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1. CSME SUCCESSIN TODAYS ECONOMIC ENVIRONMENT Presentation at CILS 2008
Acknowledgement: Amb. Havelock Brewster An Operation Strategy for Supporting RCI.
IMF: Trevor Alleyne & Paul Cashin The Global Financial Crisis Implications for the Caribbean
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2. CSME SUCCESS Outline
The state of RCI/CSME in the Region
Impact of the Financial Crisis
Implications for RCI/CSME
Adjustments required
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3. CSME SUCCESS The State of RCI Economic Underperformance
Small market size
Limited natural resources
Under-developed human resources
Under-diversified production structures
External migration
Vulnerability to natural disasters
High debt
3 The challenges to regional cooperation and integration must be viewed against the background of the Regions economic underperformance, the constraints it faces and the opportunities that may be available. In terms of growth of income, employment, productivity, diversification and competitiveness, the Region has performed below average for more than 3 decades compared with countries of a similar level of development such as Latin America, Asia and Southern European Countries. This situation, together with the economic liberalisation/globalisation accompanying it, has made for a worsening distribution of income within and among CARICOM countries.
Much of this long trending underperformance is a consequence of the tight internal and external constraints to growth that the Region faces, and the failure to address them effectively. Prominent among these are:
Small market size
Limited natural resources
Under-developed human resources
Un- diversified production structures
External migration
Vulnerability to natural disasters and external shocks
High debt levels
The opportunities that are not been effectively realized include:
ICT-enabled products and services
Higher-end tourism
Off-shore education
Health services
Food /agricultural productsThe challenges to regional cooperation and integration must be viewed against the background of the Regions economic underperformance, the constraints it faces and the opportunities that may be available. In terms of growth of income, employment, productivity, diversification and competitiveness, the Region has performed below average for more than 3 decades compared with countries of a similar level of development such as Latin America, Asia and Southern European Countries. This situation, together with the economic liberalisation/globalisation accompanying it, has made for a worsening distribution of income within and among CARICOM countries.
Much of this long trending underperformance is a consequence of the tight internal and external constraints to growth that the Region faces, and the failure to address them effectively. Prominent among these are:
Small market size
Limited natural resources
Under-developed human resources
Un- diversified production structures
External migration
Vulnerability to natural disasters and external shocks
High debt levels
The opportunities that are not been effectively realized include:
ICT-enabled products and services
Higher-end tourism
Off-shore education
Health services
Food /agricultural products
4. CSME SUCCESS The State of RCI/CSME Implementation
Single Market: Far advanced
Single Economy Not much:
National sovereignty vs Community governance
Lack of popular support
Perception of uneven distribution of benefits/costs
Ineffective cohesion mechanisms
Inefficient decision-making processes
Inadequate institutional capacity
4 Economic integration, through the progressive opening of markets combined with common external protection, was expected to be the means of overcoming the basic constraints of small size and limited natural resources. But the results have been disappointing in terms of the generation of new trade and more diversified patterns of production. This has led to the conclusion that cooperation in areas beyond commerce is a necessary pre-requisite if the benefits of regional integration are to be realized fully. This is the context in which the idea of the CSME was borne.
While the creation of a Single Market is far advanced, not much has been accomplished in respect of the Single Economy. The reasons for this are varied and include:
The clash between national sovereignty and Community governance;
Inadequate popular understanding of the process (hence limited popular support);
The perception of very uneven distribution of the benefits and costs of regional integration;
Ineffective cohesion mechanisms;
The slow and complex process of inter-governmental decision making and legislation, involving 15 Member States; and
Inadequate capacity at the Community and States level to transform policy-decisions into action i.e. the implementation problem.Economic integration, through the progressive opening of markets combined with common external protection, was expected to be the means of overcoming the basic constraints of small size and limited natural resources. But the results have been disappointing in terms of the generation of new trade and more diversified patterns of production. This has led to the conclusion that cooperation in areas beyond commerce is a necessary pre-requisite if the benefits of regional integration are to be realized fully. This is the context in which the idea of the CSME was borne.
While the creation of a Single Market is far advanced, not much has been accomplished in respect of the Single Economy. The reasons for this are varied and include:
The clash between national sovereignty and Community governance;
Inadequate popular understanding of the process (hence limited popular support);
The perception of very uneven distribution of the benefits and costs of regional integration;
Ineffective cohesion mechanisms;
The slow and complex process of inter-governmental decision making and legislation, involving 15 Member States; and
Inadequate capacity at the Community and States level to transform policy-decisions into action i.e. the implementation problem.
5. CSME SUCCESS The State of RCI/CSME Implementation
Policies and measures needed:
Policy Coordination/Harmonisation
Institutional, Legal & Regulatory Development
Policies for Sectoral Development
Market access measures
Functional Cooperation
5 The constraints to regional integration constitute very real risks to the success of regional ventures. The design of regional projects should be such that each participating state would reap acceptable benefits; the public goods which create costless, cross-country spill-over or externalities should be promoted; that not all CARICOM members need to participate in any given project; and that the demands on collective decision-making be kept within politically feasible limits. The challenge to RCI may be summarized as putting in place the following key policies and measures:
Policy coordination/harmonisation macro policy, fiscal policy, monetary union etc.
Institutional, legal and regulatory development and harmonisation Harmonisation of laws; CCJ, CDF
Policies for sectoral development Agriculture, forestry & fisheries; air and maritime transport; telecommunications/ICT.
Market access measures capital movement, rights of establishment; free movement of labour.
Functional cooperation HRD; crime and security.
With this context the urgent challenges that have to be addressed are:
Macroeconomic stability
Energy
Human resources
Air and maritime transport
Agriculture/food production & trade
Quality, standards and innovation
Agri-tourism
Cross border investment and
Private sector developmentThe constraints to regional integration constitute very real risks to the success of regional ventures. The design of regional projects should be such that each participating state would reap acceptable benefits; the public goods which create costless, cross-country spill-over or externalities should be promoted; that not all CARICOM members need to participate in any given project; and that the demands on collective decision-making be kept within politically feasible limits. The challenge to RCI may be summarized as putting in place the following key policies and measures:
Policy coordination/harmonisation macro policy, fiscal policy, monetary union etc.
Institutional, legal and regulatory development and harmonisation Harmonisation of laws; CCJ, CDF
Policies for sectoral development Agriculture, forestry & fisheries; air and maritime transport; telecommunications/ICT.
Market access measures capital movement, rights of establishment; free movement of labour.
Functional cooperation HRD; crime and security.
With this context the urgent challenges that have to be addressed are:
Macroeconomic stability
Energy
Human resources
Air and maritime transport
Agriculture/food production & trade
Quality, standards and innovation
Agri-tourism
Cross border investment and
Private sector development
6. CSME SUCCESS Impact of the Financial Crisis
Financial
Real Economy 6 The financial crisis is of historic proportions:
Recession in the developed economies
Financial system frozen due to confidence issues.
In perspective:
World equity prices have declined by about 50% in 1 year
The cost of the crisis approximately 1.4 trillion (around 25% of GDP).
The outlook for the US economy and the Regions major trading partners is negative declining economic activity.
The transmission channels of the crisis will be felt through:
The financial system; and
The real economy.The financial crisis is of historic proportions:
Recession in the developed economies
Financial system frozen due to confidence issues.
In perspective:
World equity prices have declined by about 50% in 1 year
The cost of the crisis approximately 1.4 trillion (around 25% of GDP).
The outlook for the US economy and the Regions major trading partners is negative declining economic activity.
The transmission channels of the crisis will be felt through:
The financial system; and
The real economy.
7. CSME SUCCESS Impact of the Financial Crisis
Financial
Asset quality
Liquidity
Credit sequeeze
Trade credit lines
Other external funding
Foreign bank contagion 7 In the financial system the transmission channels of the crisis include:
Financial system assets:
Likely deterioration in asset quality foreign investments of commercial banks and non-banks (securities firms, insurance companies, pension funds for example there is some question as to the availability and cost of re-insurance);
Unavailability of liquid assets liquid assets may be tied up in problem institutions.
Global credit squeeze:
tighter global borrowing conditions could squeeze domestic liquidity and raise domestic interest rates however, there is a large amount of excess liquidity in domestic banking systems and private credit growth in the region is financed mainly from domestic deposits.
Trade credit lines withdrawal from Caribbean importers; demand for credit lines from foreign importers of Caribbean exporters;
Other external funding- wider sovereign spreads, increased rollover risk sovereign spreads on internationally traded bonds have risen.
Foreign Bank Contagion:
Developed country banks usually a source of strength for local finance system but now a source of vulnerability
Canadian banking systems thus far avoided crisis but situation could change rapidly
Banks could transmit crisis to local systems.
Financial conglomerates are active in the Caribbean suggesting a channel of contagion across the region (Scotia, First Caribbean, RBC, RBTT, Republic, Citi)In the financial system the transmission channels of the crisis include:
Financial system assets:
Likely deterioration in asset quality foreign investments of commercial banks and non-banks (securities firms, insurance companies, pension funds for example there is some question as to the availability and cost of re-insurance);
Unavailability of liquid assets liquid assets may be tied up in problem institutions.
Global credit squeeze:
tighter global borrowing conditions could squeeze domestic liquidity and raise domestic interest rates however, there is a large amount of excess liquidity in domestic banking systems and private credit growth in the region is financed mainly from domestic deposits.
Trade credit lines withdrawal from Caribbean importers; demand for credit lines from foreign importers of Caribbean exporters;
Other external funding- wider sovereign spreads, increased rollover risk sovereign spreads on internationally traded bonds have risen.
Foreign Bank Contagion:
Developed country banks usually a source of strength for local finance system but now a source of vulnerability
Canadian banking systems thus far avoided crisis but situation could change rapidly
Banks could transmit crisis to local systems.
Financial conglomerates are active in the Caribbean suggesting a channel of contagion across the region (Scotia, First Caribbean, RBC, RBTT, Republic, Citi)
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9. CSME SUCCESS Impact of the Financial Crisis
Real Economy
Lower tourism receipts
Lower remittances
Lower FDI and other private capital
Lower commodity prices
Slower economic growth
Balance of payments pressures.
9 Economic slowdown/recession in major trading partners would lead to:
Lower tourism receipts the Caribbean is one of the most tourism dependent regions in the world (Antigua almost 50%; the Bahamas 38%; Barbados 29%).
Lower remittances many countries in the Region have a high degree of dependence on remittance flows e.g in % of exports Jamaica almost 35%; Grenada 30%; Guyana around 16%; SKN 15%.
Lower FDI and other financial flows current account deficits in the region are financed by financial flows which are expected to slow down.
Lower commodity prices past experience has shown that commodity prices may recede oil, bauxite, food.Economic slowdown/recession in major trading partners would lead to:
Lower tourism receipts the Caribbean is one of the most tourism dependent regions in the world (Antigua almost 50%; the Bahamas 38%; Barbados 29%).
Lower remittances many countries in the Region have a high degree of dependence on remittance flows e.g in % of exports Jamaica almost 35%; Grenada 30%; Guyana around 16%; SKN 15%.
Lower FDI and other financial flows current account deficits in the region are financed by financial flows which are expected to slow down.
Lower commodity prices past experience has shown that commodity prices may recede oil, bauxite, food.
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13. CSME SUCCESS Implications for RCI/CSME
Need for international reserve management
Importance of maintaining fiscal discipline
Revert to protection
Waivers etc for CET
Reduction in contributions to regional institutions
The need for a regional response:
Regulatory environment
Liquidity
13 What are the implications of the economic slowdown on CSME/RCI? Clearly the national economies will need to carefully manage international reserves and resist any attempt to remove the fiscal discipline required. The high debt burdens of may of the economies severely constrains the ability to engage in counter-cyclical fiscal spending. Fortunately, the OECS with its one Central Bank (ECCB) may be in a better position to manage the international reserves issue.
But if history is anything to go by recall the 1980s with the energy crisis there may be a tendency to revert to increased protectionism. There would likely be increased requests for waivers of obligations under such regimes as the CET. Contributions to regional institutions may suffer in a fiscally constrained environment.
The unfortunate thing is that deepen the RCI at this time is likely to be to more appropriate response. Again, a look at history may give some guidance. After 9/11 when tourism took a big hit, the region responded by the public and private sectors coming together and establishing a regional tourism promotion programme, which if I am not mistaken worked quite well and allowed the countries to come out of the downturn relatively quickly.
There is a clear need to devise regional solutions to improve the regulatory environment including cross-border sharing of information. There is also need to prepare for a liquidity crisis in a regional context.What are the implications of the economic slowdown on CSME/RCI? Clearly the national economies will need to carefully manage international reserves and resist any attempt to remove the fiscal discipline required. The high debt burdens of may of the economies severely constrains the ability to engage in counter-cyclical fiscal spending. Fortunately, the OECS with its one Central Bank (ECCB) may be in a better position to manage the international reserves issue.
But if history is anything to go by recall the 1980s with the energy crisis there may be a tendency to revert to increased protectionism. There would likely be increased requests for waivers of obligations under such regimes as the CET. Contributions to regional institutions may suffer in a fiscally constrained environment.
The unfortunate thing is that deepen the RCI at this time is likely to be to more appropriate response. Again, a look at history may give some guidance. After 9/11 when tourism took a big hit, the region responded by the public and private sectors coming together and establishing a regional tourism promotion programme, which if I am not mistaken worked quite well and allowed the countries to come out of the downturn relatively quickly.
There is a clear need to devise regional solutions to improve the regulatory environment including cross-border sharing of information. There is also need to prepare for a liquidity crisis in a regional context.