[The following is an edited version of a presentation by Dr Wayne Robinson, senior deputy governor of the Bank of Jamaica to the inaugural Macroeconometric Caribbean Conference organised by the Central Bank of The Bahamas and the Centre for Applied Economics and Policy Research, Indiana University, held in Nassau, The Bahamas, February 9-10, 2023]
THE COVID-19 pandemic inflicted significant economic losses for Caribbean regional economies, particularly those more heavily dependent on tourism, where the economic contraction was upward of 14.0 per cent of gross domestic product (GDP) in some cases — this figure not capturing the full human cost. As regional economies began to emerge from the pandemic, the shock waves from Russia's invasion of Ukraine continue to threaten the recovery. The region's vulnerabilities have been further exposed by yet a third exogenous shock: sharp policy rate increases in advanced and other emerging market economies (EMDEs), in attempts to contain the higher-than-normal inflationary pressures, which have resulted in significantly tighter global financial conditions.
These high interest rates, both internationally and domestically, have limited access to the critical financing needed to support the ongoing economic recovery as well as resulted in increased debt service costs, greater risk of capital outflows, and have imposed depreciation tendencies for economies with floating exchange rates.
In all of this, these small island states have to be responding to repeated climatic shocks. Based on its geographical location and experiences with natural disasters, the Caribbean is ranked as the second most environmentally vulnerable region in the world and is thus likely to suffer disproportionately as climate shocks become more frequent and severe. Against this background, the main challenge for regional economies and policymakers is how to structurally adjust economies so as to build greater resilience, thereby promoting sustained growth.
While Caribbean economies have made significant progress, the development path remains fragile, arising not only from geographical features which are predisposed to severe impacts from climate shocks, but also from the structure of the economies, quality of human capital, and low levels of national savings which comport to relatively low factor productivity and competitiveness. The ability to address these structural issues is constrained by high levels of public debt, precipitated by some instances of weak fiscal policy management, with both factors serving to further constrain the growth and development prospects of the Caribbean region.
Building resilience requires properly sequenced and integrated structural reforms and critical investments within a tight fiscal envelope, that is, an integrated policy framework.
Features of Caribbean Economies
There are key commonalities that identify and characterise Caribbean economies and which give rise to acute vulnerabilities. They include:
Narrow economic base, ie a narrow range of primary production and services;
dependence on a limited set of export markets and on remittances;
dependence on imported fossil fuels and intermediate inputs;
weak public finances;
human capital development lag; and
vulnerable infrastructure and exposure to weather and geological shocks.
Narrow Economic Base
Caribbean economies are predominantly service-based, with services accounting for, on average, 64.4 per cent of total exports between 2013 and 2020. However, constrained by size and limited comparable advantages, most Caribbean economies are largely reliant on a small number of sectors. Further, the key industries are those most vulnerable to global economic and natural disaster shocks — agriculture, mining, tourism, and financial services.
Dependence on a Limited Set of Export Markets and Remittances
Consistent with the relatively undiversified economic structure and proximity to the US, export markets are concentrated. Specifically, 41.3 per cent of Caricom's product exports go to the United States, which makes the region intricately tied to the US business cycle.
A sizeable portion of the region's foreign currency flows come from remittances. Average personal remittances as a share of GDP received by Caribbean small states over the period 2000-2021 were more than twice the average of middle-income countries. Tourism-dependent economies have been the major beneficiaries of remittance inflows over the years. The largest source markets are US, UK, and Canada. There are positives and negatives associated with remittances. Remittances appear to be countercyclical, particularly in tourism-dependent economies, increasing sharply during the heights of the pandemic. It is argued, however, that the reliance on remittances raises the reservation wage in recipient countries which can undermine competitiveness.
Heavy import dependence among most Caribbean economies on fuel and food (including agricultural products) is yet another indication of the region's vulnerability to volatile commodity prices. Between 30 per cent and 40 per cent of the region's annual products import bill between 2002 and 2021 was spent on agriculture and petroleum products.
For fuel, limited generation capacity, outdated power grids, and heavy dependence on fossil fuels compounded by high and volatile oil prices contribute to high energy costs, which further impair the region's competitiveness. Cost pressures also emanate from inefficiencies supported by the monopolistic structure that characterises the energy sectors across regional economies.
Weak Public Finance
A number of Caribbean countries have had to grapple with the weakness of public financial management (PFM) frameworks. The general weakness of the region's institutional framework is underscored by sub-par ranking on Government Effectiveness Index in the World Bank's World Development Indicators. The index captures the quality and credibility of policy and the quality of public service. Between 2005 and 2021, Caribbean economies placed in the 54th percentile, in line with the Latin America and Caribbean (LAC) average, but much less than advanced economies, such as the US.
Although much improved in recent years, generally weak PFM frameworks across Caribbean economies contributed to a decades-long record of poor fiscal and growth outcomes. Based on the '2022 Global Report on Public Financial Management' published by the Public Expenditure and Financial Accountability (PEFA) Secretariat, LAC economies perform relatively poorly, with most Caribbean economies (for which data are available) scoring less than 2.5 (equivalent to a grade of C) out of a maximum of four points. The low PFM scores was attributed largely to relatively weak transparency and credibility in the budgetary process, and the absence of independent fiscal institutions and binding rules in relation to established fiscal limits.
Human Capital Development
Caribbean countries have registered generally strong social outcomes. Median life expectancy is 73 years, compared with 70 years for other EMDEs; infant mortality is relatively low; and female labour force participation is relatively high. However, generally, the level of human capital development, while in line with Latin American economies, lags behind more advanced economies, due, inter alia, to the quality of, as well as, access to health care and generally weak educational outcomes.
The Caribbean has achieved universal primary education and near-universal secondary education, except for Haiti. However, there are access and enrolment gaps with respect to early childhood and tertiary education, due in part to the associated costs. Aside from enrolment, outcomes related to educational attainment are low and appear to be receding in recent years. On average, 46 per cent of registrants for the Caribbean Secondary Education Certificate (CSEC) examinations in 2021 did not sit the actual exams — absenteeism rates are high. Pass rates for mathematics and science subjects are low and declining over time. The throughput from the secondary education system is weak.
Tackling the region's human capital challenges has become more urgent as many of these challenges have been accentuated by the pandemic disrupting learning. Learning loss in the LAC region has been significant, and is estimated by the World Bank to be equivalent to 1.5 years of learning.
The problem is further complicated by a seeming increase in skill-based emigration from the region. Compared to other EMDEs, Caribbean economies suffer disproportionately from brain drain. The share of tertiary-educated Caribbean nationals living abroad is estimated at approximately 76 per cent, much higher than other EMDEs. Major push factors include a lack of economic opportunity and high rates of crime. Emigration of skilled workers equates to a reduction in the stock of human capital and has implications for productivity, labour market conditions, and output growth. IMF [International Monetary Fund] staff estimates suggest that migration of skilled labour has contributed to rising wage costs, with negative effects on external competitiveness in the Caribbean. They further note that the associated negative growth effects outstrip the benefits derived from remittances that migrants send back home.