Critical that we rebalance our major economic partners

Wednesday, May 21, 2014    

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Recently, we discussed the rebalancing of the United States economy and the possible repercussions on the economies of Caribbean countries. Rebalancing is also well advanced in the European Union and appears imminent in China, as the International Monetary Fund (IMF) lowers its growth forecast for the world economy.

Some time ago we also sounded the alert about the possible negative implications from the interest rate adjustment being executed by the US Federal Reserve. All indicators, notably employment data, point to continued slow growth with a dampening effect on tourist arrival and remittances for the Caribbean. This is not a surprise and the region has been coping with the US stagnation.

Also not unexpected is the European Union which encompasses several economies in serious debt and others in a low-level growth trap consequent on self-indulgent macroeconomic policies and the aging of the productive capacity, infrastructure and populations. The devastating effect of the UK economy on tourism in Barbados is clear proof of the deleterious impact on the Caribbean. But the real surprise is China.

China has grown at the phenomenal rate of over 10 per cent per annum for the last 25 years, making it one of the few engines of growth for the global economy, even despite the eruption of the global economic crisis in 2008. But there are reasons to be concerned about the sustainability of its growth model. Before the global crisis, China's growth relied to a considerable extent on net exports and on a high rate of investment financed by inflows of foreign direct investment and a very high rate of domestic savings. However, there are now worrying signs that the model may have exhausted its own momentum and is now beset by internal problems which arose from the very process of economic growth itself. These internal problems include rising wages which are now causing the shedding and relocation of labour-intensive manufacturing eg shoe-making to Ethiopia and apparel to Vietnam and Sri Lanka.

The situation in China portends a slower rate of economic growth which in turn is likely to be reflected in lower demand for certain raw materials and commodities. This will have negative implications for the fledgling exports of minerals and food from the Caribbean. But China's demand for natural gas will be unabated and will continue to stimulate its interest in both demand and for investment in the exploration for oil and natural gas.

China's increased diplomatic presence in the Caribbean has been accompanied by a campaign to win friends and influence governments by the generous provision of aid in kind, grants and loans. This largesse appeared just in time to fill the vacuum left by the cutback in bilateral aid by traditional allies, in particular the United States. Fortunately the slowdown in China is not of a sufficient magnitude to cause China to reduce its level of aid to the Caribbean.

An aspect of the imminent changes in China is that it will be one of the main sources of foreign direct investment. So the Caribbean must make itself attractive to Chinese FDI in order to pump up economic growth. We do not expect at this time any fall-off in Chinese tourists visits and expenditure.

For our own sake, the Caribbean must see to its own rebalancing.





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