Essays on the impact of export earnings instability on growth, investment, the balance of payments and external debt in the Caribbean

This thesis contains four essays that investigate export earnings instability in the Caribbean. The investigation of this topic begins by exploring the causes of export earnings instability and extends to the impact this has on key macroeconomic variables in the economies of Caribbean countries, namely growth; investment; the balance of payments, and external debt. The first essay focuses on calculating the level of export earnings instability, exploring which group of exports contribute most to the level of instability and investigating the causes of export earnings instability for 15 Caribbean countries. The main findings of the study indicate that export earnings instability in the Caribbean is relatively stable when compared to other small island developing countries. In addition, the analysis produces results that are consistent with the literature on the causes of export earnings instability in developing countries. Specifically, the results show that the share of raw material exports in total exports and commodity concentration are the main causes of export earnings instability in the region. The second essay examines whether in addition to the conventional determinants of economic growth, export earnings instability affects economic growth in the region. The findings of the essay show that while investment and export growth are positive contributors to economic growth, export earnings instability reduces economic growth in the region. The study estimates that a one standard deviation increase in export earnings instability reduces economic growth by an average of 0.035 percentage points. This result underlines the importance of addressing export earnings instability in the Caribbean in order to foster economic growth and development. The third essay studies the determinants of private investment in the region and tries to ascertain whether export earnings instability makes a difference to the behaviour of private investment in the Caribbean. The findings in this essay show that the level of investment in the Caribbean is driven by real GDP growth and the availability of credit (credit to the private sector). In addition, contrary to the relationship outlined in the theoretical literature, the real interest rate is insignificant. Export earnings instability does not seem to have a statistically significant effect on private investment at the regional level. The fourth essay uses conventional export and import demand functions to ascertain the drivers of the balance of payments and the effect of export earnings instability on the balance of payments. In addition, the essay tries to assess the determinants of external debt and the influence of export earnings instability on the level of external debt. The main findings are: (i) the current account and trade balance are negatively related to domestic income growth and positively related to world income growth, as theory predicts; (ii) the real exchange rate has a positive and significant effect on the current account balance but no statistically significant effect on the trade balance; (iii) the current account has a negative effect on external debt, while the debt service ratio has a positive relationship effect on external debt; and (iv) export earnings instability does not seem to have a statistically significant effect on the balance of payments or external debt in the Caribbean