Caribbean Countries Caribbean Economic Overview 1996

Transcription

1 Report No LAC Caribbean Countries Caribbean Economic Overview 1996 May 1996 Caribbean Division Country Department III Latin America ancl the Caribbean Region u Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of the World Bank

2 This report was prepared under the auspices of the Caribbean Group for Cooperation in Economic Development (CGCED). Established in 1977, the CGCED is the main forum for policy dialogue and aid coordination among the Caribbean countries, international financial institutions, and bilateral donors. A meeting of the CGCED is held every two years in Washington, D.C., and is chaired by the World Bank. The theme of the June 10-14, 1996 CGCED meeting is public sector modernization and reforms that the Caribbean countries can take to adapt successfully to a fast-changing world economy. In addition to country reports, the following regional reports with various perspectives on the role of the state have been prepared for the meeting: Caribbean E'conomic Overvieu (World Bank) Plhiic Sector Modernization in the ('aribhean (World Bank) 1'rospecsj fbrservice Axports from the English-Speaking Caribbean (World Bank) Study to Assess the l.conomic Impact of 7ourism on Selected Caribbean Countries (Caribbean Dcvelopment Bank) Infrastricizure for I )evelopment, A Policl! Agenda for the Caribbean (Inter-American Development Bank and Caribbean Development Bank) J'overtv Reduction cnd Huiman Resource D)evelopment in the Caribbean (World Bank) Caribbean Regional Health Stuidy (Intcr-Aimierican Development Bank and the Pan American Health Organization)

3 Caribbean Economic Overview 1996 MAY 1996 The World Bank

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5 Preface The "Caribbean Economic Overview 1996" is prepared for the meeting of the Caribbean Group for Cooperation in Economic Development (CGCED) in June Although the discussions at the meeting will focus on issues for which specific reports are being prepared-public sector modernization, health, infrastructure, poverty, tourism, and export services-the "Caribbean Economic Overview" updates participants on how recent developments in the North American Free Trade Agreement (NAFTA) and international capital flows since 1994 have affected the Caribbean. The 1994 meeting of the CGCED focused on the trends in trade and capital flows for the region, and the main report was on coping with changes in the external environment. Given the continuing importance of trade and capital flows and new developments in these areas, it seemed important to provide an update, even though no major new analytical work has been done on these issues for the Caribbean. The main text also gives an overview of macroeconomic performance in the region in the past two years, and the annex presents brief summaries of the economic situation in the Caribbean countries. The team preparing this report was comprised of Steven Webb (task manager), Lisa Da Silva, and Demetris Papageorgiou. Philippe Nouvel is the division chief, Norman Hicks is the lead economist, and Paul Isenman is the department director. Deborah Trent assisted in production of the report.

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7 Contents PREACE LIST OF ACRONYMS.v EXECUTIVE SUMMARY. vii 1 RECENT TRENDS. 1 Growth.2 Policy reform and growth prospects.3 2 THE EFFECT OF NAFTA ON THE CARIBBEAN... ; 7 Trade preference programs.7 Exports of the Caribbean countries to the United States.9 Response strategy..1 3 PRIVATE AND OFFICIAL CAPITAL FLOWS.13 Country flows. 14 Funding sources.19 ANNEX I SUMMARY INDICATORS AND COUNTRY PROFILES.24 ANNEX II U.S. TRADE PROGRAMS WITH THE CARIBBEAN.S1 ANNEX m ss5 F un ing so rce

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9 List of Acronyms CARIBCAN CARICOM CBI CGCED DOD DBMC ERP EU FDI GALs GDP GNFS GNP GSP IDA IDB IMF NAFTA OECD OECS SITC WHFTA Caribbean Community/Canada Technical Cooperation Agreement Caribbean Community Secretanat Caribbean Basin Initiative Caribbean Group for Cooperation in Economic Development Debt Outstanding and Disbursed Dominica Banana Marketing Corporation Economic Recovery Program European Union Foreign Direct Investment Guaranteed Access Levels Gross Domestic Product Goods and Non-factor Services Gross National Product Generalized System of Preference International Development Association Inter-American Development Bank International Monetary Fund North America Free Trade Agreement Organization for Economic Cooperation and Development Organization of Eastern Caribbean States Standard International Trade Classification Western Hemisphere Free Trade Agreement v

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11 Executive Summary i. Although some Caribbean countries are doing well, the region as a whole is growing only slowly-growth per capita is slower than in East Asia, Latin America, and even the high-income countries Tourism, other service exports, and manufacturing are leading the Caribbean growth. In none of these areas, however, is the region growing as fast as the world market. Although it is not automatically a cause for concern that Caribbean output and exports are growing slower than some world averages, the end or decline of traditional preferential trade arrangements and the expansion of Mexico, Cuba, and other competitors threaten to undermine the bases for even the modest growth achieved recently. To prepare for these eventualities, the Caribbean countries need to speed up implementation of the investments and policy adjustment that will facilitate diversification of the private sector. Creating a supportive environment for the private sector involves more than a one-time policy reform. It requires frequent revisits and fine-tuning in order to help the private sector sustain its competitive edge in the world market. ii. Improving policies in the Caribbean will continue to bring benefits no matter what the rest of world does, but the benefits will be greater if the industrial countries liberalize their imports of nontraditional Caribbean products. The advent of NAFTA in 1994 produced high hopes that it would lead to a similar agreement for the Caribbean, but such an agreement has not materialized and is unlikely to do so this year. Apparel, shoes, and sugar are the main products for which NAFTA gives Mexico an advantage over the Caribbean, with apparel being the most important. Since 1990 Caribbean apparel exporters have increased their market share in the United States, but growth slowed in to about the same pace as the market. Mexican apparel exports to the United States, in contrast, were already growing faster than the Caribbean in the early 1990s and have further accelerated since the NAFTA agreement was signed. iii. For several years the major industrial countries have been reducing aid flows and emphasized export development in their assistance strategies. The countries of the Caribbean have accepted this as the new reality and recognized it as beneficial to them in the long run. To achieve those long-run benefits, however, the main industrial trading partners need to improve further the export opportunities for nontraditional products from the Caribbean and also to taper off their financial assistance in a way that does not make excessive debt-servicing demands on the heavily indebted governments of the region. iv. Caribbean countries, particularly the larger ones, continue to attract private investment from the rest of the world, but not enough to offset the decline in official aid flows over the past decade. This extends the trend seen two years ago-total official flows have declined further-although governments of smaller economies continue to receive positive flows, often very large per capita. The net repayments from governments of larger economies put a serious burden on public saving. Total private flows have not grown further since 1992, but the foreign direct investment (FDI) component has. This is a favorable change of composition, because experience elsewhere indicates that FDI is less liquid and volatile, is the most likely to increase efficient investment and growth, and is the least likely to finance unsustainable government spending or exchange rate overvaluation.

12 CARIBBEAN ECONOMIC ORERmw v. The increased openness of most Caribbean economies over the past decade, the improved macroeconomic stability, and the growth of foreign direct investment are reasons to hope that overall growth will accelerate in the future. To realize this hope will require continued increase in trade openness, improved labor and financial market systems, and more efficient public sectors, focused on human resource development, law enforcement, and facilitation of private sector growth. It will also require more innovative and export-oriented private sectors. viii

13 1 Recent trends The one common trait of most Caribbean countries-democracy-has become even more universal within the region.' Democracy was restored in Haiti, and a peaceful, if tense, election brought in a new president-the first time that one elected president succeeded another in Haiti. Democracy is expected to be strengthened with elections this year in the Dominican Republic and Suriname. Elections also brought in new governments in Barbados in 1994 and in Dominica, Grenada, St. Kitts and Nevis, and Trinidad and Tobago in 1995; a new prime minister was chosen in St. Lucia in early Thus, the majority of Caribbean countries have new governments since the 1994 CGCED meeting. The frequent turnover of governments through the constitutional process, which is the hallmark of true democracy, is much in evidence in the Caribbean. The Caribbean countries have widely varying economic situations. Annex I gives a statistical overview as well as individual profiles of all the countries. Income levels range from low in Guyana and Haiti to upper middle in Barbados and some countries of the Organization of Eastern Caribbean States (OECS). All the countries have service-export industries, including tourism, but their importance varies. In Barbados, the Bahamas, and some of the OECS countries, where these industries have developed most strongly, people now enjoy the highest per capita incomes in the region. Rising labor incomes are gradually pricing these countries out of traditional agricultural export activities. During this transition they have used migrant labor from other, lower income islands. Thus the exportdiversification strategy of moving into services, a strategy to which most countries subscribed in their medium-term strategies, has been successful. 2 Countries that have moved slowly with this strategy, however, now need to implement it more expeditiously in order to prepare for the accelerating changes in the world economy. ' Unless otherwise noted, the term Caribbean in this report refers to the member countries of the Caribbean Group for Cooperation in Economic Development: Antigua and Barbuda, Bahamas, Barbados, Belize, Dominica, Dominican Republic, Grenada, Guyana, Haiti, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, and Trinidad and Tobago. 2 Various medium-term economic strategy papers, 1994.

14 CARIBBEAN ECONOMIC OVERVIEW Growth Growth in the Caribbean in the 1990s has been positive in all countries except Haiti and, with Haiti excluded, has been slightly faster on average than in the 1980s. See Table 1.1. Table 1.1 Real GDP Growth Rate, (annual average percentages) Country Antigua & Barbuda Bahamas Barbados Belize Dominica Dominican Republic Grenada Guyana Haiti Jamaica St. Kitts & Nevis St. Lucia St. Vincent & Grenada Suriname Trinidad & Tobago Region Region without Haiti Source: World Bank, economic and social database and At a Glance reports. In per capita terms, however, the growth for the Caribbean as a whole was slightly negative for Haiti had the worst growth performance, but even in the rest of the region per capita growth averaged barely 1 percent per year. See Table 1.2. This is poor by world standards, where annual per capita growth of gross domestic product (GDP) for the period was 7.6 percent in East Asia, 2.0 percent in South Asia, 1.3 percent in the high-income countries, and 1.1 percent in Latin America. The Caribbean out performed the Middle East, Africa, and Eastem Europe-Central Asia, where growth was negative on average, but this hardly addresses the aspirations of the Caribbean. External conditions partly, but only partly, explain the growth outcomes in the Caribbean in : Hurricanes and tropical storms retarded growth in St. Lucia in and in Dominica, St. Kitts/Nevis, and Antigua/Barbuda in Continued growth in Europe and the United States has kept the Caribbean tourist industry growing, if not in high boom. Higher world mineral prices helped exporters of oil (Trinidad), nickel (Dominican Republic), and bauxite (Guyana, Jamaica, and Suriname). Sugar exporters (in most islands, see Table AlI.) faced mixed news, as world prices improved but the reform of the 2

15 I Recent trends Table 1.2 Growth and Integration, by Region Real per capita Growth of real FDI inflows as a GDP growth, exports per percentage of Region capita, GDP, East Asia South Asia High income n.a. Latin America & Caribbean Caribbean b 4.4c Middle East & North Africa Sub-Saharan Africa Europe & Central Asia n.a. Not applicable. a. Excludes Haiti. b. Includes Barbados, Dominican Republic, Guyana, Jamaica, Suriname and Trinidad & Tobago, which had more than 70 percent of the region's exports in c , excludes Haiti and Suriname. Source: World Bank, Global Prospects and the Developing Countries (Washington, D.C., March 1996); World Bank data. The Common Agricultural Policy in Europe, where most Caribbean sugar is sold, brought the European price closer to the world price and thus lowered the effective value of the preferential access. For countries, like Guyana, that can produce more at the lower price, opportunities will improve because expansion of the European Community is leading to increased sugar quotas for the Caribbean. Banana exporters (Belize, Jamaica, and the Windward OECS economies) now must compete in Europe with dollar bananas; a quota system still restrains the quantity of competition, but even that restraint is slated to drop in Banana growers in the Windward Islands, especially Dominica in 1995, were also hit hard by the storms. Policy reform and growth prospects The effects of external factors did not seem to persist as much as the effects of economic policy and of private sector entrepreneurship. Annex I contains profiles of recent economic developments and the policy issues in each country. St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines have continued their growth from the 1980s, but the pace has slackened as their tourist sectors mature and as sugar and banana export revenues plateau. Barbados, Dominican Republic, Grenada, and Trinidad and Tobago undertook varying degrees of structural adjustment in the 1980s and early 1990s and are now enjoying its fruits. Guyana has stabilized its macroeconomic situation, completed part of the needed structural reforms, and had strong growth in the early 1990s as the economy rebounded from the disastrous effects of earlier policies. Haiti and Suriname also rebounded in 1995, on the first hints of reform. In all three countries, this growth seems unlikely to continue unless structural reforms, such as privatization, trade liberalization, civil service reform, and regulatory reform, improve the environment 3

16 CARIBBEAN ECONOMIC OVERVIEW for the private sector. Other countries have experienced stagnation or declining growth, largely because the necessary adjustment programs are not complete, as in Belize and Jamaica, or need to be initiated, as in Antigua and Barbuda. Most Caribbean countries have made substantial progress on macroeconomic stabilization in the 1990s. Inflation rates in 1994 and 1995 were below 20 percent annually in all the countries, except Jamaica and Suriname, indicating that the Caribbean economies are sharing in the success of most Latin American and OECS economies in achieving more macroeconomic stability. See Table Al. 1. As prices and exchange rates stabilize, the macroeconomic problems are mostly fiscal deficits and interest rates that are moderate by past standards but high compared with those of other economies today. Most Caribbean economies have opened to the rest of the world although more for financial flows than for trade. Table 1.2 shows that FDI inflows per capita in the Caribbean have been substantial, even greater than for East Asia, as Chapter 3 will discuss in more detail, but exports per capita have grown slowly in the 1990s. 3 The Caribbean economies have always been very open in the sense of high export and- import shares of GDP, because of the smallness of the economies, but openness in the sense of foreign-exchange convertibility and lack of price distortions from world prices has come more recently and more slowly. Exports as a share of GDP have increased in the last decade in most countries, but the aggregate change is not large for the region. The composition of exports has changed greatly since the early 1980s. Whereas primary products dominated the region's exports until the mid-1980s, manufactured exports have grown considerably and are now the leading export to the U.S. market. Given the trends of greater economic stability, smaller government deficits, and more open trade regimes in most Caribbean countries, what are the prospects for future growth, compared with the recent deceleration? Recent, worldwide research shows that, when low- and middle-income countries open their economies and integrate with the rest of the world, they tend to have faster than average growth rates. In the open developing economies, per capita real growth in averaged more than 4 percent and was at least 2 percent in each. The growing disparities in world income distribution, however, are the result of exceptionally poor growth performance by most countries that either were not integrating or were becoming more closed. Among twenty-seven countries that opened after 1975, per capita growth increased from slightly negative rates on average in the three years before the opening to positive rates in the year of reform and the next two, and after that average growth rose further. 4 3 The export growth figures in Table 1.2 do not include free trade zones, which are more important in the Caribbean on average than in the other regions. Including free trade zones would raise the average annual growth rate of Caribbean exports by almost 2 percentage points. 4 Jeffrey D. Sachs and Andrew Warner, "Economic Reform and the Process of Global Integration," Brookings Papers on Economic Activity I (Washington, D.C., 1995): These (Continued i) 4

17 1 Recent trends So why has growth performance in much of the Caribbean been disappointing? Trade liberalization has begun but has not been completed and has not yet had a strong effect on growth. Contrary to most liberalizing experiences in the 1960s and 1970s, where the growth of output and exports responded quickly to trade liberalization, the response to the liberalizations of the late 1980s and 1990s has been slower in Latin America and in at least the larger countries of the Caribbean. The immediate cause of the difference seems to be that the countries with early successful liberalizations made and sustained a real depreciation of the exchange rate, which played a crucial role in stimulating and reorienting growth. 5 None of the Caribbean countries did this. Furthermore, oligopolies of local trading companies still dominate the economy and policies in most Caribbean countries, and in a variety of ways they limit the dynamic development that might be led by new entrants to the export sectors. Restrictive policies and procedures that the traditional private sector has learned to live with, and earn rents from, need to be pushed aside if faster growth is to come. The rise of foreign direct investment may indicate that past reforms in this direction are starting to pay off. The general economic environment also needs to be improved by modernizing the public sector, making labor markets more flexible and less contentious, upgrading economic infrastructure, especially telecommunications, and improving supervision and regulation of the financial sector. results are consistent with the findings of Dollar (1992) for David Dollar, "Outwardoriented Developing Economies Really Do Grow More Rapidly: Evidence from 95 LDCs, ," Economic Development and Cultural Change 40(3): Michael Michaely, Demetris Papageorgiou, and Armene Choksi, Liberalizing Foreign Trade: Lessons of Experience in the Developing World, in Demetris Papageorgiou, Michael Michaely, and Armene Choksi, eds., Liberalizing Foreign Trade, vol. 7 (Oxford: Basil Blackwell, 1991). 5

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19 The effect of NAFTA on the Caribbean While tourism is the largest export earner for the Caribbean, and minerals remain important for most of the larger countries, manufacturing is second or third largest in most countries and is growing faster than minerals. More than 60 percent of Caribbean merchandise exports go to Canada and the United States, and the share is larger if one excludes sugar and bananas, which mostly go to Europe on preferential programs. So it is not surprising that Caribbean countries have sought free access to this market. They have followed with great interest the emergence of NAFTA and are actively engaged in planning the Western Hemisphere Free Trade Agreement (WHFTA). They also participate in the Lome process with the European Community and would benefit from having Europe open more to their nontraditional exports. Sinice the last CGCED meeting, NAFTA constitutes the change in the world trade regime that has the most importance for the Caribbean. This chapter, therefore, summarizes the aspects of NAFTA and the U.S. trade preference regime that are relevant to the Caribbean. Although NAFTA has not yet had its full effects, this chapter analyzes the pattern of trade flows to see what changes have occurred since NAFTA started in The analysis concentrates on exports to the United States, which are quantitatively the most important and for which detailed and recent information is available. Trade preference programs The United States has several trade-preference programs that benefit the Caribbean. See Annex 2. The Generalized System of Preferences has since 1976 granted the Caribbean and most other developing countries preferential access compared with other, mostly industrial, countries. The Caribbean Basin Initiative (CBI) offers even better tariff treatment for some products from the Caribbean and Central America, although it excludes many important Caribbean exports, like petroleum, sugar, textiles, clothing, and footwear. Canada has a similar program called the Caribbean Community/Canada Technical Cooperation Agreement (CARIBCAN). The U.S. Program for Production-Sharing Agreements, commonly known as the 807 Program, after the number in the tariff code, helps U.S. firms to

20 CARIBBEAN ECONOMIC OVER H'EW compete with labor-intensive foreign manufactures by allowing U.S. producers of partly finished goods, like cut cloth for clothing, to ship them abroad for assembly (sewing) and then to re-import them. Duty at the standard rate of 19 percent must be paid only on the value added abroad. The program applies to many developing countries, not just the Caribbean, but proximity to the United States makes the program relevant mainly for Mexico and the Caribbean. 6 For most countries the program does not exempt these products from any existing quota or other nontariff barriers. Although the program encouraged the growth of textile trade in the 1990s between the Caribbean and the United States, quota limitations soon impeded further growth for some countries. Accordingly, in 1986 the Reagan administration, under the umbrella of CBI, expanded the 807 Program to improve the Caribbean's access to the U.S. market. With the Special Access Program (CBI) and the Special Regime Program (Mexico), countries can increase their quotas as long as they demonstrate that they actually have the capacity to produce. Although this was an improvement, and seems to have encouraged export growth, the quotas still discourage major new investments, because firms are reluctant to invest in a large factory for which the existing quotas do not allow profitable exports. With the inception of NAFTA in 1994, Mexico, Canada, and the United States granted each other a number of reciprocal trade advantages including progressive tariff reductions and immediate quota elimination. The Caribbean did not lose any of the special programs described above, but their relative value diminished somewhat. In reaction to the gains that Mexico made through NAFTA, the CBI countries have sought to obtain NAFTA parity by way of the Caribbean Basin Free Trade Agreements Act. If implemented, this program would grant CBI countries the same privileges that Mexico has attained through NAFTA. It would last ten years, at which time countries would have to decide whether to join NAFTA, to form independent bilateral agreements, or to return to the original CBI trade policies. NAFTA parity would not be the same as joining NAFTA, in that parity would not obligate the Caribbean to give reciprocal treatment to Canada, Mexico, and the United States. To date, NAFTA parity has not passed the U.S. congress, in spite of strong support from some officials. For most products, the CBI already provides equal or better treatment than what Mexico receives under NAFTA. The most important area where Mexico now has an advantage is in textiles and footwear. Prior to January 1, 1994, Mexico and the countries of the CBI received the same treatment on textile exports to the United States. Now NAFTA allows Mexico's apparel and footwear exports to enter totally duty free, as long as these products are manufactured under the Special Regime Program, which places Caribbean exports under this program at a disadvantage. Caribbean officials have expressed concern that NAFTA 6 Almost 60 percent of U.S. textile imports under 807 come from Mexico, the Dominican Republic, and Jamaica, with most of the rest coming from other CBI countries. See Table A

21 2 The effect of NAFIA on the Caribbean provisions for the trade of these products will have a negative impact on the region's trade. Exports of the Caribbean countries to the United States The U.S. market has traditionally been the main destination of Caribbean exports to the NAFTA countries, so this section focuses on exports to the United States to understand the likely impact of NAFTA. 7 The nontraditional Caribbean exports to the U.S. market almost quadrupled between 1983 and 1994, measured in current U.S. dollars (see Table A3.2). Apparel has been the most important item in the surge of nontraditional exports to the United States. In 1983, textile apparel exports constituted only 6 percent of the exports of the Caribbean countries to the United States, but by 1994 their share reached 39 percent (in current U.S. dollars). In 1994, about 80 percent of the region's apparel exports to the United States entered under the 807 Program, mostly from free trade zones in the Dominican Republic and Jamaica. 8 Within the free trade zones, manufacturing is subject to minimal taxation, which means that basically no duty is placed on imported materials and machinery and that most, if not all, regulations that would normally apply to manufacturing outside the free trade zones are not enforced. Consequently, the growth rate of apparel exports from the Caribbean to the United States in the early 1990s was higher on average than the growth rate of all such imports by the United States. See Figure 2.1. Between 1989 and 1994, apparel exports from the Caribbean to the United States increased by about 94 percent in current dollars, while total U.S. imports of such products increased by only 49 percent (see Table A3.3). The Dominican Republic and, to a lesser extent, Jamaica are the leading exporters of apparel and footwear to the United States among the Caribbean countries. By 1994, Dominican Republic apparel exports to the United States were US$1,572 million-more than double the 1989 figure-and Jamaica's were US$454 million, double the 1989 figure. By contrast, in the same period Haiti's exports of these products to the United States fell to one-third of their 1989 value. This robust growth of apparel exports from the Caribbean countries to the United States slowed in 1994 and 1995 to a rate that some would consider too slow. Mexican apparel exports to the United States have grown faster than those from Caribbean countries since 1991, and in 1994 and 1995 they grew three to four times as fast. Between 1989 and 1994 Mexican apparel exports to the United States more than tripled, from US$500 million in 1989 to US$1,597 million in In the first year of NAFTA, 1994, the volume of such exports from Mexico to the United States grew by 41 percent, compared with 8 percent for apparel ' In 1980, about 98 percent of the Caribbean exports (excluding goods manufactured in free trade zones) to NAFTA went to the United States, and even after strong growth in trade with Canada, the U.S. share was still 86 percent in IMF Direction of Trade Statistics. 8 Estimates from the American Apparel Manufacturers Association. 9

22 CARIBBHEN ECONOMIC OVERVIEW Figure 2.1 Growth of U.S. Apparel Imports frorn CGCED Countries, Mexico, and the World, ci (Jan- -*--Worldtotal -C--CGCED countries A+Meeico Sept.) Satir-e. American Appael Maruidurers Assoarabon, see Table. A3.3 imports from the Caribbean countries and 11 percent for total U.S. imports of apparel. In the first nine months of 1995 the growth of Caribbean exports to the United States rebounded to 16 percent, while similar Mexican exports grew by 68 percent. In this same period, the value of Mexican apparel exports to the United States surpassed for the first time the value of similar exports from the Caribbean. The spectacular growth rates for Mexican textile exports must be considered in light of the small base from which they started, as Caribbean textiles also grew fast from a small base starting in the 1980s. Both Mexico and the Caribbean have much scope to increase their market shares, as one can see from Figure 2.2, which shows the absolute levels of U.S. apparel imports from the world, the Caribbean, and Mexico. Figure 2.2 U.S. Apparel Imports from CGCED Countries, Mexico, and the World, ,000 30,000 ' 25,000 E 20000, i (Jan- (Jan- M World total E CGCED countries 0 Mexico Sept) Sept.) Source: American Apparel Maiufadurers Association, see Table A3.3 10

23 2 The effect of NAFTA on the Caribbean Response strategy The acceleration of the growth rate of U.S. apparel imports from Mexico is attributed to the duty-free treatment provided under NAFTA. Similar exports from Caribbean countries to the United States are subject to 19 percent duty on the value added in assembly, which is around 33 percent of the total value of these exports. In other words, U.S. firms producing apparel and other products under the 807 Program may choose between outsourcing assembly operations to the Caribbean and paying an average 19 percent duty on the value added or outsourcing to Mexico and paying no duty on the assembly value added. To offset this disparity in the duty treatment, even with the 807 Program, Caribbean assembly operations must make themselves more attractive than Mexico in other ways-production quality and speed, transportation costs, local costs of production, and transaction costs. While it will be good for the Caribbean economies to improvw in these ways, obtaining NAFTA parity or membership would also help their economic development and encourage apparel manufacturers to increase tie share of value added in the Caribbean. The evidence here justifies the concerns of Caribbean officials regarding the effects of NAFTA on exports of apparel and shoes by Caribbean countries under the 807 Program. The Caribbean countries will face considerable challenges from Mexican competitors, with the duty differential of 19 percent on value added. Apparel assembly operations are mobile geographically, because the required fixed investment is minimal and easy to transport. In order to preserve the gains achieved by the Caribbean in the past decade, it will be important for the countries of both NAFTA and the Caribbean to hasten preparation for full membership of the Caribbean in the WHFTA. An important requirement for Caribbean participation in the WHFTA is a more open trade regime, progressing beyond what has been done already. The bargaining power of the Caribbean is small and therefore would perhaps not justify waiting on action from the NAFTA countries. To varying degrees the Caribbean countries have started moving away from trade policies of the past that relied on preferential market agreements and that protected domestic economic activities from import competition and have perpetuated the concentration of Caribbean exports. It would benefit the Caribbean countries to complete the opening process quickly so that they can advertise themselves, for both manufacturing and export services, as attractive business locations near to Miami, Caracas, Toronto, Omaha, and even London and Brussels, via air or internet. 11

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25 Private and official capital flows The 1994 Woild Bank report Copinig with Changes in the External Environment gave a relatively upbeat assessment of external financing for the Caribbean countries. Average net annual flows in exceeded the flows of the mid- and early 1980s in nominal U.S. dollars. Although this represented little or no rise in real terms, it was good news in view of the well-known decline of financing flows to the Caribbean public sector. These flows had fallen by almost a billion dollars from 1982 to the average of , as the principal on the heavy balance of payments lending of the 1980s started to come due. See Table 3.1. The private capital flows to the private sector had increased, due to an increase of both foreign direct investment and private transfers. 9 Furthermore, the official flows were shifting toward grants, in order not to repeat or exacerbate the problems that were emerging because of net repayment on earlier lending. For net flows to public sectors, the downward trends continued and accelerated into 1993 and 1994, as the data now show, and probably into 1995 as well. Flows to public sectors in 1994 were less than US$100 million -a drop of more than 80 percent from the average for Haiti's grants in 1994 were about US$235 million, and net flows to the other Caribbean governments were a negative US$139 million in Although final data are not available for 1995, the net flows from the multilaterals and the traditionally largest bilateral donors- United Kingdom, Canada, and the United States-have probably declined further. Flows from the European Union (EU) and perhaps Asian bilaterals rose, but probably not enough to offset declines elsewhere. For the official flows in the 1990s, one must also bear in mind that debt forgiveness is counted as a grant. It has been concentrated in Guyana, Haiti, and Jamaica. The net external flows to the private sector in increased from the average of Net foreign direct investment increased from US$500 million on average in to US$1,235 million in This shift in composition of liabilities of the private sector bodes well for the region. FDI is less liquid than private lending and bank deposits and is thus less likely to cause sudden swings in 9 The figures for in Table 3.1 differ from those in Table 3.5 of the 1994 report, because the "Other" category was recalculated on a more consistent basis.

26 CARIBBEAN ECONOMIC OVERVIEW the balance of payments. Also, because the service on FDI is profits, it would tend to adjust automatically with the export performance of the economy. The patterns of flows for individual countries and their governments and for individual sources differ substantially from the aggregate flows. Table 3.1 Overview of Net External Financing to CGCED Countries, (current USS million) Type of financing Financing to the public sector Bilateral Loans Grants of which debt forgiveness Multilateral Commercial' Total net flows to public sector 1, Private sector Foreign direct investment ,235 Private transfers Otherb Total net flows to private sector ,052 1,838 1,424 Total net external rinancing 2,183 1,342 1,770 2,388 1,520 a. Includes financial institution and export and supplier credits to public agencies. b. Includes private lending, bank deposits, and errors and omissions. Sources: World Bank, Debt Reporting Unit (public sector, except grants and debt forgiveness); OECD (grants and debt forgiveness); IMF, recent economnic development reports (private sector). Country flows The countries can be divided into two groups: smaller economies and larger economies. The smaller economies have very small population (OECS), very low per capita income (Guyana, Haiti, and Suriname), or small population and middle income (Belize). The larger economies have either middle income per capita and relatively large populations (Dominican Republic, Jamaica, and Trinidad and Tobago) or small populations with high per capita incomes (Bahamas and Barbados) ṭ 0 10 Of course, all of these countries are small by conventional standards. The smallest "larger" economy-barbados, with a 1994 gross national product, GNP, of US$1.78 billion-is not much larger than the largest "smaller" economy-haiti, with a GNP of US$1.54 billion-but they each belong to their group in terms of the pattern of capital flows. The extremes are far apart- Dominican Republic with a GNP of USS10.5 billion and St. Kitts/Nevis with US$185 million. See table Al. l. 14

27 3 Private and official capitalflows The smaller economies still receive positive flows to their public sectors, and the flows are substantial, at least in per capita terms, and have remained relatively steady over the past decade. See Figure 3.1. The flows to private sectors in these economies have grown, with private transfers (remittances) being the most important, but with FDI growing strongly N / Figure 3.1 Net Flows to Smaller Economies, (US$ millions) 20o I -4-To 0 public sector I 100 ##",A O I For St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines, official credit flows have remained positive, because the governments have limited borrowing to what they can obtain on concessional terms and grants have kept coming. The private sector in the islands has also received substantial inflows of direct investment. The other OECS countries and Belize have managed less well. Governments in Belize, Dominica, and Grenada resorted to nonconcessional borrowing and have had negative net flows before grants, which have sufficed to keep their total flows positive. Foreign direct investment to these three countries has been much lower than to the other OECS countries. FDI is less important than private transfers, typically remittances from individuals who emigrated to find jobs. In Antigua and Barbuda the government has been running arrears, so actual credit flows are about zero, but accruals of additional debt for unpaid interest have been substantial and probably exceed the small flow of grants still coming to Antigua. Direct foreign investment to Antigua in was less than half of what it averaged in the previous five years. The lesson emerging from this group is not new: These small economies are too vulnerable to allow the government much borrowing on commercial terms or much guaranteeing of private borrowing, which is where most of Antigua's arrears originated. With proper fiscal management, none of these governments should have needed to borrow commercially, because they were all receiving well over US$100 per capita per year in official development assistance, except Belize with an annual average of $108 per capita and Antigua and Barbuda with $86. See Table 3.2. In Guyana, net flows to the government have remained positive despite external debt stock and accrued debt service ratios that are the highest in the region and among the highest in the world. Rescheduling of old obligations that 15

28 CARIBBEAN ECONOMIC OVER HEW were on commercial terms and new concessional lending and grants have made this possible. Debt forgiveness counted as grants amounted to US$114 million in 1991 but was not significant in other years of the 1990s.11 In the 1990s, Guyana has received more net flows of official assistance than any other country in the region except Haiti, and on a per capita basis Guyana received an annual average of US$173-much more than Haiti and slightly more than the OECS countries. Haiti has recently received the most in net official flows, almost all in the form of grants, although in the 1990s they have averaged only US$26 per capita because of the large population. Since the mid-1980s Haiti has usually received between US$100 million and US$150 million annually, and this increased to US$235 million in Of this, debt forgiveness constituted US$99 million in 1991 and US$15 million in Official credit flows were zero, because the country was not creditworthy and did not repay principal on old loans. Private transfers and other private flows were US$80 million in 1994 and could well have increased in Surinamc has positive flows of official grants and private transfers, but virtually no lending: Until recently creditworthiness was an issue, given the lack of an appropriate macroeconomic framework. In Suriname, net foreign direct investment is actually negative. The larger economies have had low or negative flows to their public sectors in the 1990s, but large positive flows to their private sectors. See Figure 3.2. Not surprisingly the experience of the larger economies dominates the aggregate figures in Table 3.1. The Dominican Republic has had little change in net flows over the past few years, except in the "other" category, which has varied widely. Flows to the government declined from 1992 to 1994, as the net lending flow became about US$100 million more negative and grants stayed about constant at just under US$100 million. Increased flows to the private sector were almost as much as the official decline, as transfers increased about US$60 million and FDI continued its gradual rise but stayed under US$200 million in total. From the same Organization for Economic Cooperation and Development (OECD) sources as the data on grants. 16

29 Table 3.2 Overview of Net External Financing to CGCED Countries, 1994 (current US$ millions) Antigua/ Dominican SL Kitts/ St. Trinidad/T Type of financing Barbuda Bahamas Barbados Belize Dominica Republic Grenada Guyana Haiti Jamaica Nevis St. Lucia Vincent/ Sarinamt obago CGCED Grenadine Publhc sector Bilateral Loans ~.0-45.S Grants ofwhich is debt forgiveness Multilateral Commercial' Totalnetflowsto public sector Private sector Directforeigninvestment ,234.9 Privatetransfers Otherb Totalnet flowsto private sector ,423.6 Totalnetexternal fnancing ,519.8 Memorandum items (U.S. dollars per capita) Net aid flows, 1994' Average aid flows, ' Not available. a. Includes financial institutions and export and supplier credits. b. Includes private lending, errors, and omissions. c. Includes net flows of multilateral and bilateral loans and grants. Sources: World Bank, Debt Reporting Unit; IMF, recent economic development reports; OECD. s

30 CARIBBE4N ECONOMIC OVER HEW Figure 3.2 Net Flows to Larger Caribbean Economies, (US$ millions) ] 1,400-1,200i 1, [ To public seior To private sector For Jamaica net flows declined in Lending flows to the public sector became more negative, and grants other than debt forgiveness stayed in the range of US$90 million to US$180 million. Debt forgiveness was high in 1991 and 1993, US$231 million and US$105 million, respectively, but less than US$10 2 million in each of the other years in the 1990s.' The Paris Club rescheduling, the Extended Fund Facility, and adjustment lending from the World Bank all ended in late 1995, so official flows have turned more negative. Foreign direct investment has grown strongly in the 1990s, up to US$350 million in 1994, and private transfers were almost as large. The recent strength of FDI is surprising, given the slow growth of output, but it may bode well for future growth. Trinidad and Tobago has had only small net flows of official loans and grants in the 1990s, but net flows between the public sector and external private creditors have averaged negative US$100 million, with fluctuations but no clear trend. The flows to the private sector have boomed, however, led by foreign direct investment rising from an annual average of US$134 million in to US$415 million in This was mainly to the oil and gas sector. As elsewhere, the government faces the problem of how to sustain private sector growth while still raising enough resources to service its debt. Barbados completed most of its structural adjustment from the early 1990s and now has the debt profile of a successful graduate-robust flows for the private sector and sustainable negative net flows for the public sector-because it is repaying past public borrowing and receiving little in grant assistance. For the larger Caribbean countries the challenge for the medium term is to raise 12 From the same OECD sources as the data on grants. It is possible that some additional debt forgiveness occurred but is not counted in grants. 18

31 3 Private and official capitalflows public saving enough to sustain public sector investment while repaying the principal on debt. The inflows to the private sector that help the economy to balance payments internationally are not directly available to the public sector to help pay it obligations. To raise resources to service its debt, with negative net flows, the public sector must run an overall surplus. In other words, to avoid domestic borrowing which is costly, the recurrent public sector surplus (public saving after grants) must be enough to cover public investment (other than what is externally financed) and net repayment of principal. Most of the gross external lending is now for projects, so improved implementation is necessary to help balance the flows to the public sector. A good public sector investment program is also needed to obtain the mix of investments that will best serve the economy and that will be sustainable, considering the maintenance and other recurrent expenditures needed to make use of the investments. Funding sources Bilateral loans need to be considered along with grants, for they both come mostly out of the same development assistance budgets. Even grants from multilateral sources like the EU, the United Nations Development Programme, and the Multilateral Investment Fund at the Inter-American Development Bank (IDB) come ultimately from the foreign aid budget of individual countries. The total of grants and net bilateral credit flows has not changed much in recent years- US$530 million in , US$610 million in 1993, and US$461 million in As Table 3.1 shows, about 15 percent of grants have consisted of debt forgiveness in the 1990s. For the Caribbean governments the reversal of credit financing flows from multilateral and commercial sources accounts for most of the aggregate decline of their external financing. The multilateral lending flows reflect a combination of two phenomena: balance of payments and project lending. Balance of payment lending, from the International Monetary Fund (IMF), the World Bank, and the IDB were intended to be short- and medium-term assistance that the countries would repay promptly. Guyana, Jamaica, and the Dominican Republic (IMF only) partook heavily in the 1980s, and Guyana continues to do so, but on concessional terms. The repayment of loans that were on commercial terms puts great strain on fiscal resources and the balance of payments, especially when the initial lending was excessive relative to the actual subsequent growth. The standard expectation for countries receiving adjustment lending has been that, as it tapered off, the economies would be ready, along with donor support, to increase investment under a more efficient incentive regime. The resulting growth of exports and inflows of investment capital would allow the countries to improve the balance of payments and repay the adjustment loans. This has rarely happened smoothly. With a few exceptions-barbados, St. Lucia, and Trinidad and Tobago-governments are sorely lacking the capacity to implement investment projects. The problem is especially severe in Guyana, Jamaica, and Suriname, where repeated rounds of unplanned fiscal adjustment 19

32 CARIBBEAN ECONOMIC OVERVIEW through inflationary erosion of reai wages have left a shortage of trained and motivated personnel in the public sector.13 Commercial lending to the public sector has largely ceased, leaving negative net flows for the governments that borrowed in the past and zero for the others. As noted earlier, foreign direct investment has been the main source of increased financing for the private sectors and for the aggregate economies. The country-by-country review shows that this is happening in almost all countries, the biggest exceptions being Haiti and Suriname, because investor confidence is lacking. Guyana, for instance, has had modest but sustained FDI flows since 1991, which illustrates that the private sector will become involved when policies improve. The largest recipients of FDI in were Trinidad and Tobago, with an average of US$392 million per year, Jamaica with US$306 million, and the Dominican Republic with US$187 million. Figure 3.3 Net Foreign Direct Invement in the Caribbean, (US$ million per year) lt lw :: 00 $ 00::,; i ITotalFDI Sourcie: IMF Recenl Economic Developmenl reports, various countries and years. Private transfers averaged US$940 million per year for the subregion. These flows presumably financed private consumption or domestic investment. The Dominican Republic and Jamaica had the largest flows, averaging US$392 million and US$307 million, respectively, per year. For Trinidad net private transfers have been negative since at least the early 1980s, probably reflecting remittances by foreigners who came to work in Trinidad. Shifts in the composition of external flows, from public sources and recipients to private sector ones, are qualitatively appropriate and consistent with the Caribbean countries' medium-term economic strategies of making the private sector the engine of economic growth. Nevertheless, the public sector needs to strengthen itself in selected areas. 14The governments of the region need to decide to undertake the necessary and sometimes politically difficult measures for '3 World Bank, Public Sector. Modernization in the Caribbean (Washington, D.C., 1996), pp World Bank, Public Sector M.odernization, pp

33 3 Private and official capitalflows rationalizing and refocusing the public sector. For countries that make these bold decisions to modernize the public sector, the international development community needs to renew its commitment to support them with technical assistance, project funding, and, as appropriate, the reduction of debt service on old credits. 21

34

35 Annexes

36

37 Annex I Summary indicators and country profiles

38

39 Table Al.l. Summary of Economic Indicators of Caribbean Countries, 1994 (USS, unless otherwise noted) Indrcato, Dominican Bahamas Barbados Belize 2nrndadl Republic Guyana Hait Jamaica Sunname Tobaga Antgua Dominica Grenada All Population Montrerrat (thousands of St Kitts 273 St Lucia 265 Sc V'incenl 210 countines 7,600 persons) 825 7,035 2, , GNP 10 per capita ,500 III 6, ,550 GNP(millions) 1, ,783 g ,495 6, ,620 6,290 GDP growth 458 4,760 (percentage) , ,812 3, , , Sl Mnhlation(percentage)' Populationinpoverry (percenlage) Unemploymentrate (percentage) Exports 83 (millions) GNFS 2, ,752 GNFSaspercentage , , of 1263 GNP , Sugar Bananas Bauxite, - mnerals, fuel Otlherdomestic Tourism , Oublic 1, ectorsurplusor ' 3540 deficit 164 (millions) e ,1996' , Public -73 seaor deficitn I I percentage 6 of -6 GDPa ' Currentaccoumtbalance I (millons) Current account -286 balance a percentage -11 of 5 GDP DOD spercentageofgdp DODaspercentageof GNFS , Not available DOD Deb outstanding and disbursed GNF'S - Goods and non-factor Note: scrvices. Poverty and unemployment estimates come from various sources and may not a End-1994 be comparable. GNP per capita for total non-oecs, OECS. and all countries are estimated by dividing GNP totals by population b totals 1994/95. c Central govenrsteisi data. Sources: IM} repots. govenaseni publications, and World Bank staffeasirnates v-.

40

41 Annex I ANTIGUA AND BARBUDA Population: GNP per capita: 67,000 (mid-1994) US$6,970 (1994 Atlas methodology) The economy Real GDP growth was more than 5 percent per year during the 1980s on account of the rapid expansion of tourism, which was fueled by foreign direct investment and supported by adequate public investment. Over the period, the central government and public enterprises (mostly hotels and tourist resorts) recorded large deficits, which were financed by commercial borrowing and the accumulation of external arrears. In the 1990s, growth slowed to less than 3 percent per year following a sharp decrease in public and private investment and a continuation of lax financial policies. By end-1994, external arrears exceeded US$300 million, or 67 percent of GDP, and the stock of external debt was around 80 percent of GDP. The new government elected in March 1994 granted a general wage increase of 8 percent for civil servants, retroactive from January 1, This exacerbated the already weak fiscal situation, which was worsened further by the damage caused by the September 1995 hurricanes. Without a major reversal of policies, economic prospects are projected to deteriorate further. The government is developing a program of fiscal measures. Policy issues 1. Debt matnagement andfiscal stabilization. The 1995 hurricanes exacerbated an already difficult economic situation. To regain investors' confidence and tum the situation around, the government must act swiftly to restore the country's creditworthiness and improve its fiscal performance and public investment. It needs to enact fiscal revenue measures and privatization, reduce current expenditures, and improve debt management. 2. Competitiveness. Competitiveness as a tourist destination needs to be improved because Antigua and Barbuda is rapidly becoming one of the more expensive destinations in the Caribbean. Trade liberalizatio needs to be rapidly advanced by reducing import tariffs to the 5-20 percent range mandated by the Caribbean Community Secretariat (CARICOM) and by eliminating quantitative restrictions. Given the country's membership in the Eastem Caribbean Monetary Union, increasing competitiveness calls for wage discipline. Trade liberalization needs to be accompanied by measures to strengthen public finances. 3. Fnvironmental management. Increasing reliance on tourism will require increased efforts to conserve the environment. Up-market tourists will react negatively to perceptions of environmental degradation. Investments in sewage facilities, waste management, water treatment, and coastal zone protection, which are assigned the highest priority, need to be continued. 27

42 CARIBBEAN ECONOMIC OVER VIEW BELIZE Population: GNP per capita: 199,371 (nid-1992) US$2,210 (1992 Atlas methodology) The economy From the mid-1980s to the early 1990s, Belize experienced very rapid economic growth in response to good economic management and a favorable extemal environment. During , real GDP growth exceeded 10 percent per year on average, with strong contributions from all sectors. The impressive economic performance stemmed from the adoption of sound macroeconomic policies, supported by an IMF standby arrangement in 1985 and a favorable external environment. Following the rapid growth of the last half of the 1980s, growth has slowed since the early 1990s due to deteriorating macro management, delays in trade reform, and a less favorable external environment. In November 1995, the government reconfirmed its commitment to a fiscal adjustment program and to public sector reform. The government has begun to make some difficult adjustments, including a recently announced retrenchment of public employees. However, further restructuring of the public sector will be necessary to sustain macroeconomic stabilization. Policy issues 1. Fiscal discipline. Regaining fiscal discipline will be crucial to maintaining a sound macroeconomic framework that will support the expansion of private investment. The fiscal adjustment needs to reduce current expenditure substantially through consolidation of the wage bill and rationalization of expenditure on goods and services and needs to eliminate low-priority capital outlays. 2. Incentive framework. To reduce the antiexport bias and diversify its export base, Belize needs to eliminate nontariff barriers, to phase out stamp duties, and to follow up its implementation of phase I of CARICOM's common extemal tariff with continued movement toward getting all duties in the 5-20 percent range. 3. Infrastructure development. Infrastructure development needs continued emphasis, both in rural areas and in the generation and distribution of electrical power. 4. Human resource development. The quality and efficiency of primary education need to be improved, secondary education and vocational training services need to be expanded, the education financing reform program needs to be implemented, and the efficiency and rural coverage of health services need to be improved. Continued 28

43 Annex I preparation and subsequent implementation of the Social Investment Fund will help in this area. 5. Environmental protection. Environmental protection efforts need to be consolidated and deepened, especially to address deforestation, over-fishing, and waste management. Consultations on the environmental action plan need to be followed now with implementation. 29

44 CARIBBEAN ECONOMIC OVERVIEW DOMINICA Population: GNP per capita: 72,000 (mid-1994) US$2,830 (1994 Atlas methodology) The economy Rapid increases in the price and volume of banana exports and high levels of aid flows during the 1980s enabled Dominica to grow rapidly, albeit unevenly. During the period, annual real GDP growth showed to 2 percent, compared with about 4 percent during In September 1995 two hurricanes and a tropical storm battered the island, destroying most of the fruit crops and considerable infrastructure, particularly sea defenses, but the recovery is well under way. A new government, elected in 1995, is developing a fiscal and economic reform program, in consultation with the Caribbean Development Bank, IMF, and the World Bank. Continued subsidized inputs to farmers by the Dominica Banana Marketing Corporation (DBMC) have contributed to a deteriorating public savings effort and a fairly high level of public debt. By end-1994, extemal debt amounted to about half of GDP. Because of the highly concessionary nature of its extemal debt, Dominica has been able to maintain a debt service ratio below 10 percent of exports. Policy issues 1. Public finances. The fiscal situation has continued to deteriorate, especially in 1995, with the hurricane-related expenses. Revenue-enhancing measures, such as improving the efficiency of tax collections in the customs and inland revenue departments and eliminating duty concessions and exemptions, will be undertaken. In addition, further administrative reform, strengthening of expenditure controls, and contracting out of public services are required. 2. Banana industry. Until recently, bananas accounted for one-fifth of GDP, half of merchandise exports, and close to one-third of employment; the sector remains very important. The new EU banana regime already resulted in an estimated 20 percent decline in unit banana earnings, and the 1995 storms exacerbated the situation. Also in 1995 the govemrnments of the OECS banana-growing islands bought a 50 percent interest in the company that ships and markets their bananas to Europe; that business will need to be managed properly. The banana industry must undergo significant restructuring in order to increase efficiency and improve product quality if producers are to compete successfiully. Social safety nets will need to be put in place during the transition, because more than 30 percent of the population is already living below the poverty line. 3. Diversifi cation. The tourist industry is growing rapidly, albeit from a small base. Export services, fisheries, and floriculture are other potential sources of economic diversification, but limited air access could impede growth. Diversification efforts 30

45 Annex I should be accelerated by improving the country's incentive and regulatory frameworks. This includes speeding up the processing of investors' applications, implementing the remaining phases of the revised common external tariff, and eliminating barriers to private sector investment. Improving human resource development will also be critical in supporting diversification efforts. 4. Environmental management. Development of ecotourism requires increased efforts to conserve the environment. Investments in sewage facilities, waste management, water treatment, and coastal zone protection, which are assigned the highest priority, need to be continued. 31

46 CARIBBEAN ECONOMIC OVERW1EW DOMINICAN REPUBLIC Population: GNP per capita: 7.6 million (mid-1994) US$1,320 (1994 Atlas methodology) The economy Since August 1990, the Dominican Republic has been implementing a stabilization program and has initiated important structural reforms. In 1993 inflation was less than 3 percent, growth was moderate (3.5 percent), and the current account deficit declined sharply. Although there was serious fiscal and monetary slippage in 1994 and structural measures were delayed by the election and subsequent political uncertainty, macroeconomic stability was restored in Fiscal adjustment took the lead, so that even a relatively tight monetary policy did not cut off private sector growth. Growth in 1995 rose to 4.8 percent, while inflation fell to 9 percent at the end of 1995, down from an annual rate of 21 percent in late One good economic development in 1994 was a debt- and debt service-reduction operation of the govemment with commercial banks. In 1995 tourism and free trade zones continued to grow strongly, despite further appreciation of the peso, and mining continued to recover from the severe slump of the early 1990s. Manufacturing was hurt, however, by the continued financial and technical deterioration of the state electrical corporation, as power disruptions became more common and more severe. Despite improvements in macroeconomic management, social indicators remain weak. Malnutrition affects somewhere between 29 and 43 percent of children under six years of age. Child and matemal mortality rates are high compared with those of other countries in the region. Recent sample surveys suggest that the infant mortality rate may be as high as 88 out of every 1,000 children who survive the first year of life. Overall, the govermnent's capacity to provide social services is limited. Recently, however, the government has had success with efforts to reform the education system. Policy issues 1. Fiscal management. In order to maintain fiscal discipline while fully implementing trade liberalization, the govemment needs, in a sustainable way, to improve tax administration and to increase domestic tax collections. As revenue collections improve, the govermnent could increase investment in basic infrastructure and the social sectors in order to support private sector growth and reduce poverty. 2. Domestic deregulation. Despite the recent measures to lower and simplify the tariff regime, domestic prices remain severely distorted by discretionary behavior of the customs administration and other nontariff interventions in trade. These distortions need to be reduced in order to provide an incentive framework for efficient growth. 32

47 Annex I 3. Key reform programs. The government needs to foilow through on the implementation of key reform programs, especially (i) to streanline the trade regime to enjoy ful1 participation in the hemispheric integration process, (ii) to implement the tax reform, (ii) to improve prudential regulations in the banking sector, (iii) to restructure the power sector in order to attract private investors in power generation and to make supply more reliable, and (iv) to continue the education reform program so as to improve the quality and coverage of primary education. 4. Environmental protection. Environmental protection efforts need to be consolidated and deepened, especially to address deforestation and waste management. 33

48 CARIBBEAN ECONOMIC OVER VIEW GRENADA Population: GNP per capita: 92,000 (nmid-1994) US$2,620 (1994 Atlas methodology) The economy Grenada's economic performance has improved in the last two years, following low and negative growth rates during the early-1990s. Beginning in 1992, the government implemented a "home-grown adjustment program" with the assistance of regional institutions and frequent monitoring by the IMF and the World Bank. Between 1991 and 1995, the overall public sector balance improved from negative 9 percent of GDP to a small surplus in 1993 and in Some reduction in the size of the civil service and privatization of the electricity company, state-owned bank, and other small public entities were achieved. External arrears, which amounted to more than 6 percent of GDP at end-1992, had been reduced to 2.5 percent at end Total external debt obligations were almost half of GDP, but their concessionary nature has kept external debt service manageable. Grenada's economy is projected to grow by only 2-3 percent over the medium term, because the fiscal situation remains fragile, tourism growth is constrained by water shortages, and nutmeg prices are projected to remain low. Grenada exports only small amounts of bananas, so changes in the EU regime have had limited effect. Policy issues 1. Enhanced growth. Tourism and information-processing services, fueled by foreign direct investment, have been the main sources of growth, but the government has focused its investment on agriculture and manufacturing. Ensuring private sector-led growth requires reorienting the public sector investment program to address immediate water and power shortages, further trade liberalization, and counterpart funds on the order of 3 percent of GDP for public investment in social and economic infrastructure. 2. Fiscal policy. The government's recent decision to eliminate income tax on employment earnings below EC$60,000 has narrowed the tax base and increased the government's reliance on indirect taxes. The government will need to compensate effectively for the loss of revenue. 3. Human resource development and poverty reduction. High rates of grade repetition, a high proportion of unqualified teachers, and weak management of the education sector are problems now being addressed by the government. About 20 percent of the population is below the poverty line and more than 25 percent of the labor force is unemployed. 34

49 Annex I GUYANA Population: GNP per capita: 825,000 (mid-1994) US$530 (1994 Atlas methodology) The economy A state-led development strategy, pursued after independence in 1966, contributed to more than a decade of economic decline in Guyana. In 1988, the government embarked on an economic recovery program (ERP) to provide a basis for sustainable growth. The ERP consisted of broad macroeconomic measures and structural reforms to restore macroeconomic balances, realign relative prices, dismantle state controls, and establish a market-oriented economy. The ERP was carried out quickly, and within two years the economy had begun to respond strongly to the improved incentive framework. Real GDP rose by 6 and 8 percent, respectively, in 1991 and 1992, propelled by dramatic growth in sugar and rice output. Inflation declined from 102 percent in 1991 to less than 28 percent in 1992, while the nominal exchange rate, which initially depreciated considerably, has since remained fairly stable. Public and private savings strengthened considerably. The resource balance turned positive, the external current account deficit declined, and gross international reserves increased. The government that was elected to office in October 1992 has been following through with the basic policies underlying the ERP. Progress has been made in achieving economic stabilization and in implementing the structural reforms. This has encouraged economic diversification and has supported strong economic growth. Real GDP has continued to grow by an average of 7 percent per year from , and inflation fell further to 12 percent in 1993 and has remained near that level since. Guyana posted a strong GDP growth rate of 5.1 percent in 1995, but this was lower than expected due to the five-month closure of the Omai gold mine in the fall of that year. Growth is projected to increase to more than 6 percent in 1996, and inflation is expected to decline to 5 percent. In the public sector, deficit reduction has been complemented by restructuring and downsizing, and revenue collection has improved. In policies related to the private sector, exchange and trade reforms have continued to advance, but privatization has been slower than planned. The government must continue to show full commitment to market-oriented reforms in order to build confidence among potential private investors. Guyana's external financial position remains precarious on account of the heavy debt service for the large public debt of more than US$2 billion. The accrued current account of the balance of payments continued to record large deficits, amounting to 22 and 13 percent of GDP in 1994 and 1995, respectively. 35