Economic Survey of the Caribbean 2004-2005
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LIMITED LC/CAR/L.52/Rev.1 21 October 2005 ORIGINAL: ENGLISH ECONOMIC SURVEY OF THE CARIBBEAN 2004-2005 __________ This document has been reproduced without formal editing. Table of contents Executive summary......................................................................................................................... 1 I. Regional overview....................................................................................................................... 3 1. Caribbean economic performance in 2004 ..................................................................... 4 2. The external sector........................................................................................................ 12 3. Fiscal performance and policies.................................................................................... 19 4. Monetary policy............................................................................................................ 25 5.Trade negotiations.......................................................................................................... 29 II. Analysis of selected topics.................................................................................................... 34 Caribbean labour markets: Challenges and policies ......................................................... 35 Labour market policies ..................................................................................................... 49 Conclusion ........................................................................................................................ 52 III. Country briefs ......................................................................................................................... 53 Aruba................................................................................................................................. 54 The Bahamas..................................................................................................................... 59 Barbados ........................................................................................................................... 65 Belize ................................................................................................................................ 71 British Virgin Islands........................................................................................................ 77 Guyana .............................................................................................................................. 82 Jamaica.............................................................................................................................. 88 Netherlands Antilles.......................................................................................................... 95 Member States of the Organisation of Eastern Caribbean States (OECS) ..................... 101 Suriname ......................................................................................................................... 108 Trinidad and Tobago....................................................................................................... 114 United States Virgin Islands ........................................................................................... 120 Executive summary Average real GDP growth of around 4%, with declining inflation and unemployment, indicate a very satisfactory economic performance of the Caribbean in 2004. The outlook for 2005 suggests only a modest slowdown of these positive trends. It would be the third year in a row of steady growth. The economic bonanza in the Caribbean is underpinned by strong external demand for tourism services, high prices for commodity exports and low international interest rates. The Caribbean countries, whose exchange rates are either pegged or otherwise closely related to the United States dollar, have benefited as a tourism destination in 2004 from the depreciation of the United States dollar, vis-à-vis the Euro and currencies in Latin America. The analysis of trends in the real economy puts Caribbean countries in three groups: service-oriented, commodity-based and mixed or bipolar economies. As a group, the Caribbean economies obtain their inflow of foreign exchange in almost equal parts from services and goods exports. The commodity exporters also contain a small but highly dynamic services exports sector, but the service-oriented economies do not generally have a successful goods exporting sector. In the bipolar or mixed economies, exports of goods grew at a rate three times higher than exports of services. The fiscal performance of Caribbean countries shows stark contrasts. Jamaica continued its severe adjustment policy and is on track in bringing the deficit under control, whereas Trinidad and Tobago faces the luxury problem of how to use the current bonanza to strengthen the base for long-term growth. Many small countries suffer the fiscal consequences of high deficits inherited from the past, especially from excess spending in the 2001-2002 crisis years. Some, but not all, have been able to reduce the deficits. The political cycle plays an important role witnessed, for example, by Suriname’s expansionary fiscal policy leading up to the elections. Also, the upcoming Cricket World Cup in 2007 casts its shadows forward and may bring fiscal deficits up again in 2005 and 2006. Monetary policies are also quite contrasting, beginning with the different exchange rate regimes in existence. In some countries with more prudent fiscal policies, monetary policy could be used to stimulate economic activity by bringing interest rates down. In others, monetary policy faced the task of reigning in the pressures on the balance of payments and interest rates tended upwards. In all, the contrasting fiscal and monetary policies pose the question of how regional integration can be deepened in the absence of a coordinated macroeconomic policy approach. The outlook for 2005 and 2006 is generally positive, although it is doubtful whether the 4% real GDP growth of the 2003 and 2004 years can be repeated. Demand for tourism services is bound to be less dynamic, also due to the changing trend in the United States dollar-Euro parity. The increase in oil prices should bring more pressure on the balance of payments. 2 A second section of this report analyzes the challenges facing labour markets in the region over the past decade with a view to specifying policies and programmes aimed at meeting these challenges. It identifies youth unemployment, the mismatch between the educational system and the needs of the labour market, low levels of labour productivity coupled with relatively high wages and the emigration of skilled persons from the region (‘brain drain’) as main challenges that member States are facing and explains the measures that will be required to address these issues. The analysis underlines the need to restructure and refocus the education and training system to promote a dynamic labour market capable of meeting the needs of workers and employers. It also calls for the establishment of productivity agencies, the promotion of social partnerships and the strengthening of labour market institutions with revised labour laws and strategic plans. The third section of the report presents detailed country studies on each of the member States; a complete set of statistics is provided in an accompanying cd-rom. 3 I. REGIONAL OVERVIEW 4 1. Caribbean1 economic performance in 2004 1.1. GDP growth The Caribbean had in 2004, on average, a second consecutive year of positive real GDP growth of 4% (4.2% in unweighted average and 3.8% in weighted average) and prospects for 2005 suggest that growth continues, albeit at a slightly lesser pace. The region thus has overcome two years of near zero growth (2001-2002) to regain the growth rate of 1995-2000 (See Box 1). Table 1 GDP Growth Nominal US$ GDP Real GDP growth growth 2003 2004 2003 2004 Anguilla 3.3 14.0 4.5 16.3 Antigua and Barbuda 5.5 5.2 5.7 6.7 Aruba 1.6 3.6 0.7 5.2 the Bahamas 1.9 2.8 1.9 4.2 Barbados 3.7 4.5 3.8 3.4 Belize 9.0 4.2 6.5 13.9 British Virgin Islands -1.6 6.6 Dominica -0.3 3.5 0.2 4.7 Grenada 5.8 -3.0 7.2 -0.4 Guyana -0.6 1.6 0.9 5.6 Jamaica 2.3 1.2 - 3.3 7.8 Montserrat -0.8 4.5 2.2 5.9 Netherlands Antilles 1.4 1.0 3.3 2.6 St. Kitts and Nevis 0.6 5.1 2.4 9.0 St. Lucia 2.9 3.6 4.8 4.7 St. Vincent and the Grenadines 3.4 5.4 3.4 7.9 Suriname 5.4 6.8 18.2 15.5 Trinidad and Tobago 12.6 6.4 18.6 8.6 United States Virgin Islands 3.1 3.0 5.4 5.0 Unweighted average 3.1 4.2 4.5 7.0 Weighted average 5.2 3.8 6.4 6.7 Source: ECLAC, on the basis of official data As can be gleaned from Table 1, real GDP growth accelerated in 11 of 18 countries; on average, these 11 countries saw an increase from 1.6% to 5.2% growth between 2003 and 2004. In seven countries growth declined. It must be noted that in the cases of Belize and Trinidad and Tobago, the 2003 growth rate appears high: 9% and 12.6%, respectively. In both cases, these numbers for 2003 were influenced by a change in base year of the national accounts. Growth in 2004, although still strong, could not match the extraordinary numbers of 2003. 1 In the context of this report, the Caribbean refers to the member countries of the Caribbean Development and Cooperation Committee (CDCC), except its Spanish and French speaking members (Cuba, Dominican Republic, Haiti and Puerto Rico). In all, the 19 countries listed in Table 1 are considered. 5 The slowdown of growth in Jamaica and the actual decrease