Is a regional economic model the answer for Caribbean countries?
Caribbean Development Bank borrowing member countries (BMCs) have experienced low and volatile growth over the last decade, and this growth has lagged other country groups, including other small states.
Indeed, the average growth rate of BMCs during the period was less than half that of other small states, and just over a quarter of that of emerging market and developing countries. What is more significant is that the volatility of that growth was about twice that of other small states and emerging market and developing economies. In essence, average growth is lower, but the swings are more extreme.
Much of this performance results from the high export concentration among BMCs. In a sense, all BMCs rely exclusively on the exploitation of natural resources. This has created a situation where these countries are highly susceptible to shocks that affect these respective industries, rendering growth rates that are very volatile, and on average, relatively low.
This note seeks to explore the likely reasons for this performance, and more important, suggest some solutions. The main proposition is that institutional reforms that improve the business environment are key to increasing and sustaining investment and growth.
If the region is to generate high and sustained growth that would allow it to maintain its standing in the global economy, it will require the development of competitiveness that can foster greater diversification. In small countries, diversification is limited. Nevertheless, many small countries have achieved relatively significant levels of diversification.
These include Mauritius and Singapore – which are two-and-a-half times and slightly smaller than the land area of Dominica, respectively – have done so, and consequently, have maintained relatively high and stable growth rates.
Generating sustained inclusive growth for poverty reduction, requires that BMCs achieve some level of diversification by enhancing competitiveness. Diversification has its limits, given the size of the BMCs. There are clearly aspects of competitiveness where the performance of BMCs places them in a position to be competitive.
However, these areas need to be complemented by improvements in other areas in order to fully develop and exploit competitive advantages in appropriate niches. It is reasonable to expect that some aspects of competitiveness will be more important for specific types of goods or services, but there are some critical drivers of competitiveness that are fundamental.
The areas of competitiveness where BMCs need to improve include macroeconomic stability, as well as the regulatory and institutional framework for doing business. In those regard, there are some areas that require special attention – macroeconomic stability, registering property, access to finance, resolving insolvency, and enforcement of contracts.
Low and volatile growth is no doubt linked to the high level of export concentration among BMCs. Moreover, exports largely reflect the exploitation of natural resources all BMCs. This reflects an inability to generate competitive advantages that would allow for greater diversification.
Other small states have diversified their economies beyond the comparative advantages dictated by natural endowments, and have managed to generate relatively high sustained per capita GDP growth as a result.
If CDB’s BMCs are to forestall losing their enviable position in the global development hierarchy, then efforts have to be made to improve competitiveness, especially those dimensions related to doing business.
Ian Durant is deputy director in the Caribbean Development Bank’s economics department.