Chapter

Chapter 17: External Competitiveness

Author(s):
Alfred Schipke, Aliona Cebotari, and Nita Thacker
Published Date:
April 2013
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Author(s)
Melesse Tashu

The Eastern Caribbean Economic and Currency Union’s (OECS/ECCU’s) current account balance has been deteriorating for decades, partly reflecting declining performance in the export and tourism sectors. The region’s average current account deficit rose from about 11½ percent of GDP in the 1980s and 1990s to 19 percent of GDP during the 2000s. Even before the 2008–09 global economic and financial crisis, the average current account deficit for the region had worsened and stood at 18 percent of GDP during 2000–07. By the same token, exports of goods and services as a percentage of GDP fell by about 12 percentage points from an average of 53.4 percent of GDP for the 1980s and 1990s to 41.6 percent of GDP in the 2000s. During this period, exports of goods declined precipitously, from about 30 percent of GDP in the early1980s to a mere 8 percent of GDP in 2010 (Figure 17.1).1

Figure 17.1OECS/ECCU: Current Account and Exports, 1980–2010

Source: IMF, Balance of Payments Statistics online database, December 2011.

The decline in exports of goods through the early 1990s could be attributed somewhat to the structural transformation from agriculture to services, especially tourism. After growing through the mid-1990s, however, tourism revenue also reversed course, suggesting an overall loss in competitiveness.

Following implementation of the European Union’s (EU’s) single market in 1993, the EU’s preferential regime for bananas underwent significant changes. This resulted in an erosion of the preferences for the OECS/ECCU economies and an associated decline in banana exports, especially to its largest market in the United Kingdom, suggesting that the region’s banana producers were not competitive without the level of protection that prevailed before 1993.

This chapter focuses on assessing the external competitiveness of the OECS/ECCU. It aims to identify the underlying constraints to competitiveness and highlight possible policy options for improving competitiveness. Using a diagnostic analysis, the chapter finds that economic and event risks, limited infrastructure, the high cost of labor, and limited access to intermediate inputs are the main constraints to the region’s external competitiveness.

The results of the chapter need to be interpreted taking into account its scope and limitations. The benchmark for the analysis is regional economies, and constraints to competitiveness are identified in comparison with regional competitors.2

The chapter is organized as follows: The next section lays out the conceptual framework of the study, and is followed by a section that assesses the competitiveness of the OECS/ECCU economies using neighboring Caribbean economies as benchmarks. The concluding section highlights the main binding constraints to doing business in the OECS/ECCU and makes policy suggestions to alleviate them.

Competitiveness: A Conceptual Framework

The literature has no standard definition or conceptual framework for competitiveness. Some perceive competitiveness narrowly as a relative cost advantage, according to which a nation would be regarded as competitive if it can produce goods and services of international quality at relatively lower cost (Di Bella, Lewis, and Martin, 2007). Relative factor costs are important determinants of a nation’s competitiveness, but they are only part of the story. Competitiveness also depends on a range of other factors, including institutions, policy, risk, and availability of complementary factors. At the other end of the spectrum, some define competiveness very broadly as the ability of a nation to realize its central economic policy goals of growing income and employment without running into balance of payment difficulties (Fagerberg, 1988), or the ability to achieve high productivity (Porter, 1990; and World Economic Forum, 2009). However, in theory, a nation does not have to be competitive or engage in international trade to achieve these goals. For example, the United States was able to achieve vigorous growth in income and employment during the 1950s and 1960s with minimal engagement in international trade (Krugman, 1994).

Following Thompson (2003, 2004), this chapter views competitiveness as a latent construct reflecting a complex set of factors in an economy that determine the dynamic ability of firms to achieve and sustain adequate capital returns. In a globalized world, a small open economy’s ability to achieve its central economic policy goals depends heavily on its ability to attract businesses (investors) and thereby produce and trade goods and services that meet the test of international standards. An economy’s ability to do so, in turn, depends on the relative costs and availability of factors of production, the level of taxes and the efficiency of the tax structure, and a set of factors that affect the rates of return on capital. In essence, small open economies compete for investment and export market shares (Siggel, 2006) based on these attributes. Figure 17.2 summarizes the framework of the study in this chapter.

Figure 17.2A Framework for Analyzing the Competitiveness of a Small Economy

Source: Author.

To identify the determinants of the expected rate of return on capital, the analysis adopts the model developed by Hausmann, Rodrik, and Velasco (2005). Hausmann, Rodrik, and Velasco (2005) formulate private return on capital as a function of total factor productivity, availability of complementary factors of production such as infrastructure and human capital, and an index of externality. The analysis in this chapter adds to this specification an index of risk indicators to capture the roles of natural, political, economic, and related risk factors in investment decisions in small open economies.

Indicators of Competitiveness

The empirical literature covers a plethora of indicators ranging from simple measures such as unit labor costs, the real exchange rate, and market shares to more comprehensive indicators such as those produced by the World Economic Forum’s Global Competitiveness Reports and by the International Institute for Management Development’s (IMD’s) World Competitiveness Yearbook (Buckley, Pass, and Prescott, 1988; Fagerberg, 1988; Neary, 2006; Siggel, 2006; World Economic Forum, 2009; IMD, 2011). Some of these indicators reflect only one aspect of competitiveness. Although the World Economic Forum’s and the IMD’s indices are multidimensional (constructed from several variables), they suffer from a number of conceptual and methodological weaknesses.3 Furthermore, the OECS/ECCU economies are not covered by any of these institutions.

Although this chapter maintains the multidimensionality of competitiveness, the analysis assesses each dimension separately instead of constructing a single composite competitiveness index. In addition to avoiding the methodological problems associated with constructing a composite index, this approach helps to identify the most binding constraints to competitiveness for policymakers to target. In identifying the competitiveness indicators, the study makes a distinction between ex post indicators (which reflect competitiveness performance) and ex ante indicators (which reflect the potential to compete) in line with Buckley, Pass, and Prescott (1988) and Siggel (2006). Indicators such as export market shares, foreign direct investment (FDI) shares, and the revealed comparative advantage index are ex post indicators because they reflect the outcomes of competitiveness. Indicators such as the costs and availability of factors of production, the level and burden of taxes, and the determinants of the rate of return on capital are ex ante indicators of competitiveness, reflecting an economy’s potential to compete.

Ex Post Indicators

Market Share

The trends in shares of exports of goods, tourism, and FDI are assessed for the OECS/ECCU economies vis-à-vis the world, CARICOM, and the entire Caribbean. OECS/ECCU export and tourism figures are not adjusted for intraregional trade because of the limited availability of such disaggregated data for the period before 1996. Comparisons of gross and net exports during 1996–2010, however, show no significant difference between the two trends (see Appendix 17A).

Export Market Shares

After registering a steep gain through the first half of the 1980s, the OECS/ECCU economies have seen a precipitous decline in shares of exports of goods since the early 1990s (Figure 17.3). The decline largely reflects the erosion of the EU banana trade preferences.

Figure 17.3OECS/ECCU: Shares of Exports of Goods, 1980–2009

Source: IMF, Balance of Payments Statistics online database, December 2011.

Before 1993, the OECS/ECCU banana producers (Dominica, Grenada, Saint Lucia, and St. Vincent and the Grenadines, also known as the Windward Islands) enjoyed preferential access to the UK market. However, these preferences have been continuously eroded since the creation of the EU single internal market in 1993. Major episodes that led to the erosion include the following:

  • The creation of the EU single internal market in 1993. The single market opened the United Kingdom to competition from nontraditional suppliers, which led to downward pressure on prices. Retail banana prices in the U.K. market declined by about 23 percent between 1992 and 1995. As a result of the price decline, the Windward Islands’ share of the banana market in the United Kingdom shrank from 41 percent in 1991 to 26.3 percent in 1995. Although prices improved by 16.4 percent between 1995 and 1998, the Windward Islands’ share of banana markets in the United Kingdom continued to decline, hitting 17.2 percent in 1998. At the same time, other Caribbean banana producers, such as Belize, which faced equally eroded preferences, and the Dominican Republic, which took advantage of the opening of the U.K. market, were able to increase their market shares (Figure 17.4).

  • The initial modification of the EU trade arrangements for bananas (from 1999). In an attempt to resolve a World Trade Organization (WTO) dispute, the EU ended the use of country-specific quotas for bananas in 1999 and in July 2001 began to implement the agreement that had resolved the dispute. This development further eroded the preferences for the Windward Islands (NERA and Oxford Policy Management, 2004; Goodison, 2007; and Mlachila, Cashin, and Haines, 2010). As a result, the volume of banana exports from the Windward Islands to the U.K. market declined 62 percent between 1999 and 2005; Belize continued to maintain its share and the Dominican Republic was able to increase its share by about sixfold to 13.2 percent in 2005 (Figure 17.4).

  • The movement to a tariff-only regime (from 2006). Following the WTO’s rulings that the EU’s banana import regime discriminated against Latin American exporters, the EU moved to a tariff-only system (with no quotas or licenses) beginning January 1, 2006, with a Most Favored Nation (MFN) tariff of €176 per ton for Latin American bananas, and a duty-free 0.775 million ton quota for African, Caribbean, and Pacific countries (Goodison, 2007; and Mlachila, Cashin, and Haines, 2010). This move to a tariff-only system further eroded preferences for Windward Islands producers, who saw their export share in the U.K. market slashed to a mere 3 percent by 2010 (Figure 17.4).

  • A decrease in the MFN tariff rate (from 2010). In December 2009, the European Commission, the African, Caribbean, and Pacific countries, and the Latin American countries completed an agreement to decrease the existing MFN tariff of €176 per ton to an initial €148 per ton in 2010; further cuts will be made to reach an MFN tariff floor of €114 per ton by 2017 (Mlachila, Cashin, and Haines, 2010).

Figure 17.4The Banana Market in the United Kingdom

Sources: (a) Based on data from UN Comtrade online database, retrieved on February 16, 2010; (b) U.K. Office of National Statistics, online database, www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/april-2012/cpi-time-series-data.html, April 2012.

While the OECS/ECCU banana producers watched their export shares in the U.K. market plummet, Belize, which faced similar challenges in the U.K. market, was able to increase its market share by 24 percent during the same period, reaching 6.4 percent in 2010. The Dominican Republic, which was not a beneficiary of the pre-1993 preferential access to the U.K. market, was able to increase its market share from virtually zero in 1992 to 18.9 percent in 2010. Thus, the OECS/ECCU banana producers are not competitive without the preferential access that prevailed before 1993. A reduction in preferences to anywhere near international prices would likely wipe out the banana industry as a result of the inefficiency of production in the union (Mlachila, Cashin, and Haines, 2010). A study sponsored by the U.K. Department for International Development (NERA and Oxford Policy Management, 2004) identifies the sources of inefficiency as difficult land terrain, high labor costs, and high transportation costs.

Tourism Shares

Similar trends in tourism market shares seem to confirm that the decline in export market shares is a result of weaknesses in external competitiveness rather than of a structural transformation into tourism (i.e., intersectoral allocation of resources). The OECS/ECCU’s shares of tourism, measured by both visitor expenditure and number of visitor arrivals, have declined since the mid-1990s (Figure 17.5a). Shares declined across the board in all economies with the exception of Dominica, reflecting that country’s late entrance into the market. Declining shares of tourism arrivals could reflect a shift toward high-end tourism. However, declining indicators of tourism productivity, measured as tourism receipts per arrival and the ratio of shares of visitor expenditure to shares of visitor arrivals,4 suggest that the decline in market share was not a result of upgrading (Figure 17.5b).

Figure 17.5OECS/ECCU Tourism Productivity Indicators

Sources: Author’s calculations based on data from IMF Balance of Payments Statistics online database, December 2011; and World Travel and Tourism Council online database.

FDI Shares

The OECS/ECCU’s shares of FDI also declined with respect to the world and to regional competitors, indicating that the region has lost competitiveness in attracting FDI since about the mid-1990s, consistent with the evidence observed in export and tourism market shares (Figure 17.6).

Figure 17.6OECS/ECCU: Shares of Inward Foreign Direct Investment Stock, 1980–2009

Source: UNCTAD online database (UNCTADStat), August 2011.

Revealed Comparative Advantage

The revealed comparative advantage (RCA) index is constructed to determine whether the OECS/ECCU economies have a comparative advantage in any areas or industries. Following Balassa (1965, 1977), the index is constructed as the ratio of a country’s export share in a given commodity category (vis-à-vis world exports of that commodity category) to its share in total exports. A revealed comparative advantage greater than 1 indicates that the country has a comparative advantage in that particular industry or commodity. A revealed comparative advantage in a commodity, however, does not necessarily mean the country has an absolute competitive advantage.

Although the RCA index is most often used for exports of goods, the analysis in this chapter includes exports of travel (tourism) in the product mix because tourism is the major source of export revenue for the OECS/ECCU economies and is likely to be an area of comparative advantage. For exports of goods, four digit level SITC 1 and SITC 3 commodity classifications are used.5

The results show that the range of commodity groups in which the OECS/ECCU countries have a revealed comparative advantage is very narrow, reflecting the lack of diversification. For most countries, the range has narrowed even more over the last decades; Antigua and Barbuda, for example, has a revealed comparative advantage in only one “commodity” group (tourism). It seems that comparative advantage in the region is driven mainly by natural resource endowments. Most of the countries have revealed comparative advantages in unprocessed commodities such as fruits, vegetables, spices, sands and gravel, and fish. There are a few exceptions: Dominica has a revealed comparative advantage in the export of soaps, essential oils, and paints and varnishes, transforming its natural source of comparative advantage in copra oil. St. Kitts and Nevis created new sources of comparative advantage in electric parts and transformers. Other examples of comparative advantage with no obvious link to the availability of natural resources include wheat flour processing in Grenada and St. Vincent and the Grenadines and rice processing and packaging in St. Vincent and the Grenadines. However, these products are supported through protections at the CARICOM level via Article 164 of the Revised Treaty of Chaguaramas (and Article 56 before 2006).6

As expected, all countries have a revealed comparative advantage in tourism. However, tourism ranks toward the end of the lists of advantaged commodities (see Table 17.1).7 This low ranking indicates that the OECS/ECCU economies are not even as competitive in tourism as they are in the higher-ranked commodities. This ranking also underscores the need for enhancing the competitiveness of the tourism sector given its substantial role in generating foreign exchange revenue and employment opportunities in the region’s economies.

Table 17.1Revealed Comparative Advantage (RCA) in the OECS/ECCU Economies, Commodities Ranked by RCA Index
Country1980/811199320002008/092
AntiguaDomestic stoves, boilers, cookers, etc. (2.3)n.a.Tourism (99.0)Tourism (99.2)
Clothing accessories of textiles (1.5)
Tourism (83.8)
Domestic electrical equipment (1.2)
Furniture (1.9)
Clothing of textile fabric (5.0)
DominicaBananas including plantains, fresh (24.8)Bananas including plantains, fresh (35.5)Soap (13.6)Soap (8.4)
Other citrus fruit (3.5)Soap (13.1)Preparations for oral or dental hygiene (7.2)Vegetable products, roots, tubers (2.8)
Coconut copra oil (3.0)Vegetable products, roots, tubers (2.1)Bananas including plantains, fresh (13.6)Sands, natural, not metal bearing (1.0)
Food preparations, n.e.s. (1.0)Essential oils (1.2)Vegetable products, roots, tubers (1.6)Bananas including plantains, fresh (6.4)
Tourism (23.7)Containers, etc. of paper (1.5)Sands, natural, not metal bearing (1.2)Pebbles, gravel, broken or crushed
Paints, varnishes, etc. (1.0)Disinfectant, etc., retail (1.9)stone (1.2)
Tourism (38.5)Pebbles, gravel, broken or crushed stone (1.0)Paints, varnishes, etc. (2.4)
Essential oils (1.1)Tourism (72.8)
Sauce, seasoning, condiments (1.3)Fruit, fresh, dried, n.e.s. (1.6)
Detergents, except soap (2.0)
Paints, varnishes, etc. (1.7)
Tourism (48.6)
GrenadaSpices, excluding pepper and pimento, ground or not (10.9)Cocoa beans, raw or roasted (3.9)Spices, excluding pepper, pimento (8.2)Flour of wheat or of meslin (5.4)
Spices, excluding pepper, pimento (4.1)Electrical insulating equipment (8.4)Spices, excluding pepper, pimento (1.9)
Cocoa beans, raw or roasted (18.6)Flour of wheat or of meslin (1.6)Flour of wheat or of meslin (2.8)Paper, paperboard, cut, n.e.s. (2.1)
Bananas including plantains, fresh (11.3)Bananas including plantains, fresh (2.3)Cocoa beans, raw or roasted (1.0)Cocoa beans, raw or roasted (1.7)
Tourism (53.6)Fish, fresh, chilled, whole (1.5)Switching apparatus, <1,000 volts (8.4)Fish, frozen excluding fillets (1.8)
Clothing of textile fabric (2.4)Paper, paperboard, cut, n.e.s. (1.0)Paper, paperboard, cut, n.e.s. (1.0)Tourism (78.0)
Fruit, fresh, dried, n.e.s. (1.5)Tourism (56.7)Food waste, animal feeds (1.1)
Tourism (77.8)Parts for data processing machines (8.0)
Fish, frozen excluding fillets (1.2)
St. Kitts and NevisRaw sugar, beet and cane (45.6)Sugars, beet or cane, raw (13.1)Sugars, beet or cane, raw (6.7)Switching apparatus, <1,000 volts (13.6)
Molasses (1.0)Switching apparatus, 1,000 volts+ (1.4)Switching apparatus, <1,000 volts (19.2)Beer including ale, stout, porter (1.0)
Uppers, legs, and other prepared parts ofNonalcoholic beverage, n.e.s. (1.0)Nonalcoholic beverage, n.e.s. (1.2)Tourism (71.9)
footwear (1.6)Electric motors of an output not exceed-Yachts, sports vessels, etc. (1.0)Transformers, electrical (1.1)
Electric power machinery (2.3)ing 37.5 watts (1.1)Parts suitable for rotating electric plants (1.0)Parts, telecommunications equipment (8.4)
Tourism (30.6)Tourism (73.8)Tourism (66.8)
Television broadcast receivers (1.3)Switching apparatus, <1,000 volts (1.7)Electrical capacitors (1.6)
Clothing of textile fabric, not knitted crocheted (4.6)
Electrical machinery and apparatus, n.e.s. (1.0)
Saint LuciaBananas including plantains, fresh (14.2)Bananas including plantains, fresh (20.5)Bananas including plantains, fresh (6.8)Bananas including plantains, fresh (5.7)
Coconut copra oil (4.0)Brassieres, corsets, etc. (1.0)Beer including ale, stout, porter (2.1)Beer including ale, stout, porter (3.5)
Paper bags, paperboard boxes, & other containers (3.5)Beer including ale, stout, porter (1.5)Tourism (87.7)Tourism (81.9)
Men’s suits and ensembles (1.1)Containers, etc. of paper (1.4)
Margarine, imitation lard, and preparedWomen’s suits, dresses, skirts, etc. (1.8)
edible fats, n.e.s. (1.0)Tourism (62.7)
Beer including ale, stout, porter (2.1)Jerseys, pullovers, cardigans, waistcoats, etc. (2.1)
Nonalcoholic beverages, n.e.s. (1.5)
Children’s toys, indoor games, etc. (3.9)
Apparatus for electrical circuits (5.1)
Tourism (54.6)
Clothing and accessories, knitted or crocheted (2.7)
St. Vincent and theFlour and flakes of potatoes, fruits,Bananas including plantains, fresh (26.6)Bananas including plantains, fresh (15.2)Rice, husked but not further prepared
Grenadinesvegetables (2.7)Flour of wheat or of meslin (8.8)Vegetable products, roots, tubers (2.8)(3.4)
Bananas including plantains, fresh (20.0)Rice, husked but not further preparedRice, husked but not further preparedFlour of wheat or of meslin (6.7)
Meal and flour of wheat or of meslin (4.0)(1.5)(1.1)Vegetable products, roots, tubers (4.1)
Spices, excluding pepper and pimento, ground or not (1.1)Vegetable products, roots, tubers (3.3)Rice, milled, semimilled (2.6)Bananas including plantains, fresh (6.2)
Rice, milled, semimilled (4.1)Nonalcoholic beverage, n.e.s. (1.0)Nonalcoholic beverages, n.e.s. (2.3)
Coconut copra oil (1.3)Dresses, women’s or girls’, of textile mate-Tourism (65.5)Tourism (69.6)
Edible nuts, fresh or dried (1.7)rials (1.4)Food waste, animal feeds (1.0)Containers, etc. of paper (1.3)
Tourism (51.5)Nonalcoholic beverage, n.e.s. (1.1)Flat-rolled iron, zinc plate (1.0)Flat-rolled iron, zinc plate (1.4)
Food waste, animal feeds (1.5)Food waste, animal feeds (1.2)
Tourism (44.8)
Source: Author’s calculations, based on data from UN Comtrade and IMF Balance of Payments databases.Note: Based on 4-digit SITC rev. 1 (for 1980/81) and rev. 3 (for 1990–2009) classifications for exports of goods. Numbers in parenthesis are shares of total domestic exports and tourism revenue. For exports of goods, only commodities with shares of at least 1 percent of total domestic exports are included, n.e.s. = Not elsewhere specified.

Ex Ante Indicators

Although useful, the ex post indicators have limited relevance for policy because they do not provide any information about underlying sources of competitiveness or an economy’s potential ability to compete. For such indicators, this study looks into the costs and availability of factors of production, the level and burden of taxes, and the determinants of the rate of return on capital. Limited availability of historical data on these indicators, however, constrains the analysis. When data are not available, the latest data points or averages of the latest years’ data are analyzed. In some cases, indicators cannot be readily identified, which means that the closest available proxies have to be used. Despite these limitations, a broad range of indicators is compiled for the underlying determinants of competitiveness to shed light on policy options for improvement.

Factor Productivity

Available proxies for factor productivity indicate that the OECS/ECCU economies’ loss of competitiveness does not appear to be driven by weaknesses in factor productivity.8 The region’s total factor productivity has on average stagnated since 1990, with Dominica and Grenada registering declines and Antigua and Barbuda, St. Kitts and Nevis, and St. Vincent and the Grenadines registering mild increases.9 Average factor productivity for regional comparators has shown a similar trend. Another potential indicator of factor productivity is the rate of technology adoption. The OECS/ECCU countries have, on average, better rates of Internet and telephone penetration than do comparator countries (Figure 17.7).

Figure 17.7Indicators of Factor Productivity

Sources: Thacker and others, Chapter 4 in this volume; and World Bank, World Development Indicators online database, December 2011.

Institutional, Policy, and Event Risks

Risk and uncertainty are among the main determinants of private investment (Lucas and Prescott, 1971; Dixit and Pindyck, 1994; and Carruth, Dickerson, and Henley, 2000). Although all investors face some sort of risk or uncertainty, foreign direct investors face additional risk, known as country risk, which arises from a variety of national differences in economic structures, policies, sociopolitical institutions, geography, and currencies (Meldrum, 2000; and Hauser, 2005). Only those country risks relevant for long-term investment in equities (i.e., FDI), such as economic risk, political risk, foreign exchange risk, and event risk, are assessed here.10

Economic Risk

Economic risk measures the overall direction of the economic outlook, including potential changes in the economic structure or growth rate that affect the expected rate of return on an investment (Meldrum, 2000; and Hauser, 2005). The Euromoney country risk rating provides an economic risk assessment based on five fundamentals: the stability of the overall economic outlook, the risks posed to the economy by unemployment, the strength of government finances, the stability of banks or the financial system, and the stability of monetary policy or the currency. The only OECS/ECCU country considered in the Euromoney country risk analysis is Antigua and Barbuda, and it is ranked at the very bottom among comparator Caribbean economies (Figure 17.8). The following analysis attempts to assess economic risk in the OECS/ECCU based on the Euromoney framework.

Figure 17.8Index of Economic Risk in Selected Caribbean Countries, 2011

Source: Euromoney Country Risk Index, accessed online on February 29, 2012.

The stability of the overall economic outlook. The OECS/ECCU’s economic outlook has weakened in the atmosphere of the ongoing uncertainty in Europe and a tepid recovery in the United States, which have adversely affected private consumption and hence tourism demand. Unresolved financial sector problems (see below) in the region add a further layer of uncertainty. Most of these challenges are common to all small economies, but the OECS/ECCU economies are particularly vulnerable because of their extremely narrow economic bases and lack of fiscal space, factors that Moody’s also highlighted as a reason for its “low” rating of St. Vincent and the Grenadines’ economic strength (Moody’s, 2009). Also, unemployment rates in the OECS/ECCU countries are among the highest in the Caribbean (Figure 17.9; see also Chapter 2 on the Social, Political, and Economic Setting).

Figure 17.9Unemployment Rates in Selected Caribbean Countries

Sources: Poverty Assessment Surveys (Dominica and St. Vincent and the Grenadines); census (Saint Lucia); authorities’ estimates (Antigua and Barbuda and Grenada); UNDP, 2010 (St. Kitts and Nevis); Caribbean Center for Money and Finance (the rest).

Note: Antigua and Barbuda, 2010; Dominica, 2009; Grenada, 2008; St. Kitts and Nevis, 2009; Saint Lucia, 2010; St. Vincent and the Grenadines, 2008; The Bahamas, 2009; Barbados, 2010; Belize, 2009; Jamaica, 2010; Suriname, 2008; and Trinidad and Tobago, 2009.

The strength of government finances. The OECS/ECCU economies have very high public sector debt levels (Figure 17.10) and relatively weak public finances, but progress has been made recently in addressing those issues. Public sector debt has surged in the years following the global economic crisis, further limiting the fiscal space. Interest payments continue to consume a substantial share of current revenue, ranging from 11.2 percent in Dominica to 36.8 percent in Saint Lucia in 2010. Owing to these financial pressures, some of the governments had to resort to restructuring their sovereign debt to address the debt overhang (for example, Antigua in 2010 and St. Kitts and Nevis in 2011; see Chapter 9 on Experiences with Debt Restructuring). Moody’s rates St. Vincent and the Grenadines’ government financial strength as “low,” citing the high level of debt and the limited fiscal flexibility in the face of frequent weather shocks. Given that St. Vincent and the Grenadines’ public debt ratio is relatively low by OECS/ECCU standards, the more highly indebted members would likely receive a lower rating.

Figure 17.10Public Sector Debt in Selected Caribbean Countries, 2010

Source: IMF, World Economic Outlook database, April 2012.

The stability of the banks and the financial system. The OECS/ECCU’s financial sector has also weakened following the global financial crisis. The collapse of two insurance subsidiaries and the failure of two banks in Antigua and Barbuda highlight the vulnerabilities and weaknesses of the financial system in the union. Nonperforming loans in the banking system are well above the Eastern Caribbean Central Bank’s (ECCB’s) 5 percent prudential guideline, and profitability continues to be squeezed. The deteriorating health of nonbank financial institutions (such as credit unions and offshore banks) could further undermine the stability of the banking sector (see Chapters 10, 11, and 14 on the Banking Sector, Credit Unions, and Offshore Financial Centers, respectively).

Standard & Poor’s Ratings
CountryLong-term ratingTransfer and

convertibility
Outlook
Foreign currencyLocal currency
Bahamas, theBBBBBBBBB+Stable
BarbadosBBB-BBB-BBBNegative
BelizeCCC+CCC+B-Stable
Dominican RepublicB+B+BBStable
Grenada1B-B-BBB-Stable
JamaicaB-B-BNegative
SurinameBB-BB-BBStable
Trinidad and TobagoAAAAStable
Source: Standard & Poor’s.Note: Ratings are as of February 22, 2012.

The stability of monetary policy and the currency. Since 1976, the OECS/ECCU has used a currency board arrangement, with its currency, the EC$, pegged to the US$ at a rate of EC$2.7 per US$. Foreign exchange reserves have been near 100 percent of the monetary base, well above the official requirement of 60 percent and the operational guideline of 80 percent.11 This monetary stability prompted Moody’s to grant St. Vincent and the Grenadines an A3 foreign currency bond ceiling rating, even better than Barbados’s ceiling of Baa1. Standard & Poor’s gave Grenada a BBB– transfer and convertibility rating, which is better than most of its regional peers with the exception of The Bahamas, Barbados, and Trinidad and Tobago (Table 17.2).12

Table 17.2Credit Risk Ratings for Selected Caribbean Countries
Government bondsLong-term foreign currency ceilings
CountryForeign currencyLocal currencyBonds and notesBank depositsOutlookDate
Bahamas, TheA3A3Aa1A3NegativeAugust 11
BarbadosBaa3Baa3Baa1Baa3NegativeJune 11
BelizeB3B3B1B3StableFebruary 9
Dominican RepublicB1B1Ba2B1StableApril 10
JamaicaB3B3Ba3B3StableMarch 10
St. Vincent and the Grenadines1B1B1A3Baa1StableDecember 7
SurinameB1Ba3Ba2StableFebruary 4
Trinidad and TobagoBaa1Baa1A1Baa1StableJuly 2006, April 2000
Source: Moody’s Investors Service.Note: Ratings are Moody’s ratings as of December 2011. — = not applicable.

In summary, on the basis of ratings agencies’ assessments, the OECS/ECCU is benefiting from the stable currency board arrangement, but economic risks are judged to be relatively high based on the dimmed economic outlook and narrow economic base (lack of diversification), high rate of unemployment, limited fiscal space, and a financial sector that faces challenges.

Political Risk

Political risk refers to risks of transfer and convertibility, expropriation, and political violence. Transfer and convertibility risk arises from governments’ restrictions on repatriation of profits or other capital transactions; expropriation risk arises from governments’ confiscation of investors’ assets; and risk of political violence arises from the possible impact of politically motivated violence and terrorism on the assets of investors (Meldrum, 2000; Hauser, 2005; and Jensen, 2005).

Major risk ratings agencies such as Moody’s and Standard & Poor’s regard the OECS/ECCU economies’ political and institutional systems to be strong. Both agencies have a positive view on transfer and convertibility risk. Moody’s rates St. Vincent and the Grenadines’ institutional strength as “high,” highlighting the country’s history of “political stability, orderly changes from one administration to the next, and a general consensus on major policy issues,” features that are shared by the other OECS/ECCU countries. Furthermore, the agency praises the country’s “respect for the law, including acceptance of appeals courts’ decisions in the UK and a strong payments culture” as an important positive credit strength. This assessment is supported by the World Bank’s Governance Indicators, in which the OECS/ECCU countries demonstrated high institutional strength (Figure 17.11).

Figure 17.11The World Bank’s Governance Indicators for Selected Caribbean Countries, 2009

Sources: World Bank, Governance Indicators online database; and the author’s calculations.

Note: The original indicators, which range from –2.5 (weak governance) to +2.5 (strong governance) were rescaled to a 0 (weak governance) to 10 (strong governance) scale to avoid negative numbers. The following formula is used to rescale the data: (Country indicator – minimum)/(maximum – minimum) × 10; where minimum and maximum values are –2.5 and +2.5, respectively.

In the past, high current account deficits were financed mainly by tourism- and construction-related FDI. With the recent decline in FDI flows caused by the global economic and financial crisis and the region’s deteriorating competitiveness, however, financing has mainly come from official borrowing and grants, which may not be sustainable.13 Moreover, the high rate of crime and drug trafficking could pose serious threats to the region’s security and institutional stability.

Foreign Exchange Risk

The OECS/ECCU has had a long history of a stable quasi–currency board arrangement pegged to the U.S. dollar, which has been a sign of strength. Therefore, it is important to address vulnerabilities such as high current account deficits, especially if financed by debt-creating flows.

Event Risk

A main source of event risk in the region is the vulnerability to natural disasters. The OECS/ECCU is one of the most hurricane-prone regions in the world. Recent hurricanes caused considerable economic damage to some of the OECS/ECCU economies, including Hurricane Ivan in Grenada (2004), Hurricane Omar in Dominica (2008), and Hurricane Tomas in Saint Lucia and St. Vincent and the Grenadines (2010). Such vulnerabilities for a region with weak government finances (high public sector debt and no fiscal space) mean that the economic and social consequences of an event could be large, despite the fact that the countries are members of the Caribbean Catastrophic Risk Insurance Facility, which provides a range of insurance products aimed at reducing the economic impact of natural disasters. These potentially large consequences are reflected in Moody’s assessment of St. Vincent and the Grenadines’ credit rating, which underscored that the high susceptibility of the country to event risk could trigger a sudden multinotch downgrade or default.

Complementary Factors

Human Capital

Standard measures do not seem to suggest that the OECS/ECCU’s competitive weaknesses in comparison with regional peers is a result of limited human capital development. The OECS/ECCU economies tend toward the upper ranks of human capital, measured by life expectancy and the average years of education of an adult. The level of education for an adult 25 years old or older is on average 8½ years, and life expectancy is 74 years, both of which compare favorably to most regional peers (Figure 17.12). Conversely, a shortage of skilled labor is often cited as a constraint to doing business in the region (see World Bank, 2005), possibly reflecting either poor quality of education or skills mismatches.

Figure 17.12Human Capital in Selected Caribbean Countries, 2009–10

Source: UNDP, Human Development Report online database, accessed on October 31, 2011.

Infrastructure

Infrastructure appears to be a major bottleneck to competitiveness in the region, based on the following:

  • The cost of electricity is very high, partly reflecting the lack of economies of scale. Although there appears to be no shortage of supply, and access to electricity seems easy by regional standards (measured by the waiting time to get electricity after requesting a connection), the OECS/ECCU countries have among the highest effective electricity tariff rates in the Caribbean. This seems to have hurt businesses’ competitiveness (Figure 17.13; see Chapter 18 on Impediments to Developing the Private Sector).14

  • And so is the cost of communications; the OECS/ECCU countries rank on the higher end of access to communication services, but rates for international calls and for accessing broadband Internet appear to be higher than most of the peers for which data are available (Figure 17.7 and Table 17.3).

  • Access to sea transportation is limited by the low capacity of port facilities. The OECS/ECCU countries rank very low in the World Bank’s shipping connectivity index. Port capacity in the OECS/ECCU countries, measured by the number of available berths, the length of berths, and the size of covered storage, is low compared with most of the regional peers. Consequently, sea freight rates are very high in the OECS/ECCU (Figure 17.14 and Tables 17.4A and 17.4B).

  • Similarly, air access to the OECS/ECCU is limited by the low capacity of airport facilities. The runway size of the OECS/ECCU countries’ international airports is, on average, smaller than that of major regional competitors. Dominica and St. Vincent and the Grenadines currently do not have international airports; their runways accommodate only small planes by the U.S. Federal Aviation Authority’s guidelines. However, an international airport is currently being constructed on St. Vincent and the Grenadines. St. Kitts and Nevis’s international airport currently does not meet the minimum requirement for planes equivalent to the Boeing 747 (which needs a runway length of 8,000 ft) (Figure 17.15a). These shortcomings seem to have a bearing on flight cost and convenience15 (Figure 17.15b).

Figure 17.13Electricity Indicators in Selected Caribbean Countries

Sources: (a) Gerner and Hansen, 2011; (b) World Bank, Doing Business Indicators online database, December 2011; and (c) Country power companies and Caribbean Electric Utility Service Corporation.

Note: Effective rates calculated as ratio of total revenue to total sales. U.S. dollars per kilowatt hour.

Table 17.3International Call and Internet Use Rates
CountryCalling rates to the United States1Internet2
Barbados0.4330.0
Dominica0.4129.3
Grenada0.4129.3
St. Kitts and Nevis0.4129.3
Saint Lucia0.4129.3
St. Vincent and the Grenadines0.4129.3
Trinidad and Tobago0.2023.7
Jamaica0.1721.9
Source: Eastern Caribbean Telecommunications Authority (ECTEL), Annual Report, 2010.

Figure 17.14Liner Shipping Connectivity Index for Selected Caribbean Countries

Source: World Bank, World Development Indicators online database, December 2011.

Figure 17.15Airport Indicators for Selected Caribbean Countries

Sources: (a) www.azworldairports.com; (b) Expedia.com; and www.travelmath.com/flying-distance/.

Note: (a) A runway must be longer than 8,000 feet to accommodate large aircraft such as the Boeing 747 (World Bank, 2005). (b) Fare is for round trip February 2–5, 2012, if booked on January 18, 2012.

Table 17.4APort Capacity in the Caribbean
Capacity of main port
CountryNumber of portsLongest vessel handled1 (meters)Size of covered storage2 (square meters)Number of available berthsAverage size of a berth (meters)Length of largest berth (meters)
Antigua and Barbuda12683,7204258365
Bahamas, The736037,8473533600
Barbados130016,2158270825
Belize1n.a.1,2121150150
Dominica33261n.a.2163266
Dominican Republic4122158,00011187264
Grenada12082,7872208335
Guyana629031,8828205290
Haiti1120411,24012263480
Jamaica15306465,51826175306
St. Kitts and Nevis22707459165242
Saint Lucia4n.a.9,3886170219
St. Vincent and the Grenadines55312n.a.2210260
Suriname222020,6001520520
Trinidad and Tobago1185240,90715160248
Sources: Caribbean Shipping Association, www.caribbeanshipping.org/archway/ports/index.htm; and World Port Source, www.worldportsource.com/countries.php.Note: n.a. = not available.
Table 17.4BInternational Sea Freight Rates from Selected Caribbean Countries, by Destination(US$ per 40-foot standard container)
RotterdamNew York CityLong BeachYokohamaSingaporeMiami
Belize1,5672,7272,4272,0171,4671,867
Dominican Republic2,1471,8902,5002,4002,2501,650
Jamaica2,4001,7001,7002,0002,0001,600
Saint Lucia7,6803,6568,2555,2303,0503,656
Source: Multilateral Investment Guarantee Agency and Commonwealth Secretariat, 2007.

Burden of Taxes

The tax burden on businesses, measured by taxes paid as a percentage of profits and time spent on paying taxes, is not homogeneous across the OECS/ECCU economies. St. Kitts and Nevis has the highest effective business tax rate (more than 50 percent of profits) in the region, and businesses in that country spend relatively more time processing and paying taxes. Although not as severe as in St. Kitts and Nevis, the tax burden in Antigua and Barbuda also appears to be high by regional standards. However, businesses in Saint Lucia, Dominica, and St. Vincent and the Grenadines pay relatively low effective business tax rates and spend very little time processing and paying taxes by regional standards. In the middle lies Grenada, where effective business tax rates are among the highest in the region, but businesses appear to spend relatively little time processing and paying taxes (Figure 17.16).

Figure 17.16Tax Burden on Business in Selected Caribbean Countries, 2010

Source: World Bank, Doing Business Indicators online database, December 2011.

1 Includes property taxes, turnover taxes, and others such as municipal fees and vehicle and fuel taxes.

Cost of and Access to Factors

Labor

The scant labor market indicators in the OECS/ECCU preclude a thorough analysis of labor market conditions. However, the OECS/ECCU countries have much smaller populations than most of their competitors. The combined size of the labor force in the two most populous OECS/ECCU economies (Saint Lucia and St. Vincent and the Grenadines) is lower than that of the smallest competitor, Belize, suggesting that the OECS/ECCU economies’ pool of labor resources is substantially smaller than that of competitors (Figure 17.17). In particular, the shortage of skilled labor is often mentioned as one of the key constraints to improving competitiveness (World Bank, 2005).

Figure 17.17Labor Force in Selected Caribbean Countries, 2009

Source: World Bank, World Development Indicators online database, December 2011.

Note: Labor force comprises people ages 15 and older who meet the International Labour Organization definition of the economically active population.

It is puzzling that a region with such a shortage of labor also suffers from one of the highest rates of unemployment in the world. This dichotomy could be the result of the high cost of labor and rigidity of employment. Estimated hourly wages are higher in the OECS/ECCU economies than most of its competitor peers for which data are available, largely reflecting high legal minimum wages (Figure 17.18). In particular, St. Kitts and Nevis and Antigua and Barbuda have two of the highest wage rates in the region.

Figure 17.18Hourly Wages in Select Caribbean Countries, 2010

Sources: U.S. Department of State; 2010; and World Bank, Doing Business Indicators.

An assessment of real wage growth since 2000 paints a mixed picture (Figure 17.19). In most countries, real wages appear to have been stable and in line with labor productivity growth. Nevertheless, the trends are worrisome for some countries. For instance, real wages remained stable despite declines in productivity in Grenada. Real wage growth has also surpassed productivity growth in Saint Lucia and in St. Vincent and the Grenadines in recent years. Conversely, in Dominica and St. Kitts and Nevis, productivity has exceeded real wage growth.16

Figure 17.19Real Wages and Productivity, 2000–10

Source: Author’s calculations based on wages and employment data received from corresponding national insurance companies.

Land

Although data on the availability of land for investment are not available, the OECS/ECCU countries obviously have a comparative structural disadvantage in the supply of land because of their small size. Of the regional comparators considered in this chapter, only Barbados’s land area is comparable to that of the OECS/ECCU countries; the rest are significantly bigger. Furthermore, most OECS/ECCU countries are mountainous, making it more costly to develop the land and to build public infrastructure.

Property and construction costs also appear to be more expensive in the OECS/ECCU. According to data from the Global Property Guide,17 the OECS/ECCU countries for which data are available generally have more expensive property prices than most of their competitors (Figure 17.20). Similarly, a study by the Multilateral Investment Guarantee Agency and the Commonwealth Secretariat (2007) shows that real estate costs for industrial sites and office rental costs in Saint Lucia, the only OECS/ECCU country included in the study, are higher than those in the other three countries in the study (Belize, the Dominican Republic, and Jamaica). As a result, costs for construction of factories, office buildings, and hotels are more expensive in Saint Lucia than in the comparator countries (Table 17.5).18

Figure 17.20Average Property Prices in Selected Caribbean Countries, 2011

Source: Global Property Guide, http://www.globalpropertyguide.com/Caribbean/.

Note: Price of a 120 square meter apartment located in the center of the most important city in each country.

Table 17.5Real Estate and Construction Costs(US$ per square meter)
IndicatorBelizeDominican RepublicJamaicaSaint Lucia
Real estate costs
Sales price for industrial sites0.311–302.8–3.431–314
Sales price for hotel land0.853.0n.a.17.0
Annual rental cost for Class A offices151.0253.0187.0262.0
Annual rental cost for Class B offices69.0117.0131.0193.0
Construction costs
Standard factory costs8275255381,711
Office building costs1,6546008751,883
Five-star hotel costs2,4824,4002,5842,690
Medium-level hotel costs1,6541,3121,8302,690
Budget hotel costs1,2419191,1842,690
Source: Multilateral Investment Guarantee Agency and Commonwealth Secretariat, 2007.

Finance

The OECS/ECCU economies seem to have relatively good supplies of finance as measured by credit to the private sector (as a percentage of GDP) and the number of commercial bank branches per 100,000 adults. And the cost of finance, measured by the real lending rate and the spread between the lending and deposit rates, is not particularly high in the union’s economies (Figure 17.21; see Chapter 18 on Impediments to Developing the Private Sector).

Figure 17.21Indicators of Availability and Cost of Finance in Selected Caribbean Countries

Source: World Bank, World Development Indicators online database, December 2011.

However, a significant number of firms in the region tend to cite access to finance as a major bottleneck to doing business. According to the World Bank’s Enterprise Surveys, 42.6 percent of firms in the OECS/ECCU identify access to finance as a major constraint to business, compared with the comparators’ average of 33.8 percent. Similarly, the value of collateral needed for loans (as a percentage of loan amount) is very high in the OECS/ECCU economies: 162 percent compared with the comparators’ average of 141.9 percent.19 Access to finance appears to be particularly difficult in Dominica, Saint Lucia, and Antigua and Barbuda (Figure 17.22). The fact that 58.3 percent of firms interviewed for the Enterprise Survey were small firms20 might explain the apparent contradiction between having a well-developed financial system (and a high ratio of private credit to GDP) on the one hand and limited access to finance on the other hand. Perhaps only a small number of big firms benefit from the union’s relatively advanced financial development.

Figure 17.22Access to Finance Indicators for Selected Caribbean Countries, 2010

Source: World Bank, Enterprise Surveys, http://www.enterprisesurveys.org/Data, accessed on May 15, 2012.

Note: Collateral requirements are the value of collateral needed for a loan (percent of the loan amount) weighted by the proportion of loans requiring collateral.

Figure 17.23Costs to Import in Selected Caribbean Countries, 2008–09

Source: World Bank, Doing Business Indicators online database, December 2011.

Intermediate Inputs

The OECS/ECCU economies rely almost entirely on imports for intermediate inputs, and the cost of importing is high (Figure 17.23). Although the OECS/ECCU economies are “open” in the sense that there are no or minimal restrictions on imports and import payments, according to the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions (IMF, 2011), the low shipping line connectivity and poor port facilities are likely to constrain access to intermediate inputs. In addition to the high freight costs resulting from poor shipping infrastructure, the cost of processing imports in the OECS/ECCU economies is very high21 (Figure 17.23). Hence, the limited access to and the high cost of intermediate inputs is likely to be one of the key constraints on the region’s competitiveness.

Conclusion and Policy Implications

The analysis in this chapter suggests that external competitiveness in the OECS/ECCU is mainly constrained by high macroeconomic risk resulting from weak public finance, financial sector instability, lack of diversification, vulnerability to natural disaster, poor infrastructure (limited availability and high cost), the high cost of labor, and the high costs of and limited access to intermediate inputs. In addition, some countries have other constraints. For instance, access to finance is a constraint in Dominica, Saint Lucia, and Antigua and Barbuda; the tax burden is high in St. Kitts and Nevis and Antigua and Barbuda; and real wage growth is higher than labor productivity growth in Grenada. Still, the region has one important strong asset—institutional stability (the currency union and quasi–currency board). Political and economic institutions are both stable, although the chances of reversal could be high if the chronic current account deficit and widespread crime and drug trafficking are left unaddressed.

Improving the external competitiveness of the region requires a concerted effort to address the main constraints to doing business while capitalizing on the region’s institutional stability. Most of the constraints identified in this chapter arise from structural problems that are difficult to address through policies alone. However, there is still room for policy action.

Addressing High Economic Risk

The impact of the recent global economic crisis on the OECS/ECCU economies, especially on those that are more tourism dependent, highlights the risks of overreliance on a single sector and the pressing need for diversification. The scope for diversification for microstate economies is limited because of diseconomies of scale and other structural constraints, but St. Kitts and Nevis’s success in electronics and Dominica’s success in detergents indicate that diversification into such niche areas is possible. Two potential areas of diversification follow:

  • Most OECS/ECCU economies have revealed comparative advantages in fruits, spices, and vegetables, and hence have the potential to diversify successfully into agroprocessing.

  • Sectors that require intensive use of the resources with which the OECS/ECCU economies are better endowed (such as an English-speaking labor force and relatively good human capital) and less intensive use of physical transportation and logistics, in which the region has major weaknesses, could prove to be successful. Examples of such areas include information technology and financial services.

The OECS/ECCU governments need to use the region’s scarce resources and the opportunities under Article 164 of the CARICOM Treaty to promote industries in which they have a comparative advantage, and hence a promise of success under free trade, instead of protecting inefficient industries. Successful diversification, however, requires structural reforms, including easing rigidities in the labor market to address the high cost of labor, and improving the efficiency of public services (customs, tax administrations, and the like) among others.

Creating Fiscal Space through Fiscal Consolidation

Given their vulnerabilities to exogenous shocks, the OECS/ECCU economies need to create fiscal space by strengthening revenue and rationalizing spending. This effort would help to reduce public sector debt (and hence, address the economic risk arising from poor public finances) and build buffers against the adverse impacts of natural disasters (thereby reducing vulnerabilities to event risk).

Strengthening the Financial Sector

Recent bank and insurance failures underline the need for strengthening the financial system to ensure that banks are well capitalized and can withstand exogenous shocks and economic stresses. The issues should be addressed in a comprehensive manner (see Chapter 10 on the Banking Sector).

Building Infrastructure

Lack of economies of scale in the region means that potential solutions to infrastructure problems are limited, particularly in those islands where the terrain makes the cost of infrastructure very expensive.22 Nevertheless, all available options need to be explored to address the region’s anemic infrastructure. For instance, the high cost of electricity could be partly alleviated through exploring alternative energy sources. A World Bank study shows that the region has a number of sources of alternative energy, such as geothermal in Dominica and Nevis; hydro in Dominica and St. Vincent and the Grenadines; coal in Antigua and Barbuda, Grenada, Saint Lucia, and St. Vincent and the Grenadines; and wind in virtually all of the OECS/ECCU economies (Gerner and Hansen, 2011). The region’s high communications cost despite better coverage than its comparators suggests that competition in the telecommunications sector should be enhanced.

Improving Air and Sea Access

Enhancing competitiveness in the tourism sector depends heavily on improving air and sea access. Given the high cost of expanding or building airports and seaports, options such as public-private partnerships and external donor funding need to be explored. For instance, St. Vincent and the Grenadines is undertaking an effort to build an international airport through donor support (mainly through grants).

Appendix 17A. Comparison of Gross and Net Current Account Deficit

The current account and trade figures used in this study are not adjusted for intraregional trade because net current account data were not available for the period before 1996. However, Figure 17A.1 shows that there is no significant difference between the trends for gross and net current account.

Figure 17A.1OECS/ECCU: Current Account Deficit, 1996–2010

Sources: IMF, Balance of Payments Statistics database, December 2011; and IMF, World Economic Outlook database, September 2011.

Note: The data for the gross current account deficit are not adjusted for intraregional trade. The data for the net current account deficit are adjusted for intraregional trade.

Appendix 17B. Data Sources and Methodology for Constructing Real Wages and Labor Productivity for the OECS/ECCU

General

Time series official statistics on labor market indicators are not available for the OECS/ECCU countries, with the exception of Saint Lucia, where some information on labor force participation and employment is published, albeit irregularly. As a result, this chapter uses the countries’ social security and pension databases to estimate employment and wages. Participation in the national insurance schemes (social security boards) is compulsory in the OECS/ECCU, which makes their databases a good start for estimating national wages and employment.

Employment, or “full-time equivalent employment,” is estimated by dividing the number of weeks of contributions in a year by 52. Average wages are then estimated to be the annual gross earnings divided by full-time equivalent employment. However, some of the social security administrations register only insurable earnings, not gross earnings, in which case gross earnings are estimated using the average ratio of gross-to-insurable earnings, obtained from the administrations or based on the actuals when both are available. Country-specific details on data sources and methodologies are given below.

  • Antigua and Barbuda. The Antigua and Barbuda Social Security Board provided data on annual gross earnings and number of weeks of contributions.

  • Dominica and Grenada. Data on the number of weeks of contributions and insurable earnings were obtained from the Dominican Social Security Service and the National Insurance Scheme of Grenada. Gross annual earnings were calculated using the average ratio of gross-to-insurable earnings in Antigua and Barbuda and St. Vincent and the Grenadines, where data on both gross and insurable earnings are available.

  • St. Kitts and Nevis. The source of data on gross annual wages and number of weeks of contributions is the St. Christopher and Nevis Social Security Board.

  • Saint Lucia. Data on annual insurable earnings and total number of weeks worked were obtained from the National Insurance Corporation (NIC) of Saint Lucia. NIC’s estimates show that insurable earnings are on average about 95 percent of gross earnings. This ratio was used to estimate gross earnings.

  • St. Vincent and the Grenadines. The National Insurance Service of St. Vincent and the Grenadines provided data on gross earnings and number of weeks worked.

Real Wages

Real wages are constructed using indices of full-time equivalent nominal wages and consumer price indices from the IMF’s International Financial Statistics.

Productivity

Although participation in the national social security systems is compulsory, there is no mechanism to ensure participation by self-employed and informal sector employees, who are not on the radar of government statistics. The reported numbers of self-employed contributors are very small. Because the estimated employment figures may represent mainly formal sector employees, an estimated “formal sector GDP” was used for constructing productivity indices. Formal sector GDP is estimated as follows:

Formal sector GDP = total GDP – agriculture value added – (0.3 × wholesale and retail trade value added) – (0. 2 × hotels and restaurants value added) – (0.5 × road transport value added).

The analysis assumes that 100 percent of agriculture value added, 30 percent of wholesale and retail trade value added, 20 percent of hotels and restaurants value added, and 50 percent of road transport value added are produced by self-employed people. Productivity is then estimated as the ratio of formal sector GDP to the number of full-time equivalent employees, as calculated above.

Although the choice of these ratios is arbitrary, the results are not sensitive to changes in the ratios. For instance, Figure 17B.1, which was produced using total GDP, shows that trends in productivity are similar to the ones shown in Figure 17.19 (with adjusted GDP).

Figure 17B.1OECS/ECCU: Real Wages and Productivity, Using Gross GDP, 2000–10

Sources: Author’s calculations based on wage and employment data from national insurance companies; inflation from IMF, International Financial Statistics online database, December 2011; and GDP from the Eastern Caribbean Central Bank, 2011.

References

For discussions of current account and real exchange rate developments, see the forthcoming 2012 IMF Staff Report on the Common Policies of Member Countries of the OECS/ECCU.

For an extended analysis see Cebotari and others (forthcoming).

These weaknesses include lack of content validity, that is, use of different independent variables at different times, arbitrary assignment of weights, lumping together of subjective (perception-based) and objective (hard data) variables, lack of rigor in variable derivation, and others (Thompson, 2003).

According to UN-ECLAC (2008), the ratio of the share of visitor expenditure to the share of total arrivals reflects the extent to which a destination is capable of generating visitors’ earnings over and above what is “justified” by its market share, and hence is a good measure of productivity.

The Standard International Trade Classification (SITC) is the UN standard classification of exports and imports of goods into commodity groups according to their stage of production. The third revision (SITC 3) was used for the period 1990–2009, and the first revision (SITC 1) was used for the 1980s (because SITC 3 was not available).

Article 164, formerly Article 56, of the Treaty of Chaguaramas grants the OECS/ECCU countries the right to impose tariffs, and quantitative restrictions in the case of Article 56, on imports of certain goods from more-developed CARICOM countries to protect their pre-approved industries. The list of approved commodities includes aerated water, coconut water, beer, malt, wheat or meslin flour, pasta, curry powder, animal feed, solar water heaters, wooden furniture, and industrial gases. The OECS/ECCU countries divided these industries among themselves (for instance, Grenada and St. Vincent and the Grenadines were assigned to produce wheat and meslin flour) and agreed to protect not only their own, but also each other’s, assigned industries. Despite the required time limits of the protection, currently 10 years, the OECS/ECCU countries have been protecting these industries since the early 1970s, and studies show that the protection did not lead to “sustainable industrial development” as was anticipated, but rather tended to shelter inefficient firms and expose consumers to higher costs and fewer choices (CARICOM, 2006; USAID, 2006; and UN-ECLAC and Government of Guyana, 2007).

The commodities are listed in Table 17.1 in descending order of their RCA index.

Total factor productivity is measured as a residual in a growth accounting framework, and hence may well capture the contribution to growth of the informal economy.

See Chapter 4 on economic growth for further discussion of this topic.

For instance, sovereign risk is another important category of country risk, but it is more relevant for investing in government bonds than for FDI.

See Chapter 15 on the Role of the Eastern Caribbean Central Bank and Chapter 16 on the Optimal Exchange Rate Regime.

Note that both Moody’s foreign currency ceiling and Standard & Poor’s transfer and convertibility ratings are based on their assessments of the monetary authorities, and hence reflect the assessment of the OECS/ECCU’s monetary system in general.

The inclusion of this under political risks is related to the fact that, at least theoretically, if these resources fail to be forthcoming, capital restrictions could be used as a last resort.

An IMF staff survey of the business community in St. Vincent and the Grenadines during the IMF’s 2010 Article IV mission showed that the cost of electricity is one of the binding constraints to business activity in the country (IMF, 2010).

Flights from the United States and Europe to Dominica and St. Vincent and the Grenadines take longer, for their distance, because of the lack of international airports and hence the need for flight connections.

See Appendix 17B for data sources and derivations.

This could also be partly attributed to higher labor and importing costs.

These values are weighted by the proportion of loans requiring collateral.

Another 35.3 percent of the firms were medium sized.

The cost to import measures the fees levied on a 20-foot container. All fees associated with completing the procedures to import—costs for documents, administrative fees for customs clearance and technical control, customs broker fees, terminal handling charges, and inland transport—are included. The cost measure does not include tariffs or trade taxes.

The terrain in Dominica and St. Vincent and the Grenadines is very mountainous. In addition, St. Vincent and the Grenadines is made up of a number of small islands, necessitating duplication of public services regardless of scale.

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