Report No. 15471-LAC Caribbean Countries Caribbean Economic Overview 1996 May 1996 Caribbean Division Country Department III Latin America ancl the Caribbean Region u Document of the World Bank 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) Caribbean Economic Overview 1996 MAY 1996 The World Bank I Preface The "Caribbean Economic Overview 1996" is prepared for the meeting of the Caribbean Group for Cooperation in Economic Development (CGCED) in June 1996. 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. I 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 ............................................................... .. ................ ... ........ 11 I List of Acronyms CARIBCAN Caribbean Community/Canada Technical Cooperation Agreement CARICOM Caribbean Community Secretanat CBI Caribbean Basin Initiative CGCED Caribbean Group for Cooperation in Economic Development DOD Debt Outstanding and Disbursed DBMC Dominica Banana Marketing Corporation ERP Economic Recovery Program EU European Union FDI Foreign Direct Investment GALs Guaranteed Access Levels GDP Gross Domestic Product GNFS Goods and Non-factor Services GNP Gross National Product GSP Generalized System of Preference IDA International Development Association IDB Inter-American Development Bank IMF International Monetary Fund NAFTA North America Free Trade Agreement OECD Organization for Economic Cooperation and Development OECS Organization of Eastern Caribbean States SITC Standard International Trade Classification WHFTA Western Hemisphere Free Trade Agreement v I I I 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 1994-95 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. 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 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 1996. 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 export- diversification 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. 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, 1981-95 (annual average percentages) Country 1981-90 1991-94 1995 Antigua & Barbuda 6.4 3.6 -3.8 Bahamas 2.9 0.1 -0.3 Barbados 0.9 -0.5 2.5 Belize 4.9 4.4 1.5 Dominica 4.6 2.0 -1.5 Dominican Republic 2.6 4.0 4.8 Grenada 4.7 1.7 2.5 Guyana -2.7 6.8 5.1 Haiti -0.5 -6.2 4.5 Jamaica 2.5 1.0 0.5 St. Kitts & Nevis 5.8 3.6 4.5 St. Lucia 5.3 3.1 1.8 St. Vincent & Grenada 6.5 2.8 5.0 Suriname 0.5 1.7 4.0 Trinidad & Tobago -2.3 0.8 3.3 Region 1.5 1.3 3.6 Region without Haiti 1.8 2.1 3.6 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 1991-95. 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 1994-96: Hurricanes and tropical storms retarded growth in St. Lucia in 1994-95 and in Dominica, St. Kitts/Nevis, and Antigua/Barbuda in 1995- 96. 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 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 1991-95 capita, 1991-95 GDP, 1993-95 East Asia 7.6 14.1 3.1 South Asia 2.0 8.4 0.3 High income 1.3 5.0 n.a. Latin America & Caribbean 1.1 7.2 1.1 Caribbean 1.02 1.6b 4.4c Middle East & North Africa -0.5 0.4 0.4 Sub-Saharan Africa -1.6 -1.6 0.9 Europe & Central Asia -8.6 1.0 1.4 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 1994. c. 1992-94, 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 2001. 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 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 1970- 89 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): 1-96. These (Continued i) 4 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 1976-85. David Dollar, "Outward- oriented Developing Economies Really Do Grow More Rapidly: Evidence from 95 LDCs, 1976- 1985," Economic Development and Cultural Change 40(3): 523-44. 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 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 1994. 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 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 A3. 1. 8 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 1994. 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 1994. IMF Direction of Trade Statistics. 8 Estimates from the American Apparel Manufacturers Association. 9 CARIBBHEN ECONOMIC OVERVIEW Figure 2.1 Growth of U.S. Apparel Imports frorn CGCED Countries, Mexico, and the World, 1990-95 70- 60 50 ci40 30 20 10 1990 1991 1992 1993 1994 1995 (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, 1989-95 35,000 30,000 ' 25,000 E 20000 , 15000 i 101000 0 1989 1990 1991 1992 1993 1994 1994 1995 (Jan- (Jan- M World total E CGCED countries 0 Mexico Sept) Sept.) Source: American Apparel Maiufadurers Association, see Table A3.3 10 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 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 1988-92 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 1988-92, 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 1988-92. 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 1994. 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 1993-94 increased from the average of 1988-92. Net foreign direct investment increased from US$500 million on average in 1988-92 to US$1,235 million in 1994. 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 1922-92 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. 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, 1982-94 (current USS million) Type of financing 1982 1983-87 1988-92 1993 1994 Financing to the public sector Bilateral 897 582 678 608 461 Loans 597 239 75 -165 -213 Grants 300 343 604 772 674 of which debt 0.0 0.0 91 108 33 forgiveness Multilateral 546 221 118 103 -70 Commercial' 202 141 -78 -161 -295 Total net flows to public sector 1,646 945 718 550 96 Private sector Foreign direct investment 271 177 500 991 1,235 Private transfers 361 434 792 945 936 Otherb -93 -214 -239 -97 -747 Total net flows to private sector 538 397 1,052 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).t0 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$185 million. See table Al. l. 14 3 Private and official capitalflows The smaller economies still receive positive flows to their public sectors, and the flows are substantial, at least in per capita terms, and have remained relatively steady over the past decade. See Figure 3.1. The flows to private sectors in these economies have grown, with private transfers (remittances) being the most important, but with FDI growing strongly. Figure 3.1 Net Flows to Smaller Economies, 1982-94 (US$ millions) 700- 600N / 20o I 0 -4-To public sector I 100 | ##" ,A O I 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 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 1992-94 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 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 1994. Of this, debt forgiveness constituted US$99 million in 1991 and US$15 million in 1994. 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 1995. 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$200 million in total. From the same Organization for Economic Cooperation and Development (OECD) sources as the data on grants. 16 Table 3.2 Overview of Net External Financing to CGCED Countries, 1994 (current US$ 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 s Publhc sector Bilateral Loans 0.4 0.0 -4.6 -3.1 -1.1 -64.1 0.3 -12.1 0.0 -83.1 0.7 0.1 0.0 ~ .0 -45.S -213.1 Grants 3.9 2.0 4.3 22.7 16.1 93.4 14.7 45.5 235.6 132.8 4.4 25.0 5.1 54.8 13.8 674.1 ofwhich is debt forgiveness 0.0 0.0 0.0 0.0 0.0 0.0 0.0 6.8 16.4 9.7 0.0 0.0 0.0 0.0 0.0 32.9 Multilateral 1.2 2.7 -12.0 3.1 -1.0 3.5 -0.9 6.6 0.0 -93.9 2.3 3.7 1.4 - 13.3 -70.0 Commercial' 0.0 0.0 -7.6 -6.3 0.0 -91.8 -1.3 -3.7 0.0 -43.4 -0 2 0.0 0.0 -140.5 -294.8 Totalnetflowsto public sector 5.5 4.7 -20.0 16.4 14.0 -59.0 12.8 36.2 235.5 -87.7 7.2 28.7 6.4 54.8 -159.2 96.2 Private sector Directforeigninvestment 13.9 118.9 43.9 13.7 9.0 190.1 11.5 24.0 0.0 349.3 12.6 18.5 49.5 -35.0 415.0 1,234.9 Privatetransfers 5.6 19.7 20.7 14.4 14.0 421.3 25.9 23.0 42.9 328.8 13.6 10.9 13.7 - -19.0 935.5 Otherb -24.7 40.3 -51.0 21.9 16.8 -408.2 8.4 -26.0 4.5 -53.4 11.7 25.9 4.2 -6.2 -302.0 -746.8 Totalnet flowsto private sector -5.2 178.9 13.6 50.0 39.8 203.2 45.8 21.0 38.4 624.7 37.9 55.3 67.4 -41.2 94.0 1,423.6 Totalnetexternal fnancing 0.3 183.6 -6.4 66.4 53.8 144.2 58.6 57.2 273.9 537.0 45.1 84.0 73.8 13.6 -65.2 1,519.8 Memorandum items (U.S. dollars per capita) Net aid flows, 1994' 86.5 17.3 47.3 108.3 195.4 4.3 154.1 48.5 33.5 -17.7 183.3 198.8 58.6 131.2 -14.4 18.6 Average aid flows, 1990-94' 81.7 18.1 48.3 140.5 171.1 10.5 151.9 172.7 26.3 69.0 169.1 166.3 90.1 134.1 20.2 37.6 - 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. CARIBBE4N ECONOMIC OVER HEW Figure 3.2 Net Flows to Larger Caribbean Economies, 1982-94 (US$ millions) 1,400 - 1,200i 1,000- 800 - [ To public seior 600 - - - To private sector 400 200- 19 32 1984 1986 1988 1990 1992 994 -200 ] -400- For Jamaica net flows declined in 1992-94. 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 million in each of the other years in the 1990s.'2 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 1988-92 to US$415 million in 1994. 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 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 1988-92, US$610 million in 1993, and US$461 million in 1994. 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 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 1993-94 were Trinidad and Tobago, with an average of US$392 million per year, Jamaica with US$306 million, and the Dominican Republic with US$187 million. Figure 3.3 Net Foreign Direct Invement in the Caribbean, 1982-94 (US$ million per year) 2000 1000|lt lW :: 00 $|00:: ,; i |ITotalFDI| 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 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. 18-20. 14 World Bank, Public Sector M.odernization, pp. 1-8. 20 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 Annexes Annex I Summary indicators and country profiles Table Al.l. Summary of Economic Indicators of Caribbean Countries, 1994 (USS, unless otherwise noted) Dominican 2nrndadl All Indrcato, Bahamas Barbados Belize Republic Guyana Hait Jamaica Sunname Tobaga Antgua Dominica Grenada Montrerrat St Kitts St Lucia Sc V'incenl countines Population (thousands of 273 265 210 7,600 825 7,035 2,496 418 1,292 65 71 92 10 41 145 III 20.950 persons) GNP per capita 11,500 6,240 2,550 1,320 530 220 1.463 g70 3.740 6,970 2.830 2,620 6,290 4,760 3,450 2,120 1.3625 GNP(millions) 3.059 1,783 554 10,495 458 1.542 3,553 488 4,812 425 193 219 65 185 480 233 28,544 GDP growth (percentage) 1993 19 29 09 3.5 83 26 14 30 17 35 2.1 09 19 50 23 12 - 1994 03 2.2 17 43 51 106 0.8 2.3 4 Sl 10 25 10 29 22 04 - 1995 -03 25 1 5 48 51 4.5 05 40 33 - -1 5 25 10 45 1 8 50 - Mnhlation(percentage)' 13 05 24 143 16.1 426 351 5870 85 35 1.6 26 28 26 27 04 - Populationinpoverry 5.0 80 350 - 430 - 340 39.0 21.0 120 330 200 - 150 190 170 (percenlage) Unemploymentrate 150 17.1 11.1 300 110 - 153 160 185 67 9.9 155 83 120 162 198 - (percentage) Exports (millions) GNFS 2,0390 8344 2636 2,752 463.4 64.2 2,5526 4208 1,9550 5410 97.7 1503 230 1263 314 987 12,696 GNFSaspercentage 667 45.6 476 262 1012 42 718 86.2 403 1273 506 686 352 683 654 424 44 of GNP Sugar - 243 403 148 1152 - 686 - 25.4 - - - - 108 -- - 433 Bananas - - 230 - - - 46.1 - - - 206 21 - 465 161 154 Bauxite, mnerals, fuel - - - 152 204.1 - 6107 247.2 823.0 - - - - - - - 2.037 Otlherdomestic 3530 1124 624 344 1441 574 497.6 1736 7920 409 243 21 1 299 217 483 350 2.758 Tourism 1,1368 4817 742 1,398 - - 9150 - 892 4152 348 966 164 764 194 288 4,957 Oublic ectorsurplusor 382 198 486 ' 3540 -367 -999e7 130.8 1,1996' -647 344 -260 -126 -73 -33 -291 .31 -1.853 deficit (millions) Public seaor deficitn 1.1 I I .8 8 -3 6 -6 8 -4 2 4.2 -34 3' -3 1 -7 0 -12 1 -3 5 -12 1 -I 6 -5 1 -3 3 -6 3 percentage of GDPa Currentaccoumtbalance -149.8 19.7 .38.1 -213 -620 42 -5.4 139 1040 -27.9 -209 -18.5 -19.2 -286 -610 -531 -556 (millons) Current account balance a -4 4 0.8 -6.9 -2 0 -11 5 0 3 -0 1 3.8 2.1 -5 7 -10 1 -6 6 -31.6 -13 7 -11 9 -23 1 -1 9 percentage of GDP DOD spercentageofGDP 96 221 299 40.0 3278 471 1018 - 397 8.3 469 299 47.2 216 233 347 - DODaspercentageof 161 600 627 1560 4690 1,162.1 169.2 - 969 742 99.0 61 1 1248 359 35.8 841 GNFS - Not available DOD - Deb outstanding and disbursed GNF'S - Goods and non-factor scrvices. Note: Poverty and unemployment estimates come from various sources and may not be comparable. GNP per capita for total non-OECS, OECS. and all countries are estimated by dividing GNP totals by population totals a End-1994 b 1994/95. c Central govenrsteisi data. Sources: IM} repots. govenaseni publications, and World Bank staffeAsirnates v-. Annex I ANTIGUA AND BARBUDA Population: 67,000 (mid-1994) GNP per capita: 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, 1994. 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 liberalization 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 CARIBBEAN ECONOMIC OVER VIEW BELIZE Population: 199,371 (nid-1992) GNP per capita: 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 1986-90, real GDP growth exceeded 10 percent per year on average, with strong contributions from all sectors. The impressive 1986-90 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 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 CARIBBEAN ECONOMIC OVERVIEW DOMINICA Population: 72,000 (mid-1994) GNP per capita: 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 1990-93 period, annual real GDP growth showed to 2 percent, compared with about 4 percent during 1980-90. 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 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 CARIBBEAN ECONOMIC OVERW1EW DOMINICAN REPUBLIC Population: 7.6 million (mid-1994) GNP per capita: 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 1995. 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 1994. 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 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 CARIBBEAN ECONOMIC OVER VIEW GRENADA Population: 92,000 (nmid-1994) GNP per capita: 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 1995. 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-1995. 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 Annex I GUYANA Population: 825,000 (mid-1994) GNP per capita: 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 1992-95, 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 CARIBBEAN ECONOMIC OVERIEW Policy issues 1. Privatization. Privatization needs to be accelerated, including private management contracts for public utilities. This requires strengthening the institutional framework and stepping up actions regarding the key sugar and bauxite industries. 2. Public sector reform. The scope of the public sector needs to be reduced, and its ability to deliver essential services strengthened. This requires streamlining the public administration, decentralizing the decisionmaking process, providing incentives to fill the vacancies at technical levels, and eliminating labor redundancies among the low-level positions. 3. Fiscal discipline. Continued fiscal discipline is critical to maintaining a sound macroeconomic and incentive framework. This can be achieved by (i) further restructuring the tax system including broadening the tax base, simplifying the consumption taxes, and reducing the widespread fiscal incentives; (ii) restraining the growth in expenditures for wages and for goods and services; and (iii) focusing public investment on priority needs for economic and social infrastructure. 4. Poverty alleviation. Approximately 43 percent of the population was living below the poverty line in 1993. The government needs to design and implement a comprehensive strategy to reduce poverty. This should include better targeting of poverty alleviation programs. 5. Environmental protection. Consolidation and deepening of environmental protection efforts are needed, especially to address forestry management, mining, and waste management. 36 Annex I HAITI Population: 7.0 million (mid-1994) GNP per capita: US$250 (1995 Atlas methodology) The economy During the three years following the coup d'etat in September 1991, economic mismanagement and an international embargo led to a dramatic decline in living standards. When the constitutional government returned to power in October 1994, the government pursued a program of fiscal stabilization and structural reforms. In December 1994 the government cleared arrears to the International Development Association (IDA), IDB, and IMF-allowing these institutions to resume lending activities-and entered into an IMF standby agreement in March 1995. In December 1995, Rene Preval, former prime minister under President Aristide in 1990/91, was elected president and took office on February 7, 1996. During 1992-94, the deterioration in economic performance accelerated. Real GDP is estimated to have fallen by almost 20 percent during 1992-93 and by a further 10 percent in 1994. Agricultural production and exports decreased considerably, with the latter severely affected by the embargo. Fiscal performance deteriorated, mainly due to a sharp fall in tax revenues. Government revenues declined from some 8 percent of GDP in 1991 to about 3 percent in 1994. In the first year following the return of the constitutional government the situation has improved considerably, due to the reform efforts of the government and broad- based international support. The economic performance until end-September 1995 remained broadly within the parameters of an IMF standby arrangement approved in March 1995. Real GDP, supported by significant inflows of external aid, grew by about 4.5 percent, inflation declined from 43 to 17 percent, and the gourde recovered from more than G20 per U.S. dollar to G14.5 per U.S. dollar by end- September 1995. Although the central government deficit reached 6.5 percent of GDP (before external grants), the overall public finances remained broadly on target. As a result of the government's fiscal performance and tight credit policy, the net domestic assets of the Central Bank remained well within the program. Following a change in government in October 1995, implementation of the economic reform program slowed considerably. Fiscal pressures increased as revenues fell short and expenditures exceeded programmed levels. To cover the ensuing deficit, the government resorted to increased Central Bank financing. As a result, inflation increased to about 25-30 percent by end-December 1995, and the gourde depreciated to more than G16.5 per U.S. dollar. The current government, which took office in March 1996, has taken steps to reverse the situation. 37 CARIBBEAN ECONOMIC OVER VIEW Policy issues I. Macroeconomic framework. From October 1995 to March 1996, Haiti's fiscal situation deteriorated significantly, fueling inflation and discouraging potential private investment. Upcoming discussions with the government on economic reform need to focus on sound fiscal and monetary policies, restructuring of state-owned enterprises, and civil service reform. 2. Privatization. Public enterprises have become inoperative and a drain on public finances. The lack of strategic service such as electricity, telecommunications, and a functioning port system discourage new private investment and job creation. 3. Poverty alleviation. In spite of government and donor efforts, effective support to alleviate poverty has not yet had a widespread impact. The situation is particularly critical in rural areas. The government will need to establish priorities and formulate its poverty strategy in cooperation with donors and nongovernmental organizations. The key prerequisite for poverty alleviation will be growth in rural areas and increased capacity to provide essential social services. 4. Environmental protection. Measures to protect the environment should receive high priority, especially in the area of deforestation. 5. Institutional capacity. The public sector is over-extended and lacks skilled staff and basic operational infrastructure. Interministerial coordination is weak, and coherent and compatible sector strategies need to be developed. Both to implement and coordinate external aid and to provide basic public services, the government will have to embark on a major civil service reform. 38 Annex I JAMAICA Population: 2.5 million (mid-1995) GNP per capita: US$1,420 (1994 Atlas methodology) The economy Economic performance improved substantially in fiscal 1992/93, after experiencing macroeconomic instability and recession in 1990 and 1991. Growth recovered to about 2 percent. In fiscal 1992/93 the government of Jamaica achieved its target of an overall public sector surplus of 2.2 percent of GDP. Part of this came from the strong increase in revenues originating from the new general consumption tax, but reduced spending was also important, with large layoffs and reductions in real wages. The largest cut took place in current expenditure (notably wages and salaries through the retrenchment of more than 7,000 public sector employees). Large nominal wage increases were agreed upon near the end of fiscal 1992/93, with payment deferred until fiscal 1993/94, and the government has taken strong fiscal measures to meet the target public sector surplus of 1.9 percent of GDP. Containment of external current account deficits, increasing direct foreign investment flows, and rising grant receipts have helped to reduce total external debt from a high of US$4.7 billion in 1987 to US$4.3 billion at the end of 1992, or about 135 percent of GDP. Interest payments in fiscal 1992/93 were 9.5 percent of GDP, and the total debt service ratio, after rescheduling, was 31 percent of exports. Policy issues 1. Macroeconomic framework. In the short term, and as a precondition for growth, macroeconomic stability needs to be maintained through tight fiscal and monetary policies, including an overall surplus in public sector operations. 2. Income distribution. Equity of income distribution needs to be improved through increased productivity of and demand for labor. 3. Medium-term framework for growth. In the medium term, an economic program needs to be implemented that emphasizes (i) maintenance of the liberalized foreign exchange system, stepped-up liberalization of the trade regime to a 5-20 percent import tariff range, and further deregulation of the economy; (ii) consolidation of measures, including strengthening of the public sector and continued divestment, to ensure a sustainable fiscal balance that will allow for essential infrastructure investments and the development of social services, while providing scope for an expanded private sector in an improved business environment; (iii) an effective implementation of the Public Sector Investment Program to improve the efficiency in the use of resources; and (iv) a gradual reduction of the external debt burden, 39 CARIBBEAN ECONOMIC OVER VIEW through moderate foreign borrowing and further efforts to achieve debt rescheduling and relief 4. Environmental protection. Environmental protection efforts need to be consolidated and deepened, especially to improve coastal zone management and sewage treatment and control and to address waste management. 40 Annex I ST. KITTS AND NEVIS Population: 41,000 (mid-1994) GNP per capita: USS4,760 (1994 Atlas methodology) The economy St. Kitts and Nevis has benefited from good economic management, which allowed for annual rates of growth of 6 percent during the 1980-90 period. Foreign direct investment and domestic private investment in tourism and assembly manufacturing were important factors in growth. During the first half of the 1990s, however, real GDP growth declined to about 3-4 percent per year, due in part to slow growth in tourism, drought conditions in 1990 and 1994, and the 1995 hurricanes, which reduced sugar production. By end-1994, total public external debt amounted to more than 22 percent of GDP. Real GDP is projected to grow around 4 percent per year during the rest of the 1 990s. External debt and debt service ratios are likely to remain manageable. Policy issues 1. Sugar divestment and private sector development. While the country may continue to have access to the EU market for its exports of about 16,000 tons of sugar annually, the prices in real terms are projected to decline over the long term, as the supply of vorld sugar exceeds the demand. Divestment of the sugar industry is being studied and considered. 2. Public savings. The main issue is to generate public saving of at least 5 percent of GDP on a consistent basis by restraining expenditures and improving recurrent revenue performance through tax administration, elimination of duty exemptions, broadening of the tax base, and cost recovery. Such savings are needed to provide some counterpart funding for the capital investment program and to reduce the need for borrowing. 3. Human resource development and labor market. Access to basic education is adequate, but the quality needs to be improved. With universal access to basic amenities, there is little or no human deprivation (15 percent of the population is below the poverty line). The key constraint to St. Kitts's expanding economy is rising labor costs on account of labor shortages, especially of well- trained labor. The government intends to continue importing labor from elsewhere in the region and to undertake a skills-upgrading program. 41 CARIBBEAN ECONOMIC OVER VIEW ST. LUCIA Population: 145,000 (mid-1994) GNP per capita: US$3,450 (1994 Atlas methodology) The economy The country has benefited from sound economic management. Public savings have been high in recent years (averaging more than 10 percent of GDP) but recently declined due to an increase in current expenditures and the slow growth of current revenue. GDP growth has also slowed to about 3 percent per year during the 1990s, compared with 7 percent during the 1980s. Revenues from bananas declined because of the slide in the British pound in 1992, changes in the EU trade regime for bananas in 1993, and damages caused by Tropical Storm Debby in 1994. The outstanding debt obligations of the banana association amount to about 3 percent of GDP, and the government has been under pressure to take over the banana association since 1993. By end-1994, total external debt amounted to about 23 percent of GDP. Domestic debt is the lowest in the OECS countries, amounting to about 10 percent of GDP. Policy issues 1. Banana-industry. While the banana industry is a significant contributor to income and employment, St. Lucia remains a relatively high-cost producer of bananas. With the change in the EU banana regime, producers will need to improve quality and productivity rapidly. External assistance is being provided to assist the government in phasing out inefficient farmers in order to make the industry more competitive. During the transition, temporary safety nets for vulnerable farmers will need to be designed, as social unrest in 1996 over this issue made clear. Also in 1995 the governments 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. 2. Human resources development and poverty. A diversified and growing economy needs skilled workers in tourism and related activities as well as other services. The government has embarked on large investments to improve the quality, efficiency, and accessibility of basic education through additional school construction, curriculum development, teacher training, and regional coordination in education reform. An estimated 25 percent of the population is below the poverty line. 3. Environmental management. Increasing reliance on tourism will require increased efforts to conserve the environment. The importance of land use management, including slope stabilization, river training, and disaster prevention, are critical given frequent hurricanes. Investments in sewage 42 Annex I facilities, waste management, water treatment, and coastal zone protection are being assigned high priority by the government. 43 CARIBBEAN ECONOMIC OVER VIEW ST. VINCENT AND THE GRENADINES Population: 111,000 (mid-1994) GNP per capita: US$2,120 (1994 Atlas methodology) The economy St. Vincent has benefited from prudent economic management. During the 1980s, the country experienced real GDP growth of more than 6 percent, due to expansion in banana production and tourism. The annual real GDP growth fell to below 4 percent during 1990-93 due to a deterioration in the terms of trade, the slide in the British pound in 1992, and the change in the EU banana regime. Real GDP growth recovered to 5 percent in 1995. The government has been seeking ways to increase public sector efficiency; most of the loss-making public enterprises have been privatized or their operations have been discontinued. Central government surpluses have averaged about 4 percent of GDP in recent years but declined over the past two years due to fiscal pressures from a drop in banana-related tax receipts and from banana price support. By end-1995, total public external debt amounted to about 35 percent of GDP, but mostly on concessional terms, so debt and debt service remain manageable. Policy issues 1. Banana industry. The banana industry needs to improve its competitiveness through increased productivity. Some progress has been made leading to strong output growth in 1995. The government is receiving external support to phase out inefficient banana farmers in order to make the industry more competitive. Also in 1995 the governments 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. 2. Economic diversification. The changed market prospects for bananas will encourage and support ongoing diversification efforts. Significant resources have been put into land reform programs, which make state-owned land, mostly acquired from previous owners, available for family farms. Incentives need to be designed and provided for the production of root crops and vegetables with market potential. Tourism and export services continue to be the main source of growth. To facilitate diversification, the government has commissioned an airport development study. 3. Human resource development and poverty reduction. Unemployment continues to be high in St. Vincent, which is also experiencing shortages of technical and managerial personnel throughout the economy, particularly in the public sector. Major investments in training and education are needed. Despite 44 Annex I pockets of poverty, less than 20 percent of the population is below the poverty line. 45 CARIBBEAN ECONOMIC 0OER VIEW SURINAME Population: 410,000 (1995) GNP per capita: US$880 (1995 Atlas methodology) The economy Suriname's economic performance deteriorated markedly in the 1980s due to a worsening of its terms of trade and a failure to take corrective policy actions. Reserves dropped to low levels, and the government instituted trade and exchange restrictions as well as price controls, which led to large distortions in relative prices and a parallel foreign exchange market. Real GDP declined by a cumulative 19 percent from 1982 to 1994, and inflation averaged 72 percent annually. In the 1990s inflation accelerated, reaching almost 600 percent during 1994. The economy has improved in the past eighteen months in response to corrective measures implemented by the government. Inflation declined to 37 percent in 1995 as a result of improvements in public finances and use of the exchange rate as an informal anchor for prices. The fiscal deficit, which stood at 7 percent of GDP in 1994, turned into a surplus of 5.3 percent in 1995 due largely to an improvement in the country's terms of trade, unification of the exchange market, and prudent fiscal measures. Government revenues have increased mainly as a result of higher world prices for bauxite and better tax administration, and higher export proceeds generated a current account surplus of about US$92 million; international reserves grew by US$96 million in 1995. Real GDP grew by 4 percent in 1995 and is projected to continue to grow at this rate in 1996. Further reforms are needed to sustain adequate growth. Policy issues 1. Fiscal discipline. The government needs to consolidate the recent economic gains through continued fiscal discipline, which is expected to reduce inflation and maintain satisfactory external performance. The distribution and effectiveness of investment and recurrent spending need to be reviewed and improved. 2. Environment. There has been a great deal of international concern regarding the logging of Suriname's forests. The government needs to establish an adequate framework for managing its natural resources before signing additional large logging concessions. International development and environment institutions have indicated readiness to provide technical assistance in the area of natural resource management and to provide offsetting financial resources to discourage the signing of logging contracts that would not be economicially or environmentally sound. 46 Annex I 3. Privatization. The government is considering a privatization program and has requested technical assistance from the World Bank in assessing the country's economic prospects and in examining privatization issues and methods. 47 Annex I TRINIDAD AND TOBAGO Population: 1.3 million (mid-1995) GNP per capita: US$3,700 (1995 Atlas methodology) The economy Trinidad and Tobago is making the difficult transition from an over-regulated economy, dependent on declining oil revenues, to a more market-oriented economy with diversified employment opportunities. An economic contraction that began in 1983, following the fall in oil prices, continued almost uninterrupted until 1993. An adjustment program was initiated in 1988 with support from the IMF and the World Bank. The ongoing program includes (i) a far-reaching trade reform; (ii) investment sector reforms and the opening of the oil and gas sectors to foreign companies; (iii) tax reform, including introduction of a value added tax; (iv) elimination of price controls; (v) extensive divestment of public enterprises, including major gas-based industries (one-third of the wholly or partially state- owned enterprises have already been liquidated or sold); and (vi) reform of public utilities. The economy is responding to these measures with relatively strong growth of around 4 percent in 1994 and 3 percent 1995. Stability has been achieved by sharply reducing the overall fiscal deficit from 8.7 percent of GDP in 1986 to a small surplus (0.4 percent) in 1995. Inflation is about 5 percent and is expected to fall further. Unemployment has fallen slightly from 19.5 to 16.5 percent. The impact of large foreign investment in gas-based industries (including the construction of a US$1 billion project to export liquid natural gas) is already evident and is likely to continue fueling growth in the medium term. Policy issues 1. Private sector development. To create a more diversified economy in which the private sector is the engine of growth, the government will need to (i) accelerate the reforrn of the public sector administration, (ii) increase public saving to finance an enhanced public sector investment program that will concentrate on physical and social infrastructure, (iii) ensure the quality of primary and secondary school education, and (iv) improve targeting and efficiency in the provision of social services. 2. Macroeconomic frameworkfor growth. For the remainder of the 1990s, Trinidad and Tobago needs to continue both sound macroeconomic management and restructuring of the economy in order to reduce its dependence on oil and, thus, its vulnerability to adverse changes in the terms of trade. 48 Annex 1 3. Environmental protection. Environmental protection efforts need to be consolidated and deepened, especially to address deforestation, oil and gas industrial pollution, and waste management. 49 I I Annex II U.S. trade programs with the Caribbean Excluding merchandise produced in free trade zones, 71 percent of the Caribbean countries' total exports flowed to the NAFTA region in 1983. By 1994 this total had declined to 46 percent. This reflects the large shift in composition of exports from traditional goods to nontraditional goods (which include apparel and textile products almost exclusively produced in free trade zones) and a shift in the direction of trade away from the NAFTA region. In 1983, 92 percent of the Caribbean countries' exports to NAFTA flowed to the United States. By 1994, this concentration had diminished slightly, but the overall picture had changed very little, with 86 percent going to the United States, 13 percent to Canada, and the remaining I percent to Mexico."5 Given the overwhelming share of the region's exports going to the United States, it is safe to conclude that any policy affecting the trade relationship between the Caribbean region and the United States will affect the trade relationship between the Caribbean region and NAFTA. The following section describes the various trade programs that the Caribbean has used to enter the U.S. market, and their consequential effect on overall trade flows between the regions. Generalized System of Preference The Generalized System of Preference (GSP) became effective January 1, 1976, with the intent of promoting economic development through trade diversification. Under this program approximately 4,300 products enter the United States duty free from developing countries throughout the world. Eligibility for duty-free status through GSP is dependent on direct exportation from the developing country to the United States, as well as a 35 percent value added requirement. Under the GSP program, products eligible for duty-free access can change over time, and the United States will "graduate" countries from duty-free eligibility, both for specific products and for the entire program, if the developing country achieves a specified national income or level of penetration of the U.S. market. In the past, Hong Kong, Singapore, South Korea, and Taiwan have graduated. 15 IMF, Direction of Trade Statistics. CARIBBEAN ECONOMIC OVERVIEW The Caribbean Basin Initiative The Caribbean Basin Economic Recovery Act or the Caribbean Basin Initiative (CBI) as it is more commonly known, was initiated by the Reagan administration in 1983, then permanently extended in 1990 to encourage economic diversification in the Caribbean region. Twenty-eight Caribbean and Central American countries are eligible for CBI status, including Anguilla, Cayman Islands, Surinam, and the Turks and Caicos Islands. However, as of July 1995, only Antigua and Barbuda, Aruba, Bahamas, Barbados, Belize, British Virgin Islands, Costa Rica, Dominica, Dominican Republic, El Salvador, Grenada, Guatemala, Guyana, Haiti, Honduras, Jamaica, Montseirrat, Netherlands Antilles, Nicaragua, Panama, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, and Trinidad and Tobago had formally requested to be (and been designated) CBI beneficiaries. Unlike GSP, the CBI does not have a graduation process and consequently provides beneficiary countries with greater security for duty-free access to the U.S. market. Its scope is also larger, covering 6,000 products compared with the GSP's 4,300 products. Although the CBI requires that merchandise be imported directly from the eligible country to the United States, the program offers greater flexibility than GSP in terms of the 35 percent value added requirement. CARICOM countries may satisfy this rule with materials derived from any one, or all, of the CBI countries, and, for goods containing at least 15 percent U.S. content, the value added requirement is reduced to 20 percent. In addition to the above eligibility requirements, the CBI allows tariff-free access to the U.S. market for articles assembled or produced in whole from U.S. components or ingredients. Inputs must be imported directly from the United States, and articles need not be "substantially transformed." The CBI excludes items such as petroleum and petroleum products, luggage, handbags and flat leather goods, certain gloves, canned tuna, ethanol, sugar, watches and parts from communist countries, most footwear, and most textiles and apparel. In 1990, however, the Bush administration reduced tariff rates on these products by 20 percent. Given the CBI's scope and flexibility in terms of eligible products and value added content, the Caribbean's access to the U.S. market is superior to that of many other areas of the world. Despite this, only 8.4 percent of total exports from CBI- eligible countries (including the nine members not covered in this report) entered the United States exclusively through the CBI program in 1994. 16 16 See "Caribbean Economic Recovery Act: Impact on U.S. Industries and Consumers, Tenth Report 1994, Investigation No. 332-227," Table 3-1, p. 28. 52 Annex HI The program for production-sharing agreements (807) To facilitate the global competitiveness of U.S. firms, the U.S. government has instituted a program that provides for sharing production with developing countries. Provision 9802.00.80 of the Harmonized Tariff Schedule of the United States establishes preferential tariff treatment for products covered under this program. This provision (commonly known as 807, from the previous tariff schedule) allows U.S. firms to compete with labor-intensive articles manufactured by foreign producers, especially in Asia. This program has been the main vehicle of access to the U.S. textile market for Caribbean countries. Established well before the Caribbean Basin Initiative, it permits the duty-free entrance of goods assembled abroad from U.S.-made components and re-exported back to the United States. The plan, which attempts to stimulate trade with the Caribbean countries, is ideal for textile and electronics assembly production, and as such, has been a major influence affecting trends in the apparel trade of the Caribbean region. . Garments assembled under this program's provisions are subject to the same quota, documentation, and customs laws as other apparel, but importers pay duty only on the difference between the final value of the product and the value of the U.S. inputs.17 Under the production-sharing program, components must be exported directly from the United States in assembly-ready condition, and finished articles must not "lose their identity" during the assembly process. As well, the value of the inputs must not increase while abroad, except through the assembly process. In 1994, 80 percent of the Caribbean countries' apparel products entered the United States under this program and its extension.I The production-sharing program may have been the catalyst for much of the growth in U.S. textile trade between the Caribbean countries and the United States, but quota limitations soon impeded further growth for some countries. Accordingly, in 1986 the Reagan administration, under the umbrella of the CBI, expanded the production-sharing program to improve the Caribbean's access to the U.S. market. The special access program (807A) The Special Access Program for Caribbean exporters, also known as 807A, and the Special Access Program, an identical initiative for Mexico, permit CBI countries and Mexico to negotiate guaranteed access levels (GALs) to the U.S. market for apparel products. Under these programs, GALs may be increased at the request of the exporting country, once that country has demonstrated that it posseses the production capacity to satisfy the requested GAL increase. With the '7 Foreign inputs are pernitted in the assembly process but are subject to tariffs. 18 American Apparel Manufacturers Association. 53 CARIBBEAN ECONOMIC OVERVIEW exception of quota restrictions, the production-sharing and special access programs are identical and must adhere to the same content and customs laws. Accordingly, countries export under the special access program only after they have reached their specified quota levels under the production-sharing program. AU CBI countries are eligible for the GALs. However, to date the only Caribbean countries to participate are Dominican Republic, Haiti, Jamaica, and Trinidad and Tobago.19 One year after the GALs were implemented, the Caribbean countries' textile exports to the United States increased to 23 percent of total exports-from 12 percent in 1985-and have continued to grow since then (see Table A3.2). 19 Costa Rica (a CBI member but not a subject of this study) also participates in the 807A program. "A Special Report from the International Committee of the American Apparel Manufacturers Association, 807 Apparel Assembly," vol. 1, no. 1 (December 1989). 54 Annex III Table A3.1 U.S. Imports of Textiles/Apparel and Footwear under the 807 Production- Sharing Program (1990 and 1993) (current US$ millions) Countries of origin Dominican U.S. total Mexico Republic Jamaica Other CBI imports Items 1990 1993 1990 1993 1990 1993 1990 1993 1990 1993 Apparel and 759 1,461 584 1,218 160 315 739 1,627 2,618 5,288 textiles Footwear 71 91 15 115 0 1 1 0 908 1,133 Note: According to the American Apparel Manufacturers Association, U.S. textile imports under 807 were misclassified intil recently. This may explain the statistical discrepancies between Tables A3.1 and A3.3. Source: "Production Sharing: Use of U.S. Components and Materials in Foreign Assembly Operations, 1990-93," SITC Publication 2886 (May 1995), Tables 1-7, B-16, B-31. Table A3.2 Composition of Caribbean Countries' Exports to the United States, 1983-95 (current US$ millions, unless otherwise noted) 1994 1995 (Jan.- (Jan.- Type of exports 1983 1985 1987 1990 1992 1994 Sept.) Sept.) Total exports 4,825 3,965 3,463 4,436 4,835 5,512 4,059 4,399 Traditionala 3,692 2,420 1,624 1,656 1,466 1.489 1,144 1,039 Percentage 77 61 47 37 30 27 28 24 Nontraditionalb 1,133 1,545 1,839 2,780 3,369 4,023 2,915 3,360 Percentage 23 39 53 63 70 73 72 76 Of which: Apparel from textilesc 282 464 778 1,183 1,659 2,145 1,557 1,799 Leather products and footweard 60 64 83 142 195 292 219 186 a. Includes crustaceans & mollusks (036), sugar & honey (061), cocoa (072), tobacco manufactured (122), aluminum ores & concentrates (285). ores & concentrates of base (287), crude oil from petroleum or bitumen (333), petroleum products refined (334), alcohol, phenols, etc. (512), inorganic chemical elements (522), gold, nonmonetary (971) of the Standard Intemational Trade Classification (SITC). b. Includes all SITC codes not listed above. c. Includes men's or boy's coats, jackets, etc. (841), men's & boy's outer garments (842), women's & girls outer garments (843), women's & girls coats, capes, etc. (844), articles of apparel of textile fabric (845), undergarments knitted or crocheted (846), clothing accessories (847), and apparel & clothing accessories except textiles (848) of the SITC. d. Includes manufacturers of leather (612) and footwear (851) of the SITC. Note: The values of the traditional exports are derived only from the SITC numbers listed in footnotes b and c as long as these SITCs were among the top twenty export items of the region that year. Total textile exports to the United States vary 2-4 percent by source. This has been explained by differences in how the U.S. Department of Commerce and the American Apparel Manufacturers Association define textiles. Source: U.S. Department of Commerce. CARIBBEANECONOMIC OVERVYEW Table A3.3 U.S. Inports of Textiles from Caribbean Countries and Mexico, 1989-95 (current US$ rnillions) 1994 1995 (Jan.- (Jan.- Country 1989 1990 1991 1992 1993 1994 Sept.) Sept.) World total 21,047 21,937 22,59 26,722 28,216 31,386 23,367 26,751 5 Percentage growth - 4.2 3.0 18.3 5.6 11.2 - 14.5 Mexico 500 508 673 901 1,127 1,597 1,133 1,901 Percentage growth - 1.6 32.6 33.8 25.1 41.4 - 67.8 Canibbean 1,090 1,140 1,363 1,619 1,955 2,111 1,532 1,778 Percentage growth - 4.6 19.6 18.8 20.8 8.0 - 16.0 Of which: Jamaica 226 235 252 293 389 454 324 398 Percentage - 4.2 6.7 16.4 32.8 16.8 - 22.8 growth Haiti 166 160 146 61 92 29 26 55 Percentage - -3.7 -8.8 -57.9 49.2 -68.6 - 113.6 growth Dominican Republic 642 694 910 1,203 1,410 1,572 1,142 1,283 Percentage - 8.1 31.1 32.1 17.2 11.5 - 12.4 growth - Not available. Note: Total textile exports to the United States vary 2-4 percent by source. This has been explained by the different definitions for textiles used by the U.S. Department of Commerce and the American Apparel Manufacturers Association. As well, according to the American Apparel Manufacturers Association, U.S. textile imports under 807 were misclassified until recently. This may explain the statistical discrepancies between Tables A3.1 and A3.3. Source: American Apparel Manufacturers Association. 56 IBRD 2448ZR UNITED s0 72- 64 56 88* ~~STATES . OF AMERICA 24 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~24- '/4½ -THE CARIBBEAN AREA CT - - #? ~~~~~~~~~~~~~~~~~INTERNAT1ONAL BOUNWIRES C,~~~~~~~ G~~~~~~~ - TUK and- CA YMA A(UK) HAITI DOMINICAW - Virgin-island (US) and (UK) 9. ~~~~~~~~ ~ ~~~~~~~~~~~~~~~~~REPUBLIC Puerit- 'Rica jUSt- - JAMAICA ST. K f ANTIGUA and BARBUDA I / - 3and NEVIS + > | I ~ MontnerMtse.raft 1 ~~~~ ~ ~~~~~~~~~~~~~~~~~~~~~~~~(UK) b uac.laovpe (FR) "EIZEDOMINICA 16U/AE_ AL |- Z < Martinique (FR) 16-