on the economic growth of the caribbean region: concepts and features

On the Economic Growth of the Caribbean Region: concepts and features.

Based on work by Rodrigo Fuentes (Catholic University of Chile), Karl Melgarejo and joint work with IDB

Caribbean Economics Team

Presentation for the 5th Biennal International Business and Finance Conference, Port of Spain, Trinidad

May 2, 2013

Outline: how to approach the problem

• Stylized facts and what we know from the literature

• Evidence based on four characteristic:– Small size of the economies– Lack of diversification (related to small size) and

volatility– Vulnerable: susceptible to natural disasters– Highly indebted

• Growth in more recent years, and possible policy space.

All of the Caribbean countries have small populations—but differ greatly in terms of per-capita income. Per-capita income about average relative to larger peers and small states.

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0

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10000

15000

20000

25000

30000

35000

40000

0 500000 1000000 1500000 2000000 2500000 3000000

GDP

per c

apita

(USD

)

Population

T&T

Barbados

JamaicaGuyana

SurinameBelize

St. Vincent and the Grenadines

The Bahamas

St. Kitts and Nevis

Antigua& Barbuda

GrenadaSt. Lucia

Dominica

A fairly diverse crowd for major non-OECS countries

The Caribbean countries are losing ground against the U.S., and the slowdown is structural in nature

• OECS/ECCU countries ’ growth has slowed down in the past 20 years.

• Commodity exporters (TT, Suriname, Guyana) doing better in recent years, but GDP is extremely volatile.

• ‘Other Caribbean’ (The Bahamas, Barbados, Belize and Jamaica) have a structural growth problem, losing ground for 30 years--even against the U.S..

• There is evidence of a productivity slowdown.

5

Ratio of ECCU 1Ratio of other Caribbean 2Ratio of commodity exporters 3

Recent papers on economic growth pertaining to the Caribbean using a large sample of countries• Determinants of growth:

– Loayza, Fajnzylber and Calderon (2005). Structural reforms, external conditions and stabilization policies are key determinants of growth in LAC region

• Growth and public debt: – Calderon and Fuentes (2012). Negative effect of public debt on

growth, but outward oriented policies and good domestic policies ameliorate the effect.

• Small-country issue: – Easterly and Kraay (2000): No effect of small size on growth,

vulnerability related to openness, so positive • Vulnerability:

– Armstrong and Read (2004). Charveriart (2000). Conflicting results, no clear effect

Recent papers on economic growth using a large sample of countries (continued)

• Tourism:– Sequeira and Nunes (2008). Positive effect of tourism on

growth • Tourism and other factors:

– Thacker and Acevedo (2010). Growth is positively related with tourism and negatively with volatility (period 1979-2007). Public debt is negatively associated with growth and increases volatility.

– Thacker, Acevedo and Pirelli (2012). Country size and the condition of being island are negatively related to growth. Tourism ameliorates the effect of small island conditions. TFP explain an important part of growth in the region

Recent papers using data exclusively from Caribbean economies

• Sources of growth– Peters (2001). Negative impact on growth of inflation, population

growth and government spending. Positive impact on growth of investment, education, life expectancy, trade liberalization, financial development and IT.

– Kida (2005). TFP is the main contributor to economic growth. Macroeconomic environment, quality of institutions and microeconomic efficiency are key for TFP growth.

– ECLAC (2009). Capital and TFP are the main contributors to growth in 70’ and 80’, and labor in the 90’.

• Public debt on growth– Greenidge et al (2012). Negative effect of public debt on growth

when surpassing a threshold of 56%. Nonlinear relationship.

Recent paper using data exclusively from Caribbean Economies (continued)• Structural transformation

– Hausmann and Klinger (2009). The structural change in the matrix of production is a determinant for growth. Current production matrix is “backward” and is unlikely to change to more sophisticated product. Integration allows a more diversified and sophisticated export matrix. The study does not include services.

• Vulnerability, natural disaster– Crowards (2000): Natural disasters reduce growth in the second and

third year after the date of the disaster.• Financial crisis, cycle

– Kuoame and Reyes (2011). Caribbean countries experienced a strong reduction in the growth rate due to the 2009 international crisis. They tend to amplify the business cycle of the US economy

To find structural breakpoints we estimate the stochastic process of GDP per capita, which is an AR(2) with a deterministic trend

But no relationship between breakpoints and natural disasters: example of Trinidad and Tobago Trinidad and Tobago

TestBreak DatesPeriodsLong run growth rate -0.009 (0.037) 0.005 (0.000) -0.005 (0.002) -

1962 - 1981 1982- 1989 1990 - 2009 2010 - 2011

UDmax=42.78** ; SupFT(2/1)=21.8** ; SupFT(3/2)=21.8** ; SupFT(4/3)=11.6

1981 ; 1989 ; 2009Year Type Name KilledTotal

Afected

Estimated Damage (% GDP)

1963 Storm Flora 24 4.4%1974 Storm Alma 2 50,000 0.2%1997 Earthquake 17 0.4%2004 Storm Ivan 1 560 0.0%

Trinidad y Tobago (1960 - 2011)

Source: EM-DAT: The OFDA/CRED International Disaster Database

Notes: In the first row, the first indicator shows the results of the test of no break against one break, while the second and third inidcators shows the tests of two breaks against one break and three breaks against two breaks, respectively. Significant at the 5 (**) or 10(*) percent levels. Estandar errors in parenthesis.

Source: WDI, The World Bank

Source: Author’s estimation using Bai -Perron (1998, 2001) method and World Bank data

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1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010year

GDP Per Capita(index 2000=100)

1

23

4

We decomposed actual from projected growth into policy and institutional factors for pre-crisis era:

Small size: how much does it matter for growth?• Small economies grew equally or more than the rest up to 2000 (Easterly and

Kraay) generally because small economies are more open than large ones and this has a positive effect on growth.

• But recently small economies have not done as well, with microstates (population below 1 million) doing significantly worse than larger peers.

• Economies of scale an issue—but controlling for labor, it goes away (related to migration?)

• Alesina et al (2005) provides a model in which the benefits (i.e. economic growth) of trade openness and economic integration are larger, the smaller the size of a country.

• IMF finds that small countries are affected by the limited economies of scale, as the public sector has to over-extend itself, financial sectors are somewhat shallow and finance a large portion of the government. Trade is also more costly, particularly the more remote.

• Still a puzzle about the scale: trade can also be more costly. At what level of ‘size’ does it begin to matter?

The Caribbean (CCB) has continuously lost ground in the last 30 years relative to other small economies.

4060

8010

012

014

019

71=1

00

1970 1980 1990 2000 2010Year

Real PPP GDP Per Capita Relative Index (CCB/Small Econ.)Nominal PPP GDP Per Capita Relative Index (CCB/Small Econ.)

Source: PEN World Tables

(Index 1971=100)GDP Per Capita: Caribbean relative to Small Economies

2040

6080

100

1971

=100

1970 1980 1990 2000 2010Year

Real PPP GDP Per Capita Relative Index (CCB/Small Econ.)Nominal PPP GDP Per Capita Relative Index (CCB/Small Econ.)

Source: PEN World Tables

(Index 1971=100)GDP Per Capita: Caribbean relative to Small Economies

Commodities exporters Tourism dependent

Not only the observed growth but also the potential that has been lower than that of other small economies in the last 30 year. We also found that the volatility of the potential growth has risen in the last decade.

0.5

11.

52

Gro

wth

Vol

atili

ty

-.50

.51

1.5

Pot

ent.

Gro

wth

1980 1990 2000 2010For the last 10 years

Potential Growth Growth Volatility

Note: CCB countries are excluded from the group of Small Economies

(1971-2010)Caribbean relative to Small Economies

The exposure to natural disasters decreases with the size of the economy; i.e. smaller economies have a higher exposure to natural disasters.

Lack of diversification by trading goods and by trading partner exacerbate external shocks for open economies (all countries except Jamaica have de-facto fixed exchange rates).

0.20

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0.80

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1.20

1.40

1.60

20%

30%

40%

50%

60%

70%

80%

90%

100%

Dominica Barbados Grenada St. Vincent and The

Grenadines

Suriname Antigua & Barbuda

St. Lucia Trinidad and Tobago

Belize Bahamas Guyana Jamaica St Kitts and Nevis

Three Main Exports (% Total Exports)Exports to US, Canada and Europe (% Total Exports)Trade Openess

17

..and relatively speaking, small economies’ GDP is more volatile.Many factors help increase the volatility of the GDP in small economies, and the Caribbean countries also show a high degree of volatility relatively to the rest of small economies

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

CCB ROSE ROW OECS

GDP Growth(coefficient of variation / 1990-2010)

Larger incidence of external shocks and skewed towards negative zone, and smaller buffers with which to deal with them.

Median shock and its distribution, average, 1990-2011

Policy buffer index combines the primary fiscal balance, public debt, the current account of the balance of payments net of direct foreign investment, foreign reserves in months of imports, and the inflation rate .

External Shocks

…which has led to indebtedness problems.

The smaller, the bigger…. Gross public debt is bigger in small economies

-19.1

30.9

80.9

130.9

180.9

10.0 12.0 14.0 16.0 18.0 20.0

Gros

s Pub

lic D

ebt (

% G

DP) (

aver

. 90-

11)

Log (Population)

Small Economies

Source: IMF

Among the CCB countries 3 out of 6 (50%) are located in the positive growth zone; while among the Small Econ. 10 out of 17 (59%) are in the positive zone. The highest level of debt ratio in CCB countries is 140%; while for Small Econ. Is just 99%

-1000.0

-800.0

-600.0

-400.0

-200.0

0.0

200.0

0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170

Economic growth

Debt to GDP ratio

Inverted U debt curveCaribbean CCBOECSSmall Econ.

0

PositiveGrowth

NegativeGrowth

SurinameTrinidad & Tobago

The Bahamas

GuyanaBarbados

Jamaica

ZeroGrowth

Stylized Shape of the Threshold Effects of Public Debt on Growth

Source: Greenidge et al. (2012) IMF.

2.- Is the high level of indebtedness?

Estimated Loss in Real GDP Growth (In Percentage Points)

Source: Greenidge et al. (2012) IMF.

• CCB countries have the highest losses!

Indebtedness has led to large losses, according to Greenidge and others.

CCB also does worse on competitiveness relative to small economies

0.70

0.75

0.80

0.85

0.90

0.95

1.00Competitiveness (2011-2012)

Basic Requeriments

Institutions

Infrastructure

Macroeconomic Env.

Health & primary edu

Efficiency Enhancers

Innovation and Sophistication

CCB vs. Small Econ.: Competitiveness Indicators (relative ratios)

CCBSmall Econ.

- Overall score

- 1st Pilar

- 2nd Pilar

- 3rd Pilar

Source: WEF

More recent impacts and effects on policy options..

24

Long-run output is mostly explained by a few external variables for the 6 Caribbean countries.

US GDP UK GDP EU GDP oil price gold pricepercentage point permanet change in real GDP

Tourism exportersBahamas 0.02 -0.018Barbados 0.038 -0.02Jamaica 0.007 -0.017

Commodity exportersGuyana 0.003Suriname 0.005 * 0.04Trinidad and Tobago 0.04 0.045

1/ elasticity is defined as the permanent percentage change of the country's real GDP as a resultof a 1 percent change in the variable in each column* elasticity becomes negative after 9 years

Explaining the Trend in Real Output: just a few global factors explain the majority of output movements of Caribbean countries.

Results from Vector-Error Correction Model: Long-run elasticities 1/

The 2007-08 global recession had a detrimental effect on growth.Simulations: CCB Growth Assuming Global Recession had not happened. (Actual and IMF pre-recession projections, Index 2004=100)

26

90

95

100

105

110

115

120

125

130

135

2004 2005 2006 2007 2008 2009 2010 2011 2012

Caribbean Tourism exporting Countries' Real GDP:

BahamasBarbadosJamaicaWithout 2007 crisis (dashed lines)

90

100

110

120

130

140

150

160

170

2004 2005 2006 2007 2008 2009 2010 2011 2012

Caribbean Commodity-exporterting Countries' Real GDP

Guyana Suriname

Trinidad and Tobago Without 2007 crisis (dashed lines)

Can fiscal policy improve growth performance in the CCB countries?• We estimate the following for our countries using annual data:

• Where gt and yt are the cyclical components of government expenses and output. First refers to fiscal stance, second to expansionary policy.

We found that, with the exception of Barbados, the fiscal multiplier related to capital expenditures is smaller than that for current expenditure (0.13 vs. 0.36 in average) and that the fiscal policy is highly pro-cyclical.

More importantly, investment expenditures react more aggressively to the output cycle than current expenditures, suggesting that public investment constitutes a more active policy tool than public consumption.

27

𝑔𝑡 = 𝛽𝑦𝑡 + 𝜀𝑡 𝑦𝑡 = ∅𝑔𝑡 + 𝜇𝑡

C I C + I C I C + I0.76 0.27 0.82 1.31 3.76 1.21

(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

0.13 0.04 0.13 7.71 17.99 7.73(0.002) (0.194) ( 0.031 ) (0.005) (0.262) (0.052)

0.15 0.07 0.23 2.95 13.96 3.43(0.055) (0.000) (0.005) (0.039) (0.000) (0.002)

0.41 0.15 0.32 2.37 6.55 3.11(0.001) (0.000) (0.000) (0.004) (0.000) (0.000)

-0.34 0.13 -0.77 -2.90 7.67 -1.25(0.000) (0.002) (0.244) (0.000) (0.001) (0.019)

0.86 -0.10 -0.28 0.96 -4.45 -1.38(0.024) (0.017) (0.039) (0.005) (0.018) (0.040)

Guyana 2000-2011 Trade partners growth, 6 months T-bill yield and first lag of each one

Trade partners growth, 6 months T-bill yield and first lag of each one

Fiscal multiplier (φ) Fiscal stance (β)Instruments

Barbados 1990-2011 Trade partners growth, 6 months T-bill yield

1990-2011

2001-2011

1990-2011

Trade partners growth, 6 months T-bill yield

Trade partners growth, 6 months T-bill yield

Trade partners growth, 6 months T-bill yield and first lag of each instrument and dependent var.

Bahamas

Jamaica

Suriname

T&T

1990-2011

Period

Conclusions

Small economies have not grown as quickly as its larger peers in the last few years

Lower growth in the Caribbean is only partially explained by being ‘small and vulnerable’. Its indebtedness and neighborhood may have played a role.

Few policy buffers and issues with competitiveness are at the heart of the problem. But even with buffers, multiplier effect is negligible.

29

Thank you

The Bahamas


The BahamasTestBreak DatesPeriodsLong run growth rate

UDmax=18.34** ; SupFT(2/1)=9.54

-0.028 (0.033) 0.006 (0.003)

19761962 - 1976 1977 - 2011


Year Type Name KilledTotal

Afected


1992 Storm Andrew 4 1,700 6.7%1999 Storm Floyd 1 7.5%2004 Storm Frances 2 8,000 14.1%2007 Storm Noel 1 7,0002011 Storm Irene 10,000 0.5%

The Bahamas (1960 - 2011)



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1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010year


1

2 34

5

Barbados





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100

GD

P p

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WD

I

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010year


BarbadosTestBreak DatesPeriodsLong run growth rate

UDmax=17.18** ; SupFT(2/1)=6.68

0.060 (0.005) 0.011 (0.001)

19721962 - 1972 1973 - 2011


Afected


1980 Storm Allen 5,007 0.1%1987 Storm Emily 230 5.9%2002 Storm Lili 2,000 0.0%2004 Storm Ivan 1 880 0.2%2010 Storm Thomas 2,500

Barbados (1960 - 2011)

12

3

45

Guyana


Afected


1997 Drought 607,200 2.5%2005 Flood 34 274,774 35.4%2006 Flood 35,000 11.6%2008 Flood 100,0002010 Drought 0.7%

Guyana (1960 - 2011)




GuyanaTestBreak DatesPeriods 1962 - 1975 1976 - 1991 1976 - 2011Long run growth rate

UDmax=41.75** ; SupFT(2/1)=30.43** ; SupFT(3/2)=5.55

0.018 (0.003) -0.020 (0.003) 0.018 (0.005)

1975 ; 1991


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100

120

GD

P p

erca

pita

WD

I

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010year


12

3

4 5

JamaicaJamaicaTestBreak DatesPeriodsLong run growth rate

1968 - 1974 1975- 1986 1987 - 1995 1996 - 2011

UDmax=949.3** ; SupFT(2/1)=19.5** ; SupFT(3/2)=23.8** ; SupFT(4/3)=9.2

0.049 (0.008) -0.018 (0.007) 0.036 (0.008) 0.005 (0.002)

1974 ; 1987 ; 1995Year Type Name KilledTotal

Afected


1979 Flood 40 210,0001986 Flood 54 40,000 3.2%1988 Storm Gilbert 49 810,000 31.4%1991 Flood 15 551,340 0.7%2004 Storm Ivan 15 350,000 5.8%

Jamaica (1960 - 2011)





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110

GD

P p

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WD

I

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010year


13

2

4

5

SurinameSurinameTestBreak DatesPeriodsLong run growth rate -0.029 (0.004) 0.037 (0.019)

19901977 - 1990 1991 - 2010

UDmax=108.12** ; SupFT(2/1)=12.49


Afected


1969 Flood 4,600 0.0%2006 Flood 3 25,0002008 Flood 2 6,548

Suriname (1960 - 2011)





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160

GD

P p

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1975 1980 1985 1990 1995 2000 2005 2010year


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3

on the economic growth of the caribbean region: concepts and features

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