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Development Challenges: Is the Caribbean losing out?

Many people in the Caribbean feel that times have become more difficult. The data actually corroborates the perception. An important problem is the weak growth performance since the world financial crisis. While other countries and regions have been recovering, most countries in CCB are today poorer than they were in 2007 as shown in Figure 1, which presents GDP per capita in 2018 relative to 2007.

The IDB has done extensive work to explore, understand and systematize the challenges the countries face and provide policy advice as well as technical and financial support. The blog gives an overview of some of this analysis, which has also been published in more detail in the recent Quarterly Bulletin, including country specific analysis.

 Figure 1. GDP Per Capita in 2018 relative to 2007 (in constant 2010 U.S. dollars)

Source: World Bank, World Development Indicators

Note: LAC: Latin America and the Caribbean.

Constraints to Growth and Development

Common structural issues hamper growth and development. Challenges for development include weak fiscal institutions, crime and violence, a sluggish private sector, weak productive development policies, skill-biased emigration, and other structural impediments. Taken together, these factors have resulted in a complex and challenging environment for promoting sustainable growth and development in the Caribbean. The situation is made more difficult by recurrent natural disasters, which are projected to increase in frequency in the future. These challenges can be grouped into three areas: the public sector, the business environment, and social sectors/human development.

Public Sector

Weak public service delivery at high cost burdens the Caribbean. An obvious problem resulting from the small size of the Caribbean countries is the lack of economies of scale for the public sector. As a result, public sector wages and salaries usually take up a large share of public expenditures. At the same time, capacity in terms of the qualifications and specialized skills that are available in the public sector is often insufficient, and public service delivery weak. Service delivery is also influenced by red tape as a result of a paper-based culture, regulatory complexity, insufficient coordination among ministries, and lack of digitization and use of information technology solutions.

Fiscal challenges hinder development. Debt-to-GDP ratios in CCB countries are high relative to comparable countries, especially for the tourism-dependent economies, with interest payments taking up a large share of revenues, and the countries are exposed to rollover risks that can feed fiscal crises. Conversely, the commodity-dependent countries are challenged by volatility and resulting vulnerability from commodity price swings. In addition, despite recent advances, fiscal institutions in the region remain weak and are not appropriate for the challenge the countries face in terms of potential for shocks, volatility, and vulnerability.

Business Environment

The small size of the countries, weak institutional frameworks, low available skills because of skill-based migration and high energy prices all constrain private sector development.  Because of a policy environment that fails to promote a dynamic and innovative private sector, firms in the Caribbean under-perform their peers in other regions across several dimensions, including investment, sales growth, innovative capacity, and productivity. Importantly, the business environment is generally not conducive to growth and development. In the Caribbean, Jamaica is the best-ranked country in the World Bank’s Doing Business Report at 70th, followed by Trinidad and Tobago at 102nd. Suriname is the lowest-ranked at 165th (out of 190). Jamaica, and to a lesser degree Suriname, are the only Caribbean countries examined here that have improved their business climate between 2012 and 2017 (Figure 2). Access to finance is also a challenge, especially for smaller firms as conditions for accessing financing can be prohibitive even for firms that would obtain credit. Collateral requirements range from 60 percent of the loan amount in Guyana to over 180 percent in Barbados.

 

Figure 2. Distance to Frontier, Doing Business Indicator, 2012 versus 2018

Source: World Bank, 2018 Doing Business Report

 

Caribbean exports are concentrated both in terms of products and markets. Most of the tourists visiting the Caribbean are from the United States, followed by Canada and the United Kingdom. These countries are also the main export markets for other exports and remittances. In the case of commodity producers, they depend on world commodity prices, which have proven to be volatile. This concentration brings risks and volatility in addition to restricting possibilities for faster economic growth.

Social Development

The region has undergone a transition where coverage of social services has made important strides, but quality is lagging. For instance, in education, school attendance is near universal at the primary school level, but it decreases for higher school levels. In addition, there are differences in terms of learning achievements, achievements between socio-economic groups, and achievements between boys and girls (with girls performing better in education than boys). Nevertheless, indicators for education are mostly on par or above those for comparable countries.

Basic health indicators have also improved. Infant mortality and life expectancy are mostly in line with Latin America and the level of income in the CCB countries. However, commodity-dependent countries fare worse, especially Trinidad and Tobago, which has weak indicators considering its high level of income.

3a.                                                                                                                                         3b.

Figure 3a. Educational Attainment versus GDP Per Capita/ Source: September 2018, Caribbean Regional Quarterly Bulletin
Figure 3b. Infant Mortality versus GDP Per Capita/ Source: September 2018, Caribbean Regional Quarterly Bulletin

 

 

 

 

 

 

 

 

 

 

 

 

Note: OECD: Organisation for Economic Co-operation and Development; ROSE: rest of the small economies of the world.

The transition to increased non-communicable diseases is a strain for the region. While the incidence of communicable diseases has decreased, the incidence of non-communicable diseases has increased, putting an important burden on health systems.

Where to go from here?

The weak economic performance is related to common development challenges. While each country faces idiosyncratic challenges, common constraints to growth and development emerge. For example, all countries are small, and all countries face climate risks from their geographic location in the Caribbean. But there are other similarities as well, such as issues involving competitiveness, the ease of doing business, and institutional development, all of which are usually below levels in comparator countries.

Policy suggestions are often similar. For instance, fiscal prudence and strengthening of fiscal institutions is central in all countries. Most countries would also benefit from institutional strengthening, a better business climate, and more competitive environments. This blog has only provided a small overview of these and other challenges facing the region. More detailed analysis and policy recommendations can be found in the individual country summaries in the Quarterly Bulletin.

 

Juan Pedro Schmid is a Lead Economist in the Caribbean Country Department of the Inter-American Development Bank (IDB). Since joining the IDB, Juan Pedro has worked in different capacities, including as a country economist for Jamaica and for Barbados, and as regional macroeconomist. His work has covered a broad range of areas, including macroeconomic monitoring, preparation of country strategies, lending operations, coordination of departmental macroeconomic work, and programming and research on a broad range of topics. Before joining the IDB, he worked for three years as an Economist at the World Bank’s Economic Policy and Debt Department on debt relief operations, technical assistance missions, and advisory services across different regions, including Africa, Asia, and Oceania. He holds a M.A. from the University of Zurich and a Ph.D. from the Federal Institute of Technology, both in economics.

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