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Session I

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  • 1. The Global Economic Crisis and Caribbean States: Impact and Response* Andrew S Downes PhD Professor of Economics and Director Sir Arthur Lewis Institute of Social and Economic Studies University of the West Indies, Cave Hill Campus PO Box 64, Barbados *Presented at Commonwealth Secretariat Conference on the Global Economic Crisis and Small States, London, July 6-7, 2009
  • 2. Structure of Presentation • Nature of the Global Crisis • Impact of the Crisis on the Caribbean • Response of the Caribbean • The Way forward
  • 3. 1 Nature of the Global Crisis • The proximate roots of the current global economic crisis lie in the collapse in the USA housing (sub-prime mortgage) market in 2007 and the subsequent crash of the financial market. USA went into recession in December 2007. • Contagion effects to other developed countries’ financial markets resulting in a global financial crisis in September 2008. Interconnectedness of large financial institutions internationally—some considered ‘too big to fail’.
  • 4. • Global financial crisis led to a global economic crisis as the financial market effects spilled over into the real sector (i.e., fall in incomes/wealth and demand for goods/services, decline in employment—job losses). • Several other underlying elements to be considered with the financial/economic crisis – inefficiencies in the market, lack of regulation/supervision, market interconnectedness, greed, etc.
  • 5. • Unlike recent crises which originated in ‘developing countries’ – Asia, Latin America-- this crisis has originated in the world’s largest economy, USA ,upon which several economies depend (exports, investment, remittances, etc). Major contagion or butterfly effects on other economies. • Caribbean countries have small open developing economies, hence the global economic crisis can be considered as an
  • 6. • ‘external shock’ which has both direct and indirect effects on Caribbean economies. • USA and other developed economies upon which the Caribbean economies depend have experienced: – Slow down in output: 3.0% in 2006 to 0.8% in 2008 and expected decline in 2009 to -3.8% – Increase in unemployment: up to 9.4% in USA, 7.2% in UK, 8.4% in Canada in 2009 (first quarter)
  • 7. - increase in fiscal deficit to GDP: from -2.4% in 2006 to -4.6% in 2008 for developed countries. Expected to be -10.4% in 2009. - decrease in world trade volume: from 9.2% in 2006 to 3.3% in 2008. - fall off in net capital flows to emerging and developing economies: from US$202.8b in 2006 to US$109.3b in 2008, with a further decline to – US$190.3 in 2009 (i.e., outflow greater than inflow)
  • 8. • Given the dependence of the Caribbean economies on the advanced economies, it is expected that the decline in economic activity would have an adverse effect. • Unsophisticated nature of Caribbean financial markets have not resulted in a direct impact from the financial crisis. Impact has been indirect through income/wealth effects.
  • 9. 2 Impact of the Crisis on Caribbean Economies • The main effects of the global economic crisis on Caribbean economies would be (and is being) felt through: – The fall in export demand (goods and services such as bauxite, tourism and off-shore finance) – A decline in remittances from migrant workers – Reduced foreign direct investment (capital inflows) – Reduced access to financial credit—changes in credit rating – Some depreciation in the exchange rate – Increased unemployment
  • 10. – Deterioration of the fiscal balance and the balance of payments • The severity of the effects depends on the set of initial conditions, the degree of interconnectedness and the policy responses • Caribbean economies are generally regarded as being vulnerable to external economic shocks and given the size of this shock, one would expect significant large and lasting effects • To date, the impact has been largely moderate but this may be due to lagged responses.
  • 11. • Decline in Real Output – IMF estimates indicate a decline in real GDP from an average growth rate of 5.5% in 2006 to 1.7% in 2008 and an expected rate of -0.9 in 2009 (i.e., English- speaking Caribbean countries) – Tourist arrivals have declined in the major tourist destinations: Bahamas, Barbados, St Lucia. Jamaica has recorded a slight increase in stay-overs – There has been a decline in private sector construction activity
  • 12. • Unemployment – After a steady decline in unemployment to under 10 percent in the Bahamas, Barbados, Jamaica and T&T in 2007, unemployment rose in 2008 and is expected to rise further in 2009 – Barbados: 7.4% in 2007 but 8.1% in 2008, 8.4% in 2009 (1st) – Bahamas: 7.9% in 2007 but 8.7% in 2008,9.2% in February 2009 in Grand Bahama – Belize: 12.1% in 2007 but 8.2% in 2008 – Jamaica: 9.9% in 2007 but 10.3% in 2008 – T&T: 5.6% in 2007 but 4.9% in 2008, forecast to be 8-10% in 2009
  • 13. • Remittances – Net remittances to Jamaica declined from US$174.1m in December 2007 to US $161.8m in 2008. The net remittances for the first quarter of 2009 are much lower than in 2007 and 2008 • Fiscal Balance – An increase in the fiscal deficit as a % of GDP between 2007 and 2008: • Barbados: 2.5% to 5.9% • Jamaica: 4.3% to 5.5% • T&T: 0.5% to 7.7%
  • 14. – But slight declines in other Caribbean states – Further deterioration expected in 2009 with the use of countercyclical policy measures • External Balance – Increase in external current account deficit as a % of GDP in almost all the countries between 2007 and 2008. Example: • Barbados: from 6.9% to 10.4% • Guyana: from 21.5% to 25.6% • Jamaica: from 15.9% to 21.9%
  • 15. – Some deterioration in external capital account as a % of GDP in Barbados, Belize but improvement in Jamaica, Guyana – Gross International Reserves at the Central Banks were still strong in 2008 compared with 2007 – Import cover ratio ranged between 2 months (Bahamas) and 11 months (T&T) – Deterioration in the exchange rate in Jamaica from J$69 for US$1 in 2007 to J$73 for US$1 in 2008 – No major changes in the debt service ratio and the external debt to GDP ratio over the 2007-8 period
  • 16. – Slight decline in foreign direct investment in the Bahamas (hotel plant, second homes market), but slight increases in Jamaica, T&T • Inflation – Increase in average inflation rates over the 2007-8 period: range of 2.3% (Belize) to 14% (Guyana) in 2007 and a range of 4.5% (Bahamas) to 22% (Jamaica) in 2008 – Increases in inflation rate due to increase in oil prices up to mid-2008
  • 17. • Financial Failure – Collapse of CL Financial, a conglomerate based in T&T with interest in insurance, financial services, manufacturing, etc. Bailout provided by the T&T government with supporting assistance from the Government of Barbados – Collapse of Stanford Group saw a bailout of the Bank of Antigua by the government
  • 18. • Summary – Jamaica and the Bahamas have experienced significant shocks – especially in tourism, bauxite – Other Caribbean countries have suffered milder effects to date. They are in a wait-and-see mode – Credit agencies have downgraded Caribbean economies although some are still in the investment grade – Some policy measures have been put in place – Greater effects expected in 2009
  • 19. 3 Response of Caribbean States • Several policy measures have been adopted by Caribbean states especially in an effort to reduce the impact of the crisis on unemployment: fiscal policies, monetary/financial policies, sectoral policies, social policies, multilateral financing • Fiscal policies: expenditure on social programs and social infrastructure, reduction in taxes to reduce cost of living, provision of subsidies. Larger counter- cyclical measures to save jobs
  • 20. • Monetary/Financial Policies: liquidity injections in national currency (i.e., issue of treasury bills, notes and debentures); reduction in interest rates (except Jamaica); regional liquidity support fund in the OECS to support countries affected by CL Financial collapse • Sectoral Policies: initiatives to boost agricultural production to market tourism; to promote SME; to boost manufacturing exports; restructuring of the bauxite industry in Jamaica; increase in housing construction
  • 21. • Social Policies: increase in minimum wage; provision of training, establishing unemployment assistance fund (Bahamas), broadening the scope of special social programs (PATH in Jamaica), boost in social welfare; use of National Insurance Fund in Barbados for training---UI already in Barbados. • Multilateral Financing: increase in Caribbean Development Bank assistance (policy-based loans/grants, economic infrastructure, education and lines of credit to financial institutions), support from the EU for Jamaica, Belize, Guyana: IMF funding for St Vincent ($5.7m), St Kitts ($3.4m) and Grenada ($6.8m)
  • 22. • Summary Policy response has been expansionary fiscal and monetary policies to keep employment at high levels, fiscal support for key sectors, boosting the social protection system/safety net and sourcing external funds when appropriate
  • 23. 4 The Way Forward • Still a high degree of uncertainty on duration and depth of global recession – small signs of recovery in USA • Main effects to be felt in 2009 (lagged effect on the Caribbean states – evidence from business cycle analysis) • Adoption of Just-in-Time (JIT) approach to policy making given uncertainty • Existence of inertia of confidence with possible hysteresis effects • Rethinking of macroeconomics—rise of behavioural economics
  • 24. • Regional efforts have been suggested by a Regional Task Force – agricultural expansion, tourism marketing, monitoring and dialogue – medium term measures • Strengthening regulation and supervision at the national and regional levels )e.g., deposit insurance schemes) • Regional approach to IFIs with respect to the additional funding provided by the G20 to IMF, World Bank. Also identification of funds in various agreements which have not been used
  • 25. • Need to manage fiscal deficit (i.e., pull back from high ratios to GDP), expand exports to deal with external debt service or possible renegotiation of debt payment • Need to re-examine graduation criteria from international financial institutions ( eg World Bank) • Strengthen social programs to have built-in stabilisers (e.g., unemployment insurance) • Monitoring the recovery process to take advantage of any opportunities • Strengthening of regional economic integration— strategic development planning