A
significant strength of the Caribbean, as it faces the forces
of globalisation, is the existence in most countries of vibrant,
democracies. In the decades since independence, Caribbean
countries have exemplified transparent institutions and governance
in the Western Hemisphere. Pluralism and democracy have flourished,
and racial and gender equality have long underpinned the political
process. It is no accident that this region is a world leader
in attracting talented women to economic and political decision-making,
starting from Dominica's Mary Eugenia Charles in 1980 - the
first woman prime minister in the Caribbean to the present
day, with Portia Simpson Miller holding the office of Prime
Minister of Jamaica. Caricom countries have healthy competitive
political processes, decades of experience with regular national
elections, and entrenched respect for civil and economic liberties.
Economists widely attribute strong institutions as important
contributors to sustained economic growth and stability. Hence,
these exemplary achievements have, and will continue, to serve
the Caribbean well in the environment of increasing globalisation.
Another
attribute of the region is the demonstrated ability to seize
on emerging comparative advantages - such as your thriving
tourism sector. As the world economy integrates, encouraging
specialisation and developing the region's comparative advantage
should indeed be of utmost importance to policy makers. But
as you know, the task of transforming parts of the agricultural
sector or improving the competitiveness of the manufacturing
sector is not yet complete. In particular, the erosion of
trading preferences with Europe has brought a sustained decline
in traditional agricultural export earnings - the prospects
going forward are not encouraging. This challenge of continuing
to transform the islands, while ensuring that the poor and
vulnerable are protected and that workers are equipped with
the skills necessary to compete in today's global economy
- remains very relevant for much of the Caribbean. Of course,
with the large emigration of skilled labor from the region
to industrial countries, the task of ensuring that the retooling
of skills meet the evolving demands of the region is even
more formidable.
Since
independence, the region has strived to develop advanced financial
markets that have strong cross-border linkages, but a question
you may wish to ask yourselves is: are these markets being
tapped to serve the region's strengths? Lending to high growth
sectors remain relatively low. Instead, they have been used
to finance public debt to levels that are now among the highest
in the world. These trends are highlighted by two sets of
numbers. In the decade to 2005, financial depth indicators
for the Caribbean showed great improvements. For example,
the ratio of broad money to GDP increased, on average in the
region, from about 50 per cent to about 80 per cent during
the period. At the same time, however, public debt increased
rapidly. Indeed, the region is now home to seven of the world's
ten most indebted emerging market countries, with the average
level of public debt to GDP rising above 90 percent in 2005,
up from 70 per cent in the mid 1990s.
Integration
Despite a shared history and many of the shared experiences
since independence that I have noted, it is surprising that
there has not been more significant progress at regional integration.
As you know even more than I, it is not that the sentiment
for integration has been absent.-indeed, regional integration
has been a top agenda item for Caribbean leaders for nearly
half a century, but the action has not fully matched the rhetoric.
It is encouraging, however, that a strong consensus to integrate
remains in the region, as is evident with the launching of
the Caribbean Single Market and Economy (CSME) initiative
this year.
The challenge
now is how to proceed and advance the integration process.
Our own experience from looking at other countries around
the world indicates to us that reduction of trade barriers
- not only within the region but with the rest of the world,
convergence and coordination of economic policies, and steps
to strengthen financial sector linkages are key to successful
integration. But before proceeding on these specific topics,
it is important to ask why integration is imperative now.
And with whom - that is, what should the balance be between
regional and global integration?
The answer
to these questions lies in the fast pace of globalisation
which has fundamentally changed the external environment facing
the region. Globalisation provides great benefits but competition
in the international arena is also fierce. As an illustration
of the benefits, consider the increase in the market for tourists,
or of investment funding, from an increasingly affluent Asia
that is now more closely linked to the Western Hemisphere
by more frequent and direct air routes. On the side of costs,
consider the outlook for the Caribbean's traditional agricultural
exports as regional neighbors, such as Brazil, have solidified
their positions at the top of the world's league of efficient
sugar exporters amidst cuts in European Union subsidies to
the Caribbean.
Seizing
the opportunities presented by globalisation means, by definition,
increasing integration with the world economy. As I just noted,
however, globalization comes with new risks and vulnerabilities
as well, and countries need to address these as part of their
strategies. It is in these respects that greater regional
integration gains prominence.
Integration as a way to improve competitiveness
With greater regional integration, economies of scale in production
of goods that are not available to individual islands may
be feasible for the region as a whole. Moreover, politically
challenging policy changes can often be achieved through regional
agreements. In addition, gains from specialisation within
the region can be realised by pursuing different strands of
the value-added chain, as has been observed in the differentiations
among Caribbean countries between mass versus boutique tourism,
and development of higher quality locally branded products,
such as Jamaican Blue Mountain coffee.
But note
the emphasis I placed earlier on the need to get regional
integration right. When it comes to trade, for example, one
needs to be careful with the issue of diversion. Trade diversion
occurs when imports from a low cost third country are replaced
by a higher cost intra-regional source. To avoid this phenomenon,
it is important, as part of the process of regional integration,
to continue to reduce trade barriers to the outside world.
At the risk of repeating myself, this point emphasizes the
fact that regional integration needs to complement, not substitute
for, integration with the world economy.
Greater
regional integration of product and factor markets is also
necessary to facilitate adjustments to the very large exogenous
shocks that the Caribbean region is very frequently subject
to and that can have very detrimental impacts on competitiveness.
Such integration serves to increase market flexibility and
efficiency, and thereby increases the capacity of the region
as a whole to recover from these shocks.
A necessary
policy imperative for the Caribbean today is, therefore, the
relaxation of rigid laws governing the labour market, which
can hinder economic flexibility and also distort wages and
productivity. Greater labor mobility should serve to ameliorate
shortages within the region as some regional economies inevitably
grow faster than others. Another dimension of labor market
reform relevant to globalisation is the issue of migration,
which is after all both a cause and a consequence of globalisation.
As you know, the Caribbean has some of the highest emigration
rates in the world, in particular for the most skilled, and
while the debate is not concluded, there is some evidence,
based on studies conducted by my colleagues at the IMF, that
the losses to the Caribbean from emigration to the OECD countries
have outweighed the value of remittances received. Under these
circumstances, it is incumbent upon Caribbean countries to
assess their education and migration policies to consider
how best social investment could be directed to benefiting
the region first and foremost.
Policy Convergence and Coordination
Let me now turn to convergence and cooperation of policies.
Such coordination is both a necessary ingredient for, and
a necessary outcome of, greater regional integration. Moreover,
the convergence of macroeconomic policies to a significant
degree is essential before full monetary union, such as in
the Euro area, can be considered. As such, it is critical
for countries to try to meet the joint Caricom policy objectives
that you have established but the record, thus far, has not
been encouraging. Not only does macroeconomic performance
vary widely across countries, but the nature of the shocks
also differs: for example, Trinidad and Tobago is facing the
challenge of managing the windfall gains from the high energy
prices, while other countries are having to adjust to the
negative shock. Such differences should, however, not preclude
the Caribbean countries from undertaking close coordination
of, and consultations on, macroeconomic policies, including
on exchange rate policies. Indeed, with greater integration
comes the need to ensure that changes in monetary and exchange
rate policy in one Caribbean country do not unduly impact
on another.
A key
policy area where coordination can make every country better
off is that of tax concessions. Tax incentives and tax holidays
have been used extensively in the Caribbean to promote investment.
The associated revenue losses are large and the benefits in
terms of new and profitable investments are questionable.
Indeed, studies that we have carried out at the Fund suggest
that regional competition for investments, including the prevalent
tax holidays, create a phenomenon of a "race to the bottom",
where marginal effective tax rates in most countries come
down to near zero or become negative.
Surely,
this state of affairs is not beneficial for the region as
a whole. Yet, the necessary coordination on tax policy has
not come about. To take greater advantage of increasing integration,
there is also a need to harmonise requirements and procedures
for investors, yet significant differences remain across countries,
even in the OECS (ECCU) area where, relatively speaking, there
has been more integration.
A third
area, where the benefits of regional cooperation are clear
is in providing collective government services. You have collectively
built the expertise in trade negotiations with the rest of
the world. Many other areas for cooperation - such as the
creation of regional tax administration or regional financial
oversight bodies - remain, however, to be tapped.
Financial Stability
The regional financial markets have increasingly become integrated
over the last decade. Interest rates in regional countries
are much closer to each other than they were a decade ago.
Also, cross-listed companies in regional stock exchanges currently
account for nearly 60 percent of total market capitalisation,
up from zero a decade ago. Trinidad and Tobago, the financial
hub of the region, has clearly played a leading role in bringing
about greater financial integration by channeling its large
oil windfall savings to neighboring countries. This impetus
toward regional financial integration has also been contributed
to by the extremely rapid growth of non-banking financial
firms and attendant securitisation, particularly in Jamaica
and Trinidad and Tobago. Currently, total bank deposits are
exceeded by funds managed by securities dealers in Jamaica
and mutual funds in Trinidad. As I noted before, the financial
sector in much of the Caribbean, however, still appears largely
to be geared toward meeting the need to finance government
deficits. Nowhere is this more true than in Jamaica where
the core business of the security dealers is to serve as retail
outlets for government debt.
While
the deepening financial integration of the region is clearly
encouraging in that it has the potential to make more capital
available to the most efficient regional firms, this potential
has not been fully tapped. From a macroeconomic perspective,
reducing fiscal imbalances and the large debt burdens is a
precondition for such resources to be directed to the private
sector. In addition, there is uneven regulatory oversight
of the financial sector and limited corporate governance in
an environment of rapidly growing financial derivatives and
increasing cross-border financial flows.
As linkages
grow, so do the risks of financial contagion, especially when
fiscal policies are not as strong as they should be, As we
have observed in other emerging market countries, and there
are some examples in the this region also, when financial
conditions tighten, markets are quick and ruthless in punishing
vulnerable economies. Hence, existing vulnerabilities need
to be addressed. The stability of the financial sector would
need to be safeguarded by enhanced supervision. With increasing
linkages, there is a clear need for close coordination in
regulation and supervision among country authorities, and
possibly the creation of a regional oversight body. Reducing
remaining entry barriers and capital controls and harmonising
taxation, regulatory and supervisory frameworks and improving
market infrastructure will go a long way toward maximising
the benefits from financial integration. Extending financial
integration beyond the region would also help reap the full
benefits by diversifying risks and enlarging financing flexibility.
The Caribbean
is at cross roads in facing globalisation. But exploiting
the full opportunities at the right time is key. And the right
time is now. The Fund stands ready to assist you, in every
way that it can, in helping globalisation and regional integration
improve the living standards of the people of the Caribbean
- the ultimate objectives of the policy makers in this region
as well as ours.
Dr Agustin Carstens
is Deputy Managing Director of the International Monetary
Fund (IMF).
Petroleumworld not necessarily share
these views.
Editor's
Note: This commentary was published by The Trinidad
Express, on Wednesday, May 10th 2006. (Dr Augustin
Carstens was the keynote speaker at last week's
2nd International Conference Business, Banking &
Finance organised by the University of the West
Indies, the Central Bank of Trinidad and Tobago
and Caribbean Money Market Brokers (CMMB). The following
is an edited version of Dr Carstens' speech on regional
integration.) Petroleumworld reprint this article
in the interest of our readers.
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Trinidad
Express 05 15 06
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© 2006 Dr Agustin Carstens.
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