Economic Development Challenges in the Caribbean* Andrew S Downes Professor of Economics and Director Sir Arthur Lewis Institute of Social and Economic Studies University of the West Indies, Cave Hill Campus, Barbados July 2009 *A Regional Forum for IDB’s 50 th Anniversary, Port au Prince, Haiti

Structure of Presentation Two Decades of Economic Performance Development Strategies Constraints to Caribbean Development Future Direction

1. Two Decades of Economic Performance Economic development is a long-term dynamic process While being cognisant of short-run issues, development goals should be the focus Focus on the long-term socio-economic welfare of the people Consideration of institutions, policies and programs, resources, management and leadership etc

Growth and Production Performance –Slow down in economic growth over the past 3 decades GDP (%) GDP per capita (%) (Source: World Bank) - decline in the contribution of agriculture and the rise of the services sector – output and employment

CountryAgricultureIndustriesServices Antigua Barbados Belize Grenada Jamaica St Lucia T & T

–Tourism has been a main contributor to output and its growth – Antigua, Bahamas, Barbados, St Lucia –Petroleum and associated products have dominated Trinidad and Tobago –Agriculture is still important to Belize, Dominica, Guyana –Economies still dependent on one-two major areas of economic activity which are export-oriented –Regression analysis of economic growth of Caribbean points to the statistical (and economic) significance of (i) exports and (ii) physical capital in the growth process

Employment and Unemployment –Employment distribution mirrors that of the sectoral distribution of GDP – service workers (tourism, distribution, government) dominate in almost all countries. Significant number in elementary occupations (including the informal sector) –Unemployment rates have been historically high (over 10 percent of the labour force). Decline in the past decade to single digit (e.g., 4.9% in 2008 for T&T)

–Bahamas: 14.8% in 1992 to 8.7% in 2008 –Barbados: 24.3% in 1993 to 6.7% in 2007 –Belize: 14.3% in 1998 to 8.2% in 2008 –Jamaica: 15.9% in 1992 to 10.0% in 2007 –T & T: 19.6% in 1992 to 4.9% in 2008 –Youth unemployment (females and in recent years, male) has been a chronic problem

Poverty and Income Inequality –Relatively high rates of poverty in the region OECS: 18.4% (Antigua 2006) to 39% (Dominica 2002) of the population Bahamas: 9.3% (2001) Jamaica: 24.4% (1993) to 12.9% (2005) T & T: 24% (1997) to 16.7% (2005) –Significant degree of income inequality: Gini coefficients over the period varied between 0.23 (BVI in 2002) to 0.57 (Bahamas in 2001)

Human Development –Caribbean countries have middle to high levels of human development (using the HDI) by the UNDP –In 2005, the HDI values ranged from (Jamaica) to (Barbados) or a ranking of 25 to 101 from 177 countries –Generally high levels of life expectancy at birth (generally over 70 years); high level of primary school enrollment and literacy (over 90% in most cases)

Economic Freedom –The Heritage Foundation’s Index of Economic Freedom ranks Caribbean high: moderately free to mostly free –Barbados (ranked 22 nd in 2008 with a value of 71.5 – mostly free) to Dominica (ranked 70 th in 2006 with a value of 62.6 – moderately free) out of 177 countries Competitiveness –World Economic Forum’s Global Competitiveness Index 2008/9:

CountryRankScoreStage of Development Barbados Transition from 2 to 3 Jamaica Stage 2 T & T Transition from 2 to 3 Suriname Stage 2 Guyana Stage 1

CountryRankScoreStage of Development Singapore 55.53Stage 3 Malta524.31Stage 3 Mauritius574.25Stage 2 Costa Rica594.23Stage 2

–Stage 1(factor-driven economies), Stage 2 (efficiency -driven economies), Stage 3 (Innovation-driven economies) Doing Business –The World Bank’s Ease of Doing Business ranked the Caribbean countries in 2009 from St Lucia (34 th ) to Guyana (105 th ) out of 181 countries –Singapore (1), Malta (n/a), Mauritius (24), Costa Rica (117)

Summary of Economic Development Performance –Lower than average and declining growth rates of output –Relatively high levels of unemployment, poverty and income inequality –Relatively good performance with respect to HDI, economic freedom and competitiveness but –Much more needed to reach the level of flexibility and competitiveness especially of Singapore, Malta and, to some extent, Mauritius

2. Development Strategies Historically move to develop Caribbean in the post-independence era. Adoption of development plans Attempts to diversify economies away from dependence on agriculture (e.g., sugar and bananas) Strategies adopted include: –Agricultural diversification – alternative crops –Industrial (manufacturing) development – first import substitution/replacement, then export promotion

based on foreign direct investment –Services development (especially tourism and more recently, professional, financial and cultural services) –Mining (bauxite, oil/natural gas) –Economic integration (free trade area to single market/economy) –Nationalisation/socialist organisation in some countries (issue of role of State in national development)

After a period of macroeconomic stabilisation policies (1970s to 1990s), there has been a return to strategic development planning with a focus on becoming a “developed country” by some specified period Strategic Development Plans –T&T: Vision 2020 –Barbados: National Strategic Plan –Jamaica: Vision 2030 –OECS: Development Strategy and Charter

T & T Vision 2020 –Development priorities are: Developing innovative people Investing in sound infrastructure and environment Enabling competitive businesses Governing effectively Nurturing a caring society –Diversification program with Non-energy export sector (food, beverage, chemicals, metal processing, leisure, marine, IT and electronics, printing)

–Oil and gas production still central to T&T development (i.e., energy-related services development) Barbados’ Strategic Plan –Strategic goals are: Unleashing the spirit of the nation New governance for new times Building social capital Strengthening the physical infrastructure and preserving the environment Enabling Barbados’ prosperity and competitiveness Branding Barbados globally

–Focus on export of services such as tourism and international business along with cultural and health services Jamaica’s Vision 2030 –National goals are: Jamaicans are empowered to achieve their fullest potential Jamaican society is secure, cohesive and just Jamaica’s economy is prosperous Jamaica has a healthy national environment

–Development of internationally competitive industries in: Agriculture Manufacturing Mining/quarrying (bauxite) Creative industries Sports ICT Services (financial, business, tourism)

Common Elements in the Plans –Internationally competitive industries (old and new) –HRD as a central element –Use of new developments in technology –Services sector development (new services and tourism) –Sustainable development (physical environment) –Social capital development –Improved governance structure

3. Constraints on Caribbean Development Problem of macroeconomic stability (especially debt accumulation, inflation, twin deficits) Inadequate HRD in some critical areas (universal primary education, some universal secondary, but low level of tertiary compared with competitors) Low levels of Research and Development/Innovation (little linkage between University research and industry)

Inadequate venture capital ( capital market development) Large focus on the ‘safe’ local market Relatively low levels of productivity – human and non- human Small pocket of dynamism/entrepreneurship in the private sector (not enough to propel economy into international market)-Pan Caribbean companies Too heavy reliance on government incentives, crowding- in effects, etc

Inability to capitalize on trade agreements- meeting international standards/regulations Vulnerability to external shocks – natural and economic – which can derail development Little/slow attempt at regional development/integration – agriculture, tourism marketing, industrial production Migration of skilled professionals Growth of the informal sector Limits of the infrastructural development (ports, telecom etc )

4Future Direction The economic transformation of the Caribbean requires the adoption of a strategic development planning framework (vision, objectives/goals/strategies, policies/programs, implementation framework, monitoring and evaluation process) Planning Framework: -national and regional levels; - social, economic, environmental etc aspects

Identification of strategic product clusters based on existing/potential resources and markets (product space concept) For Caribbean: services linked with agriculture, manufacturing and energy (some examples exist with the regional conglomerates). Belize, Guyana, Dominica – forward links with agriculture

Given the importance of services in the region – special emphasis on services sector development (tourism, business/professional, ICT, cultural/entertainment, financial) linked to other sectors –Institutional/network strengthening –Export development strategy formation –Standards setting – quality standards –Certification/accreditation –Establishment of strategic alliances/partnering

Focus on improving national productivity and performance to enhance economic growth and competitiveness – HRD, investment in physical capital and infrastructure, promotion of social capital, work design, management/leadership/ supervision Taking advantage of trading agreements (capacity building to remove supply constraints, information sharing, improved negotiation skills to obtain better terms, etc)

Enhancing the institutional framework – identification of the role of the government versus private sector in the development process Strategic use of embassies, high commissions, consulates to supply market information and networking

Make financial resources available to obtain resources to enhance product growth and development Support regional approach to development – pace is too slow and uneven (e.g., Pan Caribbean firms) Provide macroeconomic stability – debt management, inflation, exchange rate depreciation, fiscal and BOP deficits