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Central Bank of Trinidad and Tobago–IMF seminar: The Caribbean faces up to globalization

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
June 2004
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The economic performance of the Caribbean region has weakened in recent years, amid a series of natural disasters and an increasingly competitive global economic environment. What can be done to spur higher growth was the topic of “Developmental Challenges Facing the Caribbean”—a seminar held in Trinidad on June 11–12. The event, part of celebrations marking the 40th anniversary of the Central Bank of Trinidad and Tobago, underscored the urgency of encouraging more flexible labor markets and lowering debt ratios as these economies seek to become more adaptive to the demands of a fast-changing global economy.

Since 1980, average per capita income in the Caribbean region has grown by only about 1½ percent a year—roughly 1 percentage point below the average for other developing countries. In recent years growth has slowed in several countries, notably those in the Eastern Caribbean Currency Union. At the same time, fiscal balances have deteriorated markedly, and public debt in 15 countries of the Caribbean now averages more than 90 percent of GDP. The region has also suffered disproportionately from natural disasters, with several islands repeatedly devastated by hurricanes. Most recently, severe floods devastated parts of the Dominican Republic and Haiti, particularly affecting the poor. In addition, two important elements in the region’s economy—tourism and offshore banking—were dealt a blow following the events of September 11.

The region is a diverse one—populations range from 8½ million in the Dominican Republic to less than 50,000 in St. Kitts and Nevis, and GDP per capita varies from over $16,000 in The Bahamas to only about $500 in Haiti. But there are a remarkable number of shared features, too. The region features, for example, a widespread commitment to democratic political systems, a relatively high level of educational attainment, and natural beauty that makes it one of the world’s top tourist destinations. But, as one presenter put it, the economic performance can best be described as middling. There is scope for improvement, as “the Caribbean economies seem not to be performing at their full potential,” said Takatoshi Kato (IMF Deputy Managing Director).

What is holding the region back? The main theme of the two-day seminar, which was jointly organized by the Central Bank of Trinidad and Tobago and the IMF, is the difficulty Caribbean economies have had in adjusting to the forces of globalization. As Ewart S. Williams (Governor, Central Bank of Trinidad and Tobago) noted, globalization has expanded growth opportunities, but it has also created challenges for most developing countries “and certainly for those in the Caribbean region.” One example of this has been the profound change associated with the dismantling of trade barriers worldwide. This has eroded the preferential access that exporters traditionally have had to European markets. Sugar and bananas—once mainstays of many Caribbean economies—are no longer competitive.

Photo credits: Issei Kato for Reuters, page 181; Bretton Woods Committee, pages 181 and 183-84; Eugene Salazar and Michael Spilotro for the IMF, pages 183-85, 187-89, and 192-93; Bank of Spain, page 186; Central Bank of Trinidad and Tobago, pages 194-96.

Benefiting from globalization

Despite difficulties, the region has, in many ways, been at the forefront of the globalization process and has, as Anoop Singh (Director, IMF’s Western Hemisphere Department) explained, seen progress on numerous fronts. Technological advances in transportation have allowed tourism to flourish and enabled countries to diversify their economies beyond dependence on single commodities. In recent years, Caribbean countries with relatively cheap labor costs have also been able to benefit from outsourcing.

Increased regional cooperation was widely perceived as having great potential benefits. Given the small size of many of the region’s island economies, freeing up the movement of labor would allow for better use of skills and provide greater scope to exploit economies of scale. Nevertheless, the movement toward establishing the Caribbean Single Market Economy initiative has been slow. In the absence of a powerful supranational authority and an intraregional transfer mechanism, such as in the European Union, it has been difficult to implement the necessary steps, even though the long-term benefits are universally recognized.

Why has growth lagged?

According to Keith Nurse (Senior Lecturer, University of the West Indies), one of the main impediments to growth has been the region’s slow response to changes in the competitive environment. Kato concurred, underscoring the need for increased flexibility given the changes associated with the globalization process and the region’s susceptibility to shocks. In the view of many participants, removing labor market rigidities held the key to reducing high unemployment rates, enabling workers to move from declining to emerging sectors, and facilitating adjustment to shocks—something that is particularly important for the countries (like most of those in the region) that have fixed exchange rate regimes. It will also be critical, as local academics stressed, that the educational system become more responsive to the changing needs of the workplace and the increasing role of knowledge in jobs.

Greater entrepreneurship and a more risk-taking business environment can play an important stimulative role, as Sanjay Kathuria (Lead Economist, World Bank) emphasized. But this will require greater competitive pressure and a more supportive investment climate. Also crucial, he added, is the effective delivery of public services, which will, in turn, require more efficiency in collecting and spending tax revenue, and a larger role for the private sector in the delivery of services. Kathuria cited India as a telling example of how these forces had combined to transform a number of sleepy old firms selling outdated products into highly competitive, world-class companies.

Macroeconomic environment

The single most important factor underlying the sharp accumulation of debt has been a rapid increase in government expenditures—current and capital—rather than a stagnation of revenues. Over the past five years, as Ratna Sahay (Assistant Director, IMF’s Western Hemisphere Department) explained, the fiscal positions have deteriorated in each of the 15 countries in the region. While negative external shocks played a part, policy slippages also occurred. The positive association between increased public investment and economic growth observed in many countries in the past has also broken down in recent years. Faced with high public debt, low growth, and reduced availability of external grants, the room to pursue countercyclical policies is increasingly limited.

Several commentators underscored the urgency of addressing the region’s macroeconomic imbalances. Nouriel Roubini (Professor, New York University) discussed the causality between a buildup of debt and a deceleration of growth, noting that very high debt levels in some countries in the region were likely crowding out private investment and depressing growth. In his view, a rapid improvement in fiscal balances was essential.

Sir Dwight Venner (Governor, Eastern Caribbean Currency Board) agreed that the focus needed to be on fiscal adjustment. But he also cautioned that development needs should not be forgotten and pointed out that further development of the nascent government securities market would impose market discipline by rewarding responsible governments and penalizing the laggards.

Many saw scope to tighten tax loopholes and redirect spending. In his remarks to the gathering, Singh noted that “While the region’s tax effort is generally relatively high in proportion to GDP, there is still much room to reduce tax concessions and exemptions, and reorient spending away from subsidies and wages and toward greater infrastructure support.” Singh also cited widespread support for strengthening financial supervision. “We have learned from other countries how financial sector weaknesses and public debt vulnerabilities can interact to the detriment of macroeconomic stability and growth,” he said. Encouraging the regional policymakers, he noted that “fiscal adjustment and structural reform can initiate a virtuous circle toward debt sustainability and growth.”

Choosing between continuity and change

“Our economic aspirations are not so different from our political and social objectives,” said Patrick Manning (Prime Minister, Trinidad and Tobago), arguing that sustained economic growth would reduce poverty and bring benefits in many other areas. While not as prevalent as in many other parts of the world, poverty is a major concern in the Caribbean. Many participants argued for improving safety nets and opportunities for training, especially in the context of enhancing flexibility and the need to provide opportunities for displaced workers.

“The challenge is how best to choose between continuity and change,” Manning said. The consensus of the participants was that there had been too much continuity and too little change. But while there was agreement on objectives, participants stopped short of converging on the process forward.

A final panel discussion focused on the role of international financial institutions in the Caribbean. José Fajgenbaum (Deputy Director, IMF’s Western Hemisphere Department) stated that the IMF intends to remain actively engaged in the region by providing quality policy advice, supporting institution building through the Caribbean Regional Technical Assistance Center (CARTAC), and extending financial assistance in countries with IMF-supported programs. He also underscored that Caribbean countries would need to take more proactive control of their own policy agendas.

Laura Wallace

Editor-in-Chief

Sheila Meehan

Managing Editor

Christine Ebrahim-zadeh

Production Manager

Camilla Andersen

Elisa Diehl

Jacqueline Irving

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Niccole Braynen-Kimani Maureen Burke

Editorial Assistants

Julio Prego

Graphic Artist

Graham Hacche

Senior Advisor

Prakash Loungani

Associate Editor

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