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The Caribbean’s Fiscal Dilemma: To Cut or Not to Cut?

 

What has been the technical assistance and policy advice from International Financial Institutions (IFIs) to select Caribbean countries in the area of fiscal sustainability? The International Financial Institutions (International Monetary Fund in particular, World Bank, Inter-American Development Bank and the Caribbean Development Bank) have invested a lot of resources in technical assistance and policy advice over the last 20 years advising on policies which can improve fiscal sustainability. A recent IDB Policy Brief entitled:  ‘To Cut or Not to Cut’ looks at this issue.

It turns out that policy advice has had an important influence in shaping the debate in these countries, and this is because advice does not happen in a vacuum. Rather, it is the result of a close dialogue and a ‘consensus of sorts’ reached after extensive discussions between policy-makers and technical staff in IFIs. Indeed, IFIs rely heavily on the information they acquire from within the country to make their analysis.

Why is there not greater uptake? Actually, there is uptake in many areas, but the enduring reforms generally take time and are not always reflected in higher growth, so their impact is difficult to measure. Moreover, policy-makers are constrained by political cycles and the need to build consensus, and sometimes there may just not be enough of it.

In some cases, the advice of IFIs coincides with a window of opportunity in a country, where a policy-maker becomes a national champion for reform, leading the charge by using the IFIs to move their agenda ahead, rather than the other way around (i.e., a passive implementer of IFI advice).

Moreover, the small size and susceptibility to shocks from outside the Caribbean countries already limit the degrees of freedom these countries have to manage fiscal policy. Therefore, a modicum of reality needs to be injected in the expectations of what can be achieved, while not letting complacency take over.

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