Abstract

Caribbean countries have attained some successes in the 1980s and 1990s in reforming their economies. On the whole, economic performance has been broadly satisfactory, but not sufficient to make serious inroads toward eliminating the problems of unemployment and poverty. These countries will face tougher challenges in the future, as their trade preferences will likely be eroded further and concessional assistance will become increasingly more difficult to attract. Also, because of their small size and their location, they remain vulnerable to external shocks, such as hurricanes, that can destroy infrastructure and income-generating activities on which they rely for sustenance.

Caribbean countries have attained some successes in the 1980s and 1990s in reforming their economies. On the whole, economic performance has been broadly satisfactory, but not sufficient to make serious inroads toward eliminating the problems of unemployment and poverty. These countries will face tougher challenges in the future, as their trade preferences will likely be eroded further and concessional assistance will become increasingly more difficult to attract. Also, because of their small size and their location, they remain vulnerable to external shocks, such as hurricanes, that can destroy infrastructure and income-generating activities on which they rely for sustenance.

In light of the challenges ahead, Caribbean countries will need to intensify their efforts in a number of areas. They should preserve their accomplishments in maintaining low inflation rates, but face the task of ensuring tight monetary policies while reducing high reserve requirements, so as to help reduce interest rate spreads. At the same time, they will need to find ways to deepen financial markets and improve banking sector efficiency, thus reducing the costs of financial intermediation. For that purpose, some measures should be considered, such as privatizing state-owned financial institutions, reducing barriers to entry to the financial system, and strengthening further supervision for onshore and offshore banks.

In the fiscal area, public sector deficits have tended to become larger in recent years and countries will need to address this problem more vigorously to raise public savings and investment. Reducing public sector deficits will require a balanced combination of tax reform and expenditure restraint. On the tax side, those countries that have not implemented a VAT should adopt one, given the improvement in tax performance realized by those countries that have introduced it, along with other tax reforms that improve efficiency, reduce compliance costs, and broaden the tax base. On the expenditure side, countries will need to face the difficult task of containing the growth of the public sector wage bill, while at the same time making public service sufficiently attractive to retain highly qualified employees.

Caribbean countries have generally had some success in undertaking structural reforms in the 1990s, such as the privatization of state enterprises, liberalization of trade, and removal of price controls. However, more needs to be done to position them to address the challenges in the near future. Further progress in liberalizing trade could help countries to fully enjoy the benefits of freer, more open trade. Despite the benefits from trade liberalization, certain sectors may contract when protection is removed, and countries should therefore find ways to mitigate the short-run adjustment costs that arise from liberalization. Also, the reduction of import tariffs may tend to reduce tax revenue, so an additional challenge will be to find ways to replace the lost revenue.

Given the highly open nature of the Caribbean economies and their relatively weak export performance in recent years, improving external competitiveness and diversifying the structure of their exports are key challenges in the period ahead. Competitiveness can be improved by enhancing labor productivity—through additional training and education—and by keeping wage increases, particularly in the public sector, in line with productivity growth. Furthermore, many of the economies in the region need to diversify the structure of their exports to become less reliant on earnings from a narrow group of products. This is a difficult task that cannot be achieved in a short period of time, but can be addressed through making the economy more resilient to shocks—for example, by removing administered prices and allowing market forces to operate and reallocate resources across sectors (including in the labor market).

On the whole, the economic prospects for the region are generally satisfactory over the medium term, but the projections depend importantly on the resolve of governments to pursue appropriate policies, as well as favorable developments in the rest of the world. The relatively favorable outlook for the region is not without risks, such as a slowdown in growth in the major trading partner countries or a terms of trade shock.

Cited By

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