IMF Survey: Caribbean Countries Have Several Ways to Enhance Prospects
February 3, 2011
- Caribbean region taking longer to recover from crisis
- Reducing high debt levels and improving productivity are region's top priorities
- Caribbean conference explores new and better sources of growth
Caribbean countries, saddled with high debt levels and badly affected by the global economic crisis, need to reduce debt and develop new sources of growth to enhance their prospects, according to participants at a regional conference convened to explore the Caribbean’s challenges and policy options.
The global crisis had a big impact on economies in the Caribbean because of their strong links to the United States and Europe—and their recovery has been sluggish so far.
While governments responded appropriately to the drop in tourism, trade, remittances and capital flows, they now face economic and social challenges that call for fresh ideas and a renewed policy resolve if the region is to reach a brighter, more sustainable growth path.
To discuss these issues, researchers and policymakers gathered at a conference in Barbados January 27–28 entitled Caribbean Policy Challenges after the Global Crisis. The conference was organized by the University of the West Indies (UWI), the Central Bank of Barbados, and the International Monetary Fund (IMF), and brought together experts from across the Caribbean, Canada, the Seychelles, the United Kingdom, and the United States.
“This conference presented a valuable opportunity to exchange ideas and approaches to common challenges, to search for new solutions, and to develop a shared vision,” noted Dr. DeLisle Worrell, Governor of the Central Bank of Barbados.
Debt and the future of the region
One of the most difficult issues facing the region is the high level of public debt, and its implications for fiscal sustainability and growth. Five of the world’s 13 most indebted nations (as a share of GDP) are now in the Caribbean. Debt has accumulated because of successive years of fiscal deficits and, since the mid 1990s, borrowing by public enterprises and off-balance sheet spending, including financial sector bailouts. With mounting interest bills, the global financial crisis caused serious problems for debt management.
This suggests that fiscal consolidation is critical to ensure macroeconomic stability, and also to ‘crowd in’ the private sector. Conference participants acknowledged that lowering debt would lead to higher growth over time, a finding that is based on considerable research. They accepted also that fiscal adjustment was inevitable since, like households, countries must―over time―live within their means.
The conference looked at the case studies of the Dominican Republic and the Seychelles, where the impact of the crisis was severe, but where governments had responded proactively, relaxing considerably monetary policy in the Dominican Republic, and pushing through fiscal adjustment and debt restructuring, as well as exchange rate adjustment in the Seychelles. These efforts, supported by Fund assistance, had helped restore stability, improve confidence, and spur the recovery.
Participants also discussed innovative ideas about how to manage debt, including the recent experience of the debt exchange by Jamaica and debt restructuring by Antigua. Some of the important factors behind these successful outcomes included realistic burden sharing, no haircut on loan principal, social consensus, and a strong communications strategy.
Producing more with the same resources
Even before the crisis, economic growth in the region had lagged other parts of the hemisphere because of weak productivity growth―not low rates of investment―and weak integration with the so-called new global “growth poles.” These are the large, vibrant, emerging market economies like Brazil and China with spillovers that drive growth in other countries. Participants agreed that diversification of economic partners and export markets, which some countries are already pursuing, should become a deliberate strategy going forward.
“Like most of the advanced economies, the Caribbean needs to tackle the obstacles to higher growth, and come up with new, home-grown ideas to enhance its prospects,” said Nicolás Eyzaguirre, Director of the IMF’s Western Hemisphere Department, in a lunchtime address. Tourism remains a core economic activity, having contributed positively to growth without raising volatility. But tourism could play a stronger role if steps were taken to increase the competitiveness of the sector to attract more tourist arrivals.
Also, while evidence suggests that the Caribbean has benefited from offshore financial centers both in terms of revenue and growth, increasing compliance costs associated with a number of global initiatives to strengthen regulatory standards will change the lay of the land. Authorities will need to take a more proactive approach to meet these demands in order to maximize the benefits associated with a more level playing field.
New sources of growth
The conference also explored new sources of growth, including other offshore services, for example, in the areas of health, education, and specialized financial services. Some countries would need to improve the efficiency of key factors like information technology and energy production to make this possible. Presenters also proposed ideas for cost savings from scale economies, particularly in the area of integration of institutional activities like financial sector supervision and regulation.
Ideas about productive development policies (PDPs)―policies that seek to overcome market failures by developing specific products, activities, and enterprises―were also discussed. “Caribbean economies need to make available greater financing and other incentives to encourage entrepreneurship, innovation, and micro, small, and medium-size enterprises,” claimed Professor Andrew Downes of the UWI during his presentation about PDPs.
Rodrigo Valdes, Senior Advisor in the IMF’s Western Hemisphere Department, wrapped up the discussions, noting that “This is the beginning of a closer dialogue about policies that will set the stage for greater private sector engagement, greater economic integration, and diversification of sectors and markets.”