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CHAPTER 1: Introduction

Author(s):
Sanjaya Panth, Paul Cashin, and W. Bauer
Published Date:
October 2008
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Author(s)
Andreas Bauer, Paul Cashin and Sanjaya Panth 

This volume explores the policy implications for the Caribbean region of some of the forces of globalization. The Caribbean’s historically very open economies have achieved relatively high income levels and strong social development. However, other parts of the developing world have also now integrated with the global economy, bringing new competitive forces and challenges to bear on the Caribbean. Several specific factors (frequent natural disasters, large public debt levels, and weak external current account positions) further render the region vulnerable to swings in the external environment. Under these circumstances, a key challenge for the Caribbean is to come together as a region, overcome the limitations posed by size, and make the most of globalization.

Chapter 2 addresses financial integration. Integrating the Caribbean’s relatively underdeveloped and still segmented financial markets can confer significant benefits for the region, including higher rates of economic growth. Integration can, however, also increase risks by making capital flows more susceptible to sudden swings and creating blind zones for national regulators, especially in an environment (as in the Caribbean) of large financial conglomerates operating across different industry segments and in several countries. The chapter argues that improving macroeconomic fundamentals, bolstering monetary policy toolkits, increasing coordination among national regulators, and strengthening oversight can help reduce those risks.

Chapter 3 considers the efficacy of tax incentives in attracting investment. Caribbean countries provide extensive tax exemptions in their efforts to attract foreign investment. The chapter finds that factors such as institutional quality, infrastructure and governance are also important determinants of FDI. Furthermore, tax incentives entail significant costs, particularly when fiscal positions are already under strain from high debt. The chapter, therefore, suggests that policymakers consider reducing incentives; step up efforts to improve other determinants of investment; and make remaining incentives more cost-effective. It argues that regional coordination can play a useful role in avoiding a “race to the bottom” with ever more generous tax incentives.

The final chapter looks at the impact on the Caribbean of the erosion of traditional trade preferences. The value of implicit assistance provided by the preferential trading regimes for sugar and banana exports to the European Union is large for some Caribbean countries facing competition from more efficient producers elsewhere in the world. There are, therefore, significant output and revenue costs for the Caribbean from preference erosion, and social costs can be large even in cases where the macroeconomic impact is limited. The chapter suggests that Caribbean countries use targeted safety nets to help vulnerable populations, raise the efficiency of agriculture where it can remain price competitive under the new trade regimes, and transition away from traditional agriculture where production is no longer economically viable.

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