Loser: This seminar was organized and cosponsored by the IMF and the Caribbean Development Bank. Participants included prime ministers, regional finance ministers, and central bank governors, as well as representatives from the regional and multilateral organizations, the University of the West Indies, and the private sector. Many IMF representatives also attended, including IMF Deputy Managing Director Shigemitsu Sugisaki, who delivered a luncheon address [see below].
The seminar dealt with key issues in the region, in the context of the Caribbean initiative, and was intended to bring into focus the IMF’s interest in all the areas of activity affecting the Caribbean.
Loser: The Caribbean initiative was put in place in response to a number of concerns voiced by the authorities of our Caribbean constituency. There was a perception on their part that the IMF was not paying sufficient attention to the region, which is made up of small, vulnerable states, and they felt they had been left behind in the process of globalization. Our response has been, particularly since last year, to push for a closer relationship with them. We began in the Western Hemisphere Department by restructuring our work on the Caribbean. We established two divisions that regroup most of the countries in the region. This restructuring gives us a better regional focus and helps us develop regional studies and to provide more specialized services to the region.
The initiative also involves closer cooperation and an enhanced policy dialogue with the authorities. In particular, we can offer the countries a better understanding of the key issues involved in the new international financial architecture that the IMF is helping to establish. One very important element of our relationship with the Caribbean economies is technical assistance, and we are seeking ways to increase its volume and effectiveness. As part of this effort, we are working on the development of a Caribbean Technical Assistance Center, in conjunction with the United Nations Development Program. We are hoping to bring in the World Bank, the Inter-American Development Bank, and other agencies on this project. A similar model has already demonstrated its potential in the Pacific [see IMF Survey, January 10, page 15].
Loser: Let me start on a positive note: if we compare the recent performance of the Caribbean countries with that of Latin America, we see that they have shown much stronger growth—close to 5 percent during the period 1996-99—lower inflation, overall lower public sector deficits, and higher levels of investment. This is in spite of the fact that the region is mostly made up of small countries that are more vulnerable to external shocks and that have in fact suffered from a number of them in recent years. The Caribbean economies also display lower poverty levels and have a much more equitable distribution of income than the Latin American economies. However, they do tend to have a lower level of savings, so they depend much more on foreign savings, and they have higher external current account deficits.
That said, what are the major challenges facing the Caribbean? First, even though these countries have a relatively high per capita income, compared to, say, countries in Africa or in South Asia, they are small and have vulnerabilities that other countries do not have. Second, for many years they were heavily dependent on foreign assistance or on the preferential treatment of certain exports, like bananas and sugar. However, these preferential arrangements are being phased out over time by the European Union and others, and the Caribbean countries now need to diversify their exports. Foreign assistance is also drying up, with a reduction in the level of aid to the Caribbean. Since these economies cannot depend on foreign resources to the same degree as in the past, they have to develop their own resource base and strengthen their own savings, in order to grow on a sustained basis. This is the major challenge. We believe that the new technical assistance center and the Caribbean initiative can help catalyze these restructuring efforts.
Loser: First of all, the Caribbean economies are very strategically located: they are close to the United States, easily accessible, with low transportation costs. Further, their population is on average highly educated. Also, these countries are already well integrated into the world economy through their links to their main traditional trading partners, which gives them strength for new sources of growth.
With a few exceptions, these countries have traditionally pursued very prudent monetary and fiscal policies, which has been reflected in their good macroeconomic performance in recent years. There are several types of exchange rate regimes in operation among the Caribbean countries, including a fully functional currency union. But despite the different regimes, the policies behind them are nearly uniformly strong, and in that sense, they are well managed.
The Eastern Caribbean currency union encompasses eight members, six of which are independent countries and members of the Fund. Operating under the authority of the Eastern Caribbean Central Bank (ECCB). In practice, the ECCB functions like a quasi-currency board, and member countries have to follow prudent fiscal policies. The same cautious policies are true of other countries, like Trinidad and Barbados. Jamaica, too, has been strengthening fiscal discipline.
The region’s financial systems have features that make them well placed to benefit from globalization, including a number of foreign-owned banks with close links to major banks abroad. There are also many local banks, which raises the issue of the quality of bank supervision. However, the various central banks have been taking important steps to strengthen financial supervision and prudential regulations. In fact, it is interesting to notice that during the episodes of financial turbulence of 1998 and 1999, no Caribbean country suffered any serious problems because of financial contagion.
The region’s financial systems have features that make them well placed to benefit from globalization.
Loser: The Caribbean economies have to maintain supportive macro policies; but they also must advance with structural reforms—for instance, making their labor markets more flexible. Fiscal policy needs to be less dependent on import duties, and many of the countries are moving to broaden their tax base. Barbados, for example, has introduced a value-added tax that has worked very well, and others may follow that example. There are other issues in the area of taxation, including the level of property taxes and the possible introduction of user fees for services such as health and education.
The Caribbean countries are generally open in terms of capital flows, with only few, limited restrictions. One interesting possibility for these countries would be to unify their capital markets. This would raise some operational issues, because of the countries’ differences in terms of size and output; but there is still significant scope for higher integration of capital markets in the Caribbean. In fact, the Caribbean economies are already much more integrated than other regions at the political and social levels. There are many contacts among them and a larger sense of community than you would find, for instance, in Latin America.
small size, it would be impossible to fully insulate the Caribbean economies from developments in their large partners.
Loser: We have to understand that tourism is already a source of diversification. These countries started as monoproducers, producing a single or only a few agricultural commodities. Tourism has been an agent of diversification and modernization, although it is, admittedly, a cyclical industry. But in view of their small size, it would be impossible to fully insulate the Caribbean economies from developments in their large partners like the United States, Canada, and the European Union. There are a number of areas into which they can diversify further, however. An example is the high-tech data processing industry, as for instance in Jamaica, where this sector has been growing strongly, helped in part by the relatively high skill level of the population. Another area of development has been offshore financial sector activity, which can be a valuable source of growth as long as it operates within the principles of transparency and adequate supervision.
Loser: These countries depend a lot on what happens in North America, of course; but if you come to think of it, there are less reliable places to depend on than North America. They also have important links with Europe in the areas of trade, services, and tourism. Links with Latin America are weaker, for two main reasons: first, the absence of common roots, which led each region to develop very different trade links; and second, the fact that up until relatively recently, Latin America was fairly unstable from an economic point of view. Then, in the Caribbean, Latin America is arguably seen as a less reliable source of foreign exchange than Europe or North America. The larger Caribbean countries are working on establishing closer links with Latin America, but there is a fair way to go before Latin America would be considered a major source of their foreign exchange earnings.
Loser: In terms of regional organizations, the OECS is the institution through which the eight members of the ECCB have institutionalized their economic and political cooperation. As noted, for this group of countries, the ECCB is a major source of discipline and policy harmonization. The CARICOM is also very important. Its member countries are involved in a major process of trade integration and tariff rationalization. These efforts are helpful as long as they foster trade and higher integration with the rest of the world. A key issue here is that the Caribbean is not a large region. The region’s GDP—excluding the Dominican Republic and Haiti—is $27 billion, compared to about $1.9 trillion for the whole of Latin America and the Caribbean. So we are not talking about large numbers. Still, integration efforts, including through the provision of common services in areas like agriculture and transportation, help in creating new opportunities. But in view of its size, the Caribbean cannot be—and its people know this—self-sufficient; its economies have to be very closely associated with the rest of the world. And to make the best of this situation, they need to continue with strong macro-economic policies that will help them absorb the impact of external shocks, while maintaining as open a trade and financial system as possible.
Photo Credits: Denio Zara, Padraic Hughes and Pedro Márquez for the IMF, pages 65, 66, 68, 69, and 71-75; Apichart Weerawong for Reuters, page 66.