ReportNo. 48'oCCRG CaribbeanGroup CurrentSituation and Prospects January5, 1984 Public Disclosure Authorized LatinAmerica and the ( arihbeanRegional Office FOR OFFICIAL. USE ONLY Public Disclosure Authorized Public Disclosure Authorized Document of the World Bank Thisdocument has a restricteddistribution and may be used by recipients Public Disclosure Authorized only in the performanceof their officia; duties.its contentsmay not otherwise be disclosedwithout World Bankauthorization. FOR OFFICIAL USE ONLY TABLE OF CONTENTS Page No. I. THE ECONOMIC SITUATION in 1982-83 ......................... 1 It. REGIONAL PROGRAMS ... ....... ............ 4 A. Energy ..............*.*... .......... a.a........*....a....*..........4 B.- Agriculture........ C. Tourism ................**... *....... 66....**...** D. Private Sector Development ............................ 7 E. Export Promotion *.................................... 8 F. Transportation..................... a......a..e..e. 10 G. Regional Payments Support Fund ........................ 11 II1 . THE OECS COUNTRIES . .****..............#*.. L2 A. The Inter-Agency Resident Mission ..................... 12 B. The Staffing Gap .......aa.aaa.a. aaaaaaaaaa... aaa. *a .. 12 C. The East Caribbean Central Bank ....................... 13 IV. EXTERNAL FINANCING ..................... 15 V. FUTURE CGCED ACTIVITIES ....... ...... .... ........ e 19 ATTACHMENTS: 1. Country Notes .aaa... ...... ....... *...... 20 2. Statistical Appendix ...... .... .... ...... 27 This document has a restricted distribution and may be used by recipients only in the performance of their oMcial duties. Its contents may not otherwise be disclosed without World Bank authorization. 1. THE ECONOMIC SITUATION IN 1982-83 1. The international recession continues to generate serious problems for the economies of the Caribbean. Although world market prices of key exports such as bauxite/aljumina,bananas., and sugar appear to have stabilized and even, risen slightly frox the historically low levels of 1982, demand for these commodities,aad thus export earnings by the countries of the Caribbean remain weak with little prospect of a dyaamic recovery. Sugar prices remain below the costs %:t; production,often by a considerable margin, for virtually all countries in the region. Even the subsidized markets that exist in the United States and EEC are sat'pliedat a loss to the exporting countries. Bauxite markets appear extremely bleak as the decline in world steel demand has severely dampened the demand for Guyanese calcined bauxite, while the export volume of Jamaican bauxite fell by over 25% in 1982 in spite of significant stockpiling by the US Government. Only tourism held its own in 1982 as a result of a significant iLcrease in Jamaica which has now wore than recovered the sharp faLl in the Late i970s. 0ost other destinationsexperienced declines and have had to institute significant price cutting in order to maintain their tourist industries. Until early 1983, internationaLiafLation and escalating oil prices slowed the region's once relentless growth. 2. The linkage of the currencies of the Caribbean countries to the US dollar has further exacerbated the situation. It has driven real prices of Caribbean exports In EEC markets to new lows and has had a strong negatLve effect on tourism from these countries and Canada to the Caribbean. The fact that most of the imports of Caribbean countries are from the US has meant that the terns of trade have continued to decline. Sharp devaluations in major Latin American countries,moreover, have served to reduce further the competitiveness of Caribbean exports. Foreign financial assistance to the Caribbean has increased substantially since the CGCED was established in December 1977. It should be noted, however, that assistance requirementsincreased even faster, owing to the effects of the international economic situation. The recession has created pressures on the foreign assistance budgets of major donor countries, raLsing increasingly acute questions about the future supply of assistuace to the Caribbean. Aid programs to the Caribbean also now face--after the 1983 decline in oil prices--veryuncertain futures in both Trinidad and Tobago and Venezuela. 3. The adverse trend in the balance of payments of the Caribbean Countries was reflected in the growth performance of these economies. Real per capita income growth rates were lower In 198Z than In 1981; for Barbados, Belize, Jamaica, and Guyana, they were negatlve. While the world economy appears to have turned up slightly in 1983, this has been reflected very unevenly in Caribbean economies and for many of them 1983 may have been even worse than 1982. The fact that most of the Caribbean countries have stable, well-managed governments and that many of them embarked on the process of adjusting to a changed world economy several years ago, has mitigated somewhat the worst effects of the current internationaleconomic situation. Unlike the Latin American economies, most of the countries of the Caribbean do not have heavy burdens of commercial bank indebtedness. Nevertheless, significant problems of internationalliquidity, brought on by the virtual collapse of the -2- internationalmarkets for bauxite and alumina, have become manifest in Jamaica and Guyana. 4. Some signs of improvement irLthe economic situation of the Caribbean appear to have taken place in 1983. With the revival of the economy of the United States and price moderation in the tourist sectors of many Caribbean countries,has come some increased US demand for Caribbean tourisu. Tourist arrivals thus far indicate that 1983 may be a new peak for tourism. Ahtthe sane time, markets for other Caribbean exports are still in the doldrums. The Caribbean Basin Initiative (CBI) of the United States has provisions for stimulatinga great number of new exports from the region, but generally does not affect traditional exports. It ia of great importance that the countries of the reg.on draw up their respective plans of action for taking advantage of the CBI. Little if any results will come from passively waiting for trade to develop on its own. 5. While the CBI holds promise for the future, protectionismis rising in the United States. The number of cases now before the InternationalTrade Commission is ten times the level of just five years ago. While in the past most litigation concerned cases of obvious d4mopiigfrom Large industrialized countries, a finding was made in early 1983 against ISCOTT, the Trinidad and Tobago steel company, for dumping wire rods. The sane petitioners are now asking for very large countervailingduties to be levied against ISCOTT exports. The grounds for the petition include all types of government assistance,loan guarantees,pioneer status, industrialestates, and import duty relief. If the petition is granted, the implicat1onsfor Caribbean trade to the United States would be far reaching and would seriouslyjeopardize the potentiaL gains from the CBI. 6. Of great concern during the past two years has been the apparent weakening of the CARICOM system. There is now significantlyLess trade among the members of the community than there was in 1980 in spite of the trade preferences and the ready availabilityof supply inside the market. The general cause lies in the severe recession in the Caribbean, but three specific events have been dominant. First, as part of the plan to revive the Jamalcan economy in 1981, that country shifted from purchasing Guyanese rice to US PL480, presumably for reasons of price, quality, and, most importantly,financing. This exacerbated the deficit position of Guyana in the CARICOM4,greatly hampering the clearing facility. Second, significantviolations of the "rules of origin" (i.e., relabelling of non-CARICOMgoods) led to an increase in the inspectionand documentationrequirements, particularly in Trinidad. As many LDCs have always experiencedproblems in preparing adequate documentation,this has led to a sharp drop in their exports to Trinidad. Finally, in early 1983 Jamaica instituted exchange rate policies which were considered discriminatory against imports from CARICOM by some other CARICOM countries. Such countries reacted initiaLly by adopting retaliatorymeasures. While this issue was settled by negotiationsin May 1983, it made clear the need for high-level agreement among all CARICOM countries about the future of their regional cooperationschemes. After many years of having no formal meeting, the heads of Government have met twice in the past year, including a meeting on the Tenth Anniversary of the Treaty in Trinidad in July 1983. While the trying economic situation makes it more difficult to make substantial progress, it is absolutely essential that the system be made to function properly. 7. The system of exchange rates that prevails among the member states is of great importance to the future of CARICOM. It is now generally recognized that CARICOM currencies are on the whole overvalued with respect to their major trading partners. In the case of the OECS countries, this overvaluationis estimated to be about 20-25%. In the case of the other countries, the overvaluationis also severe, but quantificationof the extent of the overvaluationis more complex, because of a plethora of quantitative restrictionsand price controls. Certainly some of this overvaluationstems from the currenciesbeing tied to the US dollar and its own overvaluation,but there is significant evidence of exchange rate distortions beyond those of the dollar. Because of the