World Bank Study Provides Overview Of Caribbean Global Trade Integration

by Amanda Banks, Tax-News.com, London

14 April 2009

The acceleration of trade integration in the Caribbean is essential to boost the region’s growth, create jobs, and reduce poverty, says a new World Bank study. The report argues that despite their small size, economies in the Caribbean must strive to become more competitive to fully reap the benefits of global trade integration.

The report, “Caribbean: Accelerating Trade Integration. Policy Options for Sustained Growth, Job Creation, and Poverty Reduction,” presented at the World Trade Organization’s (WTO) Committee on Trade and Development, acknowledges the region’s efforts in pursuing an external trade policy over the past three decades anchored on preferential access to the European and North American markets, but stresses that the Caribbean’s integration into the world economy has been slow and compares poorly with some Asian countries with similar levels of integration 30 years ago.

“A new global and regional trade environment presents the Caribbean countries with critical challenges, but also many opportunities to reposition itself as a growing and competitive region, translating into significant economic and social gains,” said Yvonne Tsikata, World Bank Director for the Caribbean.

Economic growth in the Caribbean countries is expected to slow down relative to 2007 as these economies have been hit hard by recent shocks, including a recession in the US economy, the global financial crisis, and a period of high food and fuel prices. Lower economic growth and consumption in North America and Europe could reduce exports, remittances, tourism, foreign direct investment and foreign aid.

With an aggregate GDP of about USD70bn in 2005 and a population of about 25 million people, the Caribbean economy is relatively small, three times smaller than Ireland’s. Growth performance has varied widely across countries and has been highly volatile: St. Kitts and Nevis, St. Vincent and the Grenadines, Grenada, and Antigua and Barbuda have had the highest growth trend in the long-run, whereas Haiti, Jamaica, and Guyana, the slowest.

Deficiencies in access and low quality of infrastructure and low labour productivity have resulted in relatively high production costs, which coupled with an elevated export concentration and undiversified production sectors, have continued to limit the region’s ability to compete on international markets.

The region also suffers from skill mismatching and shortages. Presently, most of the Caribbean countries’ overall performance on doing business indicators ranks below that of comparable developing countries, including Mauritius, Hong Kong, Malaysia, and Singapore.

While many Caribbean countries (most notably Trinidad and Tobago, Dominican Republic, and Jamaica) have undertaken policy measures to improve their trade policy, according to the report important weaknesses remain in five major areas:

• Customs procedures and administration;
• Legal framework for businesses, including taxation;
• Comprehensive competition policy;
• National institutions in charge of trade policy formulation and implementation; and
• Trade policies have thus had limited outcomes. Trade costs are relatively high in the Caribbean, potentially impeding trade.

The fifteeen Caribbean countries are involved in two parallel processes of regional and global integration, which complement each other and will most likely shape the region’s trade environment during the next few years. The region is in the process of redefining its relations with its main trading partners, including the European Union and the United States, through the recently signed Economic Partnership Agreement (EPA), and exploring the possibility of moving from preferential to reciprocal arrangements with the United States. At the same time, the Caribbean is redesigning the process of regional trade integration with the ongoing implementation of the Caribbean Single Market Economy (CSME).

However, global integration is being conducted in a context of macroeconomic and financial imbalances. The region experienced large current account and fiscal deficits, as well as high levels of indebtedness, which in the past, slowed trade reforms and are currently a major concern in the evolving trade environment. These macroeconomic and financial imbalances are exacerbated by the current economic crisis.

The report suggests taking prompt steps to strategically reposition the Caribbean to take advantage of new market opportunities, particularly in services, where the region has consistently demonstrated comparative advantage. On average, the Caribbean derives 45% of its GDP from services.

Furthermore, the report sets forth five specific policy recommendations:

• Reducing macroeconomic and fiscal imbalances, while investing massively in trade infrastructure and social programs, to facilitate the region’s integration in the global economy and protect recent gains in human development. These include building and/or rehabilitating infrastructure, including roads, irrigation schemes, water and sanitation facilities, electricity distribution and information and communication technology networks.
• Accelerating the implementation of national trade policy reforms and improving investment incentives. This can be done by reinforcing the capacity of ministries of commerce and industry and trade related institutions to formulate trade policy, negotiate, and implement trade agreements. Countries should also strengthen the capacity of national statistics departments to regularly produce and publish trade data as a way to monitor the outcomes of trade reforms.
• Adjusting to the erosion of preferences, accelerating the implementation of the CSME, and using the EPA enhanced competitiveness and global trade integration. In the short-term, the Caribbean region needs to reinforce its competitiveness by implementing good macroeconomic policies and addressing the losses of Government revenue following trade liberalization. In the long-term, the focus should be on finding new niches of exports where the Caribbean countries have comparative advantages or segments of existing niches.
• Developing a long-term trade strategy with a focus on increased competitiveness and new areas of opportunities. The strategy should focus on targeting sectors with high export and growth potential such as tourism, financial services, telecommunications, and maritime transportation. It should also focus on removing the constraints to competitiveness by addressing high production costs. This will require improving labor policies to enhance labor productivity and investing massively in infrastructure to reduce infrastructure bottlenecks to exports.
• Strengthening the Caribbean Forum of African, Caribbean, and Pacific States (CARIFORUM’s) regional institutions with a focus on implementation. This could be done through the creation of a Regional Implementation Mechanism (RIM) in charge of coordinating regional objectives and activities with national bodies.

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