Speech

The Caribbean Economies: Adjusting to the Global Economy, Remarks by Anoop Singh, Director, Western Hemisphere Department, IMF

June 11, 2004

Introduction

1. I feel greatly privileged to be with such a distinguished audience here today, from so many Caribbean countries, and with other friends and colleagues. This is my first visit to Trinidad and Tobago—indeed, to the Caribbean region—and I am surely late in coming. Having said that, I do believe that our seminar is off to a very good start in considering options to promote more rapid and sustained growth in the region and to ensure that the benefits of the region's continuing integration in the world economy work to the benefit of all its citizens.

2. I will begin by briefly reviewing the near-term outlook for the global economy and its implications for the region. Then I will discuss our assessment of the region's achievements in recent years and what I believe are the main challenges that now lie ahead to entrench these achievements and place the Caribbean on a sustained higher growth path. I will conclude with a few thoughts on how the IMF can help achieve these goals.

The Global Environment

3. In many ways the global outlook for 2004-05 is now more favorable than at any time since the 1990s. Robust growth in the United States—especially important to the Caribbean—is still the main driving force, but all the major regions of the world are showing a welcome pickup in activity. Looking ahead, overall financial conditions and productivity growth in the United States should provide continued impetus to activity. Indeed, most signs point to a very strong first half of this year and, while activity would be expected to moderate by the end of 2004, we still expect GDP growth to exceed 4½ percent this year and to remain around 4 percent in 2005. These are exceptionally favorable external conditions that should continue to provide near-term support to the recovery in this region.

4. Of course, there are risks. There has been considerable attention by markets to the rise in oil prices and the outlook for monetary policy in the United States. On both these fronts, the risks should be manageable. Oil prices in real terms are still below previous peaks and are expected to ease in the coming months. Moreover, the likelihood is of a gradual—rather than abrupt—withdrawal in monetary stimulus in the United States, and financial markets appear to be well prepared for this.

5. I do believe that the region is better placed to deal with these events. Growth is firming, significantly in some countries in the region, current account imbalances have eased, and many countries are securing welcome improvements in their primary fiscal positions. Of course, vulnerabilities remain and the remainder of my remarks will be on this subject, especially in the context of this region's continuing integration with a globalized world.

Achievements and Challenges

6. The Caribbean region can be proud of its integration with the world community. In many respects, the region has been among the pioneers of globalization, with an intermingling of peoples from different parts of the world that began many centuries ago. The Caribbean today has its own unique culture that is much-admired world-wide. I need hardly mention the significant contribution of the peoples of the Caribbean in the fields of literature, the arts, and sport. And, in the field closest to us economists and policymakers, St. Lucia's Sir Arthur Lewis, the Nobel Laureate in Economics, indelibly shaped our thinking on economic development.

7. Globalization is, of course, a two-way process. The benefits of globalization can be seen in many walks of life in the Caribbean. Aided by technological advances in transportation, tourism has flourished, enabling countries to reduce their dependence on single commodities such as cocoa, cotton, sugar, and bananas. There are many professional schools in the region that attract foreign students from the U.S. and other industrial countries. The region exports labor, including highly skilled labor to industrial countries, and there are large Caribbean communities outside the region whose remittances have helped raise living standards of those at home. Rapid growth in telecommunications, telemarketing, and in the computer and software industry has broken the physical barrier among distant nations. Caribbean countries with relatively cheap labor costs are tapping the outsourcing markets.

8. Yet, despite this openness to globalization, strongly democratic political systems, the high quality of human capital, and natural resources, the region's per capita GDP has increased by less than two percent per annum in the past 25 years. This is lower than the average of other developing countries in the world. I am sure that it is also less than your own aspirations, certainly less than is needed to reduce poverty and unemployment.

9. Of course, the region has suffered disproportionately from adverse shocks and natural disasters. The dismantling of preferential trade arrangements has triggered a decline in the agricultural sector and disrupted traditional lifestyles and cultures. The events of September 11, 2001 sharply curtailed tourism travel in 2001-02. Many islands are in the hurricane zone and have been repeatedly devastated by their destructive force. Recent floods in the Dominican Republic and Haiti have created serious new difficulties, particularly on the poorer sections of society.

10. The region's integration with international capital markets opened the door to enormous opportunities but also amplified exposed vulnerabilities—reminding us again that capital market opening places a high premium on strong macroeconomic and financial policies. Access to foreign capital has helped finance development projects and smooth over adverse shocks but, in the circumstances of the region's development over the past decade, it has been associated with rising fiscal deficits and debt burdens. This means, of course, that the returns to investment generally did not keep pace with the costs. As a result, the Caribbean nations are today among the most indebted emerging market countries. As many of you will be the first to testify, this reality places enormous burdens on other elements of the macroeconomic framework. What can be done to entrench a policy framework that will be more supportive of growth and consistent with the region's openness to globalization?

Looking Forward—Benefiting from Globalization

11. Before considering such an agenda, let me say that I remain convinced that the experience of small open economies world-wide demonstrates that globalization offers tremendous benefits in terms of new jobs, technology transfer, and higher incomes. The Caribbean nations have the potential, and indeed the right, to aspire to more of these benefits. The government's role—and I include the international official community in this challenge—is to make sure that we are doing all that we can to harvest these benefits and make sure that the gains are evenly distributed.

12. The agenda for the region needs, in my view, to encompass at least three core elements. First, to develop a more supportive macroeconomic policy framework with declining public debt burdens and strengthened financial systems. Second, to make economies more flexible, especially in the labor market. And, third, to strengthen domestic institutions in areas critical to entrenching growth and macroeconomic stability.

13. My sense is that such a core agenda would also serve to make the region more resistant to adverse shocks and macroeconomic volatility. Of course, policies in these areas need to be phased in with full ownership; there are some clear near-term priorities, while others would naturally need a somewhat longer timeframe to be developed and implemented. Let me make brief remarks in each of these areas.

14. Macroeconomic policy framework. Ensuring debt sustainability and maintaining financial sector soundness are among the priorities here. These would open the door to reduced pro-cyclicality of economic policies, higher fiscal reserves, and greater room for private sector credit for growth. While the region's tax effort is generally relatively high in proportion to GDP, there is still much room to reduce tax concessions and exemptions, and reorient spending away from subsidies and wages and toward greater infrastructure support. In addition, many of you here have emphasized to me the importance we all need to give to strengthening financial supervision, especially in the context of open capital accounts, offshore banks, and significant nonbank financial institutions. The Caribbean region is certainly not alone in tackling these challenges and we have learned from other countries how financial sector weaknesses and public debt vulnerabilities can interact to the detriment of macroeconomic stability and growth.

15. Increasing flexibility. In today's globalized world, there is even more importance to ensuring that economies remain flexible. Globalization entails structural shifts within domestic economies, and emerging evidence strongly suggests that the beneficiaries will be those with the most flexible economic structures—especially labor markets—to facilitate the associated shifts in resources. This is a lesson of particular relevance for this region that is already faced with periodic shocks, and where there are rigidities in elements of the policy framework and generally high unemployment. For example, in many countries, wages have tended to rise well ahead of productivity, especially in the public sectors. Enhancing flexibility will require increased training and improved safety nets, especially in the context of declining traditional agricultural sectors and the need to provide fresh opportunities for displaced workers.

16. Institutions. Emerging evidence also points strongly to the importance of strong institutions to entrenching a growth momentum. The region already has a number of advantages in this respect. There is a good foundation of high-quality human capital and strong political institutions. A more favorable investment climate with reduced public sector claims on these sources would do much to unleash the innovation and entrepreneurship that is so crucial to growth. For example, it would appear there is much scope in the region to advance in this direction. There is clear room to harmonize business procedures and regulations, as well as to reduce the costs of starting new businesses and managing work forces that are much higher than international best practices. Institutions for macroeconomic policy can also be strengthened. There is room, for example, to develop fiscal rules and responsibility legislation as part of the process of reducing the pro-cyclicality of fiscal policies and paying down debt in the good times. In the financial sector, countries in the region are already giving priority to developing stronger institutions of financial supervision.

Regional Cooperation and the IMF

17. I realize that, in many respects, there is growing consensus on the need for such a strengthened agenda. In that respect, I doubt I have broken any fresh ground. The challenge for all of us today and tomorrow is to consider how best such an agenda, carefully tailored to individual circumstances, can be developed with full ownership and implemented over a realistic timeframe. In particular, we in the IMF need to consider more carefully how best we can help the policymakers of the region address these challenges and reach the clear potential of the region.

18. I would ask if there is room for greater regional dialogue and surveillance toward these ends. Evidence from other parts of the world, from Europe and from the East Asian countries, points to the important role that such regional cooperation can play in staying the course with a sound economic policy agenda. Certainly, there is already much cooperation in the region and this augurs well for the future. CARICOM was established precisely for this purpose. It has already strengthened the voice of the region in international trade negotiations, to give just one example. The smaller grouping of the OECS countries has also had success, including with regional integration of the financial sector, the establishment of a Supreme Court, telecommunications, and airline services. However, much scope surely still remains for tapping the potentially large economies of scale that further cooperation in the economic spheres can bring. To mention a few key areas, a regional approach could help in freeing labor and goods markets, education reform, the coordination of tax incentives and holidays, collective provision of several government services, and financial market supervision of regional financial markets. Implementing the CSME (Caribbean Single Market Economy), a CARICOM initiative, will go a long way to meeting this goal.

19. Finally, let me now spend a few minutes in talking about the involvement of the Fund in the region and what we can do to help this agenda. Fund-supported programs are currently being implemented in Dominica, Guyana and the Dominican Republic. In the past, the Fund has provided financial assistance to the region, both under its regular facilities and through the rapid disbursement of emergency assistance in times of natural disasters. In the recent past, we have put more emphasis in our dialogue on crisis prevention, debt sustainability, and regional surveillance—especially in the financial sector. Another initiative of increasing importance is CARTAC—a technical assistance center located within the region—whose growing effectiveness is a clear tribute to the oversight and efforts of Governor Marion Williams. CARTAC today is an important force for change with domestic ownership.

20. But can we do more? I hope you will tell us how the IMF can be more effective in supporting your policy agendas and deepening our surveillance of key risks and vulnerabilities. The challenge we jointly face is to broaden country ownership of the policy agenda—especially in the areas where institutional change is necessary but often politically controversial. In some parts of the world, the IMF has adopted a more vigorous outreach strategy that is increasingly emphasizing more contacts with national parliaments and a more continuous dialogue with civil society. In this way, we can try to foster a better understanding on the part of policymakers and civil society about the policies that the IMF—in conjunction with the other international institutions—is advocating, and better learn of the constraints that are faced within countries to securing such change. I would ask you, distinguished guests, do you see room for us to play a greater role in this respect?

21. Ladies and Gentlemen, I would like to close with a toast. My toast is to all those that have contributed much to the development of this region, and to those who are going to move it forward.

Thank you.