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The Caribbean Group: Focus on a relatively new aid group

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
September 1984
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Its evolution and role

Robert Kanchuger

In response to the initiative of major bilateral donors in the region, and the favorable reaction of the Caribbean countries, the Caribbean Group for Cooperation in Economic Development was established in December 1977. It was established to provide development assistance to the countries of a region that had many important cultural and historical links, and that shared similar economic problems. The Group was set up at a time when many of the countries had just received, or were about to receive, their independence and when traditional economic relationships with the former colonial powers were being redefined. Unlike other consultative groups in which the World Bank plays a leading role, and which deal with the problems of one country, the Caribbean Group focuses on the development problems of 20 countries, on an individual country basis as well as in a regional and subregional context.

The Caribbean Group has no independent secretariat; it is chaired by the Bank, with assistance from five other international agencies that form a steering committee and provide direction and services to the Group. The other agencies are the International Monetary Fund, the United Nations Development Programme, the Caribbean Development Bank, the Inter-American Development Bank, and the Organization of American States. The Group met annually between 1978 and 1982, and an 18-month meeting cycle was established with the sixth meeting of the Group in 1984. (Interim meetings between individual donors and recipients are also held.) For these meetings, 81 economic reports on individual countries have been prepared (all but 7 by the Bank), each reviewing the country’s current economic situation and prospects, and its multiyear investment program. These reports formed the basis for subgroup meetings on the relevant countries, generally held at the time of the Caribbean Group meeting. In addition, 40 sector reports proposing regional programs and projects, and frequently addressing policy issues, have been prepared by the international agencies and submitted to the Group. More than half of these reports were prepared under Bank supervision.

After six years, the Group has established itself as the prime institution for channeling economic assistance to, and promoting economic cooperation and development in, the Caribbean region. The sixth meeting of the Group was attended by representatives of 38 governments and 30 international organizations, among them several heads of government, ministers of finance, and regional leaders. Fifteen country subgroup meetings, each with most of the trappings of a Bank-sponsored consultative group (a country economic report, a project list, and donor pledging), were held. A series of regional issues and project proposals were also considered.

Membership

The number of donors participating in the Group has expanded considerably since it began. Initially, major interest came from those with past or present colonial ties with the region, as well as from the United States and Canada. There are now 18 donor countries; developed countries in Asia, Europe, and North America, as well as Colombia, Venezuela, and Mexico, which are developing countries like the recipients but are donors because of their size, more advanced development, and geographic proximity to the region.

The recipient countries participating in the Group are limited to Caribbean countries, or territories of countries, that are Bank members. These include the former and present British colonies and territories that form the Commonwealth Caribbean Community, the former and present Dutch territories, and Haiti and the Dominican Republic. The recipient countries of the Group have a population of over 15 million people, who speak four languages and are scattered across the Caribbean Sea in a 2,500 mile are stretching from Suriname on the South American continent to Belize in Central America. (The Spanish-speaking countries of Central and South America bordering the Caribbean were not considered as recipient countries either because of their association with other economic groupings or because of their relatively high per capita incomes.)

The members of the Group share many characteristics and problems. Their populations are relatively small, so that productive activities directed at local markets cannot take advantage of economies of scale. Since they are mainly islands, their dispersion adds to transportation costs, which narrows opportunities for production based on exports. A limited resource base in most countries also restricts opportunities for productive investment and creates a dependence on single exports, such as sugar, bauxite, or tourism, which have been subject, particularly recently, to the vagaries of international prices and demand. All the Caribbean countries rely heavily on international trade; the area’s import bill, which averages about 50 per cent of their GDP annually, is concentrated in food, petroleum, and intermediate products. The long-term development of all these countries depends on expanding and diversifying their exports, particularly to larger markets outside the region. In meeting this goal, these countries face similar problems of crop diversification, industrialization, transportation, and infrastructure development.

Prior to the establishment of the Group there was little cooperation, or even communication, between the countries included in the Group, except between the 17 Caribbean members of the British Commonwealth, which have a population of about five million. An early, but transitory, attempt was made at integration to overcome the handicaps of small size and limited resource endowments with the establishment of the West Indies Federation in 1958. The idea was revived in 1968 with the formation of the Caribbean Free Trade Association (CARIFTA). Within this free trade area, the seven small island countries of the eastern Caribbean formed the East Caribbean Common Market, which eventually became the Organization of Eastern Caribbean States. In 1970, a regional development bank—the Caribbean Development Bank (CDB)—was established and in 1972, CARIFTA member countries decided to strengthen the integration movement still further by forming a Caribbean Community and Common Market.

Financial contribution

Because of the regional focus of the Caribbean Group, it was hoped that it would address regional as well as individual country policy issues, and identify and attract financing for regional activities as well as projects in single member countries. Some bilateral donors may have also viewed the Group as a multilateral means of providing countries with economic policy advice that would be met with greater acceptance by countries than if such advice were made available on a bilateral basis.

The most important contribution of the Group has been to call attention to the problems of the region. This has not only stimulated foreign interest in it, but has also fostered within recipient countries a better understanding of their development problems and has probably been responsible for the sharp increase in aid flows to the region that has taken place since the founding of the Group. The Group’s ability to attract foreign financing is widely attributed to the confidence that donors have placed in the economic assessments and recommendations of financing requirements contained in the country economic reports. Donors know that the recommendations made in the reports are endorsed by the Fund and the Bank and that they have been reviewed and accepted by the recipient countries. The reports determine the assistance of many donors and have also served as a basis for attracting commercial lending.

During the five years preceding the establishment of the Group, official long-term flows to the region were approximately $2.3 billion; in the five following years, they more than doubled—to $5.6 billion. New Bank/IDA lending commitments, for instance, grew from $284.6 million to $762.4 million over the two periods. Bank financing in the latter period included, for the first time, nonproject financing of $159.7 million.

The increased official inflows have been for conventional project financing, as well as foreign exchange financing for essential imports. The Group has also succeeded in using the latter for balance of payments financing through a new instrument, the Caribbean Development Facility, established in 1980. Some donors have been willing to make balance of payments financing available only if the local funds released by the foreign financing of imports are used to finance project costs. The balance of payments financing made available in this way through the efforts of the Group has gone under the name of Caribbean Development Facility financing. In 1981, CDF financing amounted to about 15 percent of long-term net external flows to the region; in 1983, it represented about 40 percent of net external inflows. This financing has helped to ease the balance of payments problems caused by the recent sharp deterioration in the terms of trade experienced by most of the countries of the region. The Group identifies each recipient’s needs for CDF financing every year; donors then arrange the commitment and disbursement of funds bilaterally.

Nonfinancial contribution

The Group has influenced project financing in several important ways. By emphasizing the preparation of multiyear public sector investment programs, it has encouraged countries to identify priorities more clearly than heretofore. Project profiles prepared in connection with the investment programs help donors select projects, while the improved economic management that results from longer-term programs helps assure local cost financing. Donors have cooperated closely in preparing projects. For example, in the case of a hydroelectric power project now under implementation in St. Vincent, the UNDP provided the funds for the feasibility work, and the Bank acted as executing agency. The project itself is being cofinanced by the United States, Canada, the European Investment Bank, CDB, and the Bank. All of the donors first discussed the project in the St. Vincent subgroup meeting.

In the context of the economic reports prepared for countries and the discussions in the subgroup meetings, an ongoing dialogue on economic policies and issues is conducted between donor and recipient governments. This dialogue has encouraged a substantial improvement in the quality of national economic policy-making and has also made significant technical contributions to the economic work of governments. In particular, countries have become more aware of the importance of exporting to world markets, and of some of the policy and institutional measures that have to be adopted to reach that objective. They have also become more aware of the need for better fiscal and monetary management. All countries of the region now prepare multiyear public sector investment programs and have established mechanisms for improved monitoring of investment programs. Countries have also become more sensitive to the problems of managing public enterprises and to the need to establish adequate cost recovery pricing for these.

The Group’s regional activities have been varied. They have included such diverse activities as a regional intermodal transport study, a tourism promotion and marketing program directed at the European market, a program for export incentives, a comprehensive analysis of the private sector in the region, technical assistance for the development of regional energy resources, and the systematic exchange of information for agricultural project financing. As a result of the work of the Group, two new institutions were formed to assist private sector development: the Caribbean Project Development Facility, which provides assistance to the private sector in project preparation, and the Caribbean Financial Services Corporation, which provides medium- and long-term credits for private sector projects. Although some activities have been more successful than others, most regional activities have provided an opportunity for the countries of the region to communicate with each other and share a common understanding of each other’s problems, even if a cooperative solution to the problems has not always been possible.

The seven very small countries of the eastern Caribbean, because of their significantly smaller populations and even more limited resource bases than the other recipients in the Group, have received special attention. The economic secretariat of the Organization of the Eastern Caribbean States coordinates economic policy among its members and provides some common services. To assist in this effort, in 1983 the Caribbean Group established an Inter-Agency Resident Mission that operates with the cooperation and funding of five international agencies and three bilateral donors—the United States, the United Kingdom, and Canada. The Inter-Agency Resident Mission gives priority to the preparation of public sector investment programs, the development of information systems for economic management, the improvement of public sector management, and assistance in securing financing for and implementing priority development projects.

Although the countries of the region have considerably improved their economic management since the founding of the Group, most are still experiencing serious balance of payments problems and must make structural adjustments in their economies to assure economic viability. External markets for the region’s major exports—bauxite, sugar, and bananas—remain weak, while the prices of essential imports remain high. The countries of the region have, however, avoided the heavy indebtedness that has caused major difficulties for some of their Latin American neighbors. In several countries, the performance of tourism, a major foreign exchange earner, has improved. The U.S. Caribbean Basin Initiative with its trade preference for the region has provided opportunities to expand nontraditional exports. Countries and investors are beginning to take advantage of these opportunities. The Group has an important role to play in helping to mobilize the balance of payments resources required to maintain the economies of the region while structural changes are being made. The financing generated by the Caribbean Group will be required to maintain and expand essential economic infrastructure, make the production and export of traditional goods more efficient, and to expand the viable production of import substitutes and goods for export.

Not all members of the Group have always been satisfied with its activities and accomplishments. Some recipient countries expected more economic assistance than they actually received. Not all Group participants have shared views on economic policy conditionality for receiving assistance and how vigorously it should have been pursued. Although the donors to the Group have increased, the rate of expansion has been less rapid than hoped by some members. Despite these concerns, few, if any, of the members would deny the usefulness of periodically bringing together donor and recipient countries to coordinate economic development and assistance efforts on a country and regional basis. Although causality is difficult to demonstrate, there is agreement among all countries that the Group has been responsible for a major increase of aid flows to the region. The Group has also been able to adjust its structure and activities to emerging and changing needs in the region. For the future, the Group is giving consideration to more widely spaced economic reporting, fewer regional and sector reports, and an increased emphasis on policy issues. Despite some of the changes that may be made, it is likely that the Caribbean Group will continue to be heavily relied upon for some time to come by donors and recipient countries, as well as international agencies, for the services it provides and the resource flows to the region that it makes possible.

International Monetary Fund Staff Papers

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Articles appearing in the June 1984 issue of Staff Papers (Volume 31, No. 2) are:

  • Quantitative Controls and Unofficial Markets in Foreign Exchange: A Theoretical Framework, by Michael Nowak.

  • Relative Prices, Real Wages, and the Appropriate Stance of Macroeconomic Policies: Some Evidence from Manufacturing in Japan and the United Kingdom, by Leslie Lipschitz and Susan M. Schadler.

  • Government Policy and Private Investment in Developing Countries, by Mario I. Blejer and Mohsin S. Khan.

  • Optimum Taxation and Tax Policy, by Nicholas Stern.

  • The Economic Impact of Deficit Finance, by Laurence J. Kotlikoff.

  • An Empirical Evaluation of the Disequilibrium Real Wage Rate Hypothesis, by Jacques R. Artus.

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