"Caribbean Challenges, Growth, and Progress on the Small States Initiative" — Nemat (Minouche) Shafik, Deputy Managing Director, IMF

IMF News, September 20, 2013

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"Caribbean Challenges, Growth, and Progress on the Small States Initiative" — Nemat (Minouche) Shafik, Deputy Managing Director, IMF

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Bibliographic details

• Published: September 20, 2013

Overview and context

• Speech delivered September 20, 2013.
• Speaker: Nemat (Minouche) Shafik, Deputy Managing Director, IMF.
• Focus: IMF perspective on Caribbean growth challenges and the Fund’s work in support of Small States.

Good news and bad news on Caribbean growth

• Long-term performance:
  • Over the last 30 years, growth in small states has kept pace with large countries.
  • In the Caribbean, per capita income growth was double that of larger Latin American peers.
  • Average per capita incomes in the Caribbean are near $9,000, compared to under $6,000 for Latin American peers.
  • Living standards and social indicators are as good as, if not better, than larger peers.
  • Quotation: “small’ is more beautiful than the literature might suggest.”
• Recent deterioration:
  • Over the past 10 years, economic growth and social indicators did not keep pace with the rest of the world.
  • Small economies have experienced significantly more volatility, particularly micro-states with populations of fewer than 200,000.
  • In the Caribbean, private capital flows and external current accounts are two and three times more volatile than in larger Latin American countries.
  • Natural disaster vulnerability: a disaster inflicting damage over 2 percent of GDP can be expected to hit the Caribbean region every two to three years.

Additional structural and financial challenges facing the Caribbean

• Debt and fiscal space:
  • The Caribbean is the most heavily indebted region of the world.
  • Average debt levels are more than twice the median for larger Latin American countries.
  • Recent research has found a non-linear negative relation between growth and debt in small states.
• Access to concessional finance:
  • Relatively high income levels mean most Caribbean countries are not eligible for concessional financing or international debt relief.
• Competitiveness and cost structure:
  • Labor costs have typically risen faster than productivity.
  • Electricity costs are among the highest in the world.
  • Tariff and non-price restrictions give rise to protectionism.
  • Laws on deposit rates and loan recovery hamper credit availability.
• Financial system weaknesses:
  • Need for stronger supervision and regulation to address structurally weak indigenous banks and to ensure insurance and other non-bank financial institutions are adequately overseen.
  • Supervisory capacity and political interference remain issues.

The broader agenda for growth — two major themes

• Theme 1: “macroeconomic policies matter”
  • Sound macro fundamentals and healthy buffers cushion against external shocks and sustain confidence and investment.
  • Characteristics of fastest-growing countries include macroeconomic stability, high savings and investment rates, openness, market allocation of resources, and committed, credible, and capable governments.
  • IMF priorities recommended for all Caribbean members:
  • Rebuild policy space and reserve buffers;
  • Provide a stable macroeconomic environment which, together with the rebuilt buffers, are the building blocks for higher savings and investment;
  • Make growth more inclusive by strengthening social programs and education, and making sure the broader society has access to economic opportunities;
  • Pursue active labor market initiatives such as insurance, retraining, incentives for job search, and investment in education;
  • Prepare more for climate risks: strengthen risk management, provide structural incentives for cost mitigation, and make use of existing tools such as regional risk-pooling initiatives and commodity hedging.
  • For heavily indebted, tourist-dependent countries:
  • Fiscal adjustment is urgent and unfortunately there is no alternative;
  • Most of the consolidation should come from lowering current spending. In small states, cuts to current expenditure have been found to be the most growth-friendly approach.
  • In some cases, debt restructuring may be needed; a case-by-case approach is appropriate.
• Theme 2: “do what it takes to raise growth”
  • Growth is essential for addressing fiscal imbalances and overall resilience.
  • Quotation from colleague David Lipton: “there is no lasting growth without sustainable fiscal policies, but there is no sustainable fiscal adjustment without growth.”
  • Near-term growth outlook:
  • Forecast for growth in the tourism-based Caribbean in 2013 is about 1 percent—characterized as too low to improve debt ratios or to create sufficient jobs to lower unemployment.
  • Suggested short list of priorities to raise growth:
  • Improve the business environment and boost investor confidence; reduce reliance on the state for private-sector activities; leverage proximity to key markets and an educated workforce.
  • Note: Much of the region continues to rank relatively well in “Doing Business” surveys, and places comparably with Asia.
  • IMF study finding: growth was higher in small states that had smaller government and lower debt.
  • Example: Barbados announced measures to reduce the number of statutory corporations with overlapping functions.
  • Implement development plans that support sustainable growth: integrate development plans into budget frameworks to prevent pro-cyclical spending, ensure consistency of expenditure, and prioritize scarce resources.
  • Strengthen technical capacities, laws and institutions to improve governance: address weaknesses in property registration, contract enforcement, and insolvency; empower private sector where appropriate.
  • Push harder for regional collaboration and coordination to address common problems: lower wage costs, electricity and energy costs, trade protection, and financing costs; pursue regional ventures and infrastructure projects to achieve economies of scale.
  • Current intra-Caribbean trade stands at just 13 percent of the total.
  • Regional successes cited: University of the West Indies, Caribbean Disaster Emergency Management Agency, functional cooperation of the OECS in justice, pharmaceutical imports, and the Eastern Caribbean Telecommunications Authority.

Small States analysis and IMF work program

• Background:
  • IMF created an informal working group of the Executive Board and a “Small Islands” group of Fund staff; held conferences in the Pacific and in Trinidad.
  • Comprehensive assessment of the “state of small States” culminated in a series of papers discussed by the Executive Board in March.
  • Two key handicaps identified from literature: (1) diseconomies of scale, and (2) vulnerability to external shocks and natural disasters.
• Executive Board work agenda items:

1) Continue a targeted research/analytical work program on small states; 2) Ensure that program design meets small states’ needs; 3) Continue capacity building with technical assistance and staff exchanges; 4) Undertake more outreach, including through the Small States Forum; and 5) Improve collaboration with other IFIs.

• Analytical and operational initiatives underway:
  • Explore ways to strengthen insurance against vulnerabilities.
  • Take stock of regional financial interconnectedness, with a view to being more prepared to head off financial instability before a crisis; study to be carried out with collaboration of central banks of the region.
  • Apply recent reforms in exchange rate assessments specifically to the Caribbean to deepen understanding of prerequisites for external sustainability.
  • IMF is preparing a Guidance Note for staff to ensure policy advice and surveillance are tailored to the needs of small states.
  • Continue technical assistance and training, particularly through regional technical centers (including in Barbados).
  • Operational commitment: ask all IMF mission chiefs to small states with Fund-supported programs to include an explicit growth agenda in program documentation; content to depend on each government’s preferences and capacity and not intended to impose new Fund conditionality.

PRGT eligibility for micro states

• Review findings:
  • Problems of small states are more intense for micro states.
  • Caribbean micro states have seen particularly slow growth and high economic volatility, leading to emigration and social dislocation.
• IMF responses:
  • Extended eligibility for concessional financing to three more micro states in the Pacific.
  • Raised the per capita ceiling, thereby retaining the PRGT eligibility of Dominica and St. Vincent & Grenadines—which would otherwise have graduated.
  • Board conclusion: the financing toolkit currently meets the needs of small states, evidenced by the use of various instruments in recent years.

Conclusion and final messages

• Emphasis on national self-reliance and broader non-economic roots of development:
  • Quotation from E.F. Schumacher, Small is Beautiful: “Economic development is something much wider and deeper than economics, let alone econometrics. Its roots lie outside the economic sphere, in education, organization, discipline and, beyond that, in political independence and a national consciousness of self-reliance.”
• IMF commitment:
  • The IMF will continue to work closely with the region on growth and sustainability through financing, policy advice, and technical training.
  • Final assertion: ultimately, the region’s economic destiny rests in the hands of its people.

Source: "Caribbean Challenges, Growth, and Progress on the Small States Initiative" by Nemat (Minouche) Shafik, Deputy Managing Director, IMF (speech, September 20, 2013).

References

• Trinidad and Tobago and the IMF
• St. Vincent and the Grenadines and the IMF
• Speeches
• Nemat Shafik
• PRESS CENTER
• https://www.imf.org/en/home