Economic development and the IMF and the World Bank in the Caribbean
Introduction
Following the international standards, the Caribbean nations are not very rich in natural resources and this has affected their economies very much. A lot can be done so as to improve the economy in the Caribbean. The paper will discuss the history of the Caribbean economies and the experiences they have gone through in the development of their economies. It will also discuss how trade agreements with other countries, the World Bank and the IMF have helped to shape up the Caribbean economies.
Tourism and the sugarcane industry are also major contributions to the Caribbean economies and their effect and evolution will also be discussed in details. The paper will also discuss the six main challenges that are faced by the Caribbean economies which include collapse of preferential arrangement for the traditional export, liberalization in context of globalization, unemployment, foreign debt burdens, marketing risks in the current time tourism, information and offshore finance and also the vulnerability of the economies due to natural disasters. The paper will then conclude by giving suggestion as to what can be done to reduce the challenges and also improve the economy in the Caribbean countries.
The countries in the Caribbean have always had to counter international challenges due to the long historical colonial ties and their comparatively open economies including other factors. The present period challenges of globalization are however significantly very different from the ones in the past periods of globalization. Three phases of globalization are identified as follows: 1870 to 1914 which was marked by capital, labor flows and trade; 1945 to 1973 which was marked by trade expansions in manufacturing among the developed countries and also restrictions on capital and labor mobility; and lastly 1990 to present which is marked by the movement of capital, spread of the free trade as well as the convergence in the approaches of development .
The Caribbean countries got by with the changes that took place after the 2nd World War by being accorded a preferential trading regime for their status of being former colonies to metropolitan powers and also through the restrictions that were imposed on trade by postcolonial and colonial governments. The major experiences of the Caribbean economies in this period included significant growth of trade and output and also the diversification of products and the trading partners. Output growth of the Caribbean measured as GDP was estimated to 5% per annum, while the growth of export was estimated to be more than 8% between the years 1969 and 1973. Growth of export therefore was more than the growth of gross domestic product during this globalization phase.
The destinations of export in the 1960s mainly included the United States, Canada and the United Kingdom. In the 1970s, United States was the dominant destination for export as well as the main source of imports. Trade performance by most of the Caribbean countries compared to the world trade went down during the decade of 1980s. Exports in the United States however, significantly increased compared to other markets. The intraregional trade got affected by economic problems which some of the bigger countries also faced particularly Jamaica where depreciation of its currency was experienced in the first half of 1980s.
Financial assistances from the developed countries in form of ODA (overseas development assistance) grants that were very significant in the economic development of the countries in the Caribbean in 1960s and 1970s decreased in the 1980s. Meanwhile, the private financials went up as a greater reliance had been placed on the market by the developed countries so as to deliver development and growth to the countries that are less developed. To the end of 1980s, the Caribbean countries had been poised to liberalize their own trade at a quicker rate.
Already, Jamaica had removed many nontariff restrictions on the imports that it had started its reduction in early 1980s in its adjustment programs with World Bank. Convergence of ideology amongst the Caribbean countries had adopted the neoliberal approaches to the development and growth and as a result, it aided acceleration of trade liberalization. In addition, the Caribbean countries took a decision to deepen and widen their integration of their economy at the end of the 1980s. Subsequently Suriname and Haiti became members of the group integration while the Dominican Republic gained the observer status.
The arrangement of the Common Market was also to be promoted to an Economic Union. Union would not only involve free movement of goods and services but also the free movement of labor and capital. Deep economic reforms, economic integration to assist the flow of private investments and functioning of the markets, quest for preferred arrangements of trade and adoption of market philosophy were some of the responses to the environment of the international economy and to the developments in Caribbean societies and economies resulting from difficulties encountered in 1970s and the 1980s.
The 1990s decade was marked by the start of a new and also more extensive globalization phase including the liberalization of trade. Some of the significant stimulu included the reduction on costs of transportation as well as the lifting of some of the trade barriers. Other important factors were production globalization through segmentation and seperation of the production processes, ending of the divide between West and East and also the growth of information and communication technology and the internet. The 1990 decade was also marked by major trade liberalization at multilateral and regional levels. The Caribbean countries worked on the reduction of import tariff with amendments on CARICOM CET. Minimum tarriff remain at the original point of 5% but the maximum point was then reduced from 45% to 20% by the end of that decade .
The ammendments saw the phasing-in reform that allowed the zero percent tariff to apply on inputs of agriculture and some other basic goods. There are other initiatives to enhance liberalization that have or will impact on the Caribbean countries’ economy were put in place in the mid 1990s. First of them was the North American Free Trade Agreement in the 1994 amongst the United States, Mexico and Canada. The agreement was the forerunner of the free-trade agreements that were negotiated with United States. The launch of the processes to form a Free Trade Area in the Summit of America in the year 1996 was the second initiative. The third initiative was the signing of Cotonou Framework Agreement in the year 2000 between Caribbean, the European Union, Pacific and a group of African countries to start a process of discussions to form a new trade partnership.
The Caribbean countries have gone through defferent experiences in the development of their economies for the past four decades. Small countries, especially those that have limited natural resources made early shifts from export of commodities to the export of services. Such countries as Cayman Islands, Barbados and most of the countries in the OECS region attained a comparatively high per capita incomes. The larger countries which include Jamaica, Trinidad and Tobago and Guyana continued relying on export of commodity, except Trinidad and Tobago, they went on to experience lower per capita incomes. Maintaining or increasing the current income levels proves to be a major obstacle to the Caribbean countries as they look for strategies of increasing financial inflows and exports during the current period of globalization.
Economic management, political stability and polocy choices played crucial roles in the facilitation of the economic outcome to the individual countries. Since the 1990s, the range of policy choices has continued to narrow with the increased globalization making the countries more vulnerable to the unfavorable effects of global change. It is essential that the Caribbean countries completely liberalize trade and put into consideration movements within the region and create strategic agreements at the international level so as to ensure they get the best deals in the trade negotiations.
The Caribbean has been cited as one of the most beautiful places in the world but also mixed bag in the issues of the economy. The Caribbean is made up of several different independent states, overseas territories and island nations which have greatly diversified since the westernization of the Caribbean in the 15 century. Most western countries had battled over the mainland and the islands states in the Caribbean with the victor gaining new economic opportunities. Even though we are not aware whether the Caribbean islands had the capability to succeed without the involvement in the western settlers, now the economy of the Caribbean can for sure say that it has a steady progress as a whole and has the ability to keep itself afloat.
There exists several industries that contribute to the economy of the Caribbean and one of the largest is tourism. People from other parts of the world are eager to see the beauty of the islands, experience the warm weather and this as result attracts millions of people to the Caribbean islands each year. The smaller islands that have continued to undergo a slow growth in the economy are also able to make lots of revenue from visitors who come to their shores especially in form of day trips in the cruise ships. An example is, while The Bahamas attract more than 4 million visitors per year, the Dominica Island attracts as few as 76,000 visitors in comparison.
Many of the Caribbean islands that rely on the Caribbean economy to prosper in tourism are backed by their governments so as to experience a steady growth even in the future. It is widely acknowledged that the most dynamic activity in most of the Caribbean countries is tourism. This sector covers activities such as culture and sport, yachting and cruise ship tourism and all-inclusive visits. In the year 2006, the ECLAC (Economic Commission for Latin America and the Caribbean) noted that for most of the Caribbean countries’ economies, the tourism sector had a catalytic effect on transportation, communications, manufacturing and more so to the construction sector.
The report indicates that not do economies get direct benefits from tourism but also indirect benefits which include employment. From the year 1995 to 2004, arrival of visitors to the Caribbean was seen to increase from 16 million to 23 million which is a 36% increase over the duration. Employment in the tourism sector mostly in accommodation establishments such as guesthouses and hotels experienced a radical increase from 122,000 in the year 1995 to 900,000 in the year 2000. The report also shows that expenditure by some of the countries visitors accounted for a large share on the national gross domestic product.
In some of the small island states such as Antigua and Barbuda, Anguilla, St. Lucia and Grenada, the contribution by the visitors’ expenditure to gross domestic product is estimated to be 50% and sometimes even ranging high than that. In some of large islands which include Trinidad and Tobago, Puerto Rico, the expenditure by visitors account for less than 5% of gross domestic product. The fairly small contributions of tourism in Trinidad and Tobago are mostly due the fact that the country relies on the gas and oil sectors. The Bahamas and Jamaica are an exception as even though they can be referred to as large islands, they have an insignificant reliance on tourism.
The Caribbean economy’s history indicates that once the area was very productive and also a world leader in the export and production of certain resources. The major one is the production of sugarcane. Even though there is a negative part of the sugar cane production, there is no doubt that it put the Caribbean on the world map during the 17th century to the 19th century. While most of the Caribbean Islands involved themselves with the production of sugar cane, there were exceptions such as Sant Maarten and Curacao which were famous for their industries of salt mining, Haiti was a settlement of the Spanish who started gold mining while the Islands of Turks and Caicos were inhabited by collectors of salt who were from the region of Bermuda.
The six main economic challenges faced by the Caribbean economies include, the collapse of preferential arrangement for the traditional exports, liberalization in context of globalization, unemployment, foreign debt burdens, marketing risks in the current time tourism, information processing and offshore finance and vulnerability of the Caribbean economies to natural disasters.
Even though there has been substantial diversification of economy in the Caribbean, the traditional exports on agricultural products still looms large. Jamaica, Cuba and Guyana have continued to operate large sugarcane industries, especially in terms of employment. Other Caribbean economies such as those in the Windward Islands do share a similar reliance on the export of bananas. The long-established preferential agreements with European Union in the Lome Convention face a challenge from the recent WTO rulings which has now given ways to arrangements that are less favorable. As such, a decline in the banana industry has been experienced as a result triggering an increased unemployment which mounts to social tensions and other negative effects on the economy.
Globalization can be defined as the increasing integration of the world’s economy while liberalization can also be defined as negotiation of the binding contracts of nations so as to eliminate barriers hindering the opening of their economies. WTO is a forum for negotiations like that and which are reinforced mostly by loan agreements which are signed by the countries with the International Monetary Fund or the World Bank. The Caribbean economies may not in the future be able to require total or significant ownership of the tour operators, small hotels and so on. If this is the case, the share on national ownership in most of the Caribbean industries may be under threat from the transnational corporations. Even though increased competition comes with its benefits, denationalization of the industries is most probable to bring negative results which include resentment to the foreign ownership of the major industries, especially those that had been nationally owned. Commitment of the foreign firms to the development of the nation is likely to grow weaker.
Another challenge to the economy is the existence of poverty, underemployment and unemployment throughout the region and in particular in the more populated Carebbean economies. It is therefore not difficult to find a link between the frustrations of the unemployed youths and the increasing levels of crimes and particularly those related to drugs. Investment and trade patterns are very sensitive to the national stability which can easily be disrupted by issues such as crime and deviant behavior. The general scarcity of economic opportunities in most Caribbean countries is a major factor that contributes to outmigration which in turn creates a brain drain that continues to undermine future economic developments .
Substantial foreign debt burdens is one of the constraints being faced by the Caribbean economies and especially the ones that have significant socialeconomic difficulties as they consume large amounts of fiscal revenue. This is evidenced in Guyana, Jamaica and to a lesser extent in the Dominican Republic. Encountering the above challenges is likely to necessiate considerable fiscal expenditures so as to fund programs which include retraining the workers who have been displaced in the liberalization and globalization processes and also in the upgrading of infrastructure for the new investments. However, the countries with large debt burdens are more constrained to service the liabilities before they can address future needs.
It is with no doubt that the nonpreferential and the globally competitive export sectors of the Caribbean will also be affected by the global trends. For example, tourism which is the most dynamic industry in the Caribbean. The Caribbean is faced by the danger of destroying the proverbial goose which lays a golden egg through expansion of tourism beyond the eco-cultural carrying capacity. The Caribbean countries face the challenge of developing sustainable tourism which does not go beyond the limits of the carrying capacity and at the same time retaining most of the economic rent that acrues from the sector. The sector of information processing in the Caribbean countries is characterized by activities of low-end data entry.
One of the main challenges to the economic development to the Caribbean countries and especially to the tourism industry is the periodic occurrence of tropical storms and hurricanes and also other events related to windstorms. These kinds of natural disasters are very common in the Caribbean. The area is also affected by floods which are connected to the after-effects of windstorms and hurricanes. The larger economies in the Caribbean which include Cuba, Haiti, Jamaica and the Dominican Republic have most been affected by the regular occurrence of natural disasters.
In conclusion, the Caribbean countries have important stregths such as political stability, observance of the rule of law and investor protection which they can build on so as to make their areas attractive destinations for investment and as such their economies will be greatly boosted. Decisive reforms which can boost the private sector investment and competitivenes are important in the development of the Caribbean economies and will help in the creation of jobs which is a major challenge.
Fiscal consolidation should be initiated in the Caribbean countries by lowering the current spending so as to create room for capital expenditure, enhancement of debt management and also the reduction of tax waivers and concessions. In order to attract international banks and increase the flow of foreign fund to this region, the governments of the countries should improve their financial interconnectedness by harmonizing regulations, meeting the international best practices and also strengthening the modes of resolving crisis. The challenge by the Caribbean countries to have a sustainable growth requires a broad-based collaborative and collective approach and as such donor partners and multilateral financial institutions will need to coordinate and work closely to maximize benefits to the region. Through such measures, the Caribbean economies can greatly be improved for the betterment of its people’s lives.
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