The Caribbean islands have a distinct place in world history and culture that belies their small physical size. During the conquest of the Americas starting in the 17th century, the islands took center stage in the numerous naval campaigns between the European nations attempting to establish bases that would provide access to untold wealth in distant lands to the west. With the development of sugar and other tropical crops on the islands in the 18th and 19th centuries, the plantations themselves were treasured for the vast profits they generated.
Tax concessions—defined as preferential tax treatment for certain types of firms or entities—are commonplace in developed as well as developing countries. Concessions are granted to promote investment, in which case they may be termed tax incentives or investment incentives, or to achieve defined social objectives. For example, corporate income tax (CIT) holidays for five to 10 years may be granted to firms that export goods and services or that locate in designated areas or regions. Exemptions from import-related duties and taxes may also be given, which may be on capital imports to promote investment or on a wide range of other imported goods for statutory or civic bodies or nonprofit organizations.
Tourism contributes significantly to GDP, public finances, and the balance of payments in the countries of the Eastern Caribbean Currency Union (ECCU).1 During 1995—2003, the comovement between real economic growth and the growth in stayover tourist arrivals and tourism receipts in the ECCU was 60 and 87 percent, respectively, reflecting the strength of underlying sectoral linkages.2 In the aftermath of the September 11 terrorist attacks, tourism to the Caribbean contracted sharply, and the ECCU suffered an unprecedented decline in output (a fall of 1.5 percent) in 2001, an increase in unemployment, and a sharp deterioration in its fiscal position, with the central government deficit widening from 5½ percent of GDP in 2000 to around 7 percent in 2001.
This chapter explores the extent and effects of regional and international integration of the Eastern Caribbean Currency Union (ECCU) countries.1 It reviews their basic integration strategy, achievements, and shortcomings. It focuses on various aspects of integration to show how, despite being fairly open economies, the ECCU countries are not fully integrated into the global economy. The chapter then explores empirically the contribution of integration to growth in the ECCU.
This chapter examines the macroeconomic performance of the Caribbean countries since the 1990s, with a special emphasis on their public debt accumulation. Most Caribbean countries have a high level of public debt. The rapid buildup of this debt can in large part be attributed to a deterioration in fiscal balances owing principally to a rise in expenditures rather than a fall in revenues. The rise in expenditures reflects both policy slippages and exogenous shocks. The main policy message is that there is a critical need for fiscal consolidation and a reinvigoration of growth in Caribbean countries, so that their debt might be brought down to more sustainable levels.
Currency unions with fixed exchange rates can induce mutually conflicting fiscal incentives. On the one hand, fiscal overspending by one country can trigger a costly abandonment of the peg for the entire union, thereby requiring utmost fiscal discipline by union members. Conversely, under some conditions, member governments can defer the costs of fiscal slippages to the future or share them with other members, which induces moral hazard behavior.
The study of business cycles or the pattern of fluctuations in economic activity has a long history in economics. Since the seminal work of Burns and Mitchell (1946) and their colleagues at the National Bureau of Economic Research (NBER), work on cyclical instability has traditionally been concerned with analyzing the attributes of expansions and contractions in the level of economic activity, or the so-called “classical cycle.” In more recent decades, spurred by the contribution of Lucas (1977) and the emerging practice of using a measure of the output gap to influence the setting of monetary policy, fluctuations in real output relative to its longterm trend (or the “growth cycle”) have attracted considerable attention.
With their high degree of openness, dependence on tourism, and proneness to natural disasters, the countries of the Eastern Caribbean Currency Union (ECCU) are unusually exposed to external shocks. Nevertheless, the volatility of economic output in the ECCU has over past decades been markedly lower than in other high-middle-income countries. This chapter finds that this relative stability is explained by fiscal policies and international capital flows that are less procyclical than typically is the case in other developing countries. The scope for continued stability could be ending, however, as high public debt may force outcomes to become more procyclical.