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A coffee discussion on Caribbean’s competitiveness…

 

This is the third in a series of five blogs on economic stagnation in the Caribbean. The first two can be found at: Smallness hurts, but does it constrain growth? and Is there something wrong with the Caribbean?” Stay tuned for more!

Sarosh: Good morning Ricardo! Hope you got some sleep. Shall we go and have coffee and talk about Caribbean’s competitiveness? I was up most of the night and could use a boost.

Ricardo: Yeah sure. You know how much I like coffee!

Sarosh: I was reading the analysis in Is There a Caribbean Sclerosis? and see that the real issue is not that the Caribbean is more expensive as measured by the real effective exchange rate (REER) but  rather that it is difficult to do business in the region. Is that right?

Ricardo: Exactly! If you look at the Global Competitiveness Index, the big tourism countries—The Bahamas, Barbados, and Jamaica—as well as the commodity exporters—Guyana, Suriname, and Trinidad and Tobago—rank below the rest of small economies (ROSE), defined as economies with population of less than 3 million. (See Figure 1).

Sarosh: But the REER is also an issue, isn’t it? If you look at the trend over the last decade, it is slowly but clearly moving up. (See Figure 2).

Ricardo: Yes, you are right. It is creeping up but, on balance, institutional inefficiencies are more of an issue in the Caribbean than REER. For instance, it might be that the C6 is unable to attract adequate foreign direct investment (FDI) due to institutional reasons.

Sarosh: I see your point. Interestingly, if you add FDI and the current account balance together and look at that metric as a percentage of GDP it tells you whether the FDI adequate finances the current account deficit or not. Comparing the results of this for the C6 with those of ROSE, it is evident that the region has not attracted enough FDI.

Ricardo: Not only that, but much of the FDI that it has attracted has gone towards activities that do not necessarily add to the productive capacity of the Caribbean countries. For example, the Jamaican firm Life of Jamaica Ltd (LOJ) was acquired by the Barbadian conglomerate Sagicor in 2004. The amount that Sagicor paid for LOJ were registered as a large FDI inflow but LOJ continued to provide the same services as before.

Sarosh: Well, Ricardo… thanks a lot for taking the time to talk to me about this. Next time, let us go for coffee to a place that serves Blue Mountain.

Figure 1. Global Competitiveness Index: C6 Relative to ROSE

Global Competitiveness Index_C6 Relative to ROSE

 Source: Is There a Caribbean Sclerosis?

Figure 2. Real Effective Exchange Rate for the C6

Real Effective Exchange Rate for the C6

Figure 3. Current Account Plus FDI, C6 vs ROSE

Current Account Plus FDI, C6 vs ROSE

Source: Is There a Caribbean Sclerosis?

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