## 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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## Bibliographic details
- Published: May 1, 2006

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### 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.*

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## References

- [Jamaica and the IMF](http://www.imf.org/external/country/JAM/index.htm)
- [Trinidad and Tobago and the IMF](http://www.imf.org/external/country/TTO/index.htm)
- [Spain and the IMF](http://www.imf.org/external/country/ESP/index.htm)
- [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)
- [Speeches](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sp050106_