Ewart Williams: Restoring competitiveness and growth in the Caribbean
Feature address by Mr Ewart Williams, Governor of the Central Bank of Trinidad and
Tobago, at the 4the Biennial International Business, Banking and Finance Conference,
University of the West Indies, St Augustine, 22-24 June 2011.
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Salutations:
Let me first of all thank the sponsors for their kind invitation to deliver the feature address at
this 4th Biennial International Business, Banking and Finance Conference. The organizers
need to be commended for bringing together such an excellent group of academics and
practitioners from the region and further afield to exchange views with us on - many
hot-button economic issues. This forum is particularly timely since our Caribbean economies
find themselves at a critical inflection-point, with the legacy of the international financial
crisis not yet behind us and with our region facing a global environment, which in many ways
is markedly different from what obtained at the beginning of the last decade.
A few days ago in its mid-year World Economic Outlook assessment, the IMF warned that
the global economy had run into a speed-bump arising from greater than anticipated
weakness in US economy and renewed financial volatility arising from concerns about the
depth of fiscal challenges in the euro area periphery - particularly, the Greek debt problem.
The IMF report noted that although emerging market economies in Asia and Latin America
continue to experience robust growth, they are now facing the risk of over-heating with
inflation increasing at a faster rate than could be explained by rising commodity and food
prices.
Our Caribbean economies are still digging themselves out of the global crisis of 2008 and
unfortunately the recovery of the region is lagging behind that of other developing countries.
This most recent slide is, however, part of a longer-term trend in which countries in the
region have not been keeping pace with growth rates in emerging markets around the world.
According to the World Bank statistics, in 1980, the Caribbean's average per capita income
was twice as high as the average for developing countries; today it is only a third higher.
Countries in the region have been growing at an average rate of 2 per cent per year while
small island states have been growing at an average rate of 3.6 per cent per year, roughly
the average for the world economy.
As we seek to reverse this trend and address the challenge of long-term viability, the region
faces the reality that it has lost some comparative advantage at a time when the global
economy has become less friendly. The following examples are worth noting:
(i) First, the traditional preferences for bananas and sugar are now practically at an end
and the region still finds itself unable to compete with lower-cost producers;
(ii) Second, foreign aid flows to the region (with the exception of Haiti) have all be dried
up;
(iii) Third, while Caribbean tourism continues to be a viable brand, the region is facing
stiffer competition from Asian destinations and will experience even greater
competitive pressure when Cuba is fully opened up (as it could in the not too distant
future); and
(iv) Fourth, the prospect of continued high unemployment in the US and the UK for the
next 2 - 3 years will have implications for workers' remittances which are very
important to some Caribbean economies.
To add to these exogenous factors, most countries in the region already have unsustainably
high debt burdens, which limit the extent to which government spending could lead the
recovery.
One could argue that Trinidad and Tobago represents an exception from this theme, given
our energy resources, our stronger public finances and our much lower public debt burden
which gives us more room to manoeuvre. We should be careful however of pushing that
argument too far since (i) our proven energy reserves are fast dwindling (though some
experts think that prospects for new discoveries are high); and (ii) our fiscal space is being
steadily reduced, the more the private sector activity remains subdued and government steps
in to lead the recovery. While public sector indebtedness is still at a comfortable level, it too
is increasing rapidly to meet the high cost of the CLF/CLICO bailout.
Let me put our (Trinidad and Tobago's) challenge in another context which further
underscores the problem. In the period 2002-2006, real GDP increased at an annual rate of
close to 10 per cent based on an annual growth of 16.7 per cent in the energy sector and
5.6 per cent per year in the non-energy sector. Energy sector growth was based on higher oil
production and on the expansion of the downstream production capacity - particularly
Atlantic LNG Trains 2, 3 and the M5000 Methanol plant. The current prospects are for a
continued decline in oil production (until there are new finds) and except for planned
Melamine plant (the AUM), no significant increase in downstream capacity is envisaged over
the next few years, this would imply that energy sector growth would revert to lower, more
sustainable levels leaving the non-energy sector to carry more of the medium-term growth
burden. This makes a credible diversification strategy not merely a policy option but an
urgent necessity.
The bottom line is that the entire region needs to embark on a new private-sector-led growth
strategy to ensure medium-term economic viability.
Clearly, each country in the Caribbean faces its unique challenges in terms of its capacity to
spur private sector investment. For example, the pre-conditions for attracting investment in
the extractive industries in Trinidad and Tobago, Guyana and Suriname are different from the
steps that are needed to promote investment in the on-shore sectors. And these are different
from what is needed to promote tourism investment in Barbados or in the OECS. There are
however some common challenges and some common approaches which are worthy
of consideration by all the countries in the region.
One challenge faced by the entire region is the need to reverse the decline in productivity
and competitiveness which has occurred in recent years. The most egregious example of our
competitive disadvantage is the banana industry, where the yields of our major producers
- St. Lucia, Jamaica or Dominica - range between 20 - 25 per cent of the most efficient Latin
American producers. But there are numerous other examples. For example the 2011 "Doing
Business Report" (published by the World Bank and IFC) ranks 183 countries in terms of
their business facilitation environment. Among all countries, Jamaica and Trinidad and
Tobago - the two largest CARICOM members - were ranked 81st and 97th, respectively.
Suriname was ranked 161st. For the sub-category "registering property"; eleven of the
thirteen countries had a ranking greater than 105 for the sub-category "closing a business"
and five of our CARICOM countries tied for the lowest ranking in the world.
The Global Competitive Index for 2010-2011 shows Barbados ranked at 43rd and the rest of
the Caribbean ranked between 84th (Trinidad and Tobago) and 110th among 139 countries.
One explanation for our lack of competitive edge is the fact that the Caribbean is lagging
behind in terms of access to information technology and affordability. In 2008, it was
estimated that broadband penetration in the region was below 8 per cent compared with over
30 per cent in OECD countries. World Bank data also indicate that the cost of broadband
services in the region is close to three times the price in the US and seven times the price in
the UK.
Technology played an important role in the take-off of Singapore, Cyprus, Mauritius and
other successful small economies by making business and government services more
efficient. A concentrated focus on technological development will greatly facilitate business
competitiveness in the region.
In addition to business facilitation, regional governments could contribute to the resurgence
of the private sector through disciplined management of the public finances. And this has
many aspects. Obviously, one important aspect is avoiding sizeable fiscal deficits so as
not to crowd out the private sector and to contain public debt burdens.
Good public sector management also implies allocating sufficient resources to infrastructural
development, education and health - areas that are critical for private sector development. In
many cases, a business-friendly government expenditure policy could imply difficult
socio-political trade-offs involving expenditures on subsidies and transfers. As I noted earlier,
several countries in the region already have excessive debt burdens which sometimes force
expenditure adjustments to fall disproportionately on critical public investment.
In our university councils, we are at pains to underscore the importance of UWI as a regional
university. Regionalism is even more important in our economic sphere and deeper regional
integration is absolutely critical for our economic survival.
In delivering the William Demas Memorial Lecture last month, the Managing Director of the
World Bank put her finger on this delicate issue as follows:
"From my experience in Africa, (she said), I appreciate very well the
sensitivities around deeper integration. At first glance, it might well seem
that whatever one country wins, another loses. Free movement of people,
for instance has created concerns in all regions that are seeking deeper
integration. But regional integration is the only viable way to create scale for
your economies."
We absolutely need to move beyond pious statements and seriously pursue what C. Y
Thomas calls a model of "Open Regionalism", based on an outward-looking
market-oriented framework in which the private sector is expected to take the lead. In
addition to the liberalization of trade in goods and services, this model involves the free
movement of labour and capital, a regional strategic sectoral plan, the adoption of a
harmonized investment code and the development of a regional capital market.
Greater integration along these lines could be a critical input in improving competitiveness.
For example:

labour mobility within the region has the potential to improve skill and wage
arbitrage;

co-ordinated investment promotion could make the region more attractive for foreign
investment and reduce the fiscal cost attached to expensive and sometimes
wasteful tax concessions;

regional planning could facilitate the exploitation of production integration
opportunities, through clusters of economic activities; and

the integration model also presents opportunities for joint marketing in extra-regional
markets, joint research and development, and joint purchasing arrangements.
If the focus of our regional development strategy is the private sector, the sector would need
to undergo a cultural re-orientation. Foreign direct investment to the region has been on a
steady decline over the past several years. While policy changes may help to reverse this
decline, countries should also think about diversifying their targets for investment promotion,
with the BRICs registering the fastest growth in the global economy they must be potential
sources of foreign direct investment. So also must be Brazil.
Some people feel though that our domestic private sector needs to be more aggressive, to
get beyond their comfort zone, and to be more prepared to take risks. This is of utmost
importance since the country is depending on our entrepreneurs to expand, create jobs and
contribute to the general welfare.
In this context, there is a case for targeted partnerships between the private sector and
government to enhance international competitiveness, to identify and promote opportunities
for greater economic diversification and to develop new export markets. These partnerships
should also incorporate tertiary educational institutions that must be at the center of our
efforts to promote research and development.
Unfortunately, I have spent my entire time outlining the many challenges that the Caribbean
economies face in their quest for sustainable growth over the medium-term. But these
challenges are not destiny and difficulties can become opportunities for change. Our region
is at a cross-road of opportunity where the right combination of leadership, vision and
commitment is needed to overcome a plethora of challenges. I am convinced that closer
regional integration must be part of the solution and then we would need partnerships
between the public and private sectors and other stakeholders including labour and our
tertiary education. We need all hands on deck.