Bleak Outlook

Back in April, the IMF lowered its projections for economic growth in the region from the earlier 4.3% down to 3.5%. For some individual countries, the outlook was even bleaker: Jamaica’s present 1% was supposed to remain unchanged for 2013 and rise to just 1.5 per cent in 2017. Barbados’ figures were similarly depressed. This macro-indicator of economic performance was obviously troubling to the authorities in view of the negative social effects that would ensue.
Last week officials from the IMF, the Caribbean Development Bank (CBD), several heads of government, Finance Ministers, Central Bank Governors, etc. met in T&T “to discuss the challenges of low growth and high debt facing the Caribbean”. As a prefacatory context-setting observation, the joint IMF-CDB statement observed: The Caribbean region has important strengths on which it can build. Political stability, strong investor protections, and observance of the rule of law have made it an attractive destination for investment.
Because as a whole the latter statement has been true for the Caribbean, the notable exception of Guyana has often been overlooked. During the 70’s and 80’s, the rigging of elections by the PNC and the general political repression was overlooked by the above institutions even as the economy imploded accompanied by great social upheaval. In the present, the opposition, encouraged by their one-seat majority in the parliament, has precipitated riots in the interior township of Linden to demand priority treatment. There is a grave danger of this destabilising tactic spreading to other regions of the country and derailing the stellar growth rate projected: 3.8% – greater than the regional rate.
Sticking to its orthodoxy, the IMF statement recommended: “Countries with high debt ratios would benefit from pursuing fiscal adjustment steadfastly.” Meaning there ought to be a reduction in the governments’ primary budget deficits, which it can result from a reduction in government expenditures, an increase in tax revenues, or both simultaneously. Understatedly admitting that in the “context of weak growth (this) can be difficult to sustain”, the group announced conclusively that, “the cost of pursuing unbalanced policies can be more disruptive economically and socially than gradual and credible adjustments.” But is this necessarily so?
As one commentator noted, this question, which is occupying the undivided attention of the US, UK, Japan and Eurozone countries, is one “which continues to dominate the policy debate among economists. Rapid correction undoubtedly damages near term economic growth, but is intended to reduce the risk of a sovereign debt crisis coming suddenly out of the blue. Slow correction does the opposite. There is no theoretically “correct” policy on this. The result depends on how the near term loss of output should be weighed against the risk and consequences of a fiscal crisis, which is an empirical matter.” The bottom line is that we cannot blindly accept the IMF’s usual ‘one shoe fits all’ prescription.
This is especially pertinent when the fiscal adjustment mantra is viewed against their follow-up suggestion: “Protecting the poor and vulnerable groups should be central to reforms. Building on the social cohesion that prevails in the Caribbean, fiscal consolidation and structural reforms should also focus on improving social safety nets by making them more efficient and equitable to better target protection to the poor and vulnerable groups.” Where would the funds be coming from to fund these safety nets, when the World Bank and the IMF, having removed the Caribbean from the Lesser Developed Country (LCD) category (excepting Haiti), have now effectively increased their financing costs?
The increasing interconnectedness of our financial system (remember CLICO) will make us increasingly vulnerable to financial contagion and the forum recommended greater integration of the region’s regulatory framework. The most practical observation came from London University Prof Victor Bulmer-Thomas. Demand for the Caribbean’s products from the US and Europe decrease. The region must diversify into non-traditional services like medical tourism and increase intra-regional trade and that with the BRIC nations.