II Economic Background
Author: Mr. Simon Cueva, Mr. Stephen Tokarick, Mr. Erik J. Lundback, Ms. Janet Gale Stotsky, and Mr. Samuel P. Itam
Language:
English
Keywords:
OP; country; deficit; inflation differential; public sector deficit; Caribbean country; single market; OECS country; ACP country; market share; Exports; Treasury bills and bonds; Tariffs; Caribbean
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Abstract

The economic performance of most of the countries in the Caribbean region has been broadly satisfactory in recent years, but insufficiently robust to substantially reduce unemployment. In the five-year period ended 1998, real GDP growth in the region was somewhat higher than in the major trading partner countries, inflation declined, and the fiscal and external positions improved. Also, progress was made toward trade liberalization.

The economic performance of most of the countries in the Caribbean region has been broadly satisfactory in recent years, but insufficiently robust to substantially reduce unemployment. In the five-year period ended 1998, real GDP growth in the region was somewhat higher than in the major trading partner countries, inflation declined, and the fiscal and external positions improved. Also, progress was made toward trade liberalization.

Growth and Sectoral Structure of Output

The Caribbean countries are relatively small in size and quite heterogeneous in structure. Their combined population is about 6.5 million,4 with an aggregate GDP of about US$25 billion in 1999. These figures represent approximately 1.3 percent of the total population of the Latin American and Caribbean region and close to 1.2 percent of this broader region’s GDP. Average per capita GDP in the Caribbean region was roughly US$3,650 in 1998, ranging from about US$930 in Guyana to approximately US$14,500 in The Bahamas. Table 1 provides some summary economic indicators for the region.5

Table 1.

Caribbean Countries: Summary Indicators

(1994–98 averages, unless otherwise indicated)

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Sources: IMF, Recent Economic Developments reports; and IMF staff estimates.

1997 for Barbados, Belize, and Guyana.

1997 for Barbados and Belize.

Except for tine first three columns, averages weighted by nominal GDP in U.S. dollars. The first column refers to combined nominal GDP per capita.

The region’s output and population are concentrated in a relatively small number of countries. About 61 percent of the region’s population is concentrated in the two largest economies, Jamaica and Trinidad and Tobago, which together account for 54 percent of regional GDP. Two other countries—The Bahamas and Barbados—account for 8½ percent of the population and 27 percent of regional GDP. The six independent member countries of the OECS account for about 8 ½ percent of the total population of the region and 10 percent of the regional GDP. Finally, continental countries (Belize, Guyana, and Suriname) account for 22 percent of the population, but only 8½ percent of regional GDP.

Since the 1980s, economic performance has varied widely across the region and has been volatile in some countries (Table 2), with Belize, Trinidad and Tobago, and many of the smaller countries (particularly the OECS members) enjoying strong growth, and many of the other economies showing a mixed performance. Despite a recent slowdown for the region as a whole, two of the lower-income countries in the region (Guyana and Suriname) performed well in the mid-1990s, after a steady decline in the 1980s. However, Jamaica—which accounts for about 29 percent of the region’s GDP—has experienced a sustained decline in output since the mid-1990s. All countries in the region, except St. Lucia, have experienced at least one year of declining output in the last two decades. The volatility in growth reflects the high degree of vulnerability of these small and relatively undiversified economies to adverse shocks, including frequent natural disasters (Box 1). Unemployment is a problem across many countries in the region, but reliable data are unavailable.

Table 2.

Caribbean Countries: Real GDP Growth

(In percent)

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Sources: IMF, Recent Economic Developments reports; and World Economic Outlook database.

Annual averages; measured as the growth rate for the period divided by the number of years considered.

Measured as standard deviation of annual growth rates during each period.

Natural Disasters in the Caribbean Region

Caribbean countries face various kinds of natural disasters, such as hurricanes, torrential rains, earthquakes, volcanic eruptions, and landslides. Given their small size, the impact of a major natural disaster can be devastating, including the loss of human lives and substantial economic damages.

According to official data (from the Organization of American States, USAID, and the Caribbean Disaster Emergency Response Agency), some recent major disasters and an indication of their impact are:

  • In Jamaica, Hurricane Gilbert (1988) left over 200,000 homeless and damaged over 95 percent of all health sector facilities. Total losses exceeded 65 percent of annual GDP.

  • Hurricane Hugo (1989) resulted in damages to Montserrat in excess of 200 percent of GDP.

  • Flooding and landslides associated with tropical storm Debbie (1994) caused damages corresponding to 18 percent of GDP in St. Lucia.

  • Hurricanes Luis and Marilyn (1995) affected a number of countries in the region. Losses totaled 65 percent of GDP in Antigua. These storms also destroyed nearly the entire banana crop in Dominica and a substantial portion of it in St. Lucia.

  • Hurricane Georges (1998) destroyed 85 percent of the housing stock and 50 percent of the sugar harvest in St. Kitts and Nevis, as well as causing extensive damage to health, education, and tourism facilities; it damaged 15 percent of the livestock sector in Antigua and Barbuda.

  • Hurricane Lenny (1999) put 65 percent of the island of Barbuda under water and destroyed 95 percent of its agricultural crops; it led to the closure of the major hotel and employer in Nevis, and severely damaged urban areas in St. Kitts.

  • Losses from individual landslides have been smaller, but their collective impact has been substantial. Volcanoes have caused extensive damage to agricultural areas in several countries, including St. Vincent and the Grenadines, Martinique, and Montserrat.

Natural disasters have had particularly damaging effects on the agricultural and tourism sectors in the region through the destruction of crops and infrastructure (commercial and residential buildings). In addition, these disasters resulted in the cancellation and diversion of cruiseship calls. Unfortunately, insurance coverage for damages is only partial. As a result of the frequency of disasters in the region, both insurance premiums and deductibles are high. In the last decade, there have been episodes when some insurance providers decided to cease operating in the region.

Caribbean countries have developed some regional initiatives in the areas of prevention and coordination of disaster management. With the assistance of the World Bank, ongoing work includes improving risk sharing for catastrophic losses in small states, involving market arrangements to handle disaster risks for private and public sectors assets and infrastructure.1

1 See World Bank (2000).

Countries in the Caribbean region have made some progress in diversifying their economies, but production is still relatively concentrated in a few activities. Jamaica’s economy is relatively diversified, with agriculture and bauxite together accounting for less than 13 percent of GDP. Likewise, while the petroleum sector is still very important in Trinidad and Tobago, its share in GDP declined during the 1990s and now stands at about 20 percent. The small economies of the region, particularly the OECS countries, rely on agriculture, light manufacturing, tourism, trade, and transportation. Agriculture is also a key sector for the continental economies, together with tourism in Belize and mining in Guyana and Suriname (Table A1).

Regional Competition and Tourism Industry in the Caribbean

Caribbean countries, such as The Bahamas, Barbados, and the U.S. Virgin Islands, are long-established tourist destinations. Even though its regional market share declined during the 1990s, The Bahamas remains (after Puerto Rico) the second largest tourist destination within the region (with 11.3 percent of the region’s visitor arrivals in 1998), ahead of the Dominican Republic (9.3 percent) and Jamaica (6.5 percent). The OECS countries are relatively new destinations, where tourist arrivals grew rapidly in the 1980s and in the early 1990s. These countries received 7.7 percent of the region’s total tourists in 1998.

During the 1990s, the annual increase in the number of stayover visitors to the broad Caribbean region (including countries and territories within the Caribbean Sea that are not CARICOM members) averaged 5 percent, while the annual increase in the number of cruise-ship visitors averaged 5.9 percent (Tables A5 and A6). Concurrently, hotel facilities have been expanding at a fast rate, with the number of hotel rooms increasing by 145 percent from 1990 to 1998 for the broad Caribbean region and by 78 percent for the countries considered in this paper (Table A7). English-speaking Caribbean destinations have faced increasing competition from the less expensive destinations in the region, such as Cuba and the Dominican Republic. As a result, the market share for the English-speaking countries has declined, as measured both by stayover visitors (to 29.6 percent in 1998 from 33.6 percent in 1990) and by cruise passengers arrivals (to 40 percent in 1998 from 44.2 percent in 1990).

Despite their natural comparative advantages in tourism, English-speaking Caribbean countries are generally considered expensive tourist destinations, reflecting both higher airline and accommodation prices. The region’s competitiveness may suffer from uncertainties associated with frequent natural calamities, the lack of economies of scale, and relatively high costs of labor, basic services, and transportation.

While agriculture and mining remain important, the structure of production in some countries began to shift more decidedly toward services in the 1990s. In recent years, the share of agriculture and mining has declined, and the contribution of services in GDP has increased for many countries in the region, as they try to find new sources of employment and income generation (Table A2). While The Bahamas has been an offshore banking center since the 1940s, offshore financial activities have become more prevalent in nearly all the small countries in the region since the early 1980s.

The number of visitors to the Caribbean region grew in the latter half of the 1990s, but total tourist receipts did not keep pace with growth in nominal GDP. For the region as a whole, tourist receipts represented more than 35 percent of external earnings and 18 percent of GDP during 1994–98 (Table A3). For some of the larger regional tourist destinations, such as The Bahamas and Jamaica, tourist receipts have been declining as a percent of GDP since 1995, while rising slightly for Barbados. In the smaller island economies of the OECS, after a sharp increase in the 1980s, growth in tourist receipts as a percent of GDP have declined in Antigua and Barbuda and Grenada, but increased in Dominica, St. Lucia, and St. Vincent and the Grenadines. The tourism sector in some countries, particularly in Antigua and Barbuda and St. Kitts and Nevis, was adversely affected by hurricanes in 1995 and 1998. For most countries, tourism receipts have declined in importance as a source of foreign exchange earnings since the mid-1990s. However, in five countries—Guyana, Jamaica, St. Lucia, St. Vincent and the Grenadines, and Trinidad and Tobago—tourism receipts have accounted for a growing share of exports of goods and services.

During the 1990s, the tourism market share of the CARICOM member countries, relative to the broader Caribbean region, fell to 37½ percent in 1998 from 40 percent in 1990. Tourist arrivals expanded at an average annual rate of 4.5 percent for the CARICOM member countries, compared with an annual average of 5.7 percent for the broader Caribbean region. The Dutch and English-speaking Caribbean economies are facing increasing competition from their Spanish-speaking neighbors and require continuing efforts to maintain their market share (Tables A4–A7 and Box 2).

External Sector Developments

Caribbean countries have highly open economies: in 1994–98, exports plus imports of goods and nonfactor services averaged more than 96 percent of GDP for all the countries in the region. Partly as a result, the Caribbean countries are affected by cyclical economic fluctuations in North American and European countries, from which they obtain most of their foreign exchange earnings. More than 60 percent of the region’s merchandise exports are sold in North American and European markets; the proportion is even higher for some smaller countries. Likewise, the United States, Canada, and the countries of the European Union (EU) account for more than 80 percent of the visitors to the region (Tables 3 and 4).

Table 3.

Caribbean Countries: Stayover Tourist Arrivals by Country of Origin1

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Source: Caribbean Tourism Organization.

Includes tourist arrivals to Antigua and Barbuda, The Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, and Trinidad and Tobago.

Table 4.

Caribbean Countries: Direction of Trade1

(1998, unless otherwise indicated)

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Source: IMF, Recent Economic Developments reports.

Data not available for Antigua and Barbuda, The Bahamas, and Grenada.

1997.

Other export destinations include 23.5 percent to Canada.

Other export destinations include 11.5 percent to Canada and 21.6 percent to other European countries.

1995.

Other export destinations include 47.8 percent to other European countries.

Other import origins include 17.3 percent from the Netherlands.

Preferential Trade Arrangements for Caribbean Economies

France, Italy, Portugal, Spain, and the United Kingdom have traditionally adopted preferential trading arrangements with former colonies or overseas territories. Other European countries, such as the Benelux countries, Denmark, Germany, and Ireland, have had traditionally more open market arrangements. Despite the adoption of a common external tariff, the European Economic Community, and later the 15 EU members, have agreed to maintain past preferential trade and aid facilities to the ACP group of countries under the Lomeé Conventions, the first of which was signed in 1975 and the fourth one in 1990.

The conventions granted a wide range of trade preferences to the ACP countries, including duty-free access for most manufactured and agricultural commodities, and established separate protocols for Caribbean exports of bananas, sugar, beef, and rum, by assigning export quotas to the Caribbean states for these products. Since they are discriminatory and nonreciprocal, the trade preferences (and the quota system) have been subject to waivers from EU obligations under international trade agreements. To complement the trade preferences, the EU provides technical and financial assistance to the ACP countries in order to improve their competitiveness.

Preferential access to the EU for bananas has been the most publicly discussed issue, as these policies have led to a five-year trade dispute involving the United States and the EU. Following the 1997 WTO decisions requesting changes in its banana import regime, the EU issued a new council regulation in January 1998 that gives preferential treatment to ACP bananas, combining tariff and quota arrangements and cross-subsidies through import licenses. The WTO ruled in April 1999 that the EU’s modified system was still in violation of world trade rules and suggested some alternatives that would maintain the EU’s desire to give preferential treatment to bananas from ACP member countries, but would eliminate discriminatory quotas and cross-subsidies through the license system.

However, the effective preferences that these provisions grant to ACP countries have been gradually eroded as a consequence of the general reduction in tariff rates and trade preferences that the EU has agreed to with other developing countries. Upon the expiration of the Lomeé IV Convention, and the related WTO waiver for its provisions, the renegotiation process between the EU and ACP countries has led to an agreement that calls for a progressive dismantling of the discriminatory quotas and the licensing system in accordance with WTO rules, within an eight-year transition period.

The United States also provides preferential access to most Caribbean exports through the Caribbean Basin Economic Recovery Act launched in 1983 and amended in 1990 and in May 2000, aimed at encouraging diversification of regional economies. Provisions include tariff concessions granted on a unilateral and nonreciprocal basis, subject to some discretionary conditions, on most regional exports with some exceptions, such as fuel and related products.

The U.S. Trade and Development Act, signed into law in May 2000, enlarged those provisions and restored the competitive advantages the Caribbean region enjoyed prior to the implementation of the North American Free Trade Agreement (NAFTA), which led to increased competition from Mexican products.

Merchandise exports from the Caribbean region are generally concentrated in a few commodities, namely minerals and agricultural crops. For every country in the region, its three top export commodities account for more than 60 percent of total exports (Table A8). This concentration of exports, along with exogenous shocks—such as swings in the terms of trade and natural disasters—explains a large part of the observed volatility in export earnings over the last few decades (Table A9).

Countries across the Caribbean region import goods mainly from the United States and from other CARICOM countries. The United Kingdom and the Netherlands (in the case of Suriname) are also important suppliers of imports for some countries. Consumer goods tend to represent a high proportion of imports, particularly in the OECS countries (Table A10). The share of consumer goods in total imports is less than 40 percent for only three countries: Guyana, Jamaica, and Trinidad and Tobago.

Agricultural exports of the region are characterized by high production costs and are shipped to protected markets. The EU provides preferential access to its market for a number of commodities from the African, Caribbean, and Pacific (ACP) group of countries. Caribbean countries have relied heavily on this system of preferential access, through a tariff-quota system for a number of commodities, particularly bananas (for Belize, Dominica, Grenada, Jamaica, St. Lucia, St. Vincent and the Grenadines, and Suriname) and sugar, molasses, and rum (for Belize, Guyana, Jamaica, St. Kitts and Nevis, and Trinidad and Tobago). The United States also provides preferential access for some regional exports under the Caribbean Basin Initiative (CBI) and the Trade and Development Act. The benefits available under these preferential trade regimes are nonetheless progressively being eroded (see Box 3). Despite these preferences, the importance of agricultural exports within total exports has declined in recent years for some countries in the region and the decline is likely to continue in light of the scheduled phasing-out of preferential access under the EU-ACP Partnership Agreement.

Except for Trinidad and Tobago and Suriname, countries in the region have large trade and current account deficits (Tables A11–A13), despite, in some cases, sizable current transfers associated with migrants’ remittances. This is especially true for the small island economies, where exports of goods account for less than 43 percent of total exports earnings. Also, the relative share of merchandise and services within export receipts is generally skewed in favor of services, except for Belize and Jamaica where there is more balance (Table A12). Current account imbalances have occurred in recent years even in countries with traditional surpluses, such as Suriname and Trinidad and Tobago (Figure 1).

Figure 1.
Figure 1.

Caribbean Countries: External Current Account Balances

(In percent of GDP, 1994–98 averages

Sources: IMF, Recent Economic Developments reports; and IMF staff estimates.

In recent years, foreign direct investment flows to the region have financed a large share of the current account deficits (Figure 2). Foreign direct investment flows have permitted countries to sustain high levels of domestic investment and have been channeled mainly to the mining and energy-based sectors in Jamaica and Trinidad and Tobago and to the tourism sector in the smaller countries (Table A14). Since the early 1980s, increases in foreign direct investment flows have partially offset a decline in official borrowing and grants. The current account deficits of the countries in the region are also financed to some extent by commercial borrowing (Table A15). A larger share of commercial borrowing is directed to the nonbanking private sector (Table A16). This feature reflects largely international banks’ financing of a few specific projects in the tourism and infrastructure sectors in the region. Official grants, though significant, have been declining. They averaged 2.2 percent of GDP in the OECS economies, and 3.6 percent in Guyana, during 1994–98. Official grants to Suriname averaged 12.4 percent of GDP over the same period, but have declined appreciably in recent years (Table A17). Since the late 1980s, Dominica, Grenada, St. Lucia, and St, Vincent and the Grenadines have been receiving STABEX grants6 from the EU that have been used increasingly for health, education, and economic diversification.

Figure 2.
Figure 2.

Caribbean Countries: External Current Account Financing

(In percent of GDP, 1994–98 averages)

Source: IMF, Recent Economic Developments reports.1 Guyana figures exclude debt-stock reduction from Paris Club in 1996.

Monetary and Exchange Rate Regimes and Developments

Together with generally prudent fiscal and financial sector policies, the commitment to a fixed exchange rate (in terms of the U.S. dollar) by many of the small economies of the Caribbean has been a key factor in creating a stable macroeconomic environment and maintaining inflation close to international levels (Table 5). Following a long tradition of monetary cooperation, Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines, together with two U.K. territories, Anguilla and Montserrat, established the Eastern Caribbean Central Bank (ECCB) in 1983.7 The stability in the value of their common currency, the Eastern Caribbean dollar, is ensured through strong backing by the ECCB’s pooled official reserves. The Bahamas, Barbados, and Belize have also pegged their currencies to the U.S. dollar.8

Table 5.

Caribbean Countries: Inflation

(Consumer price index inflation, in percentage points)1

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Sources: IMF, Information Notice System, and Recent Economic Developments reports.

Measured as the inflation for the period divided by the number of years within the period.

In contrast, Guyana, Jamaica, and Trinidad and Tobago have floating exchange rate regimes, with their central banks undertaking discretionary currency interventions from time to time. Suriname has a dual exchange rate regime, with a large margin between the official and the parallel exchange rates; the authorities have begun to take steps toward unifying the exchange rates. In the last two decades, all of these countries have experienced episodes of economic instability, when explicit or implicit commitments on the exchange rate could not be maintained (Figure 3). Except for Suriname, countries within the region have been successful in reducing inflation to single-digit rates. Consistent with an official emphasis on inflation as the main monetary policy objective, the countries that maintain flexible exchange rates have limited the growth rates of monetary aggregates and sought to limit exchange rate depreciation, as in the cases of Jamaica and Trinidad and Tobago.

Figure 3.
Figure 3.

Caribbean Countries with Flexible Exchange Rate Regimes: Exchange Rate Depreciation and inflation

Source: IMF, Information Notice System.

On average, the level of gross international reserves in the region has remained fairly stable, at the equivalent of about three months of imports. However, Belize, Guyana, and Jamaica have experienced a decline in coverage in the last three or four years (Table 6). In the case of the ECCB, the strict limits on credit to member governments have helped to maintain a foreign exchange cover for its demand liabilities in excess of 95 percent in recent years, compared with the 60 percent mandated in its Articles of Agreement.9

Table 6.

Caribbean Countries: Gross Official Reserves

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Sources: IMF, International Financial Statistics, and Recent Economic Developments reports.

Within the region, there has been a general trend toward a real effective appreciation of the local currencies since mid-1995, despite fluctuations since 1998. This largely reflects the strengthening in the value of the U.S. dollar against major currencies, particularly between mid-1995 and mid-1998, and the fact that the inflation differential remains large in a few of the countries (Figures 4–6).

Figure 4.
Figure 4.

ECCB Countries: Real and Nominal Effective Exchange Rates

(Monthly index, 1990 = 100)

Source: IMF, Information Notice System.
Figure 5.
Figure 5.

The Bahamas, Barbados, and Belize: Real Effective Exchange Rates

(Monthly index, 1990 = 100)

Source: IMF, Information Notice System.
Figure 6.
Figure 6.

Guyana, Jamaica, Suriname, and Trinidad and Tobago: Real Effective Exchange Rates

(Monthly index, 1990 = 100)

Source: IMF, Information Notice System.

Real interest rates remain relatively high throughout the region (Table 7), as a result of high reserve and liquidity requirements and generally conservative monetary policies, combined in some cases with large fiscal imbalances. For some countries, the perception of exchange rate risk may also be a contributing factor. In addition, the cost of banking services in most countries in the region remains high, reflecting the lack of economies of scale, relatively undiversified loan portfolios, due to the small size of the economies, and the oligopolistic nature of the banking industry in most countries in the region.’10

Table 7.

Caribbean Countries: Interest Rates

(In percent a year, end of period)

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Sources: IMF, Recent Economic Developments reports, and International Financial Statistics.

Issue rate.

Saving Deposits.

Prime rate.

Treasury bill discount rate.

Time deposits.

Commercial loans.

Weighted average.

A general guiding rate set by the commercial banks and not a specific rate for prime customers.

Banking intermediation in the region is relatively high compared with Latin American countries, as measured by the ratios of bank lending and deposits to GDP.11 In most countries in the region, commercial banks tend to play a very large role in the financial sector, although nonbank financial institutions in many countries are becoming more important as they tend to be subject to less strict prudential regulations and supervision.12 While bond and equity markets have become an increasingly important source of financing for governments and private firms in recent years, markets and adequate institutional arrangements have only been established in a few countries. There are a range of initiatives to establish regional financial markets—such as the ECCB’s efforts to establish a securities market for its member governments—and equity market capitalization has increased in recent years (Table A18).

Except for the ECCB member countries, financial institutions in the region are subject to high and unremunerated levels of reserve requirements. These reserve requirements are generally set to levels well above those needed to protect the safety and soundness of the banking system (less than 10 percent). Also, reserve requirements are not uniform across financial institutions, instruments, or local- and foreign-currency-denominated liabilities. The reserve requirements may have remained high in many countries because of reluctance to give up an important source of financing for the public sector as government securities account for a sizable proportion of the required reserve. Furthermore, since markets are relatively undeveloped, many countries have traditionally relied on reserve requirements as an instrument in the monetary management.

Fiscal Policy

In the 1990s, the experience of the region in reducing fiscal deficits was mixed, with deficits widening toward the end of the decade.13 The central government deficit in the region rose to 4½ percent of GDP in 1998 from 2 percent of GDP in 1994 (Table A19).14 Some countries, which began the decade with a relatively light debt burden, were able to strengthen or maintain a relatively strong fiscal position. Despite being buffeted by fluctuations in oil prices, Trinidad and Tobago maintained a roughly balanced budget, through tight limits on spending on goods and services and transfers. The Bahamas, Barbados, St. Lucia, and St. Vincent and the Grenadines also established a track record of moderate deficits. However, a number of other countries experienced a widening of their deficits and increased debt burdens. In Jamaica, despite the maintenance of large primary surpluses, the overall budget deficit rose sharply, owing to high real interest rates and the increase in the domestic debt burden caused by government support to rehabilitate the financial sector. In St. Kitts and Nevis, the need to upgrade infrastructure in the aftermath of Hurricane Georges increased the fiscal deficit.

Caribbean countries tend to have a high revenue/GDP ratio, which increased slightly to 26½ percent in 1998 from about 26 percent in 1994 (Table A20). In recent years, some countries have strengthened revenue collections to support a higher level of public spending or to reduce fiscal deficits. Accordingly, tax receipts relative to GDP rose in many countries.

For the region as a whole, reining in public expenditure has proved difficult, with some tendency for expenditures to creep upward over time. Central government expenditure rose to 33 percent of GDP in 1998 from 30 percent of GDP in 1994 (Table A21). In many countries, public sector payrolls constitute a sizable part of current expenditure and large real wage increases have been a major source of fiscal imbalances, with the average public wage bill for the region rising to about 12 percent of GDP in 1998 from 10½ percent of GDP in 1994. Part of the reason for this increase can be attributed to relatively strong trade unions and the system of public salary reviews which has built-in annual increments that are not performance based. In addition, many governments in the region have found it increasingly necessary to make supplementary wage adjustments for the civil service to retain qualified employees for critical positions—the “brain drain” being part of the problem. Also, most countries have been reluctant to reduce the size of the public sector workforce because it may exacerbate unemployment. Nevertheless, Guyana reduced the size of its public sector in the 1990s, cutting central government employment by 50 percent and public sector employment by 45 percent.

For a few countries, rising interest payments have also contributed to the observed increase in central government expenditure. For St. Kitts and Nevis, St. Lucia, and St. Vincent and Grenadines, this reflected primarily an increase in external debt. In Jamaica, it resulted from sharp growth in the stock of domestic debt, while public external debt declined (Table 8).15 Guyana began the decade with a particularly large debt overhang but has reduced it through greater access to concessional borrowing, grants, and debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative.

Table 8.

Caribbean Countries: Public External Debt

(In percent of GDP)

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Source: IMF, Recent Economic Developments reports.

Fiscal year begins on April 1.

Fiscal year begins on July 1.

Before Heavily Indebted Poor Countries (HIPC) Initiative.

The region as a whole has made significant progress as regards privatization. Many countries have taken steps to privatize state-owned enterprises. They have also made efforts to improve the operating performance of enterprises that have remained within the public sector. As in other developing countries, privatization is seen as a means to improve economic efficiency, to lessen the role of the public sector, and to generate funds for the budget. The widening of the consolidated public sector deficit to 4¼ percent of GDP in 1998 from 1 percent of GDP in 1994 reflected a worsening in central government balances (Table 9). Excluding the central government, the consolidated balance of the nonfinancial public enterprises improved from approximate balance to a surplus of about 1 percent of GDP in this period. For some Caribbean countries, however, major public enterprises continue to be a drain on the public finances or to be dependent on external grants. Examples include the Sugar Manufacturing Corporation in St. Kitts and Nevis and the Banana Marketing Corporation in Dominica.

Table 9.

Caribbean Countries: Consolidated Public Sector Balances1

(Overall balances after grants, in percent of GDP)

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Source: IMF, Recent Economic Developments reports.

For some countries, the fiscal year begins on April 1 or July 1 (see Table 8).

Central government and central bank operations.

The Caribbean Single Market and Economy

Caribbean countries have entered into a number of agreements to enhance their economic prospects and address common issues in a cooperative manner, such as the Eastern Caribbean Currency Union, the OECS, and CARICOM. In 1989, CARICOM embarked on a process of economic integration that contemplates the formation of a Caribbean Single Market and Economy (CSME), originally targeted to be launched in June 2000 (Box 4). This initiative aims at creating a single market or economy for all CARICOM countries (except The Bahamas), which will be characterized by the free movement of goods, services, capital, labor, and a common external trade policy. The single market would also entail the harmonization of internal tax regimes, the formation of a monetary union, and the adoption of a common currency.

Evolution of CARICOM

The Caribbean Community (CARICOM) was created at the first Heads of Government Conference in Trinidad and Tobago in 1963. This conference was the first in the series of several meetings among the Commonwealth Caribbean countries that resulted in the creation of the Caribbean Free Trade Association (CARIFTA) in 1965. The Caribbean Community and CARIFTA combined to form CARICOM through the Treaty of Chaguaramas, signed in 1973. Initially there were 12 member countries: Antigua and Barbuda, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, Montserrat, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, and Trinidad and Tobago. The Bahamas joined in 1983, and Suriname in 1995; Haiti still needs to complete some formalities before becoming a full member.

CARICOM has three main objectives: (1) coordination of foreign policies; (2) cooperation in common services and functional matters such as health, education, justice, culture, communications, and industrial relations; and (3) economic cooperation.

The highest decision-making organ in CARICOM, the Conference of the Heads of Government, agreed in 1989 to proceed with the formation of the Caribbean Single Market and Economy (CSME) with the launch date targeted for June 2000. This initiative aims at implementing the common market, creating a monetary and economic union, as well as raising the profile of countries in the region, especially the small member states.

There are nine amendments or Protocols—all completed—associated with the CARICOM agreement, which deal with different issues: I. Organs, institutions and procedures of the community; II. Right of establishment, the right to provide services, and the right to move capital; III. Industrial policy; IV. Trade liberalization; V. Agricultural policy; VI. Transportation policy; VII. Disadvantaged countries, regions and sectors; VIII. Disputes settlements; and IX. Rules of competition.

There are three principal motives for the creation of a CSME. First, CARICOM members believe that a larger internal market will exploit economies of scale and improve the allocation of resources, leading to a higher standard of living for the region’s population. Second, a CSME would increase the region’s bargaining position in international negotiations and raise the profile of member countries. Third, the CSME would not only reduce barriers to trade in goods and services among member countries but also reduce barriers to trade with countries outside the common market. Regional integration will not be costless, but it has potential benefits for the members of the common market principally through effecting a more efficient allocation of resources, exploiting economies of scale, and improving productivity.

Progress toward achieving the goals of a single market economy in the Caribbean region has been slow (Table 10). The countries in the region are yet to reach the stage of a monetary union with a common currency, such as that for the OECS, and a regional capital market is still not operational. On the other hand, progress in undertaking structural reforms has generally proceeded at a faster than anticipated pace, especially in the area of trade liberalization. Also, some progress has been made toward the harmonization of domestic tax regimes.

Table 10.

Status of Major Provisions of the CARICOM Single Market and Economy1

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Source: CARICOM Secretariat, 1999

Haiti is in the process of becoming a full member of CARICOM and is not included in the description in the table.

Table 11.

CARICOM: Implementation of Scheduled Reductions in the Maximum Rate of the Common External Tariff1

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Sources: CARICOM Secretariat; and IMF staff.

The Common External Tariff excludes agricultural products, which are subject to a rate of 40 percent. The Bahamas is a CARICOM member, but not a member of the Common Market.

Belize has been granted permission to implement each phase with a two-year lag.

For phase I, the maximum rate was lowered to 30 percent. For phase II, the maximum rate was lowered to 25 percent.

Suriname joined the Caribbean Common Market in 1996.

As indicated, one area of structural reform where the region has made substantial progress is trade liberalization. Important achievements in this area were the creation in the 1970s of a common market applying to trade within the region and the elimination of most quantitative restrictions. This liberalization led to an increase in total exports of the region, particularly for nontraditional items, as well as larger intraregional trade flows. The adoption of a Common External Tariff (CET) in 1973 was the next step in the process of integrating the new common market with the rest of the world. The application of uniform tariffs to imports from outside the region, together with protocols on trade in services, were important steps toward regional integration.

To accelerate the progress in trade liberalization, CARICOM countries agreed to a schedule of phased reductions in the CET starting in 1993. The objective was to reduce in steps the maximum CET on certain goods from 45 percent to 20 percent by 1998. The less developed countries16 were allowed to proceed at a slower pace in the reduction of import tariffs. Tariff rates imposed under the CET depend on the nature of the taxable commodity. Most commodities are grouped as competing (regional production satisfies at least 75 percent of regional demand) or noncompeting, and then each group is subdivided into inputs (primary, intermediate, and capital) and final goods. The rate structure is 0 or 5 percent on noncompeting inputs, 10 percent on competing primary and capital inputs, 15 percent on competing intermediate inputs, and 20 percent on all final goods.17 About half of the countries in the region, accounting for the majority of its trade, have implemented the final reductions of the CET (Table 11). Some of the other countries, especially the smaller economies, have found it difficult to implement the final reductions, mainly because of the near term inability to replace lost revenues and some concern over the ability of domestic producers to survive in a more competitive environment.

Although EU countries differ quite markedly from the Caribbean countries, several lessons can be drawn from the experience of integration within the EU. First, the process toward integration in the EU was a lengthy one. Therefore, the countries in the Caribbean should not expect a quick completion of the integration process. Second, a major difference between CARICOM and the EU is the importance of intraregional trade. Countries in the Caribbean region trade mostly with countries outside the region, while countries in the EU trade mostly with other EU countries. Hence, abstracting from other factors, the benefits from liberalizing intraregional trade are likely to be larger for the EU countries than for the countries within CARICOM, where trade links are relatively small. For CARICOM, the biggest gains are likely to be realized from liberalizing trade with countries outside the region, which is not necessarily related to the regional integration process. Third, CARICOM will need to address how the convergence process toward a single market will proceed, given the wide disparity in per capita incomes across countries in the region and the fact that countries differ markedly regarding their stage of development. For example, the size of fiscal deficits differs across countries in the region, and these differences are particularly sharp in some cases—for example, Trinidad and Tobago compared with Jamaica and Suriname. Also, average inflation in the OECS countries is quite low—about 2¼ percent in 1999—while inflation was 6 percent in Jamaica and 99 percent in Suriname. In these cases, issues about the speed of convergence will need to be addressed.

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Cover Developments and Challenges in the Caribbean Region
Developments and Challenges in the Caribbean Region
Author: Mr. Simon Cueva, Mr. Stephen Tokarick, Mr. Erik J. Lundback, Ms. Janet Gale Stotsky, and Mr. Samuel P. Itam
ISBN:
9781557759504
ISSN:
0251-6365
Publication Date:
04 Dec 2000
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781557759504.084
Pages:
64
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    Caribbean Countries: External Current Account Balances

    (In percent of GDP, 1994–98 averages

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    Caribbean Countries: External Current Account Financing

    (In percent of GDP, 1994–98 averages)

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    Caribbean Countries with Flexible Exchange Rate Regimes: Exchange Rate Depreciation and inflation

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    ECCB Countries: Real and Nominal Effective Exchange Rates

    (Monthly index, 1990 = 100)

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    The Bahamas, Barbados, and Belize: Real Effective Exchange Rates

    (Monthly index, 1990 = 100)

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    Guyana, Jamaica, Suriname, and Trinidad and Tobago: Real Effective Exchange Rates

    (Monthly index, 1990 = 100)

Caribbean Countries: External Current Account Balances

(In percent of GDP, 1994–98 averages

Caribbean Countries: External Current Account Financing

(In percent of GDP, 1994–98 averages)

Caribbean Countries with Flexible Exchange Rate Regimes: Exchange Rate Depreciation and inflation

ECCB Countries: Real and Nominal Effective Exchange Rates

(Monthly index, 1990 = 100)

The Bahamas, Barbados, and Belize: Real Effective Exchange Rates

(Monthly index, 1990 = 100)

Guyana, Jamaica, Suriname, and Trinidad and Tobago: Real Effective Exchange Rates

(Monthly index, 1990 = 100)

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