Whither the future of economic performance?

Nov.24.06

PART 3

by Dr Garth Nicholls

Director of Research, Eastern Caribbean Central Bank – Special to Searchlight

St Vincent and the Grenadines: Economic Performance since independence

Introduction

As a regional response to the dramatic growth slow down in the early 2000s generally and particularly as a result of the 911 events, the regional heads of governments of the OECS, in October 2002 convened a special meeting in St Kitts on the economy of the OECS. Coming out of that gathering, they outlined the following goals of an economic reform strategy geared towards resuscitating the OECS economy:

• Economic growth of not less than 6 per cent per annum

• Unemployment less than 6 per cent

• Poverty less than 6 per cent

• High levels of human development.{{more}}

Key to the strategy for delivering these goals, they concluded, would be deeper economic integration of the OECS; restoration of medium sustainability of the public sector finances; the resuscitation of the foreign exchange earning capability of the OECS on the basis of internationally competitive firms and labour. These policies are still very much relevant today for all the economies of the OECS.

An enhanced medium term fiscal policy framework

The Monetary Council of the Eastern Caribbean Central Bank at its 56th meeting took measures to enhance the institutional and macroeconomic policy framework through the adoption of a set of reformulated fiscal benchmarks to be achieved by 2020. The key elements of these new guidelines are:

• a debt to GDP ceiling for the public sector of 60 per cent of GDP;

• a primary balance consistent with achieving and maintaining the ceiling;

• achievement of the debt benchmark by 2020;

Individual countries are permitted to converge to the debt benchmark at different speeds and will publicly announce their fiscal targets. This framework is expected to provide a credible mechanism for sustained medium term prosperity, including an orderly debt consolidation and reduction and soft landing after the CWC event.

Competitiveness

The ability of these countries to earn foreign exchange is key to their sustainable growth performance. The export of goods and services on a sustainable basis depends on their competitiveness in the international markets. While price competitiveness is important, lasting gains in competitiveness would be achieved only on the basis of reforms that provide real economic gains. Progress on structural reforms, which enhances quality competitiveness, is therefore also required.

Export Sector Development Model

A key question is the model to be used for export sector development and expansion. Many of the original non-traditional export sectors were developed on the back of the Lewis (1954) model of economic development. The basic questions are what to produce and how to produce? What is SVG’s comparative advantage? Does it lie in producing things or ideas? The future export potential of these economies, including SVG, rests with outputs which are high value, using existing investments in human development. Services therefore, appear to be the key to our success in the future. One challenge for the ECCU in transforming to new services is the growing international trade protectionism. To facilitate us the international community must be vigilant against growing trade protectionism, which threatens to stymie our legitimate efforts at transformation to new export services.

Private Sector Development

The future growth and development of the ECCU rests with a dynamic private sector. An important component of the growth process is creating the right incentives – environment for investment in both physical and human capital. In a recent publication by the World Bank “Doing Business 2006”, SVG was ranked 42nd, a relatively high ranking, but it does indicate that we still have some distance to travel to be within the top five. In any case, there are particular categories in which there appears to be room for significant progress. In this regard the public sector may be required to engage in strategic investments to create virtuous circles of growth based on knowledge.

Labour market Reform

The efficient functioning of the labour market is a key determinant of economic competitiveness. Indeed, labour market issues partly determine both price and non-price competitiveness of the economy. Therefore, any effective and sustainable reform in these economies must address the labour market in a fundamental way. Labour market reform would involve policies to address the productivity-pay nexus and labour market flexibility.

Training and Education

Much effort is required in respect of providing the labour force with the requisite skills. Part of this challenge has to be met by retraining and retooling existing labour. The other part has to do with the reform of the region’s education system to take account of the needs of a modern economy in the information age.

Social Protection Framework

The economic reforms that are taking place along with the natural restructuring of the various economic sectors are putting considerable strain on the existing social protection framework. The framework may be inadequate to the task that is now being thrust upon it. Therefore, it is important that the social protection mechanisms reformed and expanded to ensure that the market economy functions efficiently and effectively. By necessity this would involve the reform of the social security arrangements, civil servants’ pensions, along with the improvements in the regulation and supervision of the providers of private pension plans.

Adverse natural events

The ECCU is one of the most vulnerable regions in the world. The reforms and hard work that are currently underway can be reversed with one hurricane. This is a risk that the ECCU is unable to mitigate by itself, but which has significant fiscal and economic costs. The ECCU region is doing its part by adopting and enforcing appropriate building codes and retrofitting structures. It will take years, however, for the entire building stock and infrastructure to be fully compliant and, even then, only for a certain category of hurricane or severity of volcanic explosion. The region’s exposure to these adverse natural events is increasing in line with “global warming” – for which all of us (the world community) bear some responsibility. A similar responsibility exists among the international community to devise appropriate instruments that would contribute to better and more transparent risk sharing.

An effective energy policy

Implementing a strategy to reduce dependence on oil as a source of energy and also raise the general level of efficiency: Part of this strategy must involve greater exposure to market prices that affect the dynamics of fuel choice and efficiency while at the same time protect the fiscal accounts from automatic deficits and windfalls.

Greater sectoral linkages within the regional economy

This must include where feasible tourism and other sectors such as agriculture, manufacturing and the other service sectors.

Risk proofing the financial system

Measures aimed at risk proofing the financial system and ensuring transparency and accountability are paramount. These must of necessity involve a systematic approach to the regulation of all financial institutions without stifling innovation and dynamism. An important factor here is the continuing role of the financial sector in the modernisation and transformation of the economy.

The Regional Money and capital Market Program

Efforts are required to further integrate, regulate and develop the disparate money and capital markets of the ECCU. Much progress has been made, but given the challenges that confront the ECCU we must market and use the infrastructure as part of the mechanism to further develop the ECCU economies, to increase efficiencies, transform risks, while creating jobs and earning foreign exchange from the provision of financial services to the world.

The OECS economic union

The proposed OECS economic union pulls the entire reform process together. In effect at the end of this phase of the reforms the result ought to be a vibrant OECS economic union with enhanced governance arrangements. The union would facilitate free circulation of goods and services; free movement of labour and the development of key sectors within the regional economy. In many ways the OECS economic union is central to the further successful integration of the OECS countries within the CSME, and through this the world economy, on advantageous terms.

CONCLUSION

ECCU countries are small open economies which have limited degrees of freedom for policy independence. The fiscal imbalances and the obligations under the WTO have imposed further limitations on policy choices. The performance of the export sectors determines the degrees of freedom for sustainable fiscal policy. The slowdown in inflows of foreign exchange inflows and thereby GDP growth in the early 2000s caused fiscal deficits to become generally larger in some countries. Fiscal policy in the ECCU over the medium term has to take account of the external sector forecasts and the potential bottlenecks which are likely to emerge.

Macroeconomic stabilisation is necessary but not sufficient for sustained economic performance over the medium term. The sustainability of these economies in the long run would depend on the performance of the export sectors. Therefore, tremendous effort must be spent building new and resuscitating the foreign exchange earning capabilities and encouraging foreign direct investment.

The specifics of these plans would have to be carefully crafted, but must focus on the requirements of the new knowledge economy.