Domination of Caribbean economies by favoured business groups a key problem

–IDB report

Domination of Carib-bean economies by favoured business groups is among several factors which hinder the economic performance of the region, according to a report released by the Inter-American Development Bank (IDB) which says that the integration strategy currently being pursued is not working.

“Is the Caribbean problem one of sclerosis? It would appear to be so,” says the report titled ‘Is There a Caribbean Sclerosis? Stagnating Economic Growth in the Caribbean.’ “Euro sclerosis” was a term coined in the 1970s to describe stagnant integration, high unemployment, and slow job creation in Europe relative to the United States. Since then, the term has been used more generally to refer to overall economic stagnation.

The sclerosis hypothesis is that special interest groups devote their resources to unproductive rent-seeking to redistribute social wealth. By enlarging their slice of the pie (real GDP), these interest groups reduce the enlargement (economic growth) of the total pie, which in turn reduces total social gains. This happens by influencing policy.

“Small and politically stable societies like those in the Caribbean foster the development and institutionalisation of growth-retarding special interest groups, which are then better able to influence policy to redistribute resources in their favour,” the report says. It noted that large discretionary tax waivers, often used under the banner of industrial policy, could be interpreted as returns to these groups. The report focuses on six countries in the region, namely The Bahamas, Barbados, Guyana, Jamaica, Suriname, and Trinidad and Tobago.

The report says that the sclerosis hypothesis is supported by opinion surveys of Caribbean businesspersons, relative to businesspersons in other small economies. “They think that corporate activity is dominated by a few business groups rather than spread among many; that anti-monopoly policies are ineffective; and that the existing rules discourage rather than promote foreign direct investment, and hence foreign ownership is low. They have a lower level of trust in politicians, and opine that there is a greater degree of unproductive rent-seeking, as government officials engage in more diversion of public funds and show greater favouritism,” the report says.

 

Irregular payments

 

“Caribbean businesspersons make more irregular payments and bribes than do businesspersons in other small economies,” it said. “These are characterisations that describe labour and factor markets, policies, and policy institutions that stem from the sclerotic hypothesis,” it added.

It had noted that the issue of an “anti-growth alliance” as a major factor hindering higher economic growth in the Caribbean had been raised before. “In other words, Caribbean states are good for (some) businesspersons but not necessarily good for business. Thus, the difference in growth between Caribbean countries and other small economies could be due to Caribbean governments not being as good for business,” the report says.

According to the report, economic symptoms are also consistent with the sclerosis explanation. “Economic growth and employment generation in the Caribbean are lower than in other small economies. Underlying the lower economic growth rate are lower factor inputs (both labour and capital) and lower total factor productivity. The Caribbean is falling behind due to lower productivity. Competitiveness is also lower in the Caribbean. The most common measure of a country’s competitiveness is the real exchange rate, often complemented by specific costs such as energy costs. In the Caribbean, real exchange rates appear to be overvalued and energy prices are higher,” the report says.

It also noted that the Caribbean also does worse in two often-used indirect measures: world market share of exports of goods and services, which is falling, and the current account of the balance of payments net of foreign direct investment, which is negative. The report said that the region’s poor performance can also be seen in synthetic measures such as the World Economic Forum’s Global Competitiveness Report and the World Bank’s Doing Business Index.

 

Stationary

 

“While other smaller economies are moving toward the frontier of best practices of doing business, the Caribbean remains stationary. In terms of competitiveness, the Caribbean is falling behind. The Caribbean business sector is weaker than that of other small economies. The profile of the region’s private sector is not encouraging: it is made up of smaller and older firms less engaged in international trade, and by firms that are predominantly locally owned and operate in small and medium-sized localities,” the report says.

It pointed out that businesses have lower levels of connectivity, further hindering international trade. The Caribbean private sector’s relatively poor performance in terms of growth in employment and sales—which is about a third that of other small economies—is therefore no surprise, the IDB said.

“The Caribbean business sector is falling behind because the policy environment hinders rather than promotes a dynamic and innovative private sector. Macroeconomic performance is worse. There is a large macroeconomic environment gap in the Caribbean relative to other small economies,” the report said. it quoted the World Economic Forum’s Competitiveness Index—a measure that combines the government budget balance, gross national saving, inflation, government debt, and credit ratings— which has found that the Caribbean’s macroeconomic environment is worse than that of other small economies for each component of the index.

“One major component of the macroeconomic environment is a high debt-to-GDP ratio combined with inadequate primary fiscal balances to reduce the stock of public debt. Some Caribbean countries have levels of debt that are a drag on their economic growth. In addition, the Caribbean also has more macroeconomic instability, further accentuating an adverse environment for economic growth. Macroeconomic policy hinders rather than promotes economic growth,” the report said.

It also pointed out that the Caribbean faces great challenges. “The region is subject to more damaging natural disasters, is more closely linked via trade in goods and services to relatively stagnant countries, and is subject to greater economic shocks (given product and export market concentration). Yet the region has fewer policy buffers (fiscal and external) to mitigate these shocks than do other small economies. Attempts at regional integration have not paid off,” the report said.

“There are no significant positive trends or positive ratchet effects, excluding oil, even after major agreements on intra-regional and extra-regional trade. Further, there does not appear to be convergence among the CARICOM countries. The integration strategy currently being pursued is simply not working,” it declared.

The report noted that the last few years have been harsh for the Caribbean and it was hard-hit by the global recession. “Cumulative GDP losses from 2008 to 2012 as a percent of 2007 GDP were 28 percent. Other than Guyana, countries have not recovered their pre-crisis growth rates. Clearly, when the United States sneezes the Caribbean gets pneumonia,” it said.

While noting that the projected increase in the region’s economic growth rates in the immediate future due to growth in the Caribbean’s trading partners, the report said that these figures are still lower than the already-low historical rates. “Thus, the recovery will imply a further falling behind. There are also downside risks that could negatively affect the Caribbean’s future. Of immediate and particular concern is what will happen if the United States again sneezes,” it questioned, while noting that world financial conditions could tighten at a greater rate than expected resulting in less growth.

 

PetroCaribe

 

“A Caribbean-specific shock could be the dismantling of PetroCaribe, which would worsen fiscal balances, the current account of the balance of payments, and, given automatic pass-through, lead to an increase in energy prices. This possible triple whammy—reduced world demand, increased interest rates, and being forced to go to the more expensive spot market for fuel—combined with the fact that Caribbean countries have inadequate policy buffers could send the region back into stagnating economic growth and worsening macroeconomic balances,” the report said.

“Thus, the “let it be” option does not solve the Caribbean’s problem of inadequate economic growth to generate enough well-paid jobs for its people. It implies a continuation of relative decline, thereby endangering the gains in the quality of life so far achieved,” the report declared. It said that any pertinent solution needs to be tailored to each country. “Although many problems are common across countries, serious policy design needs to delve further into country-specific details that require data and information that are often missing in Caribbean countries. Gathering and disseminating that information must be among the first steps toward finding a solution to the region’s problems, followed by detailed analysis of macroeconomic stabilisation, structural reform, and the search for new neighbours,” the report said.

It noted that the Caribbean has been here before. “Back in the 1970s and 1980s, facing the dismantling of preferential trade agreements, declining aid, and serial exogenous shocks, the countries designed and adopted a new development model that was successful for a given period of time. That model has now run its course, and the region today again faces myriad challenges. The Caribbean has overcome such challenges before. It can do it again,” it asserted.

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