1 CARIBBEAN BUSINESS SEMINAR The Private Sector and the Caribbean: Working Together for Development June 23, 2010 ECONOMIC OUTLOOK OF THE CARIBBEAN REGION: The IDB Perspective Desmond Thomas Lead Economics Specialist Caribbean Country Department

Overview Following slide in economic growth starting in late 1970s, Caribbean countries show recovery from mid- 1990s Upward trend interrupted by international economic crisis and other shocks Caribbean economies face major economic and social obstacles and challenges A unified regional market, though small, provides the best environment for growth. 2

Average GDP per Capita has fallen relative to the US 3 Caribbean is simple average of 6 Countries’ GDP/Capita: Bh, Ba, Ha, Ja, Su, T&T Source: IFS and author’s calculations GDP/Capita, Caribbean/US 1960=1 0.84

But Wide Variation within Caribbean: GDP per Capita Relative to US 4 Caribbean is simple average of 6 Countries’ GDP/Capita: Bh, Ba, Ha, Ja, Su, T&T Source: IFS and author’s calculations 1960= Caribbean Average

Growth Volatility High Double Singapore’s std, on a par with other Small Island Economies 5 Standard deviation of growth in the period (from 1981 for Guyana)

What does this tell us? Growth may be constrained in different countries by different factors The Caribbean is vulnerable to external shocks, as other small, vulnerable nations Recent research at IDB shows major natural disasters have persistent growth effects – see Cavallo et al (2010). And constraints to growth may well have changed over time 6

Beautiful Design According to this view, the private sector needs many specific inputs, including from the public sector to flourish The private sector suffers many coordination problems, the public sector can help to solve them Important specific inputs include infrastructure, education & training, zoning, building codes, regulations for business (authorization, employment, taxation), regulations to ensure stable finance, efficient judiciary to ensure contracts upheld etc. 7 See Hausmann, R. “High Bandwidth..” (2008).

On Human Capital Education indicators are relatively good (Haiti excepted): Literacy Rates 61%-99%, Primary School Enrollment High >90%, Primary Completion Rates High >89%, Tertiary Education Rates Relatively High And the relatively high rates of emigration suggest its not availability, its retention The constraint is to ensure skilled labour has something to do 8

Significant Progress Toward MDG Targets 9

And Financial Systems are in General Not so Small 10 Exceptions are Haiti, Jamaica, Trinidad. Intermediation margins also do not tend to be high – not shown

In General Interest Rates are not High 11 Nominal deposit interest rates, exact definition varies, source: IMF

And Real Interest Rates Frequently Negative 12 Real Deposit Interest Rate (%) using IPC deflator Source: IFS and author’s calculations

And Rates of Gross Fixed Capital Formation Have not Been so Low 13

Tax Rates and Tax Takes High in Barbados, Low in Bahamas High Rate but Low Take in Jamaica 14 Source: World Development Indicators, *= 2007

Debt and Fiscal Pressures Becoming the Constraint in Some Countries 15 Excludes Jamaica which performed a voluntary debt swap in February 2010 for all domestic debt

Violent Crime 16 Costs of crime significant, a cost to all activities and a significant potential constraint to tourism. Source: World Bank. Per 100,000 of population

Considerable Variation within the Caribbean: But well behind Colombia and parts of Mexico 17

Transport Costs are High 18

A General Lack of R&D: R&D spending in Trinidad and Tobago 19

Scale & Coordinaton Failures Should small countries suffer less from coordination failures? Or do large cities develop to provide the range of inputs to support many industries Arguably, the Caribbean has not yet found the right products and technologies such that scale is not such an impediment If Beautiful Design is correct the role of the public sector is even more important in small countries to solve coordination problems 20

Candidate Binding Constraints Tax rates and tax structure: debt positions R&D, coordination failures, scale Public-Private interactions Transport costs and Infrastructure to support private sector development Crime perhaps not the constraint but… 21 The constraint is likely to be different in different countries (Haiti: more of a problem of accumulation and availability of financing, now relieved?).

And Low in Capabilities (The Caribbean Exports Products Others’ Export) 22

But if CARICOM were fully Integrated Sophistication Rises 23 Export sophistication of CARICOM to the Rest of the World compared to those of individual countries

24 What is behind the region’s poor economic performance? Productivity gains and losses for a sample of 76 countries, including 17 from Latin America and the Caribbean. Insufficient investment is not the key problem in LAC Rather, an inefficient use of existing resources

On the Role of the IDB: Response to the Crisis The IDB approved some US$15bn in loans for 2009 (relative to some US$6-7bn in previous years) There is now an agreement to re-capitalize the IDB for another US$70bn to give the bank some US$170bn total capital. With this level of capital US$11-12bn annual lending is feasible. This gives considerable potential to increase lending in the Caribbean including to the private sector. The IDB will also forgive Haiti’s post debt relief debt and assure some US$2bn of grant money for Haiti over the next 10 years 25

On the Role of the IDB The IDB has traditionally focused on precisely those areas that are required to enhance long term productivity These include infrastructure, public sector and institutional reform including finance, innovation as well as social policy. After the annual meetings in Cancun a special emphasis on Climate Change And renewed commitment to issues of integration, especially with regards to infrastructure 26

Compete Caribbean Approved May 5 th with CIDA, DFID, CDB and IDB for some US$32mn+ Supports private sector development, with investment funding and technical assistance to support SME development, business climate reforms and productive development policies. 27

On-Going Research Macro-surveillance in all member countries including debt and fiscal. Growth Diagnostics Financial sector: project with CCMF Enterprise surveys (World Bank, CDB) in all CARICOM countries… Labour market Innovation Productive development policies Research on Tourism Preparation of regional strategy. 28

Thank you for your attention 29