Distinguished colleagues, good afternoon.
I am pleased to have this opportunity to talk to you about the IMF’s perspective on the Caribbean growth challenge, and tell you about our work in support of Small States.
I am particularly pleased to be able to speak to you at a lunch hosted by the World Bank—since much of my experience with the growth challenge comes from the Bank, and I have long been an advocate of closer ties between our institutions. Thank you, Hasan, for accommodating the change in the agenda.
The topic of our forum, how to raise growth while achieving sustainability, is the challenge being articulated by countries small and large the world over. While growth is recovering in the wake of the global crisis, it remains in low gear. Like the Caribbean, advanced countries burdened with high debt also recognize the importance of growth in allowing them to recover financial stability. So I want to start by assuring you that the Caribbean is not alone. The world is seeking a surer path to growth.
While the Caribbean shares the problems of advanced economies, last year’s Forum in Trinidad reaffirmed the message that Small States have additional economic challenges, due to their diseconomies of scale and vulnerability to natural disasters. At that time DMD Min Zhu promised that the IMF would bring the Small States agenda forward.
Since then, the Fund has prioritized work on how to generate inclusive growth, and how to understand better the problems of small states. I will use today’s session to comment on the messages from our work on both of these topics for the Caribbean.
Let me first start by taking stock of how Caribbean growth compares with the rest of the world.
Good news and bad news
Viewed with a longer-term horizon, the findings were quitepositive. Over the last 30 years, despite the diseconomies of scale, growth in small states has kept pace with large countries. In the Caribbean, per capita income growth was, for instance, double that of larger Latin American peers. Average per capita incomes in the Caribbean are near $9,000, compared to under $6,000 for Latin American peers. Living standards and social indicators are as good as, if not better, than larger peers. In other words, ‘small’ is more beautiful than the literature might suggest.
The bad news is that these trends changed over the past 10 years. Economic growth and social indicators did not keep pace with rest of the world, and small economies have experienced significantly more volatility, particularly micro-states with populations of fewer than 200,000. In the Caribbean, private capital flows and external current accounts are two and three times more volatile than in larger Latin American countries.
It is also abundantly clear that small states, and particularly the Caribbean, are more vulnerable to natural disasters than the rest of the world. A disaster inflicting damage over 2 percent of GDP can be expected to hit the Caribbean region every two to three years. That is a significant economic and financial burden to absorb.
Additional challenges facing the Caribbean
There are other ways in which the Caribbean faces challenges beyond those faced in the rest of the world. Protracted weak rates of growth and high borrowing levels over many years have left the Caribbean the most heavily indebted region of the world. Average debt levels are more than twice the median for larger Latin American countries. This limits fiscal flexibility, discourages private investment, and pushes up borrowing costs, creating a vicious circle. Recent research has found a non-linear negative relation between growth and debt in small states.
Moreover, relatively high income levels for most Caribbean countries mean that most countries are not eligible for concessional financing or international debt relief.
Recent analysis also points to competitiveness issues: labor costs have typically risen faster than productivity in the region; electricity costs are among the highest in the world; tariff and non-price restrictions give rise to protectionism; and laws on deposit rates and loan recovery hamper credit availability.
Much of the region is also grappling with financial systemweaknesses. Stronger supervision and regulation are needed to handle structurally weak indigenous banks and also to ensure that insurance and other non-bank financial institutions are being adequately overseen. Work has started in this area, but supervisory capacity and political interference remain an issue.
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