Structural Economic Challenges Face Caribbean

By David Jessop

News Americas, LONDON, England, Tues. July 5, 2011: Across Europe, many Governments are in financial difficulty. From Greece to Ireland, Portugal and Spain, public expenditure cuts, austerity and retrenchment coupled with low levels of growth and rising inflation are creating significant political problems

In response, they are increasing taxes, cutting public expenditure, keeping interest rates low, and divesting themselves of an ever wider range of state controlled ventures.

The consequence is that protest, both public and private, is growing from a wide range of citizens. These include those most affected in the public sector, students in higher education who are having to pay increased fees or to graduate into unemployment, pensioners with smaller pensions, and for the first time what in Britain is referred to as ‘the squeezed middle’: the hard working middle class who had become accustomed to seeing their disposable income grow uninterruptedly for years.

However, these economic trends may have wider implications if as many economists believe the contagion from Europe and the United States’ continuing economic crisis spreads to nations such as those in the Caribbean that have not been able to diversify their external commercial, tourism and investment relationships.

The implication is that previous views of growth may be unsustainable for many years to come.

It may also be that the largely unspoken social contract that exists in many nations between Government and society over taxes and the delivery of continuously improving social services is unsustainable: in itself a significant political challenge if electorates refuse to accept ever greater levels of taxation while still holding on to a belief that services such as education, health care and support in old age should remain as they are.

Most concerning of all is a view emerging that inflation – largely imported through the rapidly rising price of oil and food – now poses the biggest threat to global recovery.

So serious has this become that the Financial Times ran as its recent front page lead story a report that the Bank for International Settlements (BIS) , which serves as a bank for Central Banks, believes that economic growth must now slow to curb inflationary pressure around the world.

The newspaper’s report referred to a speech delivered by Jaime Caruana, the General Manager of the Bank at its Annual General Meeting in Basel on 26 June, where he focussed on the steps required to build a lasting foundation for sustainable growth.

In his remarks he argued that there was little or no slack left for rapid non-inflationary expansion. With the scope for rapid growth closing, monetary policy should, he suggested, be quickly brought back to normal and countries should act urgently to close budget deficits.

The Bank’s General Manager also urged advanced and emerging economies alike to act to normalise interest rates, despite signs of weakening economic momentum, and warned policymakers not to expect a normal recovery. This was because much of the growth that had occurred before the 2007/8 crisis was in the Bank’s view unsustainable and because some capacity had been destroyed for ever, particularly in finance and construction.

Mr Caruana, also said that the imbalances caused by unsustainable growth before the crisis now need to be rectified. Policymakers should not hinder ‘this inevitable adjustment’. Rising food, energy and other commodity prices underscored the need for central banks around the world to begin raising interest rates.

The General Manager of the IBS also said that the fact that interest rates have been so low for so long introduced new risks into the world’s financial system, even though such policies had been put in place to reduce risk.

The Bank’s view is particularly worthy of note as it is one of the few global institutions that forecast correctly the banking and global economic crisis.

Despite this, their view currently runs counter to that presently held by the US Federal Reserve, which has indicated that its interest rates would remain extremely low for an extended period and to those of the Bank of England which has also suggested there will not be any imminent interest rate rise. However, the European Central Bank is expected to raise interest rates in early July.

All of which may have unfortunate implications for Caribbean economic growth.

Any delay to recovery in Europe and North America or a further slowing of growth is likely to be passed on to those Caribbean economies that continue to rely on these markets for everything from transport to remittances, exports and imports, tourism, and the pricing and uptake of the bond issues that Governments use to finance expenditure.

Take tourism for example, where the economic state of source markets have become of increasing importance to a region in which the industry is now a prime source of GDP growth.

Tourism statistics show that visitor arrivals are still not back above their peak before the financial crisis hit. A comparison of the Caribbean Tourism Organisation’s (CTO) stop over arrivals figures for 2008-2010 reveals an average decline of 6.5 per cent in total stop over arrivals and significantly worse figures for those nations heavily dependent on the UK and European market. Although some Caribbean destinations report a recovery in the North American market, most of the significant recent regional growth that is occurring is from starter markets in Latin America and Russia.

What this all points to are long term structural economic challenges.

The first is that full Caribbean economic recovery is likely to remain some way away and in the longer term may be difficult to achieve if the economies of the region remain so intimately linked to North America and Europe.

The second is that in regional nations where an unspoken social contract exists between governments and their electorates over social provision, governments unable to raise new forms of domestic revenue may find themselves in political difficulties.

The third is that taxing tourists as an alternative way to fund budgets may eventually prove to be counterproductive if visitors reach the limit of what they will pay.

And the fourth is that finding national solutions may drive the region apart.

David Jessop is the Director of the Caribbean Council and can be contacted at Previous columns can be found at