## _wp1682

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---

### Introduction and core reform package
- Context: 1980s–1990s shift in Caribbean development policy from protectionism and heavy state involvement toward outward-oriented, liberal policies emphasizing export competitiveness and market efficiency.
- Core reform package:
  - Trade reforms: removal of import quotas; tariff reductions; improved export incentives.
  - Exchange rate policy: ensure a real exchange rate to improve international competitiveness and expand exports.
  - Tax reforms: neutrality and administrative simplification, including shift from trade taxes to VAT.
  - Financial liberalization: set positive real rates to encourage domestic savings and investment; interest rate policy reform.
  - Product pricing policies: removal of subsidies; elimination of price controls.
  - Privatization: transfer of public companies to private sector to improve efficiency and resource allocation.
- Objective: build indices measuring extent of structural reforms in the Caribbean and estimate short-run and long-run effects of structural reforms on growth using panel dynamic OLS; where Caribbean-specific institutional quality data limited, sample widened to include other small states.

### Stylized facts on structural reforms

- Trade reforms
  - Pre-1980s: high and widely dispersed tariffs; extensive use of NTBs.
  - NTB reduction: CEPAL (2007) estimate — NTBs affected an estimated 40 percent of imports in the mid-1980s and affected only 11 percent by 1997.
  - CARICOM CET timeline and structure:
    - 1991: rate structure reduced from 0-70 percent to 0-45 percent.
    - 1993: adjusted to 5-20 percent to be implemented over five years.
    - CET final range: 0 percent to 20 percent.
    - CET tariff categories: 0 or 5 percent on noncompeting inputs; 10 percent on competing primary and capital inputs; 15 percent on competing intermediate inputs; 20 percent on all final goods.
  - Implementation status:
    - About half of countries (accounting for majority of CARICOM trade) implemented final CET reductions.
    - All countries except Antigua and Barbuda, Montserrat and St. Kitts and Nevis completed four CET phases.
  - Tariff level changes:
    - Every country except Bahamas had nearly 10 point reduction in average import tariff rates between late 1990s and early 2000s.
    - Tariffs dropped from average levels of 22% in 1998 to 13% in 2001 and stagnated thereafter.
    - Bahamas: average tariff of 30 percent in 1996–2013.
    - Montserrat: average tariff 21 percent in 1996 and 18 percent in 2013.

- Financial liberalization
  - Background: central banks used reserve ratios, interest rate controls, moral suasion, exchange controls through 1960s–1970s.
  - 1980s–1990s: reforms driven by balance of payments problems and rising fiscal deficits, many associated with IMF programs.
  - Key reforms and status:
    - Credit controls abolished in early 1990s; reserve requirements remain.
      - Guyana, Jamaica and Trinidad and Tobago: abandoned secondary reserve requirements and maintain only cash reserve requirement.
      - Barbados, The Bahamas and OECS: retained both primary and secondary reserve instruments.
    - Interest rate deregulation common; only OECS had a floor on deposit rates; Barbados abolished minimum savings rate (in place over 40 years).
    - Privatization: general trend toward privatization of commercial banks; state-owned banks remain mainly in ECCU.
      - Barbados National Bank partially privatized in 2003; fully privatized by 2013.
    - Exchange controls liberalized in 1990s to attract capital inflows.
      - Guyana, Jamaica and Trinidad and Tobago: removed all restrictions on current and capital accounts (phasing differed).
      - Fixed-exchange rate countries (Barbados, The Bahamas, OECS): liberalized current account transactions while gradually removing capital account restrictions.
  - Summary: over three decades, countries eliminated controls on credit allocation, deregulated interest rates, privatized institutions, and reduced/abolished exchange controls while retaining reserve requirements; fixed-exchange rate countries maintained significant capital account restrictions and a minimum deposit rate up to December 2005; floating-rate regimes fully liberalized those areas.

- Tax reforms
  - Objectives: neutrality, legal and administrative simplification, greater collection; replace trade taxes with domestic taxes; use VAT to broaden base and facilitate tariff reductions.
  - Challenges: widespread tax exemptions, discretionary concessions, base-narrowing, evasion, administrative problems.
  - Income taxation:
    - Antigua and Barbuda, Bahamas, St. Kitts and Nevis: no personal income tax for most of last two decades (Antigua and Barbuda had no PIT up to 2005 when PIT reintroduced; 2016 budget announced removal of PIT).
    - St. Kitts and Nevis: no explicit PIT; Housing and Social Development Levy introduced in 1996 on wages and salaries.
    - Suriname: data from 2004; personal income tax rate = 0.38.
    - Reforms since 2000 in two rounds:
      - Early–mid-2000s: consolidation of direct taxation; PIT introduced in Antigua and Barbuda; 3 percent levy in Grenada (repealed in 2009).
      - Late 2000s: reduction in income tax rates, base widening, reduction in PIT brackets.
    - Personal income tax marginal rates: except St. Lucia, high marginal rates in 1990s cut substantially in 2000s in sample, from an average of 42% to 30%.
  - VAT adoption and effects:
    - VAT prioritized to create efficient, equitable, administrable systems.
    - Many VATs applied to highly taxed goods and tourism-related services.
    - ECCU practice: most adopted standard VAT rate of 15 percent with a lower rate of 10 percent applied to tourism industries.
    - Reversals: Grenada (1995) and Belize (1999) due to weak design/administration; Grenada’s VAT heavily zero-rated and failed to broaden base.
    - 2006–2012: VAT implementation cornerstone of successful tax reforms in many Caribbean countries, especially ECCU; successful experiences in Barbados, St. Kitts and Nevis, and St. Lucia reflected in higher VAT productivity (c-efficiency ratios).
    - Technical note: c-efficiency ratio = total VAT revenue as percentage of consumption or GDP, divided by the VAT standard rate.

- Privatization
  - Historical arc: nationalization in 1960s–1970s followed by reversal starting in 1980s–1990s amid fiscal stress and structural adjustment programs.
  - Examples:
    - Guyana: privatized 14 public enterprises between 1989 and 1992.
    - Trinidad and Tobago: privatization began in 1987; by 1995 roughly 30 companies fully or partially privatized.
    - Jamaica: program began in 1981; by 1991 close to 200 companies divested.
  - Pattern: privatization occurred across region to varying degrees as part of structural adjustment.

### Literature synthesis and measurement approach
- Empirical findings cited
  - ELM (1997): stabilization policy and reforms in Latin America raised region’s average long-term growth by 1.9-2.2 points (ELM did not address structural reforms specifically).
  - IMF (2013): structural reforms give greater play to market forces and openness—keys to sustained growth.
  - World Economic Outlook: product market liberalization raises productivity (especially services) but can have negative short-term effects; labor market deregulation does not help productivity and can have negative short-run effects.
  - Financial development literature: higher initial financial development associated with higher subsequent growth and efficiency (Beck et al., 2000a and 2000b, Aghion et al., 2005).
  - Sequencing: Hauner and Prati (2008) found trade as leading indicator; McKinnon (1993) argued trade and domestic financial reforms should precede capital account liberalization.
  - IMF Board paper (2015): fiscal structural reforms are a top priority; benefits more pronounced when reforms are bundled.

- Index construction principles
  - Annual data for 13 Caribbean countries, 1970–2014.
  - Extended Lora’s trade and tax index; adopted Greenidge and Milner methodology for financial liberalization.
  - Each sub-index normalized between 0 and 1 where 0 = least liberalized and 1 = most liberalized.
  - Normalization: Iit = (Rit - Min) / (Max - Min).
  - Principal component analysis used to compute combined reform index (rather than simple averaging).
  - Indices measure neutrality of policies relative to most liberalized country; not strictly comparable across sectors.

- Trade reform index specifics
  - Components: average tariff level and tariff dispersion (standard deviation from WITS).
  - Data: WITS for 1996–2013.
  - Caveats: missing historical data for ECCU; quantitative restrictions lacking tariff equivalents cannot be reflected.
  - Empirical pattern: significant increase in index between 1998 and 2001; limited change thereafter except Barbados.

- International financial liberalization (IFL)
  - Approach: Greenidge and Milner (2006) subdivision into controls on payments/transfers and capital transactions using AREAER reporting.
  - Scoring system: raw scale 0–14 (Capital 0–4; inward/outward current account 0–8; international agreement 0–2); normalized to 0–1.
  - Subjectivity acknowledged in converting qualitative AREAER text to scores.
  - Coverage: 12 CARICOM countries for 1979–2013 (Montserrat and Anguilla excluded).
  - Country patterns:
    - Antigua and Barbuda: index ~0.8 in early 1980s.
    - Trinidad and Tobago: IFL rose from 5.5 to 6.5 in late 1980s to 7.5 in 1992; removal of all capital account restrictions in 1993 raised index from 7.5 to 13.
    - Jamaica: IFL 5.5 in early 1980s; extensive reforms from 1985; current index 13.

- Tax indices
  - Four indices constructed on 0–1 scale:
    - a. Maximum marginal tax rate on personal income (0 = highest rate).
    - b. Maximum marginal tax rate on corporate income (0 = highest rate).
    - c. Basic VAT rate on scale 0–1 where 0 = highest tax rate; for pre-adoption years imputed as 0.5 times value in year of adoption.
  - VAT productivity defined and measured (ratio of VAT revenue to private consumption divided by VAT standard rate); latest available data imputed for initial years.

### Regional VAT/GCT rates and VAT productivity (mid-2013 snapshot)
- Antigua and Barbuda — Current Standard Rate: Jan. 2007 15.0; VAT Productivity at 2013: 15.0; additional numbers: 0.55 0.51
- Bahamas — Jan. 2015 7.5; VAT Productivity at 2013: 7.5
- Barbados — Jan. 1997 15.0; VAT Productivity at 2013: 17.5; 0.13 0.72
- Belize /1 — Jul. 2006 10.0; VAT Productivity at 2013: 12.5; 1.12 0.82
- Grenada — Feb. 2010 15.0; VAT Productivity at 2013: 15.0; 0.54 0.56
- Dominica — Mar. 2006 15.0; VAT Productivity at 2013: 15.0; 0.70 0.76
- Jamaica /2 — Oct. 1991 10.0; VAT Productivity at 2013: 16.5; 0.72 0.55
- St. Kitts and Nevis — Nov. 2010 17.0; VAT Productivity at 2013: 17.0; 0.10 0.75
- St. Lucia — Oct. 2012 15.0; VAT Productivity at 2013: 15.0; 0.37 0.80
- St. Vincent and the Grenadines — May. 2007 15.0; VAT Productivity at 2013: 15.0; 0.13 0.26
- Trinidad and Tobago — Jan. 1990 15.0; VAT Productivity at 2013: 15.0; 0.49 0.43
- Footnotes:
  - 1/ Only telephone services are subject to GCT at a rate of 20 percent. And motor vehicles are subject to GCT at rates up to 113.95 percent.
  - 2/ 10 percent rate applies on goods; 8 percent rate also applies on services. 25.0 and 50.0 are reserved for luxury goods like yachts.

### Empirical model, methodology, and main econometric findings
- Methodology
  - Barro-style growth regression augmented with structural reform measures and interaction terms.
  - Panel co-integration approach using dynamic OLS estimation (DOLS); DOLS preferred in small samples (McCoskey and Kao (1998); Kao and Chiang (2000)).
  - Long-run DOLS estimates embodied in short-run error-correction model.
  - Sample periods: annual data from 1960 to 2014 for growth regressions; institutional indicators 1996–2013 where applicable.
- Long-run findings
  - Positive long-run impacts on real GDP level:
    - Foreign direct investment, gross domestic investment, trade openness, and the real effective exchange rate.
  - Negative long-run impacts on real GDP level:
    - Government consumption expenditure and financial development.
  - Magnitude of investment effects:
    - A 1 percent rise in domestic investment accumulation leads to approximately 0.5 percentage point increase in output over time.
    - A 1 percent rise in foreign investment accumulation leads to approximately 0.1 percentage point increase in output over time.
  - Interpretation caveats:
    - Openness coefficient may capture tourism-driven exports and other policy-induced trade outcomes.
    - Negative government consumption coefficient may reflect crowding out or unproductive public spending; aggregate result does not imply all government spending reduces output.
- Short-run dynamics
  - Capital accumulation is the main short-run driver of growth.
  - Government consumption and the real effective exchange rate have no short-run impact in the model.
  - Structural reforms show benefits only over the long-term; no evidence of short-run impact.

- Structural reform effects (standardized)
  - Long-run level of real GDP boosted by:
    - Lowering average tariff rates.
    - Removing restrictions on the flow of international finance (international financial liberalization).
    - Increasing the productivity of the VAT.
  - These reform variables have statistically significant long-run effects at the 1% level (as reported in the source figures).

### Institutional quality: measurement, regional comparisons, and econometric results
- Measurement
  - World Bank Worldwide Governance Indicators used for 13 sample countries for 1996–2013.
  - Governance scale: -2.5 (weakest) to 2.5 (strongest).
  - Six sub-indexes: Political Stability and Absence of Violence/Terrorism; Government Effectiveness; Regulatory Quality; Rule of Law; Control of Corruption; Voice and Accountability.

- Regional comparisons (2000 vs 2013)
  - 2000: Caribbean outperformed comparison groups in voice and accountability, government effectiveness and regulatory quality.
  - 2013: Caribbean still outperformed overall; improvements in government effectiveness and corruption control; deteriorations in regulatory quality and rule of law.
  - Tourism-based Caribbean countries: improved political stability, control of corruption and government effectiveness by 2013; absolute Institutional Quality Index value cited: 0.91.
  - Commodity-based Caribbean countries: lower institutional quality scores in 2000 and worse in 2013, especially in voice and accountability, anti-corruption and political stability.

- Appendix regional assessments (selected markers)
  - Political Stability: most countries positive in 2013 except Guyana.
  - Government Effectiveness: wide divergence; Anguilla and Barbados strong positive ratings; Belize and Guyana consistently negative.
  - Regulatory Quality: regional average in 2013 = 0.23.
  - Rule of Law: Anguilla highest; Guyana, Jamaica and Suriname maintained negative ratings; Bahamas experienced sharp deterioration after 2009.
  - Control of Corruption: most ECCU members (except Dominica and Grenada) improved after 2004 and maintained rating around 1.5.
  - Voice and Accountability: Barbados freer; Guyana most conservative; several countries displayed a V-shape 2004–2006.

- Econometric estimates on institutions and growth (long-run coefficients reported)
  - Regulatory Quality: 0.861 ***
  - Government Effectiveness: 0.104 **
  - Voice of Accountability: 0.045 **
  - Political Stability & Absence of Violence: 0.012
  - Rule of Law: 0.076 ***
  - Control of Corruption: 0.018
  - Institution Quality Index: 0.211 ***
- Interpretation summary from authors
  - Regulatory quality, political stability, and voice and accountability are significant in raising output over the long-run; anti-corruption can have a short-run boost.
  - Improvements to government effectiveness contribute to higher economic growth in both short-run and long-run.
  - Political stability has no direct effect on growth in their specification.
  - Conclusion: strengthening governance institutions is essential for stronger growth in small states including the Caribbean.

### Policy recommendations and conclusions
- Structural reform momentum stalled after 1990s; further reforms needed to support growth.
- Priority actions recommended:
  - Reduce wide ranging tax concessions.
  - Make sustained efforts to improve VAT productivity.
  - Fully implement CET across all countries (reduce tariff exceptions) and remove remaining quantitative restrictions.
  - Remove remaining restrictions on flow of international finance, including FDI, over the medium to long-run.
  - Strengthen governance institutions to improve government effectiveness: improve civil service quality; speed and transparency of policy formulation and implementation.
  - Rationalize economic regulations and improve administrative efficiency to reduce transactions costs of doing business.
  - Incorporate regulations that facilitate and promote private sector development and reduce perceptions of corruption.
- Suggested future research:
  - Gauge contribution of structural reforms to total factor productivity and potential growth using growth accounting decomposition before and after reform episodes.
  - Include domestic financial and capital market reforms, privatization and labor market reforms if data become available.

*Source: Excerpted content from _wp1682 (IMF staff calculations and cited data as presented in the supplied PDF content).*

### References .............................................................................................................

### _wp1682 - References .............................................................................................................

### Introduction
- Context: 1980s–1990s shift in Caribbean development policy from protectionism and heavy state involvement toward outward-oriented, liberal policies emphasizing export competitiveness and market efficiency.
- Core reform package summarized:
  - Trade reforms: removal of import quotas; tariff reductions; improved export incentives.
  - Exchange rate policy: ensure a real exchange rate to improve international competitiveness and expand exports.
  - Tax reforms: neutrality and administrative simplification, including shift from trade taxes to VAT.
  - Financial liberalization: set positive real rates to encourage domestic savings and investment; interest rate policy reform.
  - Product pricing policies: removal of subsidies; elimination of price controls.
  - Privatization: transfer of public companies to private sector to improve efficiency and resource allocation.
- Paper objective: build indices measuring extent of structural reforms in the Caribbean and estimate short-run and long-run effects of structural reforms on growth using panel dynamic OLS; where data are limited for Caribbean-specific institutional quality, sample widened to include other small states.

### Stylized facts on structural reforms in the Caribbean

#### A. Trade Reforms
- Pre-1980s: high and widely dispersed tariffs; extensive use of non-tariff barriers (NTBs) including quantitative restrictions and discretionary licensing; high intra-regional import duties impeded intraregional trade.
- NTB reduction: CEPAL (2007) estimate — NTBs affected an estimated 40 percent of imports in the mid-1980s and affected only 11 percent by 1997.
- CARICOM Common External Tariff (CET) reform timeline and structure:
  - 1991: rate structure brought down from a range of 0-70 percent to 0-45 percent.
  - 1993: adjusted to 5-20 percent to be implemented over a five-year period.
  - CET final rate structure: 0 percent to 20 percent.
  - CET tariff categories and rates: 0 or 5 percent on noncompeting inputs; 10 percent on competing primary and capital inputs; 15 percent on competing intermediate inputs; 20 percent on all final goods.
  - CET provisions: special rate on agricultural products; limited duty exemptions for economic development; some national discretion.
- Implementation status: about half of countries (accounting for majority of CARICOM trade) have implemented final CET reductions; all countries in the region except Antigua and Barbuda, Montserrat and St. Kitts and Nevis have completed the four phases of the CET.
- Tariff level changes and country specifics:
  - Between late 1990s and early 2000s, every country except Bahamas had a nearly 10 point reduction in average import tariff rates.
  - Tariffs dropped from average levels of 22% in 1998 to 13% in 2001 and stagnated thereafter as some countries did not fully adopt the CET.
  - Bahamas: average tariff of 30 percent in the period 1996 to 2013.
  - Montserrat: average tariff was 21 percent in 1996 and 18 percent in 2013.

#### B. Financial Liberalization
- Background: central banks established in 1960s–1970s used primary and secondary reserve ratios, interest rate controls, moral suasion, and exchange controls to maintain monetary stability.
- 1980s–1990s drivers: balance of payments problems and rising fiscal deficits prompted financial system reforms to mobilize and allocate resources more efficiently; many reforms associated with IMF stabilization and structural adjustment programs.
- Key reforms and status:
  - Credit controls: all reviewed countries abolished credit controls during the early 1990s; reserve requirements remain an active policy tool.
    - Guyana, Jamaica and Trinidad and Tobago: abandoned secondary reserve requirements and maintain only cash reserve requirement.
    - Barbados, The Bahamas and OECS: retained both primary and secondary reserve instruments.
  - Interest rate deregulation: deregulation of interest rates common; only OECS currently have controls in the form of a floor on deposit rates.
    - Barbados recently abolished the minimum savings rate on deposit which was in place for over 40 years.
  - Privatization: general trend toward privatization of commercial banks; few state-owned banks remain, concentrated in ECCU sub-region.
    - Barbados National Bank partially privatized in 2003; state retained significant interest until 2013 when it was totally privatized.
  - Exchange controls: major focus of liberalization in the 1990s to attract capital inflows.
    - Guyana, Jamaica and Trinidad and Tobago: removed all restrictions on both current and capital accounts (phasing differed: Jamaica simultaneous, Guyana phased over five years, Trinidad and Tobago over three years).
    - Fixed-exchange rate countries (Barbados, The Bahamas, OECS): liberalized current account transactions while gradually removing capital account restrictions.
  - Barriers to entry: entry criteria set by Central Bank Acts and Financial Institutions Acts; few documented refusals of banking licenses but several revocations.
  - Bank autonomy: emphasis on prudential regulation and supervision rather than direct operational involvement; notable exception: Government of Jamaica’s intervention in some banks after the 1990s financial crisis.
- Summary statement: over three decades, Caribbean countries eliminated controls on credit allocation, deregulated interest rates, privatized institutions, and reduced/abolished exchange controls, while retaining reserve requirements. Fixed-exchange rate countries maintained significant capital account restrictions and a minimum deposit rate up to December 2005; floating-rate regimes fully liberalized those areas.

#### C. Tax Reforms
- Reform objectives: neutrality, legal and administrative simplification, greater collection; replacement of trade taxes with domestic taxes; use of VAT to broaden base and facilitate tariff reductions.
- Challenges: effectiveness weakened by widespread tax exemptions, discretionary tax concessions, narrowing of tax bases, evasion, and administrative problems.
- Income taxation variation and reforms:
  - Antigua and Barbuda, Bahamas, and St. Kitts and Nevis: did not levy personal income taxes for most of last two decades (note: Antigua and Barbuda had no personal income tax up to 2005 when PIT was reintroduced; 2016 budget announced removal of PIT).
  - St. Kitts and Nevis: no explicit personal income tax, but Housing and Social Development Levy introduced in 1996 on all wages and salaries; levy structure and rate changed over time.
  - Suriname: available data from 2004; personal income tax rate has not changed since then (rate=0.38).
  - Reforms since 2000 occurred in two rounds:
    - Early to mid-2000s: consolidation of direct taxation — PIT introduced in Antigua and Barbuda; 3 percent levy on salaries in Grenada to aid reconstruction (repealed in 2009). CIT revenue increases observed in St. Kitts and Nevis linked to new tax audit program and increased profitability of indigenous bank.
    - Late 2000s: reduction in income tax rates, base widening, reduction in number of PIT brackets.
  - Personal income tax marginal rates: except for St. Lucia, high marginal rates applied in 1990s were cut substantially in 2000s in sample group, from an average of 42% to 30%.
- VAT adoption and effects:
  - VAT prioritized to create efficient, equitable, administrable systems providing adequate and stable revenues.
  - VAT reshaped revenue structures; applied to highly taxed goods including petroleum products, alcoholic beverages, tobacco, passenger cars, and services such as telecommunications.
  - Economic rationale: replacing tariffs with consumption taxes can increase revenue and consumer welfare by reducing production distortions and widening the tax base.
  - ECCU practice: most adopted standard VAT rate of 15 percent with a lower rate of 10 percent applied to tourism industries.
  - Implementation experience:
    - Reversals: Grenada (1995) and Belize (1999) due to weak design/administration or policy reasons; Grenada’s VAT was heavily zero-rated and failed to broaden base.
    - 2006–2012: VAT implementation was cornerstone of successful tax reforms in many Caribbean countries, especially ECCU; increases in VAT coverage or efficiency observed; successful recent experiences in Barbados, St. Kitts and Nevis, and St. Lucia reflected in higher VAT productivity (c-efficiency ratios).
  - Technical note: c-efficiency ratio = total VAT revenue as percentage of consumption or GDP, divided by the VAT standard rate.

#### D. Privatization
- Historical arc: post-independence nationalization of utilities and banks in 1960s–1970s followed by reversal starting in 1980s–1990s amid fiscal stress and structural adjustment programs.
- Motivations: improve efficiency in public institutions and strengthen fiscal performance.
- Examples:
  - Guyana: privatized 14 public enterprises between 1989 and 1992 including telecommunications, transportation companies, and its largest bank (part of 1989 SAP).
  - Trinidad and Tobago: privatization began in 1987, and by 1995 roughly 30 companies had been fully or partially privatized.
  - Jamaica: privatization program began in 1981; by 1991 close to 200 companies were divested.
- Pattern: privatization occurred across the region to varying degrees as part of structural adjustment programs.

### Literature review (selected points)
- Empirical evidence highlights importance of structural reforms to growth.
- Easterly, Loayza and Montiel (ELM, 1997): econometric measurement of macroeconomic policy reforms on growth using a worldwide panel (70 countries, 1961–1993, including 16 from Latin America) found stabilization policy and reforms in Latin America raised region’s average long-term economic growth by 1.9-2.2 points; ELM did not address structural reforms specifically.
- Fernandez-Arias and Montiel (1997): extended the literature by including structural reform dimensions (text ends mid-sentence).

*Source: Excerpt from the PDF chapter/section provided.*

### Introduction

### _wp1682 - Introduction

### Introduction and regional VAT table (mid 2013)
- Caribbean VAT/GCT rates and VAT productivity in 2013 (in percent or index values as presented):
  - Antigua and Barbuda — Current Standard Rate: Jan. 2007 15.0; VAT Productivity at 2013: 15.0; (additional numbers shown) 0.55 0.51
  - Bahamas — Jan. 2015 7.5; VAT Productivity at 2013: 7.5
  - Barbados — Jan. 1997 15.0; VAT Productivity at 2013: 17.5; 0.13 0.72
  - Belize /1 — Jul. 2006 10.0; VAT Productivity at 2013: 12.5; 1.12 0.82
  - Grenada — Feb. 2010 15.0; VAT Productivity at 2013: 15.0; 0.54 0.56
  - Dominica — Mar. 2006 15.0; VAT Productivity at 2013: 15.0; 0.70 0.76
  - Jamaica /2 — Oct. 1991 10.0; VAT Productivity at 2013: 16.5; 0.72 0.55
  - St. Kitts and Nevis — Nov. 2010 17.0; VAT Productivity at 2013: 17.0; 0.10 0.75
  - St. Lucia — Oct. 2012 15.0; VAT Productivity at 2013: 15.0; 0.37 0.80
  - St. Vincent and the Grenadines — May. 2007 15.0; VAT Productivity at 2013: 15.0; 0.13 0.26
  - Trinidad and Tobago — Jan. 1990 15.0; VAT Productivity at 2013: 15.0; 0.49 0.43
- Footnotes in the table:
  - 1/ Only telephone services are subject to GCT at a rate of 20 percent. And motor vehicles are subject to GCT at rates up to 113.95 percent.
  - 2/ 10 percent rate applies on goods; 8 percent rate also applies on services. 25.0 and 50.0 are reserved for luxury goods like yachts.
- Sources: International Bureau of Fiscal Documentation, 2013 ; Deloitte, Global Indirect Tax Rates, 2013.

### Evidence on structural reforms and growth (literature synthesis)
- Key empirical and theoretical findings cited:
  - An index of structural reforms to the basic ELM model (69 countries, 18 in Latin America) found macro reforms in recent years added an additional 0.5% to the average growth rate.
  - Lora and Barrera (1998): standard long-run growth model using 19 countries suggested structural reforms had a powerful effect on growth (directly or via investment and productivity).
  - IMF (2013) indicated structural reforms gave greater play to market forces, better policymaking and greater trade and financial openness—keys to sustained growth.
  - World Economic Outlook: product market liberalization increases competition and has a positive effect on productivity (especially services) but short-term effect is negative; labor market deregulation does not help productivity and can have negative short-run effects.
  - Trade openness is widely argued to reduce market restrictions and accelerate technology diffusion; however, Rodriguez and Rodrik (1999) caution that the relationship between trade reform and growth is highly sensitive to measurement and data issues.
  - Financial development literature: higher initial financial development is associated with higher subsequent growth and efficiency (Beck et al., 2000a and 2000b, Aghion et al., 2005). MacKinnon (1973) and Shaw (1973) argued financial repression blocks efficient capital allocation; liberalization can boost development and growth.
  - Sequencing and interaction of reforms: Hauner and Prati (2008) found trade as a leading indicator but no clear pattern between capital account and domestic finance sequencing. McKinnon (1993) argued trade and domestic financial reforms should precede capital account liberalization.
  - Braun and Raddatz (2007): domestic financial development has a smaller effect on growth in countries open to trade and with free capital flows.
  - IMF Board paper (2015): structural reforms on the fiscal side are a top priority; benefits are more pronounced when reforms are bundled.

### Measuring the impact of reforms: methodology and indices
- Data coverage and countries:
  - Annual data for 13 Caribbean countries from 1970 to 2014: Antigua and Barbuda, Bahamas, Barbados, Belize, Dominica, Jamaica, Montserrat, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, and Trinidad and Tobago.
- Index construction principles:
  - Extended Lora’s trade and tax index to Caribbean countries; adopted Greenidge and Milner methodology to quantify financial liberalization.
  - Each sub-index normalized between zero and one where 0 = least liberalized and 1 = most liberalized.
  - Normalization: difference between raw data and least liberalized country observation expressed as a percentage of the difference between maximum and minimum observations over all countries and years.
  - Instead of simple averaging of sub-indexes (as Lora), principal component analysis was used to compute the combined reform index.
  - Index measures neutrality of policies relative to the most liberalized country; intended to measure neutrality rather than quality.
  - Indices are not strictly comparable across sectors.
- Formal formula presented:
  - Iit = (Rit - Min) / (Max - Min)  (expressed in the source as ()/( ) itit IRMa xMi n   Ma x with variables defined: Iit index value, Rit raw value, Max maximum, Min minimum).

### A. Trade reform index: methodology, data limitations, and trends
- Trade index components:
  - Two subcomponents: average level of tariff rates and dispersion of tariffs (tariff dispersion measured as standard deviation of tariff rate from WITS).
  - Data source: World Integrated Trade Solution (WITS) database of the World Bank for the period 1996 to 2013.
  - Principal component analysis used to combine subcomponents into index on scale 0–1 where 0 = highest tariff and largest dispersion and 1 = most liberalized trade regime.
- Data and measurement caveats:
  - Lack of adequate historical data for ECCU countries and discontinuities in series/methodology led to imputing latest available tariff rates to represent previous missing data.
  - Quantitative restrictions (quotas, licensing) have no tariff equivalents and cannot be reflected in the trade reform database.
- Empirical pattern:
  - Significant increase in the index between 1998 and 2001 reflecting intense reform in that period.
  - Except for Barbados, there were no major changes thereafter; reform halted in some countries due to incomplete adoption of the CET and unfinished program.

### B. International financial liberalization (IFL): measurement and country patterns
- Measurement approach:
  - Adopted Greenidge and Milner (2006) approach subdividing controls into: controls on payments and transfers and controls on capital transactions.
  - Based on IMF’s AREAER reporting: exchange arrangements, administration of controls, payments for imports/exports, payments for invisibles, capital account transactions, and gold.
  - Decision rules (Table 2) convert qualitative AREAER descriptions into quantitative scores.
- Scoring system (components and scales):
  - Capital receipts and payments: measured by “Capital” scored 0–4.
  - Inward and outward current account transactions: scale 0–8 (goods and services each 0–4).
  - International agreement: scored 0–2.
  - Resulting raw scale 0–14 where higher numbers indicate more financial liberalization.
  - IFL index normalized to 0–1 where 0 = lowest IFL and 1 = highest.
- Subjectivity and data limitations:
  - Conversion of qualitative text to quantitative measure has subjective elements but applied consistently.
  - Lack of measurement on domestic financial liberalization (freedom of interest rates, state ownership/regulation, entry barriers, credit controls) due to insufficient ECCU data.
- Coverage and notable country-level patterns:
  - IFL indices cover 12 CARICOM countries for 1979–2013 (Montserrat and Anguilla not included).
  - Antigua and Barbuda: index around 0.8 in the early 1980s — almost fully financially liberalized and more liberalized than other ECCU countries.
  - Trinidad and Tobago: index movement from 5.5 to 6.5 in the late 1980s and then to 7.5 in 1992 reflects policy changes; 1993 removal of all capital account restrictions caused IFL index spike from 7.5 to 13.
  - Jamaica: IFL index 5.5 in early 1980s; extensive reforms began in 1985 and by 1991 macro stabilization; current index is 13 (one of the most financially liberalized in CARICOM).
- Aggregated trends illustrated (figures in source):
  - Index of Financial Reform, 1984, 2001, 2013 for listed countries (plotted values not repeated here beyond country labels).
  - Time series of Indices of International Financial Liberalization (average of 12 Caribbean countries) and subgroup lines (ECCU without Antigua, Jamaica, Trinidad & Tobago, Antigua and Barbuda).

### C. Tax reform: indices and construction
- Four tax-related indices constructed (by year and country), each on a scale 0–1:
  - a. The maximum marginal tax rate on personal income where 0 is the highest rate.
  - b. The maximum marginal tax rate on corporate income where 0 is the highest rate.
  - c. Basic VAT rate on a scale of 0 to 1, where 0 is the highest tax rate; for years prior to adoption of VAT, the value was imputed as 0.5 times the value of the index in the year of adoption.
- (Text ends mid-sentence in the source regarding further tax index construction details.)

*Source: _wp1682 - Introduction (sections and tables as presented in the supplied PDF content).*

### introduction of VAT

### _wp1682 - introduction of VAT

### VAT measurement and data sources
- VAT productivity is calculated as the ratio between the tax revenue and private consumption times the basic VAT rate. The latest available data were imputed for the initial years.
- For some countries there is no VAT but consumption taxes (examples in the sample: Antigua and Barbuda — Antigua and Barbuda Sales Tax (ABST); Jamaica — General Consumption Tax (GCT); Belize — General Sales Tax (GST)).
- Tax data sources used: (i) International Bureau of Fiscal Documentation, IBFD; (ii) Individual Income Tax and Social Security Rate Survey; (iii) Corporate and Indirect Tax Survey of KPMG; and IMF data provided by country authorities.
- Some data reported on a fiscal year basis were converted to calendar year for comparability.
- Tax revenue data comes from IMF staff estimates, and consumption data comes from the World Economic Outlook database, IMF.

### Tax policy interpretation and regional patterns
- Justification for using top marginal income tax rates: the top marginal rates influence labor and investment decisions more directly than average rates.
- Tax productivity is interpreted as an indicator of the degree of effective neutrality of taxes; it reflects both neutrality in tax regulations and efficiency of collection (influenced by evasion and tax administration effort).
- Higher tax policy ratings correspond to countries with the lowest, flattest tax rates with most effective collection.
- Tax reforms in the 2000s were intense, featuring reduction of both personal and corporate income tax and introduction of VAT.
- Two rounds of strong reforms are observable in the tax indices, driven especially by increased VAT productivity.
- Exceptions where tax reform did not go smoothly in the region: Bahamas, Jamaica and Suriname.
- Despite homogenized tax rates, effective VAT collection differs across countries due to:
  - Exclusion of many final goods and services (especially in countries with higher rates).
  - Performance of government revenue administrations.
- Country example: Belize zero-rates a wide range of domestically produced agricultural products together with some medicines and medical supplies and financial services.

### Empirical model, methodology, and long-run results
- Empirical framework: a Barro-style growth regression augmented with structural reform measures and interaction terms; panel co-integration approach adopted using dynamic OLS estimation (DOLS).
- Rationale for estimator: DOLS chosen over alternatives (BCOLS, FMOLS) because DOLS is superior in small samples (cited McCoskey and Kao (1998); Kao and Chiang (2000)).
- Long-run estimates from DOLS are embodied in a short-run error-correction model.
- Sample period and data: annual data from 1960 to 2014; data from IMF World Economic Outlook database, World Development Indicators and IMF staff calculation.
- Long-run findings (summary):
  - Foreign direct investment, gross domestic investment, trade openness and the real effective exchange rate exert a positive impact on the level of real GDP.
  - Government consumption expenditure and financial development have a negative effect on the level of real GDP.
- Magnitude of investment effects:
  - A 1 percent rise in domestic investment accumulation leads to approximately 0.5 percentage point increase in output over time.
  - A 1 percent rise in foreign investment accumulation leads to approximately 0.1 percentage point increase in output over time.
- Interpretation and caveats:
  - Openness coefficient likely captures broader outcomes (e.g., tourism-driven exports of services) and may reflect other policy actions that encourage trade rather than traditional trade openness alone.
  - Negative impact of government consumption expenditure may reflect crowding out of private investment and unproductive public spending; this is an aggregate result and does not imply all categories of government spending reduce output.
- Short-run dynamics:
  - Capital accumulation is the main driver of growth in the short-run.
  - Government consumption and the real effective exchange rate have no short-run impact in the model.
  - The authors find that the benefits of structural reforms are only seen over the long term; structural reforms have been effective in raising output levels over time but show no evidence of short-run impact (short-run estimates referenced in Appendix Table 3).

### Structural reform effects (standardized impacts)
- Structural reforms found to boost long-run level of real GDP include:
  - Lowering average tariff rates.
  - Removing restrictions on the flow of international finance (international financial liberalization).
  - Increasing the productivity of the VAT.
- A figure of standardized/scaled coefficients indicates these reform variables have statistically significant long-run effects at the 1% level (figure labels in source: average tariff rates / combined tariff measure; International financial lib.; Productivity of VAT; Standardized coefficient definition: standardized coefficient = sd of dependent variable / sd. regressor * coefficient).

### Institutional quality considerations
- Institutions are correlated with economic performance: secure property rights, balanced government power, effective contract enforcement support investment in human and physical capital.
- Institutional weaknesses in lower-income countries can weaken the impact of reform initiatives.
- Empirical literature cited:
  - Mauro (1995): negative correlation between corruption and economic growth.
  - Knack and Keefer (1995): measures like bureaucracy quality, property rights, political stability have positive statistically significant relationships with economic performance.
  - Cukierman, Webb and Neyapti (1992): weak judiciary can undermine central bank autonomy effects on inflation in developing countries.
  - Rosenberg and Birdzell (1986), Eggertson (1990), Mauro (1995), Clague et al. (1996): simultaneous relationship where better institutions raise growth and higher growth can improve institutional quality.
- Regional assessment: an IADB (2009) study on institutional quality for business development found the Caribbean did not rank highly overall; the region performed best on legal system effectiveness (Barbados approximated the high income OECD average, though courts are slow but fair).
- Institutional measurement in the paper: World Bank ‘Worldwide Governance Indicators’ used for the 13 sample countries in the period 1996-2013. The Worldwide Governance Indicators aggregate indicators of six broad dimensions of governance: Political Stability and Absence of Violence/Terrorism, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption. The indicator ranges from -2.5 to

*Source: _wp1682 - introduction of VAT (IMF staff calculation and cited data sources in the provided content).*

### 2.5 where -2.5 is the weakest governance performance while 2.5 is the strongest.

### _wp1682 - 2.5 where -2.5 is the weakest governance performance while 2.5 is the strongest.

### Institutional quality: definitions and scale
- Governance scale: -2.5 (weakest governance performance) to 2.5 (strongest).
- The six Institutional quality sub-indexes:
  - Political Stability and Absence of Violence/Terrorism: perceptions of likelihood government will be destabilized or overthrown by unconstitutional or violent means, including politically-motivated violence and terrorism.
  - Government Effectiveness: perceptions of the quality of public services, the quality of the civil service and its independence from political pressures, quality of policy formulation and implementation, and credibility of the government's commitment to such policies.
  - Regulatory Quality: perceptions of the ability of the government to formulate and implement sound policies and regulations that facilitate and promote private sector development.
  - Rule of Law: perceptions of the extent agents have confidence in and abide by the rules of society, including quality of contract enforcement, property rights, the police, and the courts, and likelihood of crime and violence.
  - Control of Corruption: perceptions of the extent to which public power is exercised for private gain, including petty and grand corruption and "capture" of the state by elites and private interests.
  - Voice and Accountability: perceptions of extent to which citizens can participate in selecting their government, freedom of expression, freedom of association, and a free media.

### Empirical comparisons: Caribbean and other small economies (2000 vs 2013)
- 2000:
  - The Caribbean outperformed both comparison groups, especially in voice and accountability, government effectiveness and regulatory quality.
  - Political stability was relatively the same in all small states.
- 2013:
  - The Caribbean still outperformed the sample groups overall.
  - Improvements recorded in government effectiveness and corruption control.
  - Deterioration recorded in regulatory quality and rule of law.
- Tourism based Caribbean countries (Antigua and Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines):
  - In 2000 they outperformed small economies in regulatory quality, corruption control and voice and accountability.
  - Significant improvement by 2013 in political stability, control of corruption and government effectiveness, enhancing the business environment relative to other small economies.
  - Absolute Institutional Quality Index value cited: 0.91 (compared to 2.5, the maximum).
  - Specific tourism-based country examples highlighted: St. Kitts and Nevis, St. Lucia and St. Vincent and the Grenadines supported business development relatively better.
- Commodity based Caribbean countries (Guyana, Suriname, Trinidad and Tobago):
  - In 2000 had much lower institutional quality scores and underperformed on rule of law in society and political stability relative to other small economies.
  - In 2013 performed worse compared to 2000, especially in voice and accountability, anti-corruption and political stability.
  - Overall, commodity based economies displayed weaker institutional quality than tourism based economies.

### Econometric evidence on institutional quality and growth
- Data limitations:
  - Institutional quality indicators available only from 1996, raising reliability concerns for earlier-period estimates.
  - To quantify effects, sample widened to include 24 other small states and same model used to estimate effects on economic growth.
- Key econometric findings (long-run and statistical significance preserved as presented):
  - Regulatory Quality: 0.861 ***
  - Government Effectiveness: 0.104 **
  - Voice of Accountability: 0.045 **
  - Political Stability & Absence of Violence: 0.012
  - Rule of Law: 0.076 ***
  - Control of Corruption: 0.018
  - Institution Quality Index: 0.211 ***
- Interpretive summary from the study:
  - Government regulatory quality, political stability and voice and accountability are significant in raising output over the long-run while anti-corruption can have a short-run effect to boost the economy.
  - Improvements to government effectiveness can contribute to higher economic growth in both short-run and long-run.
  - Political stability, on the other hand, has no direct effect on growth (as stated in the text).
  - Conclusion drawn: from a long-term perspective, institutional quality is essential to achieve stronger growth in small states including the Caribbean; strengthening governance institutions could be part of a comprehensive growth strategy.

### Policy recommendations and conclusions
- Structural reform momentum stalled after progress in the 1990s; more reforms needed to support growth.
- Findings on reform impacts:
  - Benefits of structural reforms are seen over the long-term; no significant evidence of short-term gains.
  - Gains observed from lowering average tariff rates, removing restrictions on the flow of international finance, and increasing productivity of the VAT.
- Policy recommendations for Caribbean authorities:
  - Reduce wide ranging tax concessions.
  - Make sustained efforts to improve the productivity of the VAT.
  - Further liberalize the trade regime via full implementation of the CET by all countries (reduce tariff exceptions) and remove remaining QRs.
  - Remove remaining restrictions on the flow of international finance, including on FDI, over the medium to long-run.
  - Strengthen governance institutions to improve government effectiveness: improve quality of the civil service; speed and transparency of policy formulation and implementation.
  - Rationalize economic regulations and improve administrative efficiency to reduce transactions costs of doing business.
  - Incorporate regulations that facilitate and promote private sector development and reduce perception of corruption.
- Suggestions for future research:
  - Gauge contribution of structural reforms to total factor productivity and potential growth by employing growth accounting decomposition before and after reform episodes.
  - Include domestic financial and capital market reforms, privatization and labor market reforms if data is available.

*Source: World Bank Governance Indicator and IMF Staff Calculation as presented in the supplied text.*

### Appendix Table 3. Long run Estimates for Institutional Quality and Growth

### Appendix Table 3. Long run Estimates for Institutional Quality and Growth

### Regional overview
- "The institutional quality for doing business in most countries in the Caribbean is weak with a relative low score compared to the highest 2.5 margin."
- "Anguilla stands out in the region."
- Time coverage and references in figures: "1996-2013" and specific year markers such as "2013", "2006-07", and "2004".

### Political Stability and Absence of Violence
- Most countries in the region have a positive index value in 2013 except "Guyana".
- "Overall, improvement in the ratings took place in the region, especially after 2006-07."
- Prior to 2006, ratings of "Belize, Grenada and Suriname showed a marked shift down but stabilized thereafter."
- Conclusion: "the region maintains a good rating for political stability and security which is supportive to growth."

### Government Effectiveness
- "There is a large divergence of the index in the region."
- Positive ratings: "Anguilla and Barbados have strong positive ratings."
- Negative/weak ratings: "Belize and Guyana have consistently negative ratings."
- Notable improvements: "St. Kitts and Nevis, St. Lucia and St. Vincent and Grenadines showed strong improvement after 2004."
- Other sustained positives: "Grenada and Trinidad and Tobago maintained a positive rating."

### Regulatory Quality
- "The region showed a very weak pattern."
- Regional average in 2013: "0.23" (exact phrasing: "In 2013, the average index value of the region was as low as 0.23").
- Specific country declines: "for countries such as Grenada, Guyana and Barbados; the quality index fell to its lowest level."
- Volatility: "St. Kitts and Nevis, St. Lucia and St. Vincent and the Grenadines displayed significant variation ... with a sharp improvement in 2004 followed by an almost completely reversal from 2005 to 2013."
- Best performer: "Anguilla has the best quality of governance in the region."

### Rule of Law
- Highest regional rating: "Anguilla has the highest rating in the region."
- Negative ratings maintained over time: "Guyana, Jamaica and Suriname maintained a negative rating overtime."
- Notable declines: "There was a significant decline in Trinidad and Tobago from 2002 to 2007."
- Bahamas: "experienced a sharp deterioration after 2009, which indicated the need for policy actions to strengthen the legal and judicial systems to support an improved environment for investment and growth."

### Control of Corruption
- ECCU members: "most ECCU members (except Dominica and Grenada) had significant improvement after 2004 and maintained a rating around 1.5."
- Larger countries lagging: "While larger countries like Belize and Guyana compares unfavorably with the rest of the Caribbean."
- Deterioration example: "Suriname’s score deteriorated significantly over the period."
- Policy implication: "part of the region needs to decisively tackle corruption as important part of the structural reform agenda."

### Voice and Accountability
- Freer government participation: "Barbados has freer government participation while Guyana has the most conservative political environment."
- V-shape pattern: "A significant v-shape of the index for St. Vincent, St. Lucia, St. Kitts and Guyana appeared from 2004 to 2006."

### Key quantitative markers and timelines (as reported)
- Year span for indicators and figures: "1996-2013"
- Specific years called out: "2013", "2006-07", "2004", "2002 to 2007", "after 2009", "2005 to 2013"
- Regional average regulatory quality in 2013: "0.23"
- ECCU anti-corruption rating level post-2004: "around 1.5"
- Upper reference point mentioned for comparison: "the highest 2.5 margin"

### Policy recommendations and implications (text-derived)
- Strengthen legal and judicial systems to support investment and growth (motivated by declines in Rule of Law and Bahamas deterioration).
- Decisively tackle corruption as an important part of the structural reform agenda (motivated by control of corruption patterns and Suriname deterioration).
- Address divergent government effectiveness by improving public policy and government efficiency in countries with consistently negative ratings (e.g., Belize and Guyana).
- Monitor and stabilize regulatory quality given sharp reversals observed in several small states (e.g., St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines).

*Source: Appendix Table 3. Long run Estimates for Institutional Quality and Growth (figures and text from the supplied IMF content).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2016/_wp1682.pdf_