Abstract

The English-speaking Caribbean region has, for the most part, enjoyed economic stability, modest growth in per capita incomes, and a standard of living that compares fairly well with the rest of Latin America and the Caribbean as a whole. Also, social indicators are generally good and political systems stable. However, the increased integration of the region in the global economy has led to a number of risks that have to be addressed promptly for the countries of the region to accelerate growth and social progress in the period ahead. Although the region faces a number of issues that could be discussed, this paper concentrates on three broad topics, namely the need to: (1) lower the costs of financial intermediation and to strengthen supervision over onshore and offshore financial institutions; (2) improve the public finances—and, thereby, savings—to act as a buffer against external shocks; and (3) advance structural reforms—including further liberalization of trade—to enhance external competitiveness and promote the diversification of exports.

The English-speaking Caribbean region has, for the most part, enjoyed economic stability, modest growth in per capita incomes, and a standard of living that compares fairly well with the rest of Latin America and the Caribbean as a whole. Also, social indicators are generally good and political systems stable. However, the increased integration of the region in the global economy has led to a number of risks that have to be addressed promptly for the countries of the region to accelerate growth and social progress in the period ahead. Although the region faces a number of issues that could be discussed, this paper concentrates on three broad topics, namely the need to: (1) lower the costs of financial intermediation and to strengthen supervision over onshore and offshore financial institutions; (2) improve the public finances—and, thereby, savings—to act as a buffer against external shocks; and (3) advance structural reforms—including further liberalization of trade—to enhance external competitiveness and promote the diversification of exports.

Monetary and Financial Sector Issues

Reserve Requirements and Monetary Policy

In some countries in the region, reserve requirements are not uniform across financial institutions and instruments, or between local- and foreign-currency-denominated liabilities. Because of the authorities’ desire to encourage private capital inflows—particularly from nationals living abroad, reserve requirements are generally lower on U.S. dollar-denominated liabilities than on domestic-currency-denominated liabilities.18 This differential has left room for regulatory arbitrage and has contributed to:

  • large intermediation spreads, with low, and sometimes negative, real deposit rates, and high real lending rates (Figure 7) and has discouraged savings and investment—particularly by lower income households and small and medium-sized businesses, which have less ability to place and seek funds abroad;

  • the growth of both formal and informal nonbank financial institutions, which in most countries are subject to less comprehensive prudential supervision;

  • the development of financial instruments that circumvent reserve requirements; and

  • large spreads in some countries between lending rates in local currency and in U.S. dollars, which increase incentives to borrow in the latter (often from resident financial institutions), particularly in countries that also have strived to maintain a stable nominal exchange rate.

Figure 7.
Figure 7.

Caribbean Countries: Reserve Requirements and Interest Rate Spreads

(In percentage points)

Sources: IMF, Recent Economic Developments reports and International Financial Statistics.1 Interest rate spread: Defined as the difference between the lending and deposit rates.2 Reserve requirement: Percentage of deposit liabilities required to be held with the central bank or in specified financial assets.

The remuneration of reserve requirements could be an interim measure toward a deeper reliance on open market operations to control liquidity. Several countries have recently either lowered reserve requirements on domes tic-currency-denominated liabilities or signaled their intention to do so in the near term. They have also taken steps to harmonize reserve requirements among financial institutions and domestic-currency-denominated instruments, but have generally been reluctant to extend such harmonization of reserve requirements to U.S.-dollar-denominated liabilities.

Costs of Financial Intermediation

In many countries, the public sector continues to play a large, albeit declining, role in intermediating domestic savings through state-owned commercial and development banks, unit trusts, and actively managed social security funds.19 Public financial institutions have been an important source of long-term financing, which private banks have for the most part been reluctant to supply for a variety of reasons including bouts of high inflation in some countries, the vulnerability of most firms to large shocks, and inadequate laws governing bankruptcy and collateral. However, public financial institutions have also reduced the efficiency—and increased the risks—of financial intermediation. Because of the use of noncommercial criteria in some cases, the concentration of loan portfolios and the ratio of non-performing loans in state-owned banks are generally higher than in their private sector counterparts. Also, the social security funds invest mainly in central government securities and state-owned banks because many countries either limit or preclude social security trust funds from investing abroad. These goals can be achieved with the privatization of state-owned financial institutions involved primarily in commercial banking and through the diversification of the investment portfolios of social security funds.

Banking systems in the Caribbean region are characterized by relatively high real interest rates, which discourage investment and growth. In some countries, this is due in part to large borrowing by the public sector, which has crowded out private sector borrowing and increased sovereign credit risk. Domestic interest rates may also reflect exchange rate risk in economies with significant exchange rate volatility. Some countries (the OECS economies, Belize, and Barbados) also have floors on deposit rates, whose elimination could facilitate a reduction in interest rates. However, in most countries, a major reason for high lending rates has been large intermediation spreads, which have been caused by:

  • High reserve requirements, which are either unremunerated or remunerated at below market rates. In some countries, high liquidity requirements have created a captive market for government securities, which may have limited the return on their assets.

  • High operating costs. In most countries, the banking sector is still composed of many institutions that focus primarily on their home markets with sometimes high overheads. Given the small size of these markets, most of these banks are far too small to realize economies of scale. Continued government ownership and management of large banks also contribute to the high cost structure.

  • High ratios of nonperforming loans—particularly in small countries—owing in part to undiversified loan portfolios concentrated in sectors vulnerable to external shocks, delays in judicial processes, and inefficient registries for companies, properties, and deeds.20 In addition, banks’ difficulties in recovering losses by selling collateral are compounded by debtor protection laws and a reluctance, in countries with small populations and geographic areas, to purchase foreclosed property.

  • Limited competition, with a handful of banks dominating lending and deposit taking in most countries. Few countries in the region have adequate anti-trust laws or enforcement agencies.

Increasing international competition, both from within and outside the region, would help to lower costs and to diversify the risks within the financial system. International foreign banks have a long history of operation in every country in the region. However, as noted in recent studies21 the region is characterized by market segmentation and differentiation of roles among foreign, domestic, and state-owned banks. The presence of formal and informal barriers—including discretionary restrictions on licensing and legal barriers to land holding that hamper transfer of financial assets—limit competition, maintain fragmentation, and contribute to large spread margins within the financial system. In addition, the regional development of local institutions should help to foster their diversification, both for their deposit base and lending portfolio, and for their ability to compete in international markets.

When banks and banking systems have run into difficulties in several countries in the region, depositors have generally been paid in full with public funds. In the region, only The Bahamas, Jamaica, and Trinidad and Tobago have established a formal deposit insurance system. It would be important for the countries to emphasize better education about risks associated with various investments and the lack of a de facto universal government guarantee for all depositors where insurance schemes exist.

Offshore Banking

Several governments in the region have promoted offshore financial activities as a means to reduce their economies’ dependence on commodity exports and tourism. Considering the risks associated with an activity generally more leveraged than onshore banking, Caribbean countries have launched the CARICOM Bank Supervision Harmonization Project, aimed at establishing guidelines for offshore banking legislation and supervision, including minimum requirements for capital and reserves and external audits. The project also aims to promote adequate licensing policies and effective supervision and cooperation with other supervisory agencies. Nonetheless, while most governments run background checks with international enforcement agencies before granting licenses, few countries—with the exception of The Bahamas and Barbados—have adequate regulatory frameworks or fully trained staff to comprehensively supervise activities once licenses are approved. Accordingly, countries should bring the laws and regulations covering offshore activities in line with international best practices, maintain a strict firewall between offshore and onshore activities, and increase resources devoted to overseeing the offshore sector.

In order to prevent money laundering and discourage related activities, most Caribbean countries participate in the Caribbean Financial Action Task Force, which has established a process for mutual cooperation. The growth of offshore financial centers in the Caribbean region has become somewhat controversial. From the point of view of the Caribbean countries, offshore centers provide employment opportunities for the population, as well as a source of economic diversification. On the other hand, the Organization for Economic Cooperation and Development (OECD) has criticized the development of offshore centers in the Caribbean because of what is described as “harmful taxation.”22 Strengthening the legal framework under which the sector operates should be a priority, so as to avoid possible negative effects from perceptions of governance problems.

Offshore financial entities within the region are generally booking centers that serve as registries for transactions arranged and managed in other jurisdictions and they do not usually engage in financial intermediation within the region. During the 1990s, the two Caribbean offshore financial centers that report to the Bank for International Settlements (The Bahamas and the Cayman Islands) have maintained almost near-zero net cross-border positions, suggesting that they have not intermediated significant capital inflows to their host countries.23

Fiscal Issues

A principal goal in the Caribbean region is to raise national savings, particularly by strengthening the region’s fiscal position. For many countries, an increase in public savings would enable them to finance adequate public infrastructure and social safety nets while maintaining a sound debt position and a cushion against exogenous shocks—including natural disasters.

The economic structure underlying fiscal performance in the Caribbean region has been shifting; as noted in Section II, traditional economic activities, such as agriculture, have given way to a modern service (and, to a lesser extent, manufacturing) sector. In addition, trade liberalization has led to reduced revenue from traditional sources, while external grants to countries in the region have shown a declining trend in recent years, placing more emphasis on revenue generation to compensate.

These developments have forced governments to seek new sources of revenue; imposed new demands on job training programs; and required increased spending on health, education, social safety nets, and infrastructure to support new industries. They have also induced governments to begin modernizing their tax and customs administrations and the management of public expenditures. Caribbean countries have thus far taken advantage of some of the easier opportunities for fiscal adjustment, such as reducing wasteful transfers and privatization. They now need to undertake fundamental reforms to improve the quality of fiscal adjustment and facilitate fiscal sustainability.

Strengthening Central Government Balances

Most countries continue to work on improving both the structure of their tax systems and its administration. For instance, both Barbados and Trinidad and Tobago successfully introduced VATs in the 1990s, replacing an existing array of indirect taxes and generating strong revenue collections. Similarly, Jamaica moved cautiously from a sales tax to the present successful general consumption tax that is akin to a VAT. Belize, which had introduced a VAT, repealed it and replaced it with a retail sales tax at a lower rate in 1999. Whatever the specific form it might take, a broad-based sales tax is an essential component of a modern tax system. Given the increasing integration of the Caribbean economies, harmonization of indirect taxes would ease administrative burdens and increase efficiency in the regional tax systems.

Customs reform has taken on particular significance in the region. These economies are very open and imports form a significant portion of the revenue base. In light of ongoing regional efforts at trade liberalization, which have resulted in a reduction in collected duties (measured as the ratio of import duties collected to the value of imports), there has been a need to reexamine the customs systems to make them more efficient in tax collection. Under the aegis of CARICOM, customs offices in most countries are adopting international standards and computerizing operations.

Several important and relatively untapped areas for strengthening revenue efforts in the region remain. One important reform would be to extend more effectively the formal system of taxation to the self-employed and the parallel economy, both of which contribute relatively little to tax revenues now. For instance, in Trinidad and Tobago, it is estimated that despite a rapidly growing economy, the self-employed contribute less than 2 percent of personal income tax revenues. Although it is difficult to tax these components of the economy, it is important for efficiency and equity. In the absence of effective taxation, an excessive amount of economic activity takes place in these sectors and the formal sector’s perceived inequities in bearing the burden of taxation undermine overall compliance. Sometimes presumptive or other simplified forms of tax can be used to collect revenues from these sectors of the economy.

The Caribbean tax systems include an inordinate amount of incentives for investment, particularly tax holidays and tax exemptions. These incentives weaken public revenues and require higher taxes elsewhere, distort economic activities, and impose inequitable burdens on different producers and industries. They also increase the complexity of the tax system and weaken transparency. Although Caribbean countries operate in a global environment with intense competition for investment, tax incentives encourage hit-and-run investments rather than stable, long-term investments. Moreover, studies have found that investors prefer stable political and economic environments, with high-quality public services and workforces, and a well-structured and administered tax system, with generous capital allowances. 24

Caribbean countries could also strengthen revenues by expanding the use of property taxation, which is in place in most countries in the region even though it generally contributes little to public revenues. If efforts were made to update property ownership records and the assessed value of property, a broad-based property tax, levied at a modest rate (1 to 2 percent of property value) would provide a means to strengthen revenue sources and to gain revenues from the self-employed and parallel markets. Increased cost recovery could provide another means to raise public revenues and promote greater commercialization of the public sector.

In the smaller Caribbean nations, finding the means to finance capital spending poses a particular challenge. Infrastructure projects tend to be large and indivisible, such as building a modern airport. The geography of island nations also inevitably leads to some lack of economies of scale. Access to nonconcessional external financing markets at manageable rates is limited for many of these countries by their small size as well. In some cases (e.g., Antigua and Barbuda), ambitious public investment programs as well as guarantees for private sector liabilities or investments have led to the accumulation of domestic and external arrears. The use of public-sector resources for the financing of big infrastructure projects could have a large, permanent impact on fiscal expenditures if it is not accompanied by cost recovery measures in the delivery of public services. At the same time, the application of strict priorities and more stringent economic criteria for the selection of investment projects is essential to maintaining a strong fiscal position.

Strengthening of Overall Public Sector Balances

Transfers to loss-making public entities continue to absorb a significant though declining part of public expenditures. Many of the countries have found it difficult to restructure, close down, or privatize loss-making public entities, particularly in the agricultural sector. The loss of protected markets for agricultural goods, such as bananas and sugar, remains a principal concern in countries where these crops comprise a significant share of exports. The concern over the loss of jobs for workers who would be difficult to retrain has stymied meaningful reform in some cases. Nevertheless, public funds are better spent on programs that address the education and skill deficiencies of such workers, rather than on propping up the enterprises. And, divestment and restructuring of these enterprises may unleash a significantly higher level of worker productivity. Moreover, the deficits of these enterprises and other entities—such as banks, utilities, and statutory bodies—have often been financed by transfers through state-controlled banks or financial institutions, which gives rise to a loss of transparency in fiscal operations. The channeling of credit to loss-making enterprises that do not reform diverts scarce funds from more productive uses.

The current financial situation of social security systems in the region tends to be strong, owing to their relatively recent establishment, a young population, and conservatism in the level of benefits paid out. However, in a number of countries, governments have tended to use the surpluses of social security funds to finance current expenditure. With aging of the population and demands for a higher level of benefits to be paid to the elderly, the social security systems are likely to confront increased financial strains. It is thus essential that efforts be made to improve their underlying financial structure, perhaps through reforms such as those in some countries in Latin America to introduce more private sector elements into the public system. Also, efforts should be made to improve the investment performance of the funds and enforcing greater compliance. In this regard, the continuing development of financial markets in the region increases the possibilities for reforming social security systems.

Fiscal Harmonization

Caribbean countries have been successful in some forms of integration, for instance, in the formation of CARICOM in the 1970s, and in trade liberalization through the adoption of a CET and reductions in maximum tariff rates. In addition, several countries have adopted VATs in recent years, at a standard rate of 15 percent, and some harmonization of excise taxes has also occurred as part of overall trade reform. There has been less progress, however, in general fiscal harmonization, even among the smaller countries of the OECS. The challenge facing the region is to agree on a coordinated process and timing to reach common fiscal targets across countries.

Structural Policy Issues

This section considers three important structural policy issues that countries in the region will need to address in the period ahead: pursuing further trade liberalization, enhancing external competitiveness, and diversifying the structure of exports.

Effects of Trade Liberalization

Initial trade liberalization steps have been accompanied by an increase in CARICOM trade flows. The decline in the CET started in 1993 would be expected mainly to have increased imports from countries outside the region and—as trade liberalization leads to a more efficient allocation of resources—also exports. Imports (as percent of GDP) by CARICOM countries—both from other CARICOM countries and from countries outside the region—have increased in the period following the initiation of the cuts in the CET. Although total exports from the region have also grown following liberalization, they have not increased as rapidly as imports. A major factor constraining the growth of CARICOM exports has been the decline in the production of commodity exports since 1994, particularly bananas from OECS countries, which resulted from bad weather and the loss of preferential markets (Table 12).

Table 12.

CARICOM: Trade Flows

(In percent of GDP)

article image
Sources: CARICOM Secretariat; and IMF staff estimates.

Excludes data on Antigua and Barbuda, The Bahamas, Haiti, and Suriname.

As a percent of CARICOM GDP.

OECS members are Antigua and Barbuda, Dominica, Grenada, Montserrat, St. Lucia, St. Kitts and Nevis, St. Vincent and the Grenadines, Anguilla, and the British Virgin Islands.

As a percent of OECS GDP.

Export composition for the region has been changing. The exportable sectors have expanded, with tourism and information services growing to 42 percent of GDP by 1998 from about 39 percent of GDP in 1994. However, some sectors have contracted because of greater competition from producers outside the region and from trade agreements elsewhere in the Western Hemisphere such as NAFTA, which extended trade preferences to Mexico. This problem was addressed in May 2000 by passage of the Trade and Development Act in the United States, designed to grant trade privileges to Africa and the Caribbean. An example is the garment industry, which expanded rapidly in the 1980s but started contracting in the 1990s as trade liberalization intensified.

Trade liberalization raised consumer welfare by reducing prices of imported goods. Apart from allowing a wider variety of goods to became available for consumers, indications are that imported goods were available at lower prices with the reduction of the CET, even in cases where measures were adopted to compensate for the loss of fiscal revenues. This is particularly relevant as import content of the consumer baskets in all of the Caribbean countries is very high—ranging from about 50 percent in Jamaica to over 80 percent in St. Kitts and Nevis.

Trade liberalization has been associated with greater overall investment in the region. Although varying across countries, total investment rose to 28½ percent of GDP in 1998 from 26½ percent of GDP in 1994. Foreign direct investment increased to 6½percent of GDP from 4½percent of GDP during the same period. The reduction in tariffs helped reduce costs for capital and intermediate goods, crucial to the expansion in the manufacturing sector in the relatively larger economies of Barbados, Jamaica, and Trinidad and Tobago. But, also, the favorable change in relative prices for tradables brought about by liberalization has spotlighted niche areas that became competitive, such as ecotourism.

As international trade taxes—such as customs duties and service charges—are major sources of revenues for most CARICOM countries, the effect of reductions in tariffs on revenue is an important issue that needs to be given careful consideration. In general, a reduction in nominal tariff rates would be expected to lead to a loss in tariff revenue. However, increases in import volume in response to trade liberalization may mitigate such losses. Also, a reduction in tariffs—if it is large enough—may lead to increases in import value as importers are less likely to seek exemptions and special treatment, or to evade taxes through intentional misclassification, undervaluation, and outright smuggling. As indicated earlier, in the case of the Caribbean countries, it appears as if the positive effect on revenues from the increase in import volume resulting from the tariff cuts has not outweighed the negative revenue effect from the reduction in price. The overall ratio of import duties to the value of imports, as measured by the collected tariff, was reduced to 6¾ percent by 1998 from about 8¾ percent in 1994. Tariff revenue (as a percent of GDP) fell to 4½ percent from about 4¾ percent, even though imports relative to GDP rose to 46 percent from about 41 percent.

Improving Competitiveness

One common issue that most of the Caribbean countries need to address is how to improve competitiveness, given the importance of trade and tourism for the region. By improving competitiveness, countries in the region can accelerate economic growth and enhance employment opportunities. Table A9 presents a number of indicators of export performance across countries in the Caribbean region and these show that the ratio of exports of goods to GDP has been stagnant or declining between 1992 and 1998 for nearly all countries, except for The Bahamas and Barbados. For Trinidad and Tobago, the ratio of exports to GDP rose between 1992 and 1995, but declined thereafter. Similar trends are present in the data for a broader measure of export performance—the ratio of exports of goods and nonfactor services to GDP—which includes tourism. For nearly all countries in the region, this ratio has also been flat or declining except for Barbados and Dominica.25

Several factors bear on the fairly weak export performance of countries in the region. First, a number of countries—including Antigua and Barbuda, Guyana, Jamaica, St. Lucia, St. Vincent and the Grenadines, and Suriname—experienced adverse terms of trade shocks that more than outweighed increases in export volumes. Declines in the prices of traditional exports, for example, bananas, were the principal reason for the deteriorating terms of trade. Second, following a general pattern of depreciation between 1992 and 1995, there has been a clear trend appreciation of the real effective exchange rates for the currencies in the region since mid-1995.26 One likely reason for this development is the decline in inflation in the United States, which is the main trading partner for nearly all of the Caribbean countries. For those countries pegged to the U.S. dollar, this pattern reflects also the strengthening of the value of the U.S. dollar against other major currencies.

For all Caribbean countries, but especially those that maintain a fixed nominal exchange rate, a way to enhance competitiveness is to restrain the increase in production costs, particularly labor costs (see Box 5). It is crucial that labor costs be kept in line with productivity for favorable future decisions about investment. As already noted, public sector wage bills have grown fairly rapidly in recent years and this trend needs to be reversed as an important first step in improving competitiveness.

In many Caribbean countries, labor market flexibility should be enhanced to solicit the appropriate labor input in economic activities. In this regard, the role of minimum wages and labor regulations may need to be reexamined. Structural policies that would help reduce production costs and enhance wage and price flexibility would be helpful in this respect. Simultaneously, other approaches to enhancing competitiveness could include raising labor productivity by encouraging the workforce to accumulate more human capital, through greater education and training.

As the tourism sector is a principal source of foreign exchange earnings for many countries in the Caribbean region, enhancing the competitiveness of this sector should be of prime importance. To avoid losing market share to other destinations, tourism development in the English-speaking Caribbean countries requires an expansion in the quantity and quality of hotels and tourism facilities, the relaxation of seasonal capacity constraints, the improvement of infrastructure, and more air access. Accordingly, and in addition to private sector efforts, the region’s governments will need to increase investment in these areas to lay the foundation for expansion of the tourism sector in the medium term. Many countries have already launched initiatives of this type (expanding airport and port facilities and improving roads and utilities), as well as increasing marketing and promotional activities.

Diversification of the Economic Base

Several factors explain the relatively high degree of concentration of activity in certain sectors across Caribbean countries. First, all countries in the region are small, open economies. If there are one or two profitable sectors, they easily become very important even if they are marginal in the world economy. The lack of economies of scale in small countries tends to limit the development of some industries. Second, the production structure of many Caribbean countries tends to be highly concentrated in a few activities based on their natural resource endowments: alumina in Guyana, Jamaica, and Suriname; and petroleum and natural gas in Trinidad and Tobago. A third factor encouraging concentration of exports is the system of preferential access for certain products to the EU that was put in place as a form of economic assistance from which many countries in the Caribbean region have availed themselves. This preferential access has helped to perpetuate the relatively undiversified structure of the economies of the Caribbean.

The lack of a diversified export structure can have destabilizing effects on the economies of the Caribbean region. For economies in which exports are concentrated in a few products, a decline in the price of a principal export commodity would likely result in a deterioration in the trade balance and a decline in output, which would lead to a corresponding reduction in employment. The fiscal position also would worsen as a result of the downturn in economic activity. An increase in the price of a major export could also engender “Dutch Disease” effects.27 which include real exchange rate appreciation, inflation, and a contraction in the output of the nonbooming tradable sectors.

Public Sector Wage Levels in OECS Countries

In small open economies with fixed exchange rates, wage levels are an important determinant of external competitiveness. This is particularly the case when an economy’s primary sources of foreign exchange are based on industries—such as tourism, agriculture, and light manufacturing—where labor costs dominate other operational expenses. Rising wage levels in such industries, in excess of productivity gains, will erode the cost advantage of the products and services that are generating foreign exchange and, if extended over time, with serious adverse effects on the country’s balance of payments.

Among the OECS member countries, the government typically employs a significant amount of the labor force. As these countries are members of a currency union, the government should be cognizant of two factors in setting public sector wages. First, public sector salary levels, as well as their regular increments, should be formed with a view to ensuring that wage growth does not compromise the country’s ability to earn foreign exchange. Second, close attention should be given to wage setting in the neighboring countries, as the flow of labor among the countries that comprise the currency union are not negligible.

Against this background, the actual pattern of public sector wages in the OECS was reviewed (based on country and ECCB data) by focusing on comparable posts in the public sectors of the eight countries. Ten occupational groupings were chosen, representing those jobs with the largest number of workers, and which together account for the majority of government employees in the OECS region. For most of these occupational groupings, a mid-point salary was obtained by averaging the low and high salary level identified for each post. For the purposes of comparing purchasing-power-adjusted salary levels, price levels in the region were also reviewed. Price data were employed to deflate the nominal salary levels, providing an index of real wages for the 10 representative posts in the public sector. The main findings were as follows:

  • There is considerable variation in nominal salary levels among OECS countries, with the country having the highest average nominal salary (St. Kitts and Nevis) paying 33 percent more than the country with the lowest average nominal salary (Grenada). The differences between specific salaries in the highest and lowest paying countries are even larger, reaching as much as 53 percent, for certain occupational groupings.

  • There are surprisingly large differences in price levels across countries. Taking an unweighted average of prices, St. Kitts and Nevis has the lowest price level in the region (index = 100), with Antigua and Barbuda having the highest (index = 174).

  • The compression of salary levels is greatest in Anguilla, where the salaries of the highest paid public servants are only three times those of the lowest paid. On the other hand, in St. Lucia, the salary of the highest is more than six times that of the lowest paid public servants.

Achieving greater diversification in the structure of the Caribbean economies is a major challenge. Some of the economies in the region have had limited success in reducing their dependence on a single commodity. Several countries, including Dominica, Grenada, St. Lucia, and St. Vincent and the Grenadines have achieved some success in expanding their tourism sectors to compensate for the loss in banana earnings. In general, countries in the region have seen their service sectors grow during the 1990s, while the size of their traditional agricultural sectors has declined. However, governments should avoid attempts at “bad” diversification—encouraging production and export of goods for which the country does not have a comparative advantage—through subsidies or other incentives that could compromise the country’s fiscal situation and lower aggregate welfare.

Strengthening fiscal positions, as well as developing consumption smoothing devices, are prudent approaches to deal with the lack of export diversification. Increased public savings could provide a buffer to limit the negative impact of exogenous shocks on domestic activity. The development of fiscal revenue stabilization funds for key export commodities could prove useful in this regard. The creation of such a fund would require that governments increase their savings and avoid using this fund to finance expenditure.

Cited By

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    Caribbean Countries: Reserve Requirements and Interest Rate Spreads

    (In percentage points)

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