ECONOMY & TRADE FOCUS ECONOMY & TRADE FOCUS
THE CARIBBEAN:
In Search of Lost Competitiveness Over the past two decades, the Caribbean has experienced relatively low economic growth, particularly in its tourismbased countries, largely as a result of its increasing inability to compete in the global market. Many observers highlight the need for Caribbean countries to improve their economic competitiveness and in so doing, reduce their public debt burdens and raise the standard of living of their citizens. Caribbean governments face a significant challenge: how to boost growth in a weak external environment at a time when their debt levels are unsustainable and they cannot increase spending. In two recent publications, the “Regional Economic Outlook for the Western Hemisphere” and “The Eastern Caribbean Economic and Currency Union - Macroeconomics and Financial Systems”, the IMF discusses policy options for accelerating growth, taking into account that many countries operate under fixed exchange rate regimes.
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BusinessFocus • September/October 2013
Governments basically have three main ways to improve competitiveness: (i) introduce structural reforms to boost both public and private investment and the productivity of human, capital and natural resources; (ii) improve price competitiveness with fiscal measures that lower wage costs and increase labor productivity (internal devaluation); and (iii) allow a nominal currency devaluation to lower the international price of domestically produced goods (external devaluation). Caribbean governments need to determine which of these approaches would best increase their competitiveness. Structural Reforms: Structural reforms of institutions, policies, and factors that determine the level of productivity of a country have significant potential for creating longer-run economic payback. These reforms should focus on: (i) improving the effectiveness of public investment and increasing public-private partnerships; (ii) improving the business environment and providing more efficient public services particularly of state owned enterprises; (iii) increasing linkages between sectors with strong potential growth, e.g. tourism and geothermal energy, and other sectors; (iv) increasing efficiency in the product, labor, energy and financial markets; and (v) pursuing deeper regional integration to capitalize on economies of scale.