The Greater Caribbean This Week…
Economic contraction and fiscal crisis in the OECS
by Norman Girvan
The extraordinary CARICOM summit held in St Lucia August 15-16 is a further sign of a deepening economic and fiscal crisis afflicting the smallest economies of the Greater Caribbean region.
Earlier in the week news came of an emergency package of financial aid to Dominica from its CARICOM partners. The example of regional solidarity is welcome. But the problems are structural and long-term in nature. They extend beyond Dominica to the Organization of Eastern Caribbean States (OECS) sub-region as a whole.
This was thrown into sharp relief by Sir Dwight Venner, Governor of the Eastern Caribbean Central Bank (ECCB), in his presentation to the CARICOM Summit held last month in Georgetown, Guyana. Some of the highlights were:
• Economic growth for the OECS as a whole declined from an average of 6 percent in the 1980s to 3 percent in the 1990s. In 2001, there was economic contraction (negative growth) for the first time in the past two decades.
• The 2001 decline was precipitated by fall-offs in tourism and bananas. Stay-over visitor arrivals fell by 5.1 percent and while banana exports plunged by 41 percent.
• Services now account for 71 percent of the OECS GDP, up from 58 percent in 1994. The financial services sector has been affected by increased scrutiny on money-laundering and harmful tax competition. Tourism has been hurt by the global slowdown in the industry, exacerbated by the effects of September 11. And export agriculture is in decline due to the erosion of trade preferences.
• The economic slow-down in the 1990s impacted the growth of tax revenues, resulting in rising debt and deteriorating fiscal accounts. Debt interest payments grew from 12 to 19 percent of current revenue between 1996 and 2001 and personal emoluments grew from 50 to 54 percent, while Government services fell from 33 to 22 percent.
• By 2001, the fiscal current account balance moved from a surplus to a deficit amounting to 1.5 percent of the GDP, and the overall fiscal deficit reached 6.5 percent of the GDP.
Governor Venner pointed to a range of recent policy initiatives by OECS countries and the ECCB adopted in response. The extraordinary CARICOM Summit aims to complement these initiatives.
There is a wider regional significance to the OECS economic dilemma. One issue is how the sub-region can best re-position its tourist product to ensure sustainable growth in the industry, within the context of the Sustainable Tourism Zone of the Greater Caribbean.
The mass-tourism that is highly successful in other parts of the region is unlikely to be the viable growth path for the OECS.
Another issue is whether the region accepts a form of globalization in which whole countries are the losers. There is a need for built-in mechanisms of assistance to countries whose industries are no longer competitive, similar to those available to depressed regions in developed countries affected by "sunset" industries. Provisions of the World Trade Organisation (WTO) and the Free Trade Area of the Americas (FTAA) are notably lacking in this area.
A Regional Development Fund within the FTAA is one such proposal. Allowing small economies to craft tariff regimes that recognize the trade-dependence of their fiscal revenues is another, an aspect of Special and Differential Treatment fore these economies. Both principles were endorsed at the Third ACS Summit last December.
Dominica is not an isolated case. Its current plight is a wake-up call for the region and the international community.
Professor Norman Girvan is Secretary General of the Association of Caribbean States. The views expressed are not necessarily the official views of the ACS. Feedback can be sent to mail@acs-aec.org.
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