Alejandro Werner and Krishna Srinivasan | Restoring strong growth to Caribbean
Economic and social outcomes in Caribbean countries following their independence were impressive. Per-capita incomes rose sharply, poverty declined, and impressive strides were made in increasing life expectancy, reducing infant mortality, and boosting women's participation in the labour force.
But not all is well in the Caribbean. Since 2000, growth has stalled. Tourism-dependent economies have grown on average by just 0.8 per cent per year in per-capita terms. While commodity-exporting countries in the region grew somewhat faster, reflecting the commodity price boom, even they have slowed sharply more recently. Hence, convergence towards living standards in advanced economies, which looked promising at independence, now looks like a distant goal.
The reasons for the change in fortunes are many. On the one hand, countries have had to contend with external shocks, notably, the erosion of preferential trade access to European markets, the decline of official development assistance, and frequent natural disasters. At the same time, countries have found it difficult to insulate themselves against these shocks because of their small size and other structural impediments, including constrained access to credit, high costs of electricity, and a poor business environment.
The result? A poisonous mix of worsening domestic macroeconomic imbalances - particularly onerous debt positions - and weakening structural indicators that has undermined growth and resilience in the region.
But not all is lost. Countries in the Caribbean can reverse course by addressing imbalances in their economies and alleviating structural weaknesses. We identify key areas where greater progress is needed. A deeper analysis of these issues is contained in a forthcoming book from the IMF.
Breaking the vicious cycle of high debt and low growth. Public debt in the Caribbean has reached a median level of 81 per cent of GDP - the highest in half a century and more than 30 percentage points of GDP above other emerging economies. While some countries (Jamaica, Grenada, and St Kitts and Nevis) have moved decisively to strengthen their fiscal accounts, most others need additional fiscal consolidation to place public finances on a sustainable path and create room to finance resilience-building and growth-enhancing projects. Efforts need to focus on reducing the size of the public sector, streamlining tax concessions, and managing better risks related to climate change and disasters.
A NEED FOR RESILIENCE
Building resilience to natural disasters. Climate change will increase the frequency and severity of natural disasters, which, on average, costs Caribbean economies 2.4 percent of GDP per year. Better preparation, mitigation, and response would reduce the human and economic cost of climate change and improve resilience to future shocks. Countries could usefully build climate change and natural disaster risks into policy frameworks, including in the design of their budgets and public investment plans, while seeking to insure against them, possibly with help from the international community and by pooling of insurance coverage at the regional level to lower costs.
Deepening financial systems and boosting financial inclusion. The Caribbean banking system is relatively deep and interconnected, and yet households and most small and medium-size enterprises identify access to credit as an overarching constraint to consumption and investment. Strengthening institutional and legal frameworks related to property rights and collateral, reducing information costs through credit bureaus, and reducing operational costs through mobile networks will go a long way towards alleviating credit constraints in the Caribbean.
Reducing energy costs. Caribbean economies generally have high electricity costs, which reflect serious inefficiencies in the power sector and dependence on expensive imported petroleum products because of insufficient energy diversification. Given weak public-sector finances, reducing energy costs in the Caribbean requires greater private investment in energy infrastructure, including through public-private partnerships, complemented by strong institutional and legal arrangements to reduce regulatory uncertainty and implementation risks.
Improving the business environment. This could mean different things in different country circumstances. In the Caribbean context, three issues stand out: crime, brain drain, and governance.
- Crime in the Caribbean is high and often violent and imposes large monetary and social costs amounting to around four per cent of GDP. Tackling crime needs some out-of-the-box thinking. Balancing crime-suppression programmes with prevention, including youth vocational training that increases job opportunities in the formal sector and keeps youth of the street, targeting interventions in high-crime areas, and developing indicators to monitor more accurately the effectiveness of anti-crime programmes will likely yield promising results.
- The Caribbean is unique in that there is a persistent outflow of high-skilled workers to advanced countries - the share of nationals with tertiary education living abroad is about 76 per cent, several times the rate for other emerging economies. The adverse impact on growth, because of a decline in skilled labour supply and productivity, is, unfortunately, not offset by remittance flows back home. Addressing brain drain will require reforms aimed at boosting economic opportunities at home, notably by improving the business climate and improving competitiveness.
- While most countries in the Caribbean compare quite favourably with other emerging market economies in terms of corruption perceptions, weak governance is a problem in some of the larger countries in the region. In these countries, the absence of sufficiently strong anti-corruption legislation has led to weak institutions, lacking transparency and accountability, that have contributed to undermining fair competition, creating perverse incentives and a misallocation of resources. Reforms need to streamline bureaucratic procedures to reduce discretionary decision making, using automation through e-government platforms; promote greater engagement with civic society to increase the reporting and monitoring of bribery; and improve law enforcement and the justice system.
Countries in the Caribbean face daunting challenges, but when the going gets tough, the tough get tougher. What is needed is a steadfast focus on recognising the problems and making a conscious effort to address them. The IMF, in collaboration with other international financial institutions, stands ready to partner with countries to overcome these challenges and to be an advocate for policies that would help restore strong and inclusive growth in the Caribbean.
- Alejandro Werner and Krishna Srinivasan are respectively, director and deputy director of the Western Hemisphere Department of the IMF. Email feedback to firstname.lastname@example.org.