## THE CARIBBEAN: ENHANCING ECONOMIC INTEGRATION — _dp0802 (selected chapters and boxes)_ ## Source details **Canonical URL:** [THE CARIBBEAN: ENHANCING ECONOMIC INTEGRATION — _dp0802 (selected chapters and boxes)_](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/dp/2008/_dp0802.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/dp/2008/_dp0802.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/dp/2008/_dp0802.pdf.json) --- ### Regional context, vulnerabilities, and priorities - Historical characteristics and vulnerabilities - Caribbean economies: "historically very open" with "relatively high income levels and strong social development." - Key external shocks and vulnerabilities: declining terms of trade and trade preferences; frequent natural disasters; collapse in official development assistance; economic and financial fragility from major trading partners. - Structural constraints: small country size, large public debt levels, weak external current account positions. - Policy priorities and IMF engagement emphasis - Strengthen public finances. - Upgrade the investment climate. - Advance regional integration and policy coordination. - Recent progress: "accelerating economic growth, robust increases in foreign direct investment flows, continued low inflation, and sustained reductions in poverty." ### Financial integration — motivation, benefits, structure, and risks - Rationale and quantified benefits - Integrating underdeveloped/segmented financial markets can deliver "significant benefits," including higher rates of economic growth. - EU-based estimate (Rajan and Zingales framework): if all CARICOM countries had access to financial markets as developed as Barbados, annual growth in CARICOM could increase by about 0.6 percentage point per year. - Sensitivity: varying the financial dependence assumption by one standard deviation yields growth increase estimates in the range of 0.3–0.9 percentage point. - Global benchmark effects: using the United States instead of Barbados as benchmark raises Caribbean growth increase estimate to 1.8 percent per year (instead of 0.6 percentage point). - Benefits of integration (mechanisms) - Improve access to financing and lower its cost; increase availability of capital to small firms and countries; attract extraregional capital; exploit economies of scale; disseminate best practices. - Consumption smoothing and risk pooling across asynchronous national savings cycles and disaster exposures. - Key risks and limits - Increased exposure to sudden capital flow swings; "blind zones for national regulators" with large cross-border conglomerates; unequal sharing of benefits across countries/institutions; potential inward-orientation versus global integration. - Preconditions: sound macroeconomic positions, strong institutions (judicial enforcement, accounting standards, disclosure requirements, supervisory capacity), market infrastructure. - State of regional integration and market structure - Intraregional goods trade ≈ one-tenth of regional GDP. - The United States accounts for about 40 percent of total external goods trade and the bulk of services trade for Caribbean countries. - Total regional financial sector assets exceed 150 percent of regional GDP. - Regional financial sector accounts for about 8 percent of annual regional output (above G-7 average of 7 percent). - Selected country asset ratios (Total assets, in percent of GDP): T&T 170; Jamaica 185; Barbados 129; ECCU 195; Bahamas 136; Guyana 153; Belize 116; Average & Sum 167. - Banks (percent of GDP): T&T 77; Jamaica 87; Barbados 105; ECCU 183; Bahamas 115; Guyana 114; Belize 97; Average 100. - Nonbanks (percent of GDP): T&T 94; Jamaica 98; Barbados 25; ECCU 122; Bahamas 039; Guyana 196; Belize 7. - Total assets (US$ billions): 20.4, 16.7, 3.3, 6.0, 7.5, 1.2, 1.2, 56.4 (Sum). - Banks (US$ billions): 9.2, 7.8, 2.7, 5.7, 6.3, 0.9, 1.0, 33.6 (Sum). - Nonbanks (US$ billions): 11.2, 8.9, 0.6, 0.4, 1.1, 0.3, 0.2, 22.8 (Sum). - Memorandum GDP (US$ billions): 12.0, 8.7, 2.6, 3.1, 5.5, 0.8, 1.0, 33.8 (Sum). - Combined assets of nine largest regional conglomerates ≈ regional GDP; total of listed large groups $38.3 (sum); Memorandum item: GDP: CARICOM 15 $39.5. - Market-segment observations - Bond markets dominated by government securities; public debt-to-GDP ratios averaged about 100 percent at end-2004; aggregate public debt ≈ 75 percent of aggregate regional output; Jamaica accounts for 40 percent of total outstanding public debt in region. - Equity markets: six exchanges, combined market capitalization almost twice regional GDP; cross-listed stocks account for some 40 percent of consolidated regional market capitalization and 25 percent of regional GDP. - Price convergence is slow: estimated no-arbitrage threshold ≈ 8 percent; half-life for cross-market premia: T&T-JAM 8.4 and reported elsewhere as 18 trading days; T&T-BRB 40.3 trading days. - Bond and stock secondary markets are illiquid; turnover extremely low; derivatives mainly OTC and held to maturity. - Market infrastructure & settlement - Electronic trading adoption: Jamaica 2000; Barbados 2001; Trinidad and Tobago 2005. - Central depositories in place since 2003 for stock exchanges; stock markets of Jamaica, Barbados and Trinidad and Tobago in process of electronic linking. - Settlement frameworks: Trinidad and Tobago T+3 (RTGS since late 2004; central depository 2003); Jamaica CIFTS T+1 (RTGS modernization underway); ECCU T+1; Guyana T+5. - Brokerage commissions plus taxes, trading fees, and other transaction costs estimated to exceed 1 percent of transaction value. - Regulatory and supervisory challenges - Cross-holding structures and novel products complicate prudential regulation. - Many national supervisors lack full operational independence; varying ability to grant/withdraw licenses, set prudential rules, or share information. - Survey of 23 respondents: 7 do not have MOUs with domestic agencies on consolidated supervision; 10 do not conduct consolidated supervision; 18 never conducted on-site inspections of financial conglomerates; 13 reported legal impediments to information sharing. - Multilateral MOU introduced May 2004 to facilitate cooperation; scope exists to improve crisis management, safety nets, and resolution frameworks. - Policy actions recommended (financial integration & supervision) - Improve macroeconomic fundamentals and fiscal positions. - Bolster monetary policy toolkits and liquidity-management instruments (e.g., more government paper for OMO; remove minimum deposit rate constraints). - Increase national and regional coordination among regulators; strengthen oversight and supervisory capacity including consolidated supervision of conglomerates. - Harmonize laws and reporting; establish common legal framework for enforcing cross-border collateral; create mechanisms to link national depositories or regional securities depository. - Strengthen crisis-management frameworks, clarify lead regulator arrangements, and develop burden-sharing arrangements for deposit insurance and lender-of-last-resort functions. - Continue CGBS-led harmonization, training, and information-sharing initiatives. ### Tax incentives and foreign direct investment (FDI) — evidence, costs, and policy design - Prevalence and fiscal context - Tax incentives pervasive: all 15 countries in study offer CIT holidays; exemption periods range from 5 to 25 years. - Many countries fully exempt offshore banking and insurance from corporate income tax. - Public debt rose from average 56 percent of GDP in 1990–94 to about 90 percent of GDP in 2004–06. - Central government revenues rose from an average of 22 percent of GDP in 1990–94 to more than 27 percent in 2004–06. - Top statutory CIT rate reduced from average over 35 percent in 1990–94 to about 32 percent during 2004–06. - FDI trends and composition - Average FDI/GDP (Caribbean sample): 1990–94: 3.0; 1995–99: 4.6; 2000–05: 5.2. - Caribbean FDI (US$ million) — sample totals: 1990–94: 856; 1995–99: 1,987; 2000–05: 3,042. - Dominican Republic, Jamaica, and Trinidad and Tobago received over three-fourths of region’s total FDI during 1990–2005. - ECCU FDI/GDP: 1990–94: 9.1; 1995–99: 10.6; 2000–05: 13.2. - Origin of FDI: over 40 percent from the United States and Canada; about 30 percent from Europe; intraregional flows small (≈ 10 percent in ECCU). - Sectoral shares (selected): ECCU tourism 58.3 percent (1997–2005); Trinidad & Tobago mining 30.9 percent (1996–2005); Belize agriculture 18.0 percent (2000–05). - Empirical estimates — Caribbean panel (15 countries, 1990–2004) - Estimation: pooled OLS (robustness checked with random/fixed effects; Appendix 3.2). - Key regression coefficients (Table 3.9, dependent variable: Log (FDI/GDP)): - CIT rate coefficient: -0.09*** (z -8.62) in pooled specifications. - FDI Incentives: positive estimates around 1.30–1.54*** in several specifications (e.g., 1.54*** z 7.23). - FDI Restrictions: -3.14*** (z -10.14) in baseline. - Governance: positive and significant in many specs (e.g., 3.76** z 2.51). - Infrastructure: positive and significant (e.g., 0.63*** z 3.78). - ECCU dummy: 0.44*** (z 3.32) in some specs. - Observations: 122; R-Squared reported up to 0.79 in some specs. - Magnitude interpretation stated in text: "We find that a 1 percentage point reduction in statutory taxes rates leads to about a 0.6 percent of GDP increase in average in inbound investment." (Given average FDI in sample = 7 percent of GDP, an 8.6 percent increase in this ratio corresponds to a 0.6 percentage point increase in the FDI to GDP.) - Fixed-effects estimates are less precise; Caribbean fixed-effect regression: a 1 percentage point decline in statutory corporate rate associated with a 0.4 percentage point increase in FDI/GDP (Appendix 3.2). - In a broader developing-country sample (80 countries, 1990–2004), statutory CIT effects are smaller: a 1 percentage point reduction in statutory tax rates leads to less than a 0.1 percent of GDP increase in FDI. - FDI incentives matter in Caribbean subsample but are generally not significant in the larger developing-country sample; FDI restrictions consistently deter FDI. - METRs and tax-gap estimates - METRs computed for 1990–2004 using real interest rate r = 10 percent; asset lifetimes: machinery 20 years, buildings 50 years; weighted METR assumes two-thirds machines and one-third buildings. - METRs on average roughly 70 percent lower than top statutory rates; METR measures exclude tax holidays and indirect tax incentives. - Tax-gap (potential less actual receipts) estimates (1995–2004): - Average corporate income tax gap ≈ 5½ percent of GDP across 15-country sample. - Ratio of effective to potential tax receipts ≈ 40 percent. - Including indirect taxes doubles total tax gap to over 10 percent of GDP. - Table excerpt (Potential Less Actual Taxes, 1995–2004, percent of GDP): Caribbean average Corporate Income Taxes 5.6; Import-related Taxes 5.2; Total 10.8. Examples: Trinidad Corporate Income Taxes 3.3; Import-related Taxes 2.4; Total 5.7. ECCU Corporate Income Taxes 5.4; Import-related Taxes 5.7; Total 11.1. - Caveat: tax-gap is an upper bound and captures evasion, administration inefficiencies, and other factors beyond incentives. - Efficiency of incentive types and administrative design - Prefer investment cost recovery incentives (investment allowances, accelerated depreciation) over income tax holidays. - Indirect tax exemptions (customs/VAT exemptions) are very costly; in a functioning VAT system input exemptions are of limited value. - Incentives should be statutory, rules-based, automatic upon objective criteria, time-bound, transparent, and subject to mandatory reporting and central registries. - Phasing out of tax holidays: "tax holidays should not be renewed and new holidays should not be granted"; prior beneficiaries typically grandfathered; reviews at least every five years recommended. - Policy recommendations (tax incentives and FDI) - Consider reducing incentives and streamlining them toward cost-effective forms (accelerated depreciation and allowances). - Step up efforts to improve non-tax determinants: institutional quality, infrastructure, governance, telecommunications, and power supply. - Improve transparency: maintain central registries; publish tax expenditure budgets; strengthen monitoring and enforcement of beneficiary reporting. - Regional coordination to avoid a "race to the bottom": propose a regional code of conduct with elements such as transparency, nondiscrimination, limits on tax competition, rollback timetables, and potential minimum corporate/VAT rates or maximum benefit limits. - Administrative improvements: simpler uniform provisions (low CIT + broader base or accelerated depreciation) easier to administer than discretionary tax holidays; modernize revenue administration. ### Trade preference erosion — banana and sugar sectors: valuation, impacts, and adaptation - Concept and context - Preference erosion arises when preferential market access is reduced (e.g., EU banana and sugar reforms). - International consensus: removing trade preferences is globally welfare enhancing; losses concentrated in a few countries/products. - Banana sector — historical and empirical findings - Windward Islands and Belize: banana sector peak contribution ≈ 20 percent of GDP in early 1990s; declined to less than 5 percent of GDP in recent years. - Implicit assistance from banana preferences (Approach 1/Approach 2 bounds): - Windward Islands (except Grenada) average implicit assistance ≈ 8 percent of GDP for 1977–2005 (Approach 1 upper-bound). - Belize and Suriname averaged less than 3 percent of GDP. - Using Approach 2, St. Lucia implicit assistance 1995–2005 = 1.8 percent of GDP; Approach 1 = 3.9 percent of GDP. - Evolution: bell-shaped export volumes and assistance; peaks in late-1980s/early-1990s; decline to 2005 levels below early-period values. - Empirical projections (partial equilibrium and VAR): - For Windward Islands, shocks to implicit assistance improve current account and reserves growth by about 4 percentage points on impact; real GDP and revenue growth improve by about 1½ percentage points on impact. Effects on current account/reserves die out after one year; GDP and revenues persist ≈ three years. - Medium-term output reductions from banana preference erosion: St. Vincent and the Grenadines and St. Lucia estimated to lower output by about 1½ to 2 percent from 2005 levels. - Sugar sector — valuation and projected impacts - EU sugar price cuts: four-year, 36 percent phased price reduction (import price lowered from €523 per ton to €335 per ton by 2009; cuts of 5 percent in 2006, 13 percent in 2008, and 22 percent in 2009). - Implicit assistance findings: - Guyana: implicit assistance averaged nearly 10 percent of GDP and exports; extremely important macroeconomically. - Belize: assistance ≈ 2 percent of GDP and about 4½ percent of exports. - Barbados, Jamaica, St. Kitts and Nevis: assistance declined as share of exports and GDP. - Projected macro impacts (partial equilibrium / static projections): - Guyana: cumulative decline in GDP by 2010 of up to 6.5 percent of 2005 GDP from decline in sugar preferences. - Belize: estimated income decline by 2010 ≈ 1½ percent of 2005 GDP from loss of sugar preferences. - Trinidad and Tobago, Barbados, Jamaica: export earnings estimated to decline by less than ѿ of 1 percent of 2005 GDP (text uses symbol; context: "less than ѿ of 1 percent" — preserved as in source). - Projection assumptions and caveats: - Baseline uses 2005 production levels; MFN tariff assumed €176 per metric ton from 2006 onward for bananas. - Freight cost thresholds: if volumes fall below certain thresholds, freight costs may become prohibitive causing sharper contractions. - Projections static; dynamic structural adjustments can alter medium-term outcomes. - Adaptation strategies and country-level measures (selected) - Overarching strategy: enhance agricultural efficiency where viable; diversify away where not; strengthen social safety nets; facilitate structural shifts to tourism, financial services, and other sectors via improved investment climate and workforce skills. - Belize (sugar and bananas): drainage/irrigation upgrades; port/storage improvements; marketing and rural development programmes; sugar factory cogeneration; ethanol production exploration; requested EU market allocation increase; EU committed €3 million (part of 2006–13 strategy) and Belize allocated over €21 million from Bananas Support Programme historically. - Guyana (sugar): GUYSUCO Skeldon factory construction (US$167 million; 22 percent of 2006 GDP) to reduce unit costs; Agricultural Improvement Program targets and National Action Plan; risks include flooding delays and financing/timing of EU support. - St. Kitts and Nevis: sugar industry closed July 2005; transition costs include severance (EC$27.4 million = 2.3 percent of 2005 GDP) and government servicing of SSMC debt (increases central government interest bill by 1½ of GDP a year — preserved as in source); social transfers and land/housing measures implemented. - Windward Islands: diversification programs, fair-trade/organic niche targeting (initial fair-trade premium ~30 percent but eroded over time), infrastructure and input subsidies; EU disbursements slow; social safety nets and targeting improvements recommended. - Social and fiscal policy responses - Use targeted safety nets for displaced workers (income transfers, retraining, noncontributory pensions). - Improve social assistance targeting, consolidate programs, update poverty and household surveys. - Use transition period to enhance competitiveness, restructure state involvement where inefficient, and encourage private-sector participation. ### Governance, data, and evaluation gaps - Incentive administration shortcomings - Incentives often discretionary, not statutory; eligibility and durations set by ministerial/administrative discretion in many countries. - Little public information or central registry on concessions granted; beneficiaries frequently not required to submit financial data or poorly monitored. - Lack of reporting undermines ability to evaluate costs and benefits. - Data limitations for empirical work - Aggregate FDI data do not distinguish types (new plants, reinvested earnings, M&A); METRs exclude tax holidays and indirect tax incentives. - Balance-of-payments and country-pair flow data limitations constrain quantity-based assessments of integration. - Turnover and market-data tables include series with formatting or presentation issues in source (tables preserved as reported). ### Policy synthesis — prioritized actions across themes - Fiscal and incentives policy - Fiscal consolidation is needed given public debt trends (average public debt rose from 56 percent of GDP in 1990–94 to about 90 percent of GDP in 2004–06). - Streamline tax incentives: prefer statutory, transparent, time-bound, rules-based instruments; favor accelerated depreciation and investment allowances over long CIT holidays and broad indirect-tax exemptions. - Maintain central registries and publish tax expenditure budgets; review incentives at least every five years. - Consider reducing incentives and focus on improving non-tax determinants of FDI (infrastructure, governance, telecommunications, power). - Financial market and integration policy - Strengthen macro fundamentals to reap integration benefits; ensure monetary authorities have flexible instruments and sufficient government paper for OMO/RTGS operations. - Modernize market infrastructure: complete dematerialization, central/bond depositories, link exchanges electronically, settle securities efficiently (reduce T+ settlement where appropriate). - Harmonize supervisory standards, adopt consolidated supervision, empower regulators for cross-border oversight, and develop regional crisis-resolution and burden-sharing arrangements (deposit insurance, lender-of-last-resort mechanics). - Continue and deepen CGBS and CARICOM harmonization and technical assistance (Basel II, consolidated supervision). - Trade adjustment and social measures - Use targeted, time-bound safety nets and retraining to address social costs from preference erosion. - Invest in sector-specific public goods (rural roads, irrigation, drainage) and facilitate private-sector-led diversification. - Coordinate regionally where appropriate (e.g., tourism tax competition, marketing strategies) to avoid destructive tax competition and enhance collective bargaining power in extraregional markets. *Source: IMF publication — THE CARIBBEAN: ENHANCING ECONOMIC INTEGRATION (selected Foreword, Preface, Introduction, Chapter 2 boxes, Chapter 3, Chapter 4, appendices, and references) — content unit _dp0802.* ### 1. Caribbean Area—Economic integration. 2. Finance—Caribbean Area. 3. Tax incentives— ### THE CARIBBEAN: ENHANCING ECONOMIC INTEGRATION ### Regional context and challenges - Caribbean economies are described as "historically very open" and have achieved "relatively high income levels and strong social development." - Key external shocks and vulnerabilities highlighted: - declining terms of trade and trade preferences - frequent natural disasters - collapse in official development assistance - economic and financial fragility emanating from major trading partners - Structural constraints noted: small country size, large public debt levels, and weak external current account positions. ### Progress and policy priorities - Recent progress: - "substantial progress in implementing economic reforms" at national and regional levels - over the last decade the Caribbean has seen "accelerating economic growth, robust increases in foreign direct investment flows, continued low inflation, and sustained reductions in poverty." - IMF engagement emphasis: - strengthen public finances - upgrade the investment climate - advance regional integration and policy coordination ### Financial integration (chapter highlights) - Rationale: - Integrating relatively underdeveloped and segmented financial markets can confer "significant benefits," including higher rates of economic growth. - Risks: - Integration can increase exposure to sudden capital flow swings. - It can create "blind zones for national regulators" especially with "large financial conglomerates operating across different industry segments and in several countries." - Policy actions recommended: - improve macroeconomic fundamentals - bolster monetary policy toolkits - increase coordination among national regulators - strengthen oversight ### Tax incentives and foreign direct investment (chapter highlights) - Policy focus: - "Tax incentives and investment, where harmonized regional action is key to overcoming collective action problems." - Analytical emphasis: - assessment of the effectiveness and efficiency of tax incentives and implications for the Caribbean (chapters present empirical analysis, estimation approaches, and measures such as marginal effective tax rates). ### Trade preference erosion (chapter highlights) - Priority area: - "Devising strategies to manage the erosion of trade preferences in key export markets." - Observations: - Preference erosion affects traditional industries (bananas, sugar, and other preferred-export sectors) and has macroeconomic implications that require policy responses and adaptation strategies. ### Institutional and operational notes - Origin of the material: - Papers prepared as background for discussions on Caribbean regional issues in the IMF Executive Board in September 2007. - Editorial and production acknowledgements: - Publication team led by Andreas Bauer, Paul Cashin, and Sanjaya Panth. - Manuscript production credited to Andrea Aquino; research assistance cited. *Source: IMF publication—THE CARIBBEAN: ENHANCING ECONOMIC INTEGRATION (selection from Foreword, Preface, and Introduction).* ### Chapter 3 considers the efficacy of tax incentives in attracting investment. ### _dp0802 - Chapter 3 considers the efficacy of tax incentives in attracting investment. ### Tax incentives and foreign direct investment (FDI) - Caribbean countries provide extensive tax exemptions in their efforts to attract foreign investment. - Factors found to be important determinants of FDI in addition to tax incentives: - institutional quality - infrastructure - governance - Tax incentives entail significant costs, particularly when fiscal positions are already under strain from high debt. - Policy findings and recommendations: - Consider reducing incentives. - Step up efforts to improve other determinants of investment (institutional quality, infrastructure, governance). - Make remaining incentives more cost-effective. - Regional coordination can play a useful role in avoiding a “race to the bottom” with ever more generous tax incentives. ### Impact of preference erosion on traditional agriculture - The erosion of traditional trade preferences (sugar and banana exports to the European Union) has a large implicit assistance value for some Caribbean countries facing competition from more efficient producers. - Consequences of preference erosion: - Significant output and revenue costs for the Caribbean for certain countries. - Social costs can be large even where the macroeconomic impact is limited. - Policy suggestions: - Use targeted safety nets to help vulnerable populations. - Raise the efficiency of agriculture where it can remain price competitive under new trade regimes. - Transition away from traditional agriculture where production is no longer economically viable. ### Financial integration: motivation, benefits, and risks - Objective: Integrating national capital markets is an explicit objective of CARICOM as part of creating a common economic space; the revised treaty establishing the Caribbean Single Market and Economy (CSME) stipulates removal of restrictions on banking, insurance, financial services, and movement of capital. - Targets: The single-market component of the CSME has a target date of 2008 for full establishment; the single economy is expected to be phased in gradually over a longer horizon. - Benefits of financial integration: - Increase availability of capital, especially to small firms and countries. - Reduce the cost of capital. - Spur improved financial standards and regulations. - Lead to higher economic growth and improved living standards. - Risks and challenges: - Benefits may not be equally shared across countries or institutions. - Integrated markets allow shocks (including sudden stops or reversals in capital flows) to spread across borders more rapidly. - Risk of increased inward-orientation if regional integration grows relative to the rest of the world. - National regulators lose full control over domestic financial markets as assessment and management of risks become more complex. ### The regional financial sector: size, structure, and key statistics - Intraregional trade in goods has increased among CARICOM members but still accounts for only about one-tenth of regional GDP. - The United States accounts for about 40 percent of the total external goods trade of Caribbean countries as well as the bulk of their trade in services. - Caribbean financial sectors are large relative to the size of the regional economy and important contributors to regional output: - Total regional financial sector assets exceed 150 percent of regional GDP. - The regional financial sector accounts for about 8 percent of annual regional output, which is above the G-7 average of 7 percent. - Trinidad and Tobago’s financial sector contributes to the production of one tenth of its GDP. - Selected figures from Table 2.2 (Assets of Financial Institutions: Selected CARICOM Countries): - Total assets (in percent of GDP) — T&T 170, Jamaica 185, Barbados 129, ECCU 195, Bahamas 136, Guyana 153, Belize 116, Average & Sum 167. - Banks (in percent of GDP) — T&T 77, Jamaica 87, Barbados 105, ECCU 183, Bahamas 115, Guyana 114, Belize 97, Average 100. - Nonbanks (in percent of GDP) — T&T 94, Jamaica 98, Barbados 25, ECCU 122, Bahamas 039, Guyana 196, Belize 7. - Total assets (in billions of U.S. dollars) — Total assets 20.4, 16.7, 3.3, 6.0, 7.5, 1.2, 1.2, 56.4 (Sum). - Banks (in billions of U.S. dollars) — Banks 9.2, 7.8, 2.7, 5.7, 6.3, 0.9, 1.0, 33.6 (Sum). - Nonbanks (in billions of U.S. dollars) — Nonbanks 11.2, 8.9, 0.6, 0.4, 1.1, 0.3, 0.2, 22.8 (Sum). - Memorandum item: GDP 12.0, 8.7, 2.6, 3.1, 5.5, 0.8, 1.0, 33.8 (Sum). - Large financial groups in the Caribbean (Table 2.3, Large Financial Groups in the Caribbean, 2004): - First Caribbean International Bank — Domicile Barbados — Assets (US$ bn) $10.0 — Market Capitalization (US$ bn) $3.3 — Founded in 1836/1920. - Royal Bank TT Financial Holdings — Domicile T&T — Assets (US$ bn) $6.2 — Market Capitalization (US$ bn) $2.8 — Founded in 1856. - Republic Bank — Domicile T&T — Assets (US$ bn) $5.0 — Market Capitalization (US$ bn) $2.1 — Founded in 1837. - Guardian Holdings Limited — Domicile T&T — Assets (US$ bn) $2.8 — Market Capitalization (US$ bn) $1.4 — Founded in 1847. - Bank of Nova Scotia, Limited (subsidiaries) — Domicile Jamaica/T&T — Assets (US$ bn) $4.1 — Market Capitalization (US$ bn) $1.4 — Founded in 1889. - National Commercial Bank — Domicile Jamaica — Assets (US$ bn) $1.6 — Market Capitalization (US$ bn) $0.8 — Founded in 1837. - Sagicor Financial Corporation — Domicile Barbados — Assets (US$ bn) $3.3 — Market Capitalization (US$ bn) $0.6 — Founded in 1840. - Jamaica Money Market Brokers — Domicile Jamaica — Assets (US$ bn) $1.0 — Market Capitalization (US$ bn) $0.4 — Founded in 1992. - CL Financial Group — Domicile T&T — Assets (US$ bn) $4.3 — Founded in 1936 (Market capitalization entry shows "..." in source). - Total (sum) $38.3; Memorandum item: GDP: CARICOM 15 $39.5. - Characteristics of regional conglomerates: - Dominance by large, long-established financial conglomerates with activities across commercial banks, merchant banks, building societies, security dealers, and sometimes insurance companies. - Combined assets of the nine largest financial conglomerates are almost the size of regional GDP. - Most conglomerates operate in several Caribbean countries, possess extensive networks of branches and affiliates, and are based entirely or mostly within the region. ### Innovation and regulatory challenges (Box 2.1) - Jamaica: - Securities sector assets amounting to half of GDP driven by repo business (short-term borrowing from households through hold-in-custody repurchase arrangements) to fund investment in long-term government paper. - Main profit source: net interest income from the difference between short- and long-term interest rates. - Exposures: interest rate and roll-over risk; legal ambiguities on control rights over underlying securities. - Trinidad and Tobago: - Mutual fund industry grew from less than 10 percent of GDP in 2000 to nearly 40 percent of GDP in 2005. - Rapid expansion driven by attractive returns relative to bank deposits; all major financial institutions operate mutual funds; no restrictions on overseas investments. *Source: _dp0802 - Chapter 3 considers the efficacy of tax incentives in attracting investment.* ### Box 2.1 (concluded) ### Box 2.1 (concluded) ### Regulation of mutual funds in Trinidad and Tobago - Mutual funds are not required to disclose their holdings, nor to report to the authorities as they operate under trust arrangements. - Amendments have been drafted by the authorities to address the disclosure/reporting loophole, but passage remains pending. - Given the lack of reporting/disclosure requirements, Trinidad and Tobago’s mutual funds are currently de facto unregulated, similar to hedge funds or private investment clubs. - Risk exposures: - Some funds are exposed to currency risk. - Money market funds are exposed to liquidity risk; under their operating rules most funds are analogous to demand deposits (some even offer ATM cards). - Although principal is meant to be protected under trust arrangements, remuneration rules in the case of losses are unclear and the public may be unaware of inherent risks. ### Collective Investment Schemes: Funds under Management (in T&T$ millions) - 2000: Total funds under management 4,759 - Money market fund 2,451 - Growth and income fund 1,299 - Bond fund 953 - Equity fund 423 - Pension/annuity scheme 15 - Hybrid fund 0 - 2001: Total funds under management 9,390 - Money market fund 6,376 - Growth and income fund 1,450 - Bond fund 1,505 - Equity fund 753 - Pension/annuity scheme 23 - Hybrid fund 0 - 2002: Total funds under management 15,424 - Money market fund 11,343 - Growth and income fund 2,009 - Bond fund 1,964 - Equity fund 190 - Pension/annuity scheme 56 - Hybrid fund 0 - 2003: Total funds under management 21,438 - Money market fund 15,227 - Growth and income fund 3,502 - Bond fund 2,439 - Equity fund 563 - Pension/annuity scheme 82 - Hybrid fund 0 - 2004: Total funds under management 27,092 - Money market fund 18,283 - Growth and income fund 5,219 - Bond fund 2,888 - Equity fund 712 - Pension/annuity scheme 120 - Hybrid fund 19 - 2005 (estimates): Total funds under management 34,244 - Money market fund 23,109 - Growth and income fund 6,597 - Bond fund 3,650 - Equity fund 712 - Pension/annuity scheme 152 - Hybrid fund 24 - Memorandum item: - Deposits2 17948 20822 15222 21181 25872 29961 - Total funds in percent of GDP 9.3 17.1 27.4 31.9 35.2 37.9 - Source listed in the table: Trinidad and Tobago Securities and Exchange Commission (2005). - Footnotes in the table: - 1 Estimates. - 2 Deposits in the consolidated financial system. ### Market structure and liquidity in the region - Financial markets in the region are mostly underdeveloped and illiquid. - Bond markets: - Dominated by government securities. - Secondary markets are almost non-existent, except in Jamaica; even in Jamaica secondary bond markets are illiquid, due in part to an outdated settlement and custody system. - Stock markets: - Six exchanges in CARICOM with combined market capitalization almost twice regional GDP. - Market turnover is extremely low. - Derivatives: - Some financial derivatives, notably strips and structured products, are popular but issued over the counter and held to maturity given the absence of secondary markets. ### Challenges for policymakers and macrofinancial implications - The extensive and sometimes opaque cross-holding structures of conglomerates and rapid growth of novel products complicate designing and enforcing prudential regulations. - Illiquid markets: - Distort or limit the usefulness of price signals. - During periods of stress, illiquidity can cause prices to overshoot and amplify financial institutions’ demand for resources from lenders of last resort. - Fiscal policy interaction: - Challenge of fostering financial sector development in a fiscally prudent fashion. - Many Caribbean countries have offered tax incentives to promote development of the financial sector, but the efficacy of these efforts remains to be demonstrated. ### Turnover ratios of selected exchanges, 1997–2003 (Table 2.4) - Table heading: Turnover Ratios of Selected Exchanges, 1997–2003 (In percent) - Countries/Exchanges listed include UK, USA, Norway, Argentina, Singapore, T&T, Barbados, Jamaica. - Data rows in the source: - 1997 3958865362016 - 1998 6244865761553 - 1999 66528620102322 - 2000 79519120613322 - 2001 7984631252303 - 2002 9911410012722283 - 2003 719577364453 - Average row in the source: Average71718425683 6 3 - Source listed in the table: Trinidad and Tobago Securities and Exchange Commission (2005). ### Benefits of financial integration - Financial integration contributes to financial development by: - Improving access to financing and lowering its cost. - Increasing availability of capital within the region as savers and investors in less developed parts gain access to developed markets. - Attracting capital from outside the region to increase overall resources. - Exploiting economies of scale and fostering greater efficiency through competition. - Enabling dissemination and adoption of best practices by firms and regulators. - Financial development leads to growth by: - Increasing investment through greater and cheaper availability of capital in deep and liquid markets. - Improving resource allocation via better transmission of price signals, enabling creditors to better identify relative risks and rewards. - Increasing opportunities for diversification, reducing required returns for undiversified shareholders, and thereby increasing investment. - Quantified growth benefits: - An EU study based on Rajan and Zingales (1998) concluded that if integration led to all countries in the union gaining access to financial markets as developed as the United Kingdom, annual average GDP growth in the European Union would increase by about ¾ percentage point. - Applying similar estimates to the Caribbean suggests that annual growth in CARICOM could increase by about 0.6 percentage point per year if, as a result of integration, all regional countries had access to financial markets similar to those of Barbados. - The countries projected to benefit most are those currently less financially developed (Haiti and Suriname), though virtually all countries would share benefits. ### Additional welfare benefits of integration and requisite conditions - Consumption smoothing: - Integration enables countries to channel savings abroad in times of excess and borrow in times of need, smoothing consumption and directly contributing to welfare. - Relevant for the Caribbean where Trinidad and Tobago’s national savings cycle is asynchronous with that of the energy-importing Caribbean. - Risk pooling: - Cross-border investments reduce variability of returns over time given region-wide exposure to natural disasters affecting subsets of countries at any time. - Preconditions and limits: - Integration alone is insufficient to generate higher growth—concomitant macroeconomic and structural reforms may be necessary. - Strong institutions are critical (judicial enforcement, accounting standards, disclosure requirements, supervisory capacity, market infrastructure). - Weak macroeconomic positions (e.g., high debt levels) may impede the positive effects of integration, and increased financing could be captured by the state for government consumption. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/dp/2008/_dp0802.pdf.* ### Box 2.2 (concluded) ### Box 2.2 (concluded) ### Caveats and global vs. regional integration - Results are illustrative because (i) Caribbean technologies may differ from those elsewhere, affecting levels of financial dependence; and (ii) not all Caribbean countries have the same (and only just) set of industries and in equal proportion as implicitly assumed. - Varying the financial dependence assumption for the Caribbean by one standard deviation in either direction leads to growth increase estimates in the range of 0.3–0.9 percentage point. - Regional integration should be a means to, not a substitute for, global integration: - EU study: using the United States instead of the United Kingdom as benchmark raises annual average European growth by just under 1 percent (instead of ¾ percent) per year. - Caribbean example: Caribbean growth increases by 1.8 percent per year instead of 0.6 percent if the United States is selected as benchmark (instead of Barbados). - Risk: erecting extraregional walls while removing intraregional ones may impede long-run growth for countries that would naturally develop extraregional financial linkages. - Countervailing factors: commonalities (e.g., legal frameworks), greater availability of local information, and scale may make regional integration easier initially; nonetheless the ultimate objective should remain global integration and reduction of extraregional barriers alongside intraregional ones. ### D. The Current State of Financial Market Integration — overview - Financial markets in the Caribbean remain relatively fragmented although integration has been increasing and markets are closely linked through ownership channels. - Empirical approaches to measure integration used in the literature: (i) price-based indicators (interest parity); (ii) quantity-based indicators (gross capital flows, savings-investment correlations); (iii) regulatory or institutional assessments. - Data limitations: absence of country-pair capital flow information limits quantity-based assessments; absence of forward exchange markets hinders disentangling exchange rate vs. interest rate drivers in bond markets. - Analysis proceeds by market segment (banking, bond, stock) and by deriving a macroeconomic measure of regional financial integration. ### Banking: structure and cross-border activity - Large regional banks dominate Caribbean markets. - The share of bank assets held by foreign banks averages about 60 percent—most of it by regional conglomerates or extraregional foreign banks with extensive regional presence. - Comparative context: - European banks operating in other EU countries account for less than a quarter of union-wide bank assets. - Central America: regional banks’ share in total bank assets limited at one third. - Large Latin American countries (Mexico and Argentina) have foreign bank ownership rates comparable to the Caribbean, but those banks are mostly from outside the region; stakes of regional banks are at low single digits. - Cross-border banking (assets/liabilities) is less extensive than cross-border ownership: - Foreign assets and liabilities of CARICOM banks account for about a quarter of their assets. - This share is higher than in Latin America and West Africa but far lower than in the European Union. - Regulatory environment: cross-border provision of financial services to nonbank clients is largely prohibited; banks expand regionally by establishing new entities or M&A. - Survey note: CARICOM countries account for 85 percent of Trinidad and Tobago banks’ loans and investment abroad (IMF Country Report No. 06/29). Cross-country exposure data are not generally available for other countries. ### Bond markets - Bond markets are dominated by government securities, reflecting high public sector debt in most CARICOM countries: - At end-2004, public debt-to-GDP ratios of regional countries averaged about 100 percent. - Aggregate public debt is about 75 percent of aggregate regional output. - Jamaica’s debt alone accounts for 40 percent of total outstanding public debt of regional countries. - Regional bond market activity centered in Trinidad: - Trinidad’s regional bond market issued US$850 million between 1997 and 2006. - Foreign issuers (mostly public sector borrowers from smaller CARICOM countries) accounted for about a quarter of all bonds issued in Trinidad and Tobago during fiscal year 2005, up from 5 percent in 2000. - Eastern Caribbean Regional Government Securities Market established for smaller ECCU countries, but activity remains nascent. - Offshore/extraregional borrowing: - In 2005, CARICOM borrowers issued Eurobonds totaling US$1.6 billion, which is five times as large as all bonds placed by regional issuers in Trinidad and Tobago that year. - Interest rate correlations and dispersion: - Rolling 12-month correlation of exchange rate–adjusted Treasury bill rates of CARICOM countries averaged 0.2 over the last five years, considerably lower than EU and ECOWAS correlations. - Dispersion in interest rates has narrowed for six Caribbean countries over the last decade but remains pronounced; dispersion has increased within the ECCU in recent years. - The current level of interest rate disparity in the Caribbean is very large compared to fully integrated EU government bond markets. ### Equity markets - Caribbean stock markets are dominated by cross-listed stocks: - Cross-listed companies are among the largest in the region, mostly financial sector companies, represent some 40 percent of consolidated regional market capitalization. - In relation to the economy, total capitalization of cross-listed companies amounts to 25 percent of regional GDP. - Price differentials of identical stocks listed in multiple exchanges are large and volatile: - Average cross-market premia in the Caribbean are on average 6–7 percent, much wider than those observed within the EU and MERCOSUR, and similar to differentials among ASEAN exchanges. - Speed of price convergence (half-life): - It would take about 18 trading days for half of cross-market premia to disappear between Jamaica and Trinidad and Tobago. - It would take over 40 trading days between Barbados and Trinidad and Tobago. - Figure 2.10 reported half-life values (in the number of trading days): EM-USAGER-FRA 1.0; ARG-BRA 2.4; HKG-SGP 2.9; T&T-JAM 8.4; T&T-BRB 40.3; and T&T-JAM reported elsewhere as 18 (text). - No-arbitrage threshold and transaction costs: - Estimated “threshold” level (price differential below which no further convergence occurs) is about 8 percent in the Caribbean, far greater than in other regions. - Convergence speed outside the threshold is significantly slower in the Caribbean. - IMF staff estimates suggest transaction costs alone—including taxes, commissions, fees, and implicit market impact costs arising from bid-offer spreads—account for about one-third of the no-arbitrage threshold level in the Caribbean. - Market participants attribute disparities to extremely low turnover associated with high concentration of stock ownership and to regulatory barriers, including trading and investment restrictions. ### Balance of payments data and macroeconomic measure of regional integration - Methodology: current account adjustment dynamics used to infer integration; distinction made between intraregional and extraregional trade flows to extract a regional integration measure. - Key assumptions and caveats: - Intraregional financial flows broadly mirror intraregional trade (theoretically and empirically supported but may not always hold). - Observed dynamics could stem from policy changes rather than financial integration. - Measure examines net flows, not gross flows. - Focus on goods trade excludes financial flows associated with services. - Empirical findings: - Half-life of regional trade adjustment is under 1½ years in CARICOM countries — about half the duration in the Asian region and under a third of adjustment time in the EU-15. - The speed is broadly similar to ECOWAS and somewhat faster than the MERCOSUR+5 grouping. - Adjustment speed of regional trade balances slowed in the Caribbean after 1990, consistent with increased regional financial integration in the recent decade: - Half-life was less than one year in 1975–1990 when capital controls were widely prevalent. - Half-life almost doubled during 1991–2005. ### E. Barriers to Regional Financial Integration - Integration impeded by both policy and infrastructure factors: - Policies: exchange and capital controls, regulations governing financial institutions. - Infrastructure: state of payment and settlement systems, market and trading infrastructure. - Financial liberalization and the CSME: - Since the 1990s, Caribbean countries have generally relaxed exchange and capital controls. - Early 1990s: foreign exchange markets liberalized and exchange control regulations relaxed in Jamaica and Trinidad and Tobago, and to a lesser extent in the ECCU and Barbados. - Recent further removal of controls in the ECCU as part of its (unspecified) measures. - Examples of exchange and capital controls in the Caribbean, end-2005 (selected types reported in source): - Trinidad and Tobago: managed floating; approval required for inward direct investment exceeding 30 percent of firm shares; limits on institutional investors' outward investments; restrictions on purchase of foreign assets including capital market securities; foreign transactions of banks restricted to those undertaken for customers' accounts; approval required for banks' foreign borrowing to finance domestic operations. - Guyana: conventional peg; controls on all credit operations; approval required for banks' lending to nonresidents and lending locally in FX. - Additional notes: alien holding license required for purchase of local real estate by nonresidents in some countries; for CARICOM nationals, only registration required within 30 days of purchase in certain jurisdictions; in some countries nonresidents can only use offshore banks. - Overall conclusion: while liberalization has progressed, both regulatory constraints and weak market infrastructure continue to hamper deeper regional financial integration. *Source: Box 2.2 (concluded) — _dp0802 - Box 2.2 (concluded)_* ### 1.5 percent on ### 1.5 percent on ### Exchange controls and capital account restrictions - Specific charges and approvals: - "1.5 percent on outward remittances." - "Approval required for payments exceeding BDS$500000." - "Approval required for payments exceeding BDS$250000." - "1.25 percent on FX purchases." - Approval requirements (examples across jurisdictions): - "Approval required for all outward capital transfers, which are restricted." - "Approval required for most securities transactions, credit operations, real estate transactions, and all direct investments." - "Approval required for banks' lending to nonresidents and lending locally in FX." - "Approval required for most non-import external payments." - "Approval required for all transactions involving outward remittances of FX, and for local investment in real estate and stock market by nonresidents." - Observations: - Several countries require prior government approval for most categories of capital transactions, both inward and outward, raising transaction costs. - In some cases approvals have been granted liberally; in other cases controls remain effective in practice even after formal repeal (example: ECCU repeal of Exchange Control Act late 2005, yet some authorized dealers appeared unaware of repeal one year later). ### Controls specific to the financial sector and nonfinancial institutions - Controls on cross-border activities of financial institutions remain extensive: - Banks’ operations abroad and local operations in foreign exchange generally require prior approval by the authorities. - Extensive controls on non-bank financial institutions affect market-makers and hinder development of secondary markets (example: Jamaica’s regulation prohibiting securities firms from dealing on their own accounts in foreign securities except U.S., U.K., and Canadian sovereigns). - Restrictions on nonfinancial institutional investors: - Legislation in many member states does not allow social security funds to be invested abroad, even within CARICOM (Table 2.7). - These restrictions impede development and deepening of regional financial markets and hinder financial institutions’ ability to spread country risks (including hurricane risk). ### Preconditions and macroeconomic context for capital account liberalization - Policy prerequisites for successful intraregional opening of the capital account: - (i) Sound macroeconomic conditions and policies. - (ii) National monetary authorities with flexible market-based policy instruments to effectively manage domestic liquidity. - (iii) Appropriate regulatory and supervisory frameworks. - Macroeconomic concerns: - "Public debt in Caribbean countries remains among the highest in the world among emerging market countries" (Figure 2.13). - Caribbean external current account deficits have recently widened with the increase in global energy prices. - Fiscal consolidation efforts appear to be running out of steam; example: "Jamaica’s fiscal primary surplus... has fallen by over 3 percentage points of GDP since 2003." - Monetary policy and liquidity management: - Liberalization increases sensitivity of capital flows to interest rate differentials; floating regimes need to allow exchange rate and interest rate movement in both directions. - For fixed-rate regimes, higher volatility of capital flows feeds directly into domestic liquidity; central banks need tools to manage liquidity effectively. - Issues identified: insufficient government paper for open market operations in some countries; minimum deposit rates remain in place in different jurisdictions and could constrain central bank responses. ### Market infrastructure, trading, and settlement - Progress: - Electronic trading moves: Jamaica in 2000, Barbados in 2001, Trinidad and Tobago in 2005. - "Central depositories have been in place since 2003 in all the stock exchanges." - "The stock markets of Jamaica, Barbados and Trinidad and Tobago are currently in the process of being linked electronically." - "The ECCU launched its own securities exchange in 2003 on a modern trading platform and has also established its own depository for stocks." - Remaining weaknesses: - Some jurisdictions have not fully dematerialized government securities into electronic form. - No central depository exists for bonds in Jamaica; no electronic settlement for many fixed income securities, hindering secondary markets. - Differences in listing requirements, tax treatment, financial reporting, corporate governance, and collateral treatment increase transaction costs and market segmentation. - Brokerage commissions plus taxes, trading fees, and other transaction costs are estimated to exceed 1 percent of transaction value. - Settlement frameworks (examples from Table 2.8 and Box 2.3): - Trinidad and Tobago: settlement framework T+3; Real Time Gross Settlement (RTGS) system in place since late 2004; central depository established in 2003; many fixed income securities not yet in electronic registry; securities settlement often in a T+5 framework. - Jamaica: CIFTS (Customer Inquiry and Funds Transfer System) used for large transactions; CIFTS runs in a T+1 framework; central bank modernizing payments and settlement and launching an RTGS system; Automated Clearinghouse (ACH) used for smaller interbank transactions with three-day settlement; bonds traded OTC and remain in paper form. - Eastern Caribbean: settlement framework T+1 (Table 2.8). - Guyana: settlement framework T+5 (Table 2.8). ### Recommendations for market and regulatory strengthening - National-level steps: - Strengthen local market infrastructure (for example, establish central depositories for debt instruments where none exist). - Modernize payments and settlement systems (RTGS adoption and legal frameworks supporting electronic payments). - Remove or reform minimum deposit rate constraints and increase availability of government paper to facilitate central bank operations. - Regional-level steps: - Harmonize listing and reporting requirements across markets to facilitate cross-border trading. - Establish common legal framework for enforcing cross-border collateral. - Create a regional securities depository or mechanisms to link existing national depositories. - Promote cross-border sharing of credit information. - Support regional initiatives such as the regional credit rating agency (CariCris, established 2004). ### Regional supervision and crisis-management frameworks - Challenges: - Integrated markets increase speed and complexity of shock transmission and create supervisory blind spots as conglomerates organize functionally across borders. - Many national supervisors lack sufficient operational independence; some cannot grant/withdraw licenses, set legally binding prudential rules, or independently issue regulations. - Risk-based supervision not fully implemented; accounting practices and licensing regimes vary. - Weaknesses in prudential norms are being addressed, with amendments and further changes anticipated during 2007–08. - Supervision of conglomerates: - Survey results: of 23 respondents, 7 do not have memoranda of understanding with other domestic agencies on consolidated supervision; 10 do not conduct any consolidated supervision; 18 had never conducted on-site inspections of financial conglomerates; 13 reported legal impediments to information sharing. - Jurisdictional reforms underway: Trinidad and Tobago amended laws to allow information-sharing for consolidated supervision and require licensing of financial holding companies (FHC); Barbados is improving prudential information reporting and developing consolidated supervision guidelines; Jamaica is reviewing legislation to create consistent framework and prudential principles for FHC. - Cross-border cooperation: - A Multilateral Memorandum of Understanding (MOU) among several national supervisors was introduced in May 2004 to facilitate cooperation, consultation, and exchange of information. - The multilateral MOU addresses key issues but scope exists for improvement in crisis management, safety net and resolution issues, and supervision of cross-border conglomerates. *Source: _dp0802 - 1.5 percent on* ### Box 2.4. Harmonizing the Regional Supervisory Architecture and Practices ### Box 2.4. Harmonizing the Regional Supervisory Architecture and Practices ### Harmonization agenda and technical assistance - Harmonization of supervisory architecture and practices has been a key agenda item of the Caribbean Group of Banking Supervisors (CGBS). - The CGBS, alone and jointly with the Financial Stability Institute, has been arranging regional technical assistance in the application of new and/or emerging international supervisory standards such as consolidated supervision and Basel II. - A CGBS technical working group has a specific mandate to: - harmonize laws and supervisory standards across the region; - harmonize the approach to the restructuring of financial groups; - develop a standardized accounting and reporting framework; - improve information sharing between regional regulatory agencies; and - arrange thematic regional training seminars and regional supervisory conferences. ### Progress in information sharing - Notable progress has been made in information sharing across regulatory agencies. - A CGBS database, accessible to all CGBS jurisdictions, provides comprehensive and chronological information, including: - details of the ongoing work of the Harmonization Project; - enhancements of legal and supervisory structures, methodologies, procedures and practices; - prudential data reporting arrangements; and - status on publication of prudential data by respective member regulatory authorities. ### Harmonization of supervisory standards — endorsed principles - Progress is being made in harmonizing supervisory standards. The Group of CARICOM Central Bank Governors has recently endorsed the following principals proposed by the technical working group: - Ensure cross-jurisdictional consistency in regulatory reporting and definitions, inclusive of the definitions of what constitutes “capital base” and “acceptable group structures,” in order to avoid regulatory arbitrage. - Empower regulators to prescribe in legislation the accounting treatment to be used for reporting to the regulator for prudential purposes (especially in instances where conventional accounting treatment or IFRS standards are at variance or inconsistent with more stringent prudential standards promoted for deposit-taking entities). - Ensure consistency between the approach taken in amending legislation for consolidated supervision and the revised Basel Core Principles. - Enhance further the relationship between the Regulator and the External Auditors for risk-based supervision to be conducted efficiently, since regulators must be able to rely on the work of the external auditors. - Establish legislation to address the entry protocols and scope of foreign regulators, who wish to perform on-site examinations in member jurisdictions. - Footnote: Opening Remarks by Audrey E. Anderson, Senior Deputy Governor at The Financial Stability Institute & Caribbean Group of Banking Supervisors Regional Seminar on Conglomerate and Consolidated Supervision, April 11–13, 2007. ### Remaining challenges and legal/organizational gaps - Key challenges identified by the CGBS include: - Harmonizing holding company legislations to grant powers to regulators to supervise holding companies and the operations of the entire group on a consolidated basis. - Adopting regional agreement regarding the appointment of a lead regulator where relevant. - Establishing better legal and other arrangements to facilitate information sharing between supervisory authorities. - The CGBS concluded that a harmonized regional approach would have to accompany individual country efforts to establish an appropriate framework. ### Crisis management, safety nets, and resolution - Crisis management preparation warrants further strengthening: - There is no common regional early warning system. - Most individual supervisory agencies in the region do not have sufficient data on financial conglomerates and their cross-border transactions, complicating the tracing of linkages between institutions and countries and mapping potential systemic vulnerabilities and contagion. - Legal frameworks for domestic interventions have been strengthened in a number of jurisdictions, but measures should be mapped out to deal with potential cross-border crisis situations. - Remedial measures identified at national levels have not been assessed, harmonized, or reconciled across the region. - Coordination on safety net and resolution issues should be strengthened: - There are three national deposit insurance schemes operating in the region (Bahamas, Jamaica, and Trinidad and Tobago). - Differences exist in coverage and definitions, and there are no burden-sharing arrangements to handle the failure of a regional bank. - National central banks traditionally provide emergency liquidity but member states have not developed a regional plan on how the lender of last resort principle would operate in a regional context. - National bankruptcy legislation and insolvency proceedings need to be reconciled to deal with the potential of a regional bank or group failure. ### Supervisory focus on cross-border conglomerates - Initial focus on creating a stability framework for the core cross-border conglomerates is useful because these entities have complex cross-border and cross-functional operations, requiring cooperation of bank, securities, insurance and other supervisors across the Caribbean. - A comprehensive stock-taking of the regional systemic implications of the conglomerates would help pinpoint specific challenges to regional supervision. ### Conclusion — implications for integration and supervision - Financial integration is proceeding apace in the Caribbean; national financial sectors are large and complex in CARICOM countries and regional financial conglomerates play a dominant role with extensive cross-country holdings. - To realize the benefits of integration: - Regional financial integration should occur as part of, rather than a substitute for, countries’ global integration and should not lead to an increase in extraregional barriers. - Structural reforms to strengthen the business environment are needed to ensure regional financial integration leads to financial development. - Macroeconomic policies should be geared toward strengthening fundamentals and ensuring flexibility. - Financial sector supervisors should invigorate efforts at regional cooperation and coordination, especially regarding supervision of conglomerates, while continuing to strengthen national oversight. *Source: Box 2.4, "Harmonizing the Regional Supervisory Architecture and Practices."* ### References ### References ### Key cited studies on financial integration, growth, and institutions - Adam K., T. 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Spiegel, 2002, “A Gravity Model of Sovereign Lending: Trade, Default and Credit,” National Bureau of Economic Research, Working Paper No. 9285 (Cambridge, Massachussets: National Bureau of Economic Research). - Taylor, A., 2002, “A Century of Current Account Dynamics,” Journal of International Money and Finance, Vol. 21, pp. 725–48. - Tong, H.,1978, “On a Threshold Model,” in Pattern Recognition and Signal Processing, ed. by C.H. Chen (Amsterdam: Sijthoff and Noordhoff). - Trehan, B., and C.E. Walsh, 1991, “Testing Intertemporal Budget Constraints: Theory and Applications to the U.S. Federal Budge and Current Account Deficits,” Journal of Money, Credit and Banking, Vol. 23, pp. 206–23. - Trinidad and Tobago Securities and Exchange Commission, 2005, Development of the Securities Market in Trinidad and Tobago, 1997 to 2003, with Prospects for the Future (Port of Spain, Trinidad and Tobago). - Yeyati, L.E., S.L. Schmukler, and N. Van Horen, 2006, “International Financial Integration through the Law of One Price,” World Bank Working Paper WPS2897 (Washington: World Bank). ### Context and analytical focus from the following chapter: "Tax Incentives and Foreign Direct Investment: Policy Implications for the Caribbean" - Policymakers across the Caribbean have long recognized the benefits of foreign direct investments (FDI) and actively sought levers to attract them; special incentives have proliferated in the region mainly in the form of tax holidays, which exempt qualified investors from paying corporate income taxes and import duties for periods that can be as long as 25 years. - Developments motivating reassessment of these policies: - Sharply higher debt levels throughout the region are forcing governments to consider steps to achieve fiscal consolidation, including the scaling back of tax incentives. - Existing literature, on balance, is cautious about the merits of investment incentives; studies for developing countries mostly suggest that benefits of investment incentives in terms of increased FDI are limited, particularly if they are put in relation to their estimated costs. - Political-economy constraints on reform: - Governments have been reluctant to move ahead decisively with the reform of tax incentives because foreign investment is deemed necessary to generate jobs and promote economic development as countries adjust to the gradual dismantling of trade preferences and export-processing zones. - Perceptions of increased capital mobility and competition for FDI, and the emergence of extraregional free trade agreements such as CAFTA-DR (Central America–Dominican Republic–United States Free Trade Agreement), have put pressure on governments to maintain incentives. - Past regional coordination efforts (CARICOM) to harmonize investment policy have been largely ineffective as member countries adopted incentive schemes that deviated from the agreed harmonized framework. - Chapter objectives and structure: - The chapter aims to contribute to the policy debate about the appropriate use and scale of tax incentives to stimulate FDI in the Caribbean. - Section A: briefly review recent fiscal developments and take stock of the main tax incentives offered in the region. - Section B: investigate whether tax systems and tax incentives are important determinants for attracting FDI by reviewing FDI trends in the Caribbean over the past 15 years, taking stock of existing empirical evidence, and providing further econometric evidence regarding the role that tax systems have played in attracting FDI in the region and in developing countries more broadly. - Section C: investigate the revenue losses from existing tax incentives and assess the comparative merits in terms of cost-effectiveness of alternative tax incentives. - Section D: derive policy implications for a more rational and efficient use of tax incentives in the Caribbean, and discuss how regional coordination could help overcome collective action problems. - Section E: summarizes the chapter. *Italic: Source PDF: _dp0802 - References* ### conclusions. ### conclusions. ### A. Background and recent fiscal developments - Fiscal authorities in many countries of the Caribbean are facing difficult policy choices. - A sharp accumulation of public debt in recent years (Table 3.1) has forced many countries to enter a phase of fiscal consolidation to address looming debt sustainability problems. - Public debt as a share of GDP has risen from an average of 56 percent of GDP in 1990–94 to about 90 percent of GDP in 2004–06. - The average overall central government deficit in the Caribbean fell from about 4.2 percent of GDP in 1990 to about 3.3 percent of GDP in 2004–06, but the fiscal picture has become more mixed more recently. - Central government revenues in the region rose from an average of 22 percent of GDP in 1990–94 to more than 27 percent in 2004–06, reflecting in part the adoption of the VAT by some countries. - Corporate income tax (CIT) revenues rose from an average of about 3 percent of GDP in 1991–94 to more than 4 percent of GDP in 2004–06, notwithstanding a decline in statutory rates. - The top statutory CIT rate was reduced from an average of over 35 percent in 1990–94 to about 32 percent during 2004–06. ### Fiscal pressures and policy response - Public indebtedness has risen sharply over the past 15 years, and debt sustainability has become a concern in a number of countries. - Debt service costs now weigh heavily on the budgets of many countries in the region. - Fiscal consolidation will have to continue in many countries if debt levels are to be brought down to more comfortable levels. - While in some cases debt restructuring may facilitate the return to a sustainable debt position, even in such cases a commitment to a substantial fiscal effort is usually needed to achieve sustainability and the necessary support from creditors. - Further improvements in fiscal balances may require further revenue mobilization efforts. - Considerable social and infrastructure needs persist throughout the region, which limits the scope for adjustment on the expenditure side. ### Tax incentives: prevalence, features, and fiscal impact - Tax incentives are pervasive in the Caribbean. Virtually all countries in the region have special incentive regimes, most of them to stimulate private investment. - These incentives grant qualified investors a more favorable treatment compared to the general taxpayer. - While most tax incentives are aimed at foreigners, some countries also make them available to domestic investors. - Usually, tax incentives are only directed at a few sectors in the economy, mostly export-related industries; in some cases they form part of a regional initiative to promote development in key sectors (e.g., the Hotel Aids Act in the case of tourism). - CIT holidays are the most widely used incentives in the region: all 15 countries covered by this study currently offer CIT holidays, with exemption periods ranging from 5 to 25 years. - Longer exemptions are usually granted to key sectors of the host economy (e.g., tourism and manufacturing). - Many countries in the region also fully exempt offshore banking and insurance from the corporate income tax. - Tax incentives erode the tax base and thereby limit revenue buoyancy. - Tax incentives can also produce potentially harmful effects such as distortions to resource allocation and unproductive rent-seeking and corruption. ### Policy implications and options - Further revenue mobilization will be required to complement expenditure restraint given limited scope for cuts and persistent social and infrastructure needs. - The streamlining of tax incentives could be one option to improve revenues. - Streamlining tax incentives would also help to limit some of the other potentially harmful effects of tax incentives, such as distortions to resource allocation and unproductive rent-seeking and corruption. *Source: Fund staff estimates and analysis in "Tax Incentives and Foreign Direct Investment: Policy Implications for the Caribbean," conclusions section.* ### 1. CIT Revenue (in percent of GDP) ### _dp0802 - 1. CIT Revenue (in percent of GDP) ### Corporate Income Tax (CIT) Revenue, Rate, and Yield — Key Statistics - CIT Revenue (in percent of GDP) — Average: 1 3.11 3.48 4.02 - CIT Revenue (in percent of GDP) — Minimum (Haiti): 0.59 1.07 1.68 - CIT Revenue (in percent of GDP) — Maximum (Guyana) (Guyana) (Trinidad & Tobago): 5.44 6.33 9.66 - CIT Rate (percent) — Average: 35.2 33.1 33.2 - CIT Rate (percent) — Minimum: 33.0 25.0 25.0 (Grenada) (Dominican Republic) (Dominican Republic) - CIT Rate (percent) — Maximum (Guyana): 47.0 45.0 45.0 - CIT Yield (Ratio of Corporate Income Tax Revenue to GDP/CIT Rate (percent of GDP)) — Average: 1 0.093 0.105 0.127 - CIT Yield — Minimum (Haiti): 0.017 0.030 0.048 - CIT Yield — Maximum (Guyana) (St. Kitts & Nevis) (Trinidad & Tobago): 0.155 0.154 0.307 - Notes on sample coverage: - Data in all sample periods exclude The Bahamas with zero CIT rate. - Barbados and Trinidad and Tobago are excluded in 1990–94, and Barbados is excluded in 1995–99 due to data limitation. ### Investment Incentives: Forms, Prevalence, and Design Features - Common incentive types: - CIT holidays (income tax holidays). - Exemptions from indirect taxes: customs duties and VAT exemptions for a defined period. - Employment tax credits. - Property tax exemptions and privileged access to preferential land. - Investment cost recovery incentives: investment allowances and accelerated depreciation. - Prevalence and parameters: - Investment allowances: feature in about half the countries in the sample; on average allow the immediate write-off of 20–30 percent of investments in machines (the allowed write-off may differ depending on the asset). - Accelerated depreciation schemes: found in 9 out of the 15 countries in the sample; distinctions sometimes made between equipment and structures. - Design and administration shortcomings: - Incentives are often discretionary rather than fully rules-based and automatic. - Eligibility, duration, and approval often under ministerial or administrative discretion (example: Belize; Dominican Republic incentives granted through administrative decisions without congressional authorization). - Little public information or central registry on concessions granted. - Beneficiaries frequently not required to submit financial information or such requirements are poorly monitored and enforced. - Implication: - Failure to collect basic information on tax incentives makes proper evaluation of costs and benefits almost impossible. ### FDI Trends in the Caribbean (Aggregate and Distribution) - Aggregate trends: - Average share of FDI to GDP (Table 3.6): increased from 3 percent of GDP in 1990–94 to 5.2 percent of GDP in 2000–05. - FDI in absolute terms: reached US$3 billion during 2000–05, US$2 billion more than a decade earlier. - FDI grew in all countries except Guyana and Suriname. - Caribbean’s share of total inflows to Latin America and the Caribbean: about 4 percent during 2000–05, after a decline to 2.8 percent during 1995–99 (below the 4.9 percent market share held in the early 1990s). - Sample (selected figures from Table 3.6 and Table 3.7): - Caribbean Sample (weighted avg) FDI/GDP: 1990–94: 3.0; 1995–99: 4.6; 2000–05: 5.2 - Dominican Republic FDI/GDP: 2.0; 3.8; 4.1 - Trinidad and Tobago FDI/GDP: 5.4; 10.1; 7.7 - Jamaica FDI/GDP: 3.2; 4.1; 7.1 - ECCU FDI/GDP: 9.1; 10.6; 13.2 - Caribbean FDI (US$ million) — sample totals: 1990–94: 856; 1995–99: 1,987; 2000–05: 3,042 - Memorandum items: Caribbean FDI/LAC FDI: 4.90 2.8 3.98; Caribbean FDI/World FDI: 0.43 0.31 0.39 - Intraregional distribution and persistence: - Dominican Republic, Jamaica, and Trinidad and Tobago received over three-fourths of the region’s total FDI during 1990–2005. - ECCU countries received about 11 percent of GDP in FDI during 1990–2005. - FDI flows are highly persistent: countries with largest initial FDI stock (share of GDP) attract the largest inflows, suggesting agglomeration externalities. - Origin of FDI: over 40 percent from the United States and Canada, another 30 percent from Europe; intraregional flows small (about 10 percent in the ECCU). ### Sectoral Composition and Types of FDI (Table 3.8 highlights) - FDI by sector (selected shares, in percent of total): - ECCU (1997–2005): Tourism 58.3; Energy (petroleum/electricity) 0.2; Industry/manufacturing 28.7; Services (telecom/finance) 0.4; Other 41.1 - Dominican Republic (1994–2005): Tourism 22.0; Industry/manufacturing 0.8; Services (telecom/finance) 24.3; Other 5.1 - Trinidad & Tobago (1996–2005): Tourism ...; Energy (petroleum/electricity) 17.6; Mining 30.9; Industry/manufacturing 7.0; Services (telecom/finance) ...; Other 13.8 - Guyana (2000–05): Agriculture 18.0 - FDI by country of origin (selected shares, in percent of total): - United States: Dominican Republic 24.4; Trinidad & Tobago 29.8; ECCU 55.3 - Canada: Dominican Republic 2.8; Trinidad & Tobago 15.6; ECCU 2.8 - Europe: Dominican Republic 19.7; Trinidad & Tobago 37.1; ECCU 29.9 - Caribbean: 11.1 (Dominican Republic) - FDI by type (in percent of total): - Equity (incl. land sales): 57.4 (Dominican Republic) ... 81.3 ... - Reinvested earnings: 18.1 ... 21.5 ... - Other: 39.2 ... -2.8 ... ### Effectiveness of Tax Incentives in Attracting FDI — Evidence and Interpretation - Empirical observations: - Literature finds FDI is generally sensitive to tax policy, but sensitivity varies widely across studies and contexts. - For developing countries, taxes appear to have a more modest impact on FDI compared with other factors (infrastructure, business climate, legal system, skilled labor availability, macroeconomic and political stability). - Studies for the Caribbean: - Chai and Goyal (2006), ECCU panel 1990–2003: benefits of tax incentives in terms of increased FDI are far outweighed by tax revenues forgone, estimated in the range of 10–16 percent of GDP. - FIAS (2004) and World Bank (2006) survey of about 160 multinationals in the Caribbean: tax concessions did not rank among the most important factors for investment decisions; top factors included telecommunications services, power supply, political stability, favorable attitude toward FDI, and labor productivity. - Sector differences: - Tourism sector appears more sensitive to tax incentives than other sectors. - Tourism incentives (e.g., Hotel Aids Acts) have been in place since the 1960s; tourism resorts are largely foreign owned and tourism receipts average close to 25 percent of GDP. - Tourism sector arguments for incentives: - Positive spillovers: employment generation, access to new technology, agglomeration externalities. - Large upfront and sunk investments in tourism: need for guarantees and incentives where institutions and property rights are weak. - Caveats and data limitations: - Most available data are aggregate and do not distinguish FDI composition (equity increases, new plants, retained earnings, mergers and acquisitions). - Data constraints limit analysis; most studies use aggregate FDI and statutory corporate rates, which may not capture the extent of tax incentives. - Persistence of FDI flows may reflect factors beyond taxes (herding behavior, phased investment, reinvested earnings accounting for about 20 percent of total FDI in ECCU and Trinidad and Tobago; equity investments 60–80 percent). ### Policy-Relevant Findings and Implications - Information and evaluation: - The lack of public information and central registries on tax concessions, combined with weak monitoring of beneficiary reporting, undermines the ability to evaluate costs and benefits of tax incentives. - Relative importance of taxes: - While taxes matter, non-tax factors (infrastructure, institutional quality, political stability, labor productivity) often play a larger role in firms’ location and investment decisions in the Caribbean. - Sector-specific considerations: - Tourism may justify more careful consideration of incentives due to sector-specific characteristics (large sunk costs, spillovers), but benefits must be weighed against large revenue forgone estimates reported in empirical studies. - Design recommendations implied by evidence: - Move toward rules-based, transparent, and automatic incentive regimes with clear eligibility criteria, fixed durations, and mandatory reporting requirements to allow cost-benefit evaluation. - Improve public disclosure and maintain central registries of concessions granted. - Strengthen monitoring and enforcement of reporting requirements from beneficiaries. - Prioritize improvements in infrastructure, power, telecommunications, and business climate to enhance investment attractiveness alongside any incentive policy. *Sources: Country authorities; and Fund staff calculations.* ### Box 3.2. Taxation of Foreign Income and FDI ### Box 3.2. Taxation of Foreign Income and FDI ### Theory: residence-based versus source-based taxation - Under a source-based system, income earned abroad is not taxed in the home country; a decline in host country taxation increases the net return on investment and can positively affect FDI. Most EU countries have source-based tax systems. - Under a residence-based system, income earned abroad is taxable at home but firms can claim a credit on taxes paid abroad; declines in host country taxation are generally offset by higher home tax liability, so changes in host country taxation typically do not affect FDI unless a firm has an excess tax credit position. The United States, Japan, Greece, Ireland, Spain, and the United Kingdom tax income on a global basis. - Empirical findings on the importance of home-country tax regime are mixed: Slemrod (1990) finds no clear evidence; Tanzi and Bovenberg (1990) argue the distinction is of little importance because of excess foreign credit and deferrals; Hines (1996) finds investors from Germany (exemption) more likely to locate in lower-tax U.S. states than investors from the United Kingdom (tax credits). ### Empirical analysis: determinants of FDI in the Caribbean (panel, 15 countries, 1990–2004) - Estimation method: pooled OLS (alternative methods yield broadly similar results; Appendix 3.2). - Key regression findings (Table 3.9, dependent variable: Log (FDI/GDP)): - CIT rate coefficient: -0.09*** (z statistic -8.62). Across specifications: -0.09***, -0.08***, -0.08***, -0.09***. - METR: coefficients reported include 0.01* (z -1.82) and -0.03*** (z -3.11) in different specifications. - FDI Incentives: 1.54*** (z 7.23), 1.54*** (z 5.23), 1.30*** (z 8.91), 1.30*** (z 9.19), 1.33*** (z 6.02), 0.17 (z 0.84), 0.43** (z 2.04). - FDI Restrictions: -3.14*** (z -10.14), -3.14*** (z -8.88), -2.66*** (z -9.68), -2.66*** (z -9.86), -3.18*** (z -9.91), -1.40*** (z -8.65), -1.71*** (z -7.86). - Governance: 3.76** (z 2.51), 3.76** (z 2.51), 2.56** (z 2.20), 2.56** (z 2.20), 4.05*** (z 2.60), 4.66*** (z 2.81), 5.14*** (z 2.90). - Infrastructure: 0.63*** (z 3.78) across several specifications; 0.48*** (z 2.86); 0.46*** (z 2.61). - ECCU dummy: 0.44*** (z 3.32), 0.44*** (z 3.32), but not significant in some specifications with lagged FDI or initial stock. - Initial stock of FDI: 0.15*** (z 3.83) in the specification including it. - Observations: 122; R-Squared ranges shown (e.g., 0.72, 0.79, 0.59, 0.60) across specifications. - Magnitude interpretation (textual highlight): - "We find that a 1 percentage point reduction in statutory taxes rates leads to about a 0.6 percent of GDP increase in average in inbound investment." (Given average FDI in sample = 7 percent of GDP, an 8.6 percent increase in this ratio corresponds to a 0.6 percentage point increase in the FDI to GDP.) - Additional Caribbean-specific findings: - FDI restrictions and incentives both significant: restrictions are an important deterrent; incentives attract capital but are less important than restrictions. - Governance and telecommunications infrastructure (phone lines per 1,000 inhabitants) are significant determinants; paved roads less robust. - Other variables (openness, macro stability, GDP per capita, schooling, public indebtedness) are positively related but not statistically significant in many specifications. - FDI is on average more than 3 percentage points of GDP higher in the ECCU than other Caribbean countries; initial (1990) stock of FDI captures similar effects (first-mover/ agglomeration). - FDI persistence (lagged FDI) matters modestly; inclusion leaves long-run elasticity of CIT unchanged but reduces importance of incentives/restrictions and governance; ECCU dummy loses significance when lagged FDI included. ### METRs and tax measures - Marginal effective tax rates (METRs) were computed for the region for 1990–2004 (Appendix 3.3 describes methodology). - METRs show a much smaller impact on FDI than statutory CIT rates; economic and statistical significance are higher for buildings (lower depreciation rate) consistent with tourism-related FDI being building-intensive. - Caveat: METR measure is imperfect because it excludes tax holidays and incentives on indirect taxes (particularly import duties). ### Determinants of FDI in a broader developing-country sample (80 developing countries, 1990–2004) - Key regression findings (Table 3.10, dependent variable: Log (FDI/GDP), pooled OLS): - CIT rate coefficients: -0.01*** (z -2.66) in baseline and -0.01*** (z -2.66) with time trend; other specs show -0.001 (z -0.41) and -0.001 (z -0.40); also -0.01*** (z -2.68) and -0.01*** (z -3.03) in other specifications. - FDI Incentives: coefficients include -0.05 (z -0.92), -0.05 (z -0.94), -0.06*** (z -2.64), -0.05** (z -2.35), -0.1* (z -1.66), -0.02 (z -0.41). - FDI Restrictions: -0.22*** (z -16.06), -0.22*** (z -16.07), -0.05*** (z -3.02), -0.05*** (z -3.23), -0.17*** (z -9.80), -0.18*** (z -10.77). - Governance: 0.92** (z 2.29), 0.9** (z 2.31), 0.35 (z 0.85), 0.29 (z 0.71), 1.08*** (z 2.65), 0.04 (z 0.10). - Infrastructure: 0.16*** (z 3.60), 0.15*** (z 3.49), 0.04 (z 1.10), 0.05 (z 1.28), 0.12*** (z 2.96), 0.14*** (z 3.09). - Small island dummy: 0.28*** (z 2.41) in a relevant specification. - Openness: 0.005*** (z 11.43) in one specification. - Observations: 392; R-Squared varies (e.g., 0.16 baseline, 0.64 with lagged FDI). - Interpretations: - Statutory CIT rates have a significant but much smaller impact on FDI in the larger developing-country sample: "A 1 percentage point reduction in statutory taxes rates leads to less than a 0.1 percent of GDP increase in FDI." - FDI incentives are no longer statistically significant in the larger sample; FDI restrictions remain significant. - Institutional quality and infrastructure remain relevant but comparatively less important. - FDI is on average more than 2 percentage points of GDP higher in small island economies than in other developing countries. - Controlling for FDI persistence (lagged FDI) greatly improves explanatory power; with lagged FDI included most variables (including CIT) lose significance except FDI restrictions. ### Revenue cost estimates and tax gap (1995–2004) - Using a tax-gap methodology and assuming corporate sector represents 1/4 of GDP: - Average tax gap for the CIT alone is estimated at about 5½ percent of GDP across the sample of 15 Caribbean countries for 1995–2004. - Ratio of effective to potential tax receipts of about 40 percent. - The income tax gap declined from 6.2 percent of GDP in 1990–94 (note: trend mention). - Including indirect taxes (custom tariffs) doubles the total tax gap to over 10 percent of GDP. - Table 3.11 (Potential Less Actual Taxes, 1995–2004, in percent of GDP) excerpted: - Caribbean (average): Corporate Income Taxes 5.6, Import-related Taxes 5.2, Total 10.8 - Dom. Republic: Corporate Income Taxes 4.0, Import-related Taxes 3.9, Total 7.9 - Trinidad: Corporate Income Taxes 3.3, Import-related Taxes 2.4, Total 5.7 - Jamaica: Corporate Income Taxes 6.2, Import-related Taxes 3.9, Total 10.1 - ECCU: Corporate Income Taxes 5.4, Import-related Taxes 5.7, Total 11.1 - Other: Corporate Income Taxes 6.1, Import-related Taxes 5.7, Total 11.8 - Caveats: tax-gap is an upper bound on revenue losses attributable to incentives; it also captures evasion, tax administration inefficiencies, carry-forward effects, and does not capture resource-allocation distortions from selective incentives. ### Efficiency and comparative merits of tax incentives - Direct tax incentives: - Incentives that accelerate recovery of investment costs (investment allowances, investment tax credits, accelerated depreciation) are generally preferable to income tax holidays. - Tax holidays are costly and prone to revenue leakage through transfer pricing and abuses; they are less effective for projects with distant profitability. - Faster cost-recovery incentives are less prone to income-shifting abuse and permit government to collect revenue from highly profitable projects. - Indirect tax incentives: - Partial or full exemptions of indirect taxes are very costly because of diversion risks; in a functioning VAT system input exemptions are of limited value since VAT on inputs would be creditable. - Statutory basis and administration: - Incentives should be established in tax law (statutory basis), not ad hoc legal instruments. - Access should be automatic upon meeting objective criteria; administrative discretion in eligibility/extent of benefit should be minimal to limit rent-seeking and corruption and improve cost-effectiveness. ### Policy implications (summary) - Tax policy has had an impact on FDI flows to the Caribbean, but other factors—institutional quality, infrastructure development, and FDI restrictions—are also important determinants. - In the Caribbean subsample incentives appear to matter for FDI distribution; in the broader developing-country sample incentives are generally not significant. - Controlling for persistence in FDI flows reduces both significance and magnitude of tax and other variables. - Policymakers should weigh benefits of tax incentives against costs: revenue foregone, resource-allocation distortions, administrative costs, and social costs from corruption and rent seeking. - Given limited information, policy guidance favors cost-effective incentive design: prefer direct, statutory, transparent incentives that accelerate cost recovery; avoid broad tax holidays and costly indirect-tax exemptions. *Source: Box 3.2. Taxation of Foreign Income and FDI (from the provided content).* ### Box 3.3. Indirect Tax Incentives in the Tourism Sector ### Box 3.3. Indirect Tax Incentives in the Tourism Sector ### Evidence on demand elasticity and effectiveness of indirect tax incentives - Advocates argue the tourism tax base is highly mobile and demand is very price sensitive, implying lower VAT could be justified under optimal taxation—the higher the elasticity of demand the lower the tax. - Empirical evidence does not clearly support that tourism demand is more elastic than for other goods and services. - Studies cited: - The Bahamas: changes in relative prices between competing locations played only a minor role in tourist destination decisions, though they did affect marginally the amount spent by the tourist while in the country (IMF, 2005). - Spain: Gago and others (2006) find that the imposition of hotel and lodging taxes had only minor effects on the activity level of the hotel industry. - Strategies to create a unique tourist destination could lower elasticity of demand for a given country, but: - In the Caribbean, exploiting uniqueness likely requires regional coordination since countries offer somewhat similar opportunities for tourists. - Individually countries face relatively high elasticity, but collectively they face a much lower elasticity if intraregional tax competition is limited. - This collective effect is tempered by competition with countries outside the region. ### Policy implication: coordination to avoid excessive tax competition - If incentives are to be provided, some form of coordination to avoid excessive tax competition would be useful. - Scope for harmonization exists in difficult tax policy and administration issues such as the tax treatment of foreign tour operators. - The suggested approach to coordination in the next section applies to the tourism sector. ### Design principles for tax incentives (broader context relevant to tourism) - Tax incentives should be reformed based on several basic principles: - Legal basis: consolidate incentives in one law (or relevant tax laws); make them available to all firms on the same terms; grant through a fairly automatic and objective administrative process with little—if any—discretion. - Phasing out of tax holidays: tax holidays should not be renewed and new holidays should not be granted; tax holidays and exemptions are especially inefficient for new enterprises. - Use of depreciation allowances: if investment incentives continue, they should normally take the form of accelerated depreciation allowances; these are well-targeted and transparent but should not be overly generous and must be designed to avoid favoring capital-intensive over labor-intensive industries; investment allowances favor short-lived assets and are prone to abuse. - No undermining of indirect tax reform: incentives provided to existing indirect taxes should not be extended to new indirect taxes (relevant given adoption of VAT and excises). - Acquired rights and time-bound limits: when incentives are repealed, prior beneficiaries should typically be grandfathered; continuing incentives should be subject to time limits and regular review of costs/benefits (a review should be carried out at least every five years and preferably more frequently). - Transparency: all tax incentives other than holidays should be reviewed for cost and effectiveness; the cost of incentives should be published alongside annual budget expenditure figures as a tax expenditure budget, requiring systematic information collection on concessions and beneficiaries. - Administrative implications: - A broader tax base with a low corporate rate facilitates tax administration. - Uniform provisions (e.g., low CIT rate or accelerated depreciation) are simpler to administer than specific incentives such as tax holidays. - Streamlining incentives should be accompanied by modernization and professionalization of revenue administration. - Proper administration of accelerated depreciation schemes demands a more sophisticated and well-trained administration. ### Regional coordination: code of conduct elements and enforcement - Reforming tax incentive systems requires regional coordination to address collective action problems and avoid a “race to the bottom.” - Basic principles for coordination: protect tax base; strengthen each country’s tax system; maintain a friendly tax environment for investment via moderate and predictable taxes; avoid tax discrimination and tax competition; respect national sovereignty. - A regional code of conduct could include: - Transparency: publish laws, regulations, guidelines, administrative procedures; produce an inventory of existing tax incentives; strive to publish a tax expenditure budget. - Nondiscrimination: domestic and foreign investors should be able to invest on the same terms; no discrimination between foreign investors from different countries. - Limiting tax competition: countries should not compete by granting tax holidays, lower tax rates, other incentives, or preferential administrative treatment that unduly favor a particular location. The region may wish to establish certain minimum rates for the corporate income tax and the standard VAT, as well as maximum limits on the overall size of benefits that can be granted to individual projects (scaled by project size). - Rollback of existing incentives: review current incentives against the above criteria and seek agreement on a timetable to phase out incentives failing to meet those criteria. - Enforcement considerations: - Success depends on compliance and effective enforcement mechanisms. - Legally binding codes require a body with legal power to enforce the code and a judiciary to rule on disputes. - CARICOM is the most likely regional body to monitor a code; the Caribbean Court of Justice could fill the judicial role, but countries may be reluctant to cede sovereignty. - Nonbinding codes remain possible, relying on goodwill and moral obligation. - Opportunities for harmonization also exist in tax administration, taxpayer information sharing, and issues affecting large taxpayers such as transfer pricing methodologies. - Experience elsewhere: - Note: a code could increase incentives for third countries to cut taxes because signatories are less likely to follow (footnote observation). ### Related numeric and contextual references from the chapter (preserved from source) - A review of CIT rates: statutory rates in the Caribbean have fallen by an average of 2 percentage points since 1995, while in the OECD statutory rates have been reduced by 7–8 percentage points over the same period. - Average CIT rates reported: OECD average fell to 27.8 percent in 2007; Caribbean average is still roughly 32 percent. - Time limit guidance: a review should be carried out at least every five years and preferably more frequently. - Indices and ranges mentioned elsewhere in the chapter relevant for policy design: - FDI incentives and restrictions indices range between 0 and 4. - Sixth VAT Directive (EU) provides a minimum standard rate for VAT of 15 percent. ### Conclusions (as they pertain to tourism sector incentives) - Reliance on wide-ranging tax incentives to attract FDI merits reconsideration. - Tax incentives and tax policy have had a positive, yet limited, impact on foreign investment flows to the Caribbean. - Given likely significant revenue costs and data limitations on efficiency, a more sparing use of tax incentives may be warranted—especially amid fiscal adjustment needs in many countries. - Policies to promote FDI could focus more on instruments with consistently large positive effects on FDI, such as improving the quality of institutions and infrastructure. - A general strategy of lowering CIT rates while broadening the tax base and streamlining incentives appears promising; phasing out tax holidays and replacing them, if necessary, with investment cost recovery incentives could enhance efficiency. - Implementing these changes may require stronger regional coordination to overcome collective action problems that could hamper national-level reform. *Source: Box 3.3. Indirect Tax Incentives in the Tourism Sector, from the provided IMF chapter excerpt.* ### Appendix 3.2. Alternative Estimation Methods ### Appendix 3.2. Alternative Estimation Methods ### Estimation approach and methodological considerations - Regressions reestimated using panel data random-effects and fixed-effects methods to test robustness of pooled OLS results. - Random-effects regressions yield results similar to pooled OLS. - Fixed-effects regressions show substantially lower explanatory power (see Appendix Tables A3.1 and A3.2). - Fixed-effects regressions focus on within-country variation and control for unobserved country-specific effects, reducing omitted variable bias. - Caution: most explanatory variables are either constant (FDI incentives and restrictions) or slow moving (governance and infrastructure), so fixed-effects estimates tend to be less precise. - Lagged dependent variable was excluded from fixed-effect regressions to avoid biased coefficients; dynamic-panel estimation would be a proper way to control for lagged FDI but would also produce imprecise estimates given slow-moving/constant explanatory variables and the differencing used in such methods. ### Key regression results (Appendix Table A3.1 and A3.2) - Appendix Table A3.1 (Dependent Variable: Log (FDI/GDP)): - Pooled OLS, Random Effects, Fixed Effects coefficient estimates and t/z statistics (numbers below coefficients are t/z statistics; significance: * 10%; ** 5%; *** 1%): - CIT rate: Random Effects -0.09*** (t = -6.23); Pooled OLS -0.07*** (t = -3.51); Fixed Effects -0.06** (t = -2.44) - FDI Incentives: Random Effects 1.54*** (t = 5.35); Pooled OLS 1.32** (t = 1.97); Fixed Effects --- - FDI Restrictions: Random Effects -3.14*** (t = -9.11); Pooled OLS -2.59*** (t = -4.21); Fixed Effects --- - Governance: Random Effects 3.76*** (t = 2.84); Pooled OLS 1.90* (t = 1.68); Fixed Effects 1.23 (t = 1.09) - Infrastructure: Random Effects 0.63*** (t = 3.89); Pooled OLS 0.66** (t = 2.47); Fixed Effects 0.39 (t = 1.16) - ECCU dummy: Random Effects 0.44*** (t = 2.43); Pooled OLS 0.54 (t = 1.24); Fixed Effects --- - Constant: Random Effects -3.92*** (t = -6.51); Pooled OLS -3.28* (t = -1.86); Fixed Effects 0.79 (t = 0.41) - Observations: 122 (for Random, Pooled OLS, Fixed Effects) - R-Squared: Random Effects 0.72; Pooled OLS 0.71; Fixed Effects 0.08 - Appendix Table A3.2 (Dependent Variable: Log (FDI/GDP), Developing Countries): - Pooled OLS, Random Effects, Fixed Effects coefficient estimates and t/z statistics: - CIT rate: Random Effects -0.01* (t = -1.78); Pooled OLS -0.01 (t = -0.67); Fixed Effects -0.01 (t = -0.53) - FDI Incentives: Random Effects -0.05 (t = -0.72); Pooled OLS -0.02 (t = -0.13); Fixed Effects --- - FDI Restrictions: Random Effects -0.22*** (t = -5.70); Pooled OLS -0.19** (t = -2.21); Fixed Effects --- - Governance: Random Effects 0.92* (t = 1.65); Pooled OLS 2.27*** (t = 3.08); Fixed Effects 3.15*** (t = 3.65) - Infrastructure: Random Effects 0.16** (t = 2.51); Pooled OLS 0.06 (t = 0.65); Fixed Effects 0.14 (t = 0.95) - Constant: Random Effects 0.58 (t = 1.29); Pooled OLS 0.08 (t = 0.12); Fixed Effects -1.02 (t = -1.09) - Observations: 392 (for Random, Pooled OLS, Fixed Effects) - R-Squared: Random Effects 0.16; Pooled OLS 0.15; Fixed Effects 0.09 ### Subsample findings and interpretation - Caribbean subsample, fixed-effect regression: - A 1 percentage point decline in the statutory corporate rate is associated with a 0.4 percentage point increase in FDI to GDP (compared to 0.6 percent using pooled OLS). - Improvements in governance and infrastructure contribute positively to FDI but are not significant in the Caribbean fixed-effects regression. - Larger developing-country sample: - Changes in statutory rates are not significant in explaining changes in FDI flows. - Improvements in governance are positively related to FDI (significant in pooled OLS and fixed effects for developing-country sample). ### Appendix 3.3. Estimating Marginal Effective Tax Rates (METRs) - Definition (formula components preserved): - METR defined where r = real interest rate; G = economic depreciation rate of capital; W = statutory CIT rate; Z = present value of depreciation allowances. - Data and assumptions: - CIT rates, nonresident withholding tax rates, and depreciation schedules taken from tax codes using Bain and dos Santos (2004) and the annual World Wide Corporate Tax Surveys published by Ernst and Young. - Country- and time-specific inflation rates used; assumption that exchange rates are unchanged in real terms. - Real interest rates set at 10 percent. - Asset lifetimes assumed: 20 years for machinery, 50 years for buildings. - Weighted average METR calculated assuming two-thirds of all assets are in machines and one-third in buildings. - Personal income taxes (PIT) are abstracted from; other fiscal and nonfiscal incentives and tax holidays are excluded. - Results: - METRs are on average roughly 70 percent lower than the top statutory rates. - The importance of incentives appears to have increased slightly over time. - METRs differ across countries, with Barbados, Dominica, and Grenada offering the largest incentives (see Appendix Table A3.3). - Caveats: - METRs are forward-looking measures of the tax burden of an investment which just covers the cost of capital and are better suited to evaluate investment decisions conditional on a firm having made its location decision. - Average effective tax rates (AETR), which measure a firm’s overall profitability, are better suited to assess location decisions, but available FDI data do not separate new FDI from expansionary FDI; AETRs lie somewhere between METRs and statutory rates. *Source: Authors’ calculations.* ### References ### References ### A. Introduction - The chapter examines the macroeconomic effects of the erosion of EU preferences for Caribbean banana- and sugar-producing countries. - Analysis steps: - Measures the value of (banana and sugar) trade preferences, illustrating its precipitous decline since the early 1990s. - Discusses the macroeconomic impact of cuts in implicit assistance, particularly on output growth in preference-dependent Caribbean countries. - Countries examined (11): Dominica, Grenada, St. Lucia, St. Vincent and the Grenadines, Suriname (banana-exporting countries); Barbados, Guyana, Jamaica, St. Kitts and Nevis, Trinidad and Tobago (sugar-exporting countries); and Belize (exporter of both bananas and sugar). - Related analytical contributions and staff: Pelin Berkmen, Pawel Dyczewski, Nkunde Mwase, Catherine Pattillo, Emilio Pineda, Mariana Torres, Evridiki Tsounta; analytical work by Katerina Alexandraki, Ruben Atoyan, Hans Peter Lankes, Azim Sadikov. - Data sources and further technical detail references: Appendix 4.1; Mlachila and Cashin (2008, 2007). ### B. Caribbean Traditional Industries: Description and Historical Overview Banana industry - Historical role: export banana industry established post–Second World War to supply the United Kingdom and replace unprofitable sugar production. - Peak contribution: about 20 percent of (Windward Islands and Belize) GDP in the early 1990s; declined to less than 5 percent of GDP in recent years. - Current importance: roughly 15 percent of merchandise export receipts and a key rural employer in most Windward Islands. - Production structure: - Windward Islands and Belize: banana production entirely private; government provides some financial and other support. - Suriname: banana production traditionally a public sector activity. - Farm characteristics: most banana farms typically less than 10 acres; production yields significantly lower than Latin American producers. - EU preferential history: - Prior to 1993: distinct member policies and preferential arrangements under Lomé Conventions. - 1993 EU Single Market: common policy and marketing structure; duty-free ACP quota allocated historically; internal trade barriers removed exposing high-cost Caribbean producers to greater competition. - 1998: country-specific ACP quotas removed, enabling more efficient African countries to expand exports to the EU. - Price differential: EU banana price averaged some 80 percent more than the world (free market) price (Figure 4.1). - WTO and reform timeline: - Late 2001: EU pledged to switch to a tariff-only system by beginning of 2006; requested WTO waiver until 2007. - January 1, 2006: EU moved to tariff-only regime with permanent MFN tariff of €176 per ton for Latin American bananas and a duty-free 0.775 million-ton quota for ACP countries. - Conversion disputes: appropriate quota-equivalent tariff remains in dispute; challenged by Latin American exporters and the United States. - EU assistance to Caribbean bananas: - Special Framework of Assistance (SFA) 1999–2008 designed to boost productivity, encourage diversification, and provide social protection. - Commitments since 1999: €157 million for the Windward Islands and €22 million to Belize under SFA; disbursement of SFA resources extremely slow with bulk undisbursed and virtually no disbursements since 2003. - SFA disbursement shares (1999–2006): Dominica 23.9 percent; Grenada 35.3 percent; St. Lucia 32.1 percent; St. Vincent and the Grenadines 19.7 percent; Belize 35.6 percent (Figure 4.2). Sugar industry - EU regime: since 1975 ACP countries granted sugar preferences under Lomé/Cotonou; EU internal sugar prices maintained at three to four times world price via quotas, tariffs, and export subsidies. - Sugar Protocol: ACP countries export 1.3 million tons duty-free at EU internal prices; limited additional access under SPS quota. - 2005 CAP reform: November 2005 EU agreement to a four-year, 36 percent phased price reduction: - Import price lowered from €523 per ton to €335 per ton by 2009. - Cuts of 5 percent in 2006, 13 percent in 2008, and 22 percent in 2009. - SPS quotas eliminated; EBA expansion until 2009 when restrictions cease. - EU farmers compensated for about two-thirds of lost revenue. - Impact: significant adjustment costs expected for ACP countries; of Caribbean sugar exporters Barbados, Belize, Guyana, Jamaica, St. Kitts and Nevis, Trinidad and Tobago—Belize and Guyana most affected. - EU assistance for sugar adjustment: - Initial amount €40 million in assistance for 2006. - EU will provide funding of €667 million for period 2007–10, with an initial allocation of €165 million for 2007. - 2007–10 allocation among Caribbean Sugar Protocol countries: Guyana €84 million; Barbados €35 million; Belize €45 million; Jamaica €78 million; St. Kitts and Nevis €42 million; Trinidad and Tobago €42 million. - Amounts for 2011–13 yet to be decided. ### C. Preference Erosion and the Caribbean - Definition: preference erosion can occur when: - The number of beneficiaries rises; - A preference-granting country lowers its applied tariff while keeping preferential tariffs unchanged; - A preference-granting country lowers its preferential tariffs (as with EU banana and sugar markets). - Welfare implications: - International consensus: removing trade preferences is globally welfare enhancing. - Theoretical trade-off: preferences create trade that may not otherwise exist but have opportunity costs when resources could be used more productively elsewhere. - Concentration of losses: - Losses likely concentrated in a few countries and products—studies find negative impact concentrated in less than ten countries and about six products. - Alexandraki and Lankes (2004): aggregate loss between 0.5 and 1.2 percent of total exports of middle-income countries; concentrated in sugar, bananas, and textiles/clothing. - Most affected countries: Mauritius, St. Lucia, and Belize; Dominica and St. Vincent and the Grenadines among the 10 most-affected. - Subramanian (2003): preference erosion would reduce aggregate value of low-income country exports by just 1.7 percent. - Banana-exporting countries: - 1990s: exports from Windward Islands, Belize, Suriname fell dramatically due to competition, regime uncertainty, and services sector growth. - Windward Islands diversified into tourism and financial services, offsetting banana export declines. - NERA (2004): with EU tariff near €176 per ton and individual country supply elasticities, banana production in Windward Islands would decline by between 11 and 21 percent from its end-2005 level. - FAO (2004) observations: no tariff exists that would maintain the status quo implicit assistance; low tariff benefits Latin American suppliers and harms EU domestic and ACP suppliers, and vice versa. - Sugar-exporting countries: - Majority of Caribbean sugar industries have little prospect of survival post-preference erosion. - Historical EU prices on average over the past 15 years were about 250 percent higher than world prices. - LMC International (2003): except for Belize and Guyana, other Caribbean sugar industries appear unprofitable following preference erosion and likely to close. - Belize and Guyana could remain profitable only with reforms: closure of marginal estates and sizable new investment to upgrade plants and develop value added. - Research gap: virtually no studies document both the value of implicit assistance and its evolution over a long period; most studies provide snapshots for one year or a few years. ### D. Evolution of Export Prices, Quantities, and Values Banana-exporting countries - Real price trends: - Real banana export prices have exhibited a secular downward trend over past three decades. - UK real banana prices steady through early 1990s, declined thereafter, with a sharp weather-related uptick in 2005 (Figure 4.4). - International (free market) prices also show steady downward trend with occasional peaks in late 1980s and early 2000s. - Export volumes: - Overall bell-shaped evolution over three decades. - Windward Islands: volumes rose 1977–early 1990s, then declined; 2005 total volume about half of 1977 (Figure 4.5). - Grenada: exports small and largely ceased after 1996. - Belize: did not suffer significant declines 1990–2005, becoming largest Caribbean exporter by end-2005. - Suriname: slow export rise in 1990s; industry collapsed in 2002 and recovered in 2004. - Export values: - Bell-shaped evolution; Windward Islands banana export receipts peaked at over 20 percent of GDP in 1989, declined after 1993 to about 5 percent of GDP in 2005 (Figure 4.6). - Banana exports particularly important for Dominica, St. Lucia, St. Vincent and the Grenadines, accounting for about 40–70 percent of total merchandise exports depending on period. - Belize export values rose substantially 1990–2005 reflecting increased volumes despite declining unit prices. - Suriname export values rose and peaked in 2000, collapsed in 2002. Sugar-exporting countries - Real sugar prices: - Real sugar export prices trended downwards in recent years; EU sugar prices declined until 2001 and recovered subsequently (Figure 4.7). - Export volumes: - Roughly constant over previous decade with sharp decline in 2005. - Production peaked at over 700,000 metric tons in 2003. - Contributions from Guyana and Belize fell in recent years (Figure 4.8). - Barbados and Jamaica exports largely unchanged 1995–2005; St. Kitts and Nevis and Trinidad and Tobago exports halved. - Export values: - Values peaked in 1997, earlier than volumes. - Sugar exports remain particularly important for Guyana and Belize but drastically diminished for St. Kitts and Nevis, Barbados, Trinidad and Tobago (Figure 4.9). ### E. Implicit Assistance from Trade Preferences - Concept: additional export revenue from preferential access to EU markets represents an implicit income transfer. - Measurement methodology: - Price-gap methodology: difference between preferential European market price and international market price (expressed f.o.b.), scaled by actual export volume (metric tons) to measure implicit transfer. - Sources: analysis draws upon Atoyan (2006) and Mlachila and Cashin (2007); additional details in referenced appendices and technical notes. *Italicized attribution: Source content compiled from the References section and Chapter 4 (The Macroeconomic Impact of Trade Preference Erosion on the Caribbean) of the provided IMF PDF content.* ### Appendix 4.1. ### Appendix 4.1. ### Methodology: measuring implicit transfers from trade preferences - Preference margin (m) for product defined as the proportion by which the average unit price received by a preference recipient j exceeds that received by an MFN exporter (world price): m = (Pj / PW) − 1, where Pj and PW are the price received by country j and the world price, respectively. - Implicit value of preferences for producer j at time t: Qjt (Pjt − PWt) or Qjt PWt mjt. - Key assumptions: no product differentiation in quality/size/origin; perfectly competitive prices; all preferential rents accrue to exporters. - Limitations noted: - Use of f.o.b. Caribbean and world market prices likely yields a lower bound of the true price gap because it does not reflect transport and insurance differences. - Assuming entire rent accrues to exporter tends to overestimate the transfer; assuming world prices unaffected by preferences tends to underestimate the transfer. - Two approaches for banana implicit assistance: - Approach 1: wedge between United Kingdom wholesale prices for Caribbean ACP banana exports and the international (United States) landed prices for “dollar” banana exports. Data available 1977–2005; represents upper bound. - Approach 2: compare unit export (f.o.b.) prices for Caribbean ACP exporters and Latin American “dollar” exporters; likely lower bound; limited country-period data availability. ### Empirical findings: implicit assistance (bananas) - Three stylized facts (using Approach 1 unless stated otherwise): - The value of implicit assistance has been quite high for all Windward Island countries (except Grenada), averaging about 8 percent of GDP for the period 1977–2005. - Implicit assistance to Belize and Suriname averaged less than 3 percent of GDP. - The pattern of implicit assistance follows a bell-shape similar to export volumes, peaking in the late-1980s and early-1990s, and declining to levels below those observed at the beginning of the period by 2005. - Comparison with ODA: - For Windward Islands (except Grenada), implicit assistance generally exceeded official development assistance (ODA). - For Belize and Suriname, implicit assistance was lower than ODA. - Example: preference-based implicit assistance received by St. Lucia over the past three decades is about double that received as ODA. - ODA flows to Caribbean banana-exporting countries have fallen over time. - Magnitudes using both approaches: - Using Approach 1, implicit assistance averaged 3.9 percent of GDP for St. Lucia for 1995–2005. - Using Approach 2 (f.o.b. unit values), implicit assistance for St. Lucia for 1995–2005 is 1.8 percent of GDP. - Implicit assistance to Caribbean ACP banana exporters peaked in the mid- to late 1990s; based on Approach 2, transfers were at least 3 percent of GDP in the mid-1990s for Dominica, St. Lucia, and St. Vincent and the Grenadines; by 2005 these transfers comprised about 1 percent of GDP for these countries. - Transfers to Belize and Suriname peaked in the late 1990s at about 2 percent of GDP. ### Empirical findings: implicit assistance (sugar) - Sugar implicit assistance calculation: - Single price differential used: difference between announced minimum EU raw sugar price and the world free market price (Coffee, Sugar and Cocoa Exchange, New York), both in U.S. dollars and on a f.o.b. basis. - Country-level patterns: - Implicit assistance has remained extremely important in Guyana, averaging nearly 10 percent of both GDP and export receipts. - Assistance remains sizable in Belize, comprising about 2 percent of GDP and about 4½ percent of exports. - Implicit assistance has declined as a share of exports and GDP in Barbados, St. Kitts and Nevis, and Jamaica, reflecting increased nonsugar exports and downsizing of the sugar industry. - Implicit assistance was never significant in macroeconomic terms in Trinidad and Tobago. - Trends in ODA for sugar exporters: - With the exception of Guyana, Caribbean ODA flows for sugar-exporting countries have declined over the last three decades. ### Quantified policy shock: EU preference erosion and projected price impacts - Estimated EU regime effects: - New EU banana regime expected to result in about a 14 percent reduction in the EU price received for ACP banana exports. - EU sugar reform path results in a cumulative 36 percent decline in the EU sugar price by 2009. - Projection baseline and model setup: - Banana production levels of 2005 used as baseline for projections. - Partial equilibrium model calibrated with assumptions on commodity price evolution, exchange rates, export supply and import demand elasticities, and consumption multipliers. - Impact estimated by contrasting a baseline scenario (no preference erosion) with an alternative scenario (including EU preference erosion). ### Macroeconomic impacts projected (partial equilibrium results) - Bananas: - Largest output and export impacts: St. Vincent and the Grenadines and Belize. - Smallest impact: Grenada (very limited banana production). - Expected permanent diminution of export revenues; trade balance deteriorates only marginally in most countries because of associated import declines. - Preference erosion expected to raise overall fiscal deficits in affected countries; short-run impact largest in Dominica (effect declines subsequently). - For St. Vincent and the Grenadines and Belize, banana preference erosion is expected, over the medium term, to result in a cumulative deterioration of the overall balance (exact cumulative numbers not provided in this excerpt). - Sugar: - Reforms will have a large potential impact on Caribbean countries with large domestic sugar sectors relative to exports and GDP; adjustment costs significant in macroeconomic terms. - Guyana particularly exposed given implicit assistance averaging nearly 10 percent of GDP and exports. ### Modeling approaches and caveats - Two empirical methods used to analyze macroeconomic impact: - Partial equilibrium model: simple, identifies first-round effects on real, external, and fiscal variables; static and does not capture full dynamic interactions. - Vector autoregression (VAR) analysis: dynamic, captures full interactions between aggregates; examines macroeconomic impact of shocks to implicit assistance based on historical data but does not capture the regime change from large preference erosion. - Note on measurement bounds: - Approach 1 (EU vs U.S. prices) represents an upper bound to implicit assistance; includes transport/insurance differences that tend to overstate margin. - Approach 2 (f.o.b. unit export prices) represents a lower bound; data coverage limits apply. - True value of implicit assistance likely lies between the two measures. *Source: Appendix 4.1., _dp0802 - Appendix 4.1._* ### 0.5 percent of 2005 GDP, while fiscal effects for St. Lucia are slightly lower ### _dp0802 - 0.5 percent of 2005 GDP, while fiscal effects for St. Lucia are slightly lower ### Sugar exporters — projected impacts and mechanisms - Guyana - The decline in sugar preferences is estimated to lead to a cumulative decline in GDP by 2010, when the full reduction in the sugar price has taken place, of up to 6.5 percent of 2005 GDP. - Large impact on export earnings; impact on the trade balance is more subdued because the decline in GDP is assumed to lead to significantly lower imports. - Implications for the fiscal balance are also large. - Implicit assistance to Guyana averaged around 10 percent of GDP between 1975 and 2005. - Belize - The second-largest impact on output, exports and fiscal balances among sugar exporters. - Estimated income decline by 2010 from loss of sugar preferences is around 1½ percent of 2005 GDP. - Income transfers in Belize comprise about 2 percent of GDP and about 4½ percent of exports. - Other sugar-producing countries - Smaller effects reflecting the limited role of the sugar industry in these economies. - Export earnings are estimated to decline by less than ѿ of 1 percent of 2005 GDP for Trinidad and Tobago, Barbados, and Jamaica. - Magnitude of effects is smallest for Trinidad and Tobago and St. Kitts and Nevis—for St. Kitts and Nevis implications cannot be measured as sugar production ceased in 2005. - General caveats and assumptions - Projections are based on the assumption of a MFN tariff of €176 per metric ton from 2006 onward. - Projections implicitly assume transport will remain available at affordable costs; below a certain volume threshold freight costs may become prohibitive, resulting in a far sharper contraction of banana exports. - Projected macroeconomic implications are static; over time countries may adjust by shifting resources to other sectors and/or raising efficiency in traditional sectors. ### VAR analysis — Windward Islands and Guyana - Windward Islands (banana exporters) - Panel VAR variables (1977–2005): implicit assistance (IAID), current account (CUR), gross official reserves (RES), GDP, and central government revenues (REV). - A positive shock to implicit assistance has an initially positive and significant impact on growth, and external and fiscal balances. - Current account and reserves growth rate both improve by about 4 percentage points on impact. - Real GDP and revenue growth rates improve by about 1½ percentage points on impact. - Effects on current account and reserves die out after one year; effects on GDP and government revenues persist longer and die out after about three years. - Variance decomposition: IAID shocks explain about 30 percent of the variance of GDP and peak at about 20 percent for the other variables. - Guyana (sugar exporter) - VAR variables: implicit aid from trade preferences (percent of GDP), external current account deficit (percent of GDP), real growth rate (percent), and government revenues (percent of GDP). - A positive one-standard-deviation shock, equivalent to 6.2 percent of GDP, would increase real GDP growth by a couple of percentage points, peak in year three after the shock, and slowly diminish over time. - Trade balance would experience sizeable fluctuations; revenue-to-GDP ratio would exhibit an even more pronounced cycle. - Methodological notes - For the Windwards, appropriate lag length for endogenous variables was estimated at five based on Akaike information criterion. - Cointegration tests indicate no cointegration (cannot reject null at 5 percent), so a VAR in first differences was used. - Impulse response simulations consider a one standard deviation transitory shock to IAID and its impact on macroeconomic variables in the decade following the shock. ### Policy implications and recommended adaptation strategies - Overarching observation - Economic and social implications of erosion of EU trade preferences for banana and sugar are significant for some Caribbean countries; much of the macroeconomic consequences of the large terms-of-trade shock have already occurred, but social effects continue. - Country-specific adaptation strategies - Enhance efforts to raise efficiency and competitiveness of agricultural sectors via: - Investment in public infrastructure (including rural roads and ports). - Sector-specific capital (e.g., drainage and irrigation systems). - Human capital (training and skill development). - For high-cost, low-productivity agricultural industries, encourage diversification away from agriculture to more productive sectors. - Facilitate sectoral shifts through improvements in the investment climate to lower the cost of capital and greater workforce skills. - Social safety nets and transition measures - Improve social safety nets for displaced farmers and agricultural workers. - Targeted, time-bound measures could include income transfers, retraining, and noncontributory pensions (Appendix 4.2). - Public sector and structural reforms - Restructure state involvement in agriculture where public control lacks strong economic rationale; consider privatization or streamlined industry structures with increased private sector participation. - Use the time prior to removal of preferences to enhance international competitiveness, smooth the economic transition, encourage diversification, and accelerate structural reforms to raise long-term growth and achieve fiscal and debt sustainability. ### Concluding remarks — summary of magnitudes and longer-term direction - Windward Islands implicit assistance peaked at about 15 percent of GDP in the early 1990s and declined to about 3 percent of GDP by 2005. - Transfers of implicit assistance to Belize and Suriname have averaged less than 5 percent of GDP over the past three decades. - Many Caribbean banana-exporting countries lost annual external assistance flows equivalent to about 8 to 10 percent of GDP over the last 10 to 15 years, in tandem with declines in official development assistance. - Banana preference erosion findings - Most severe impact in St. Vincent and the Grenadines and St. Lucia where erosion of trade preferences is estimated to lower output over the medium term by about 1½ to 2 percent from 2005 levels. - VAR results corroborate that shocks to implicit assistance have had a significant impact on economic growth in the Windward Islands. - Sugar preference erosion findings - Guyana faces the largest impact: decline in sugar prices estimated to engender by 2010 a cumulative decline of up to 6½ percent of 2005 GDP. - Belize faces the second-largest impact with an estimated income decline around 1½ percent of 2005 GDP by 2010. - Other sugar-producing countries face smaller impacts; Trinidad and Tobago, Barbados, and Jamaica have export earnings estimated to decline by less than ѿ of 1 percent of 2005 GDP. - Long-run adjustment - Full effect of preference erosion is yet to be felt for sugar; full macroeconomic effects will become evident over the next several years. - Preference-dependent countries should continue raising agricultural efficiency and facilitate structural shifts toward tourism and financial services by improving investment climate, lowering business costs, and enhancing labor force skills. *Source: IMF Fund staff calculations and analysis as presented in the provided content.* ### Appendix 4.I. Data Sources and Issues ### Appendix 4.I. Data Sources and Issues ### Banana prices - Computations of implicit assistance (IAID) to banana producers are based on price differences between protected market prices (United Kingdom/European Union) and free market international prices—the preference margin from exporting to protected European markets. - Unit wholesale prices for the United Kingdom market are proxied by: - For the period 1975–96: The unit price for banana exports received by the Windward Islands in the United Kingdom. This is the c.i.f. price at the port after offloading and loading on a truck, that is including the port-handling charges. Prices are available until 1999. - For the period 1997–2005: World Bank unit prices for EU banana imports (originally sourced from Sopisco News, Food and Agriculture Organization and the World Bank’s own estimates). Specifically, these are the prices of Central and South American bananas—major brands (mainly Dole and Del Monte)—free on truck (f.o.t.) Hamburg, and include discharge costs. Prices also include European Community import taxes. The first year such prices are available is 1997. - Note on discontinuity: Some discontinuity is expected in the series in 1997, owing to (i) differences in discharge costs between Hamburg and London; and (ii) possible differences in rents captured from bananas between Caribbean ACP (Africa, Caribbean, and Pacific) countries and from Latin American banana exporters such as Ecuador, Honduras, and Costa Rica. - International unit prices are proxied by: - IMF data on banana exports, f.o.b., for the Windward Islands. It is assumed that all banana exports are destined for the United Kingdom (and later the EU) market. Data on export values and volume are taken from the ECCB and WIBDECO, and are available for 1970–2005. - The unit price data of “dollar” bananas is proxied by the U.S. import price of bananas from Central and South America, f.o.t., and includes upload charges to truck or rail. This data is available from the IMF’s World Economic Outlook database. ### Banana volumes - To calculate the value of implicit assistance (in terms of additional export revenues received by ACP banana-exporting countries), the preference margin for each year is multiplied by the annual volume of exports (in tons) for each country. - Data on export volumes for the Windward Islands (Dominica, Grenada, St. Lucia, and St. Vincent and the Grenadines) are taken from the Eastern Caribbean Central Bank, and for Belize and Suriname, they are from the Food and Agriculture Organization (FAO). ### Sugar prices and volumes - Computations of implicit assistance (IAID) to sugar producers are based on price differences between protected market prices (EU) and world (free market) international prices—the preference margin from exporting to protected European markets. - European Union unit prices are proxied by: - The unit price data of protected European market sugar is the EU negotiated import price for raw unpacked sugar exported from ACP countries, c.i.f. European ports. This data is available from the IMF’s World Economic Outlook database. - International unit prices are proxied by: - The unit price data of world (free market) sugar is proxied by the Coffee, Sugar and Cocoa Exchange (CSCE) contract No. 11 (price of nearest futures position), New York City Board of Trade. This data is available from the IMF’s World Economic Outlook database. - For comparability and so as not to overestimate the implicit assistance, f.o.b. prices were used. Caribbean f.o.b. prices were derived by removing from the sugar price in export markets (EU and free market) the cost of shipping (estimated by GUYSUCO, the Guyana Sugar Company), based on Sugar Protocal and SPS quota actual shipments. - To calculate the value of implicit assistance (in terms of additional export revenues received by ACP sugar-exporting countries), the preference margin for each year is multiplied by the annual volume of exports (in tons) for each country. Data on export volumes for the Barbados, Belize, Guyana, Jamaica, St. Kitts and Nevis, and Trinidad and Tobago are taken from the FAO. ### Macroeconomic data - All macroeconomic data (used in the VAR analyses) on gross domestic product (GDP), current account (CUR), international reserves (RES), and central government revenues, excluding grants (REV) are from IMF International Financial Statistics and World Economic Outlook databases, complemented by data from the country authorities. - For most variables, data for 2005 is based on Fund staff estimates. - For the Windward Islands: - To obtain real domestic variables, all nominal variables are deflated by the national consumer price index (CPI), which is taken from the Eastern Caribbean Central Bank. - Exception: nominal GDP is deflated by the GDP deflator (base 1990=100) and is taken from the Eastern Caribbean Central Bank. - Data on international variables expressed in U.S. dollars such as international prices and exports are deflated by the U.S. CPI. - For Guyana: the GDP deflator is used, and is taken from IMF, International Financial Statistics. *Appendix 4.I. Data Sources and Issues* ### Appendix 4.2. Country Adaptation Strategies ### Appendix 4.2. Country Adaptation Strategies ### Belize - Belize is the only Caribbean country significantly affected by trade preference erosion for both sugar and bananas. - EU trade regime impacts: - Expected 36 percent price reduction for Belize’s sugar exports (to be gradually phased in until 2009). - Expected price reduction of more than 14 percent for banana exports (starting in 2006). - Banana sector adaptation strategy (projects): - Upgrading of drainage and irrigation systems and rehabilitation of farms using tissue culture technology to increase yields. - Pavement of highways in the banana belt and enhancement of storage facilities at the Big Creek Port to improve the quality of banana exports. - Enhanced disease management and monitoring to protect farm production from Black Sigatoka disease. - Development of an appropriate and comprehensive marketing strategy leading to the establishment of a direct marketing presence for Belize in the European market. - Development and implementation of a Rural Development Program for all banana industry workers and nearby communities to enhance workers’ ability to attain greater marketability of their skills and self-reliance. - Enhanced environmental monitoring program to increase yields. - Increasing the value added through better utilization of “reject” bananas. - Sugar adaptation strategy (actions): - Increased cane supply through effective deregulation of the cane production system. - Improved cane quality through reduced cut-to-mill time, improved harvesting methods and field-to-factory transportation systems, and the implementation of core sampling. - Organization of farmers to allow for effective financial and technical resources pooling. - Introduction of a new cane payment system encouraging farmers to produce high quality cane. - Increased capacity to produce packaged direct consumption sugar. - Reduction of overall unit costs of production through improved field and factory costs and technical efficiencies and economies of scale. - Exploration of options to change the current costly and inefficient mode of transporting sugar from the factory to the ship, including opportunities related to developments at the Belize City Port. - Construction and operation of a cogeneration facility at the Tower Hill sugar plant to supply power and sell some to the national grid as of mid-2008. - Pursuit of plans for alcohol/ethanol production to add value to molasses, which are currently mostly exported. - Requested increase of market allocation from 42,000 tons to 100,000 tons to secure additional access to the EU market. - Financing and support: - Government committed to the European Union’s eight year assistance strategy (2006–13), which will provide €3 million in funding. - EU Banana Support Programme: Belize has been allocated over € 21 million through the program since its inception. ### Guyana - Importance of sugar sector: - Sugar accounted for 23 percent of total exports and 18 percent of GDP in 2006. - Employment: about 7 percent of the total labor force. - Sector comprises the state-owned Guyana Sugar Corporation (GUYSUCO). - GUYSUCO restructuring plan (early 2000s): - Aim to reduce average cost from about 24 U.S. cents per pound to 15 U.S. cents per pound by 2010. - Central project: construction of a modern large-scale factory at Skeldon with annual capacity of 110,000–130,000 tons of sugar. - Construction began in 2005 after delays; factory expected to be completed in early 2008. - Total cost of the project: US$167 million (22 percent of 2006 GDP). - Agricultural Improvement Program (with Caribbean Development Bank assistance): - Aim to increase per-hectare cane yields by 30 percent and raise the sugar content of the plants by 10 percent. - National Action Plan for the Sugar Industry (2006): - Basis for EU support of countries’ adjustment strategies to the decline in sugar preference prices. - GUYSUCO intends to rehabilitate and expand some factories to accommodate an expected 60 percent increase in production by 2010. - Priority project: construction of a packaging plant at Enmore to supply the Caribbean market. - Other long-term projects: construction of an ethanol production plant, a deep water berth, and two additional cogeneration facilities. - Risks and vulnerabilities: - Repeated flooding has delayed attainment of targets. - Dependence on preferential trade agreements; expansion into the CARICOM market relies heavily on the applicability of the 40 percent Common External Tariff (CET). - Announcement in early 2007 by Trinidad and Tobago of plans to close its sugar industry could make it difficult for GUYSUCO to invoke the CET. - Delays in delivery of EU support and other financing could affect key projects during 2007–10. - Assessment: - Strategy can improve long-term competitiveness but depends on timely critical investments and restructuring to remain financially viable by 2010, when the new EU regime will come into force. - EU commitment to provide budget support is positive, but finite resources must be used to achieve lasting improvements. - Further reductions in labor costs and enhanced competitiveness will be required in the face of further liberalization. - Promotion of greater private sector participation is welcome, but fiscal risks from public-private partnerships will need to be contained to safeguard the authorities’ medium-term objective of achieving fiscal sustainability. ### St. Kitts and Nevis - Sugar industry closure: - Closed in July 2005 after more than 300 years. - Industry had incurred substantial losses—on the order of 3î4 percent of GDP annually in the previous several years—even before the announced further cut in preferential access to the EU market. - Industry occupied about 9,300 acres of land (about a quarter of the land surface of St. Kitts) and employed about 1,400 workers (9 percent of the labor force). - Government takeover of the sugar company debt: about 29 percent of GDP. - Anticipated effects: - Considerable long-term economic benefits expected from release of land and labor to more productive uses and halting quasi-fiscal losses. - Significant transitional costs expected. - Transition costs and measures: - Severance package for 1,406 sugar workers cost about EC$27.4 million (2.3 percent of 2005 GDP); severance payments up to 104 weeks’ pay under the Severance Agreement of 1961 rather than the 1986 Protection of Employment Act maximum of 52 weeks’ pay. - Government servicing of SSMC debt increases central government interest bill by 1½ of GDP a year. Debt is in the form of a 30-year bond at 5.2 percent interest rate with principal repayments scheduled at US$57 million every five years; debt secured by approximately 4,700 acres of land. - Transfers to former sugar workers to increase over the medium term: medical care under the National Health Programme; SSMC pensioners transferred to the Social Security Scheme with guarantees that pensions will not be reduced; land allocation for workers wanting to become farmers; housing scheme for workers with long tenure (20 years or more) who do not own homes and have income levels below the poverty line. - Near-term macro effects: - Estimated modest impact on growth and foreign exchange earnings. - Sugar export proceeds had declined to an average of 2½ percent of GDP a year during 2000–04. - Offsetting factors: - Booming economy and initial low level of unemployment enabled quick absorption of most workers; survey in May–June 2006 found only 317 former workers were unemployed. - European Union pledged grant support to ACP sugar producers affected by erosion of trade preferences: project assistance of €2.8 million for 2006; general budget support of €42.3 million for 2007–10 with policy conditions to be finalized. - Strategy and recommendations: - Comprehensive transition strategy covers economic, social, and environmental measures to diversify and improve competitiveness; includes developing high-end tourism facilities, strengthening land development agencies, enhancing agriculture-tourism linkages, and empowering vulnerable groups. - Public sector should provide essential infrastructure; private sector should lead tourism development. - Given very high public debt, public investment should be based on rigorous cost-benefit analysis and financing availability. - Consider transferring lands to the private sector for more productive uses. - Efforts to empower vulnerable groups need to be well targeted and balanced against fiscal costs. ### Windward Islands - Focus of banana sector adaptation strategies: - Diversification, assistance for expansion, and niche-production. - Diversifying away from banana production: - Agricultural diversification programs to stimulate modernization and competitiveness of nonbanana crops (examples: root crops in St. Vincent and the Grenadines; passion fruit and hot peppers in Dominica). - Policy actions include procurement of equipment, implements and appropriate technology; providing irrigation infrastructure; facilitating farmers’ access to credit; and setting up value-added facilities such as the refurbished arrowroot factory in St. Vincent and the Grenadines. - European Union pledged support, but disbursements have been very low. - Helping the banana industry increase production: - Policies include subsidizing key inputs (particularly fertilizers); paying off debt of banana producers’ associations; exempting farmers’ incomes from tax; establishing WIBDECO (Windward Islands Banana Development and Exporting Company) as a marketing agent and partial owner of the shipping service; and making bonus payments to farmers who sell bananas to WIBDECO. - Moving production to “fair-trade” bananas: - Medium-term plans entail producing high-quality bananas for Europe under “fair trade” or “organic” labels to access a niche market with higher prices. - Movement to fair-trade exports estimated to have granted a price-premium to banana producers of around 30 percent over nonfair trade prices. - Assessment and limitations: - These adaptation strategies have offered some relief but are unlikely to be a sustained source of growth in the medium term. - Fair-trade premium has been eroded as more efficient Central and South American producers qualify as fair-trade producers. - Diversification efforts have suffered from very low disbursement of EU support; subsidies to key inputs have been more than offset by a sharp increase in the price of fertilizers. - Social safety nets and transition measures: - Targeted income transfers to poor rural households; in St. Vincent and the Grenadines about 5,000 farmers received a monthly cash stipend of EC$125 for those over 65 years of age. - Consideration of noncontributory health care and pension benefits in St. Vincent and the Grenadines and St. Lucia; example from St. Kitts and Nevis where sugar workers receive medical care under the National Health Program and pensions are assumed by the Social Security Scheme with guarantees. - Recommendations for social protection: - Social safety nets could be strengthened through greater consolidation, more transparency, and better data. - Current social assistance programs are largely overlapping, administratively cumbersome, expensive, and inefficient in targeting the most vulnerable. - Poverty and household surveys in the Windwards are typically outdated—the exception being St. Lucia—making identification and construction of a well-targeted system with clear and transparent criteria more difficult. *Appendix 4.2. Country Adaptation Strategies* ### References ### _dp0802 - References ### Preference erosion and trade policy analyses - Alexandraki, K., and H.P. Lankes, 2004, “The Impact of Preference Erosion on Middle-Income Developing Countries,” IMF Working Paper 04/169 (Washington: International Monetary Fund). - Amiti, M., and J. Romalis, 2006, “Will the Doha Round Lead to Preference Erosion?” IMF Working Paper 06/10 (Washington: International Monetary Fund). - Commonwealth Secretariat, 2004, “Preference-Dependent Economies and Multilateral Liberalization: Impacts and Options” (London: Commonwealth Secretariat). - LMC International, and Oxford Policy Management, 2003, “Addressing the Impact of Preference Erosion in Sugar on Developing Countries,” Report Prepared for Department for International Development, London. - National Economic Research Associates (NERA) and Oxford Policy Management, 2004, “Addressing the Impact of Preference Erosion in Bananas on Caribbean Countries,” Report Prepared for Department for International Development, London. - Subramanian, A., 2003, “Financing of Losses from Preference Erosion,” Paper Prepared for the World Trade Organization, WT/TF/COH/14, February. - Sanchez, J., 2004, “Obtaining the Tariff Equivalent to the Current Banana Regime in the European Union (25), According to the Attachment to Annex 5 of the WTO Agreement on Agriculture” (unpublished; Madrid: World Trade Organization). ### Banana sector: policy, history, and economic impact - Borrell, B., 1999, “Bananas: Straightening Out Bent Ideas on Trade as Aid,” Centre for International Economics (Canberra: Centre for International Economics). - Borrell, B., and M. Bauer, 2004, “EU Banana Drama: Not Over Yet: New Distortions from a High Tariff-Only Policy” (Canberra and Sydney: Centre for International Economics) March. - Clegg, P., 2003, The Caribbean Banana Trade (London: Palgrave Macmillan). - Dickson, A. K., 2003. “The EU Banana Regime: History and Interests, commissioned by Banana Link for EUROBAN, May 2003. - Food and Agriculture Organization (FAO), 2004, “Bananas: Is There a Tariff-Only Equivalent to the EU Tariff Rate Quota Regime? Insights from Economic Analysis,” FAO Trade Policy Technical Notes No. 3 (Rome: Food and Agriculture Organization). - Guyomard, H., Le Mouël, C. Levert, F. and J. Lombana, 2004, “Will the Banana Trade War Ever End?” paper presented for FAO Informal Expert Consultation on Banana Trade Policies, Rome, October 28–29. - Vanzetti, D., Fernandez de Cordoba, S., and V. Chau, 2004, “Banana Split: How EU Policies Divide Global Producers,” paper presented for FAO Informal Expert Consultation on Banana Trade Policies, Rome, pp. 28–29, October. - Myers, G., 2004, Banana Wars: the Price of Free Trade—A Caribbean Perspective (London: Zed Books). - Sandiford, W., 2000, On the Brink of Decline: Bananas in the Windward Islands (St. George’s, Grenada: Cedon Books). - Williams, O., and R. Darius, 1998, “Bananas, the WTO and Adjustment Initiatives in the Eastern Caribbean Central Bank Area” (unpublished; Basseterre, St. Kitts and Nevis: Eastern Caribbean Central Bank). - Williams, O., W. Sandiford, and A. Phipps, 1999, “Banana Price Shocks and Adjustment Within a Unified Currency Area,” Applied Economics, Vol. 31, pp. 1455–66. ### Regional studies: Caribbean, Windward Islands, and Eastern Caribbean - Atoyan, R., 2006, “The Impact of EU Trade Preference Erosion on Belize,” Belize: Selected Issues, IMF Country Report No. 06/370, pp. 5–18 (Washington: International Monetary Fund). - El-Masry, G., 2005, “The Rice and Banana Sectors,” Suriname: Selected Issues, IMF Country Report No. 05/142 (Washington: International Monetary Fund), pp. 45–51. - International Monetary Fund, 2002, “The Restructuring of the Banana Industry in St. Lucia and the Windward Islands,” in St. Lucia: Selected Issues and Statistical Appendix, IMF Country Report No. 02/14, pp. 6–23. - Mlachila, M., W. Samuel, and P. Njoroge, 2006, “Integration and Growth in the Eastern Caribbean” in The Caribbean: From Vulnerability to Sustained Growth, ed. by R. Sahay, D.O. Robinson, and P. Cashin (Washington: International Monetary Fund), pp. 307–48. - Mlachila M., and P. Cashin, 2007, “The Macroeconomic Impact of Trade Preference Erosion on the Windward Islands,” in Eastern Caribbean Currency Union: Selected Issues, IMF Country Report No. 07/97, pp. 18–48 (Washington: International Monetary Fund). - Mlachila, 2008, “The Macroeconomic Impact of Trade Preference Erosion on the Windward Islands,” forthcoming IMF Working Paper (Washington: International Monetary Fund). ### Sector studies, methodologies, and costing assessments - Baldwin, R.E., and T. Murray, 1977, “MFN Tariff Reductions and Developing Country Trade Benefits Under the GSP,” Economic Journal, Vol. 87, pp. 30–46. - Deaton, A., and R. Miller, 1995, “International Commodity Prices, Macroeconomic Performance, and Politics in Sub-Saharan Africa,” Princeton Studies in International Finance, No. 79 (Princeton, New Jersey: Princeton University). - Evans, M., and others, 2006, “Assessment of Costings of Sugar Action Plans,” report prepared by Oxford Policy Management (Oxford). - Stoeckel, A., and B. Borrell, 2001, “Preferential Trade and Developing Countries: Bad Aid, Bad Trade,” Rural Industries Research and Development Corporation, Publication No. 01/116 (Canberra: Australian Government Publishing Service). - NERA and Oxford Policy Management, 2004, “Addressing the Impact of Preference Erosion in Bananas on Caribbean Countries,” Report Prepared for Department for International Development, London. ### IMF and edited volumes addressing Caribbean integration and vulnerability - Sahay, R., D.O. Robinson, and P. Cashin, 2006, The Caribbean: From Vulnerability to Sustained Growth (Washington: International Monetary Fund). - Mlachila, M., and P. Cashin, 2007, “The Macroeconomic Impact of Trade Preference Erosion on the Windward Islands,” in Eastern Caribbean Currency Union: Selected Issues, IMF Country Report No. 07/97, pp. 18–48 (Washington: International Monetary Fund). *References list from the content unit _dp0802 - References.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/dp/2008/_dp0802.pdf_