Regional Integration in a Globalizing World: Priorities for the Caribbean — Key note speech by Agustín Carstens, Deputy Managing Director, IMF
IMF News, May 1, 2006
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- Published: May 1, 2006
The Caribbean in perspective
- Strengths:
- Vibrant democracies, transparent institutions, pluralism, and entrenched respect for civil and economic liberties.
- Strong education and health indicators; poverty lower than many other parts of the world.
- Ability to seize emerging comparative advantages (example: tourism).
- Challenges:
- Erosion of trading preferences with Europe leading to sustained decline in traditional agricultural export earnings.
- Large emigration of skilled labor; evidence cited that losses from emigration to OECD countries have outweighed the value of remittances received.
- Financial markets increasingly developed but largely used to finance public debt rather than high-growth sectors.
- Key statistics:
- Ratio of broad money to GDP increased, on average in the region, from about 50 percent to about 80 percent in the decade to 2005.
- Average level of public debt to GDP rising above 90 percent in 2005, up from 70 percent in the mid 1990s.
- Region is home to seven of the world's ten most indebted emerging market countries (as of 2005).
Integration: rationale and current state
- Observations:
- Regional integration has been a top agenda item for nearly half a century; action has not fully matched rhetoric.
- Launching of the Caribbean Single Market and Economy (CSME) initiative noted in the speech year.
- Imperatives for integration:
- Reduction of trade barriers within the region and with the rest of the world.
- Convergence and coordination of economic policies.
- Steps to strengthen financial sector linkages.
- Complementarity:
- Regional integration should complement, not substitute for, global integration to avoid trade diversion (imports from low-cost third countries replaced by higher-cost intra-regional sources).
Integration as a way to improve competitiveness
- Potential benefits:
- Achieve economies of scale across islands for production not feasible individually.
- Facilitate politically challenging reforms via regional agreements.
- Realize gains from specialization along value-added chains (examples: mass vs boutique tourism; Jamaican Blue Mountain coffee).
- Policy priorities:
- Relax rigid labor market laws to increase flexibility, reduce wage/productivity distortions, and enable greater labor mobility.
- Reassess education and migration policies to ensure social investment benefits the region.
- Risks to manage:
- Trade diversion — must continue reducing external trade barriers.
Policy convergence and coordination
- Necessity:
- Convergence of macroeconomic policies is essential before considering full monetary union.
- Coordination needed on exchange rate, fiscal, and monetary policies to avoid undue cross-country impacts.
- Specific policy areas requiring coordination:
- Tax concessions: widespread use of tax incentives and tax holidays has led to large revenue losses and questionable investment benefits; IMF studies indicate a "race to the bottom" where marginal effective tax rates come down to near zero or become negative.
- Harmonization of investor requirements and procedures — significant differences remain even within OECS (ECCU).
- Natural disaster risk mitigation: strengthen and enforce building codes and land zoning; incorporate contingencies into macroeconomic frameworks and budgets.
- Consideration of a regional risk pooling scheme (viability being studied by the World Bank).
- Collective provision of government services (example: trade negotiation expertise); potential for regional tax administration or regional financial oversight bodies.
Financial stability
- Recent trends:
- Increased regional financial integration over the last decade: interest rates across countries have converged; cross-listed companies account for nearly 60 percent of total market capitalization, up from zero a decade ago.
- Trinidad and Tobago has acted as a financial hub by channeling oil windfall savings to neighbors.
- Rapid growth of non-banking financial firms and securitization, particularly in Jamaica and Trinidad and Tobago.
- In some markets, funds managed by securities dealers and mutual funds exceed total bank deposits.
- In Jamaica, security dealers' core business is retail outlets for government debt.
- Concerns and prerequisites:
- Financial deepening has not been fully tapped to finance private-sector growth; reducing fiscal imbalances and large debt burdens is a precondition.
- Uneven regulatory oversight, limited corporate governance, rapid growth of derivatives, and increasing cross-border flows heighten contagion risk.
- Policy recommendations:
- Enhance supervision and strengthen regulatory coordination among country authorities; consider creation of a regional oversight body.
- Reduce remaining entry barriers and capital controls.
- Harmonize taxation, regulatory and supervisory frameworks and improve market infrastructure.
- Extend financial integration beyond the region to diversify risks and enlarge financing flexibility.
Role of the Fund
- Strategic shift:
- Increased regional dimension of Fund surveillance, expanding work beyond the ECCU to encompass the entire Caribbean.
- Regional surveillance to focus on systemic and cross-cutting issues that lie between bilateral and global multilateral surveillance.
- Short-term focus areas (coming year):
- Tax concessions.
- Loss of trade preferences.
- Financial integration.
- Support instruments and activities:
- Capacity-building and technical assistance.
- Provision of financial resources under various lending windows adapted to country circumstances.
- Relatively quick disbursing loans for natural disasters and adverse terms of trade shocks (such as loss of trade preferences).
- Emphasis on outreach and engagement with governments, business and labor leaders, and civil society.
Conclusions and policy priorities highlighted
- Integration—both regional and global—is essential for Caribbean prosperity; greater regional integration can complement global integration.
- Immediate policy priorities include:
- Reduce fiscal imbalances and public debt to free financial resources for private sector growth.
- Coordinate tax policy to avoid a "race to the bottom" and harmonize investor requirements.
- Strengthen financial regulation, supervision, and regional oversight mechanisms.
- Reform labor market rigidities and reassess education/migration policies to retain and develop human capital.
- Improve disaster risk mitigation and explore regional risk pooling.
- Timing:
- The speech emphasizes that "the right time is now" for the Caribbean to exploit globalization and regional integration to improve living standards.
Source: Regional Integration in a Globalizing World: Priorities for the Caribbean, Key note speech by Agustín Carstens, Deputy Managing Director, IMF — May 1, 2006.