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Study: Caribbean highly exposed to external shocks

Published:Tuesday | December 3, 2019 | 12:00 AM


An International Monetary Fund (IMF) working paper has confirmed that Caribbean countries are highly exposed to external factors.

Using data from 1980-2017, the paper, titled The Caribbean and Its Linkages with the World: A GVAR Model Approach, says that a fall in oil prices and an increase in the United States gross domestic product (GDP), as examples, have a “positive and large impact” on most Caribbean countries after controlling for financial variables, exchange-rate fluctuations, and overall price changes.

The paper uses a global vector auto-regressive model tailored for the Caribbean, which includes its major trading partners, representing altogether around 60 per cent of the global economy.

“We provide stylised facts of the main interrelations between the Caribbean region and the rest of the world, and then we quantify the impact of external shocks on Caribbean countries through the application of two case studies: a change in the international price of oil, and an increase in the US GDP,” say the authors, Mauricio Vargas and Daniela Hess.

“The results from the model help to disentangle effects from various channels that interact at the same time, such as flows of tourists, trade of goods, and changes in economic conditions in the largest economies of the globe,” they add.

Global spillovers

The report says that global spillovers are a central element in international economics and that Caribbean countries are “as acutely exposed to them as many others”.

It says that production and trade in goods and services, as well as financial flows, depend not only on internal market supply and demand forces but also on competitiveness and world growth.

The paper notes that during the past decades, many small and large countries have leaned towards trade openness and financial liberalisation, stating that some evidence suggests that this might benefit their economies.

Notwithstanding, the paper says a strong degree of integration poses additional risks to small open economies that may suffer disproportionately from shifting conditions in the largest economies of the globe “as they are less able to diversify away from the sectors in which they have comparative advantages”.

“That is the case for most Caribbean countries, which are highly internationally integrated, especially through tourism flows – a sector often hit hard by downturns in larger economies,” the paper says.