant on the world market, are the basis of Grenada's economy. The only industries appear to be tourism, bottling companies for Coca-Cola and the local Caribe brand beer, and a soap plant.

"I suppose we just don't know any better," the resident said, "and we're too content to change things."

Perhaps the most contented Grenadian of all is Prime Minister Eric M. Gairy, 55, the political patriarch who has controlled the island's 133 square miles - 22 miles from one end to the other on the main cross-country road for 16 years with an iron fist nestled in a ruffled cuff.

A colorful, flamboyantly dressed Caribbean legend who can be found such Saturday night tending bar and openly tickling the ladies at the Evening Palace, one of a number of entertainment establishments and hostelries he owns here, Gairy attributes the strength of his government to "my relationship with the divine."

Whatever his backing, it has been enough to put him or the political party he founded 25 years ago - the island's first - into power for six straight elections. Chosen prime minister under a benevolent British colonial government in 1961, is remained a fixture through independence in 1974 and won the first free election last year.

When he is not politicking, Gairy spends his time studying yoga, mysticism and "certain phenomena that baffle man," including extraterrestrial life, flying saucers and "psychic" events.

He is also a collector of international honors ranging, as noted in his official biography, from selection as a judge in the 1970 Miss World contest to his most recent award, a British knighthood on the occasion of Queen Elizabeth's most recent birthday.

Whatever serpents have come into Gairy's Garden of Eden have been quickly disposed of by a band of paramilitary thugs that islanders have dubbed "The Mongoose Gang." His opponents charge that the gang is modeled after-Haiti's Tontons Mocautes - the special police created by the late Haitian dictator "Papa Doc" Duvalier.

The opponents, primarily a group of young Socialists called "The New Jewel Movement," call Gairy the "Jackal" and say he has grown rich while the island has grown steadily poorer. Gairy calls the Jewels "crazy."

He also attributes their penchant for troublemaking to the fact that some of the Jewels are "browner" - that is, lighter-skinned - than many in this all-black country. Grenada's simple people, Gairy says, have "African blood," meaning they are "easily intoxicated and excited" by political rhetoric.

Led by an attorney named Maurice Bishop, 33, Jewels tried, in 1973, to organize a political resistance to Gairy's one-man rule on the eve of Grenada's independence.

Opposition street demonstrations followed, resulting in a complete island shutdown for nearly a month in early 1974, ex-handle beatings of dissidents and a police shooting of Bishop's father. Virtually the entire island went on strike, crops rotted on the ground, the port closed and electricity was cut off. When Gairy later appointed and independent commission to investigate the incident, it denounced the government as the guilty party.

During elections last fall, the Jewels formed an anti-Gairy alliance with the more conservative Grenada National Party and managed to win six of Grenada's 15 legislative seats.Their campaign rallies were conducted without loudspeaker systems, which the police denied them permission to use; without broadcast advertisements, which were not accepted by the government-controlled radio station; and without their own newspaper, which was closed for violating a newly drawn government regulation.

Last week, the Jewels rose again to embarrass the "PM," as most Grenadians call Gairy, at his proudest moment - the meeting of the Organization of American States' general assembly in Grenada.

The meeting newly did not happen some OAS members protected that Grenada was too small, its facilities too inadequate and its security too lax to entertain the foreign ministers of 25 Western Hemisphere nations. Others pushed the idea, feeling that such touchy OAS issues as Latin American human-rights violations were best discussed away from big-country distractions and the international press.

The ensuing debate gave Grenada some anxious moments, and feelings in the OAS - an organization never known for its lack of internal passion - ran so high that at one point the anti-Grenada faction began to promote rumors of a typhoid epidemic on the island.

While Gairy, according to one OAS official, made several beseeching trips to OAS headquarters in Washington, "laying his life on the line to get the conference," the "PM" himself says he never had any doubt that 2,000 OAS delegates would show up in Grenada on the day set for the meeting's opening, June 14.

It was the "the power and efficacy of prayer" that brought the OAS to Grenada, Gairy acknowledged, and many of the delegates believed him. Two days before the meeting opened, he had urged his citizens to pray for rain and an end to a long winter drought. Conference discussions were frequently drowned out by the noise from drenching downpours that continued unabated, and delegates took to wearing bathing shorts instead of dress shirts.

A gracious host, Gairy invited all the delegates to the Evening Palace, where he mixed the drinks and led the dancing himself. When a visiting female newspaper reporter asked for an interview, the prime minister graciously invited her to conduct it in his bedroom.

But while Gairy noted that conference publicity turned "all eyes on Grenada," the Jewels launched their own public-relations program, inviting U.S. and Latin American reporters covering the conference to hear their side of the local human-rights problem.

They called a public rally, and the press, curious about the strange microcosm of island politics, duly attended. Not unexpectedly, Gairy's soldiers broke up the meeting with guns and clubs, and the reporters had their story.

"Gairy says he talks to God - that Papa God puts ideas into his head when he is asleep," Bishop said. "But he has no plans for any kind of progress on this island. The people have no say in anything, and foreigners own most of the tourists hotels" and virtually every other money-making enterprise.

Worst of all, the Jewels contend, Gairy has developed close ties with "fascist regimes" in Chile and South Korea. Last year, Grenada's 180-man army entered a cooperation agreement with Chile's ruling military junta.

"They are wicked," Gairy says of the Jewels. The leaders, he charges, are "criminals . . . young boys taught to smoke drugs, and disrespect law order and elegance."

No one seriously doubts Gairy power here, and most Grenadian seem, if not worshipful, at least content with his rule.

"He's kind of silly with all his talk about flying saucers," admitted one islander. "But I think he's real man of the people. At least, we always know where to find him when we want him."

On Saturday nights, that mean the Evening Palace.