Update Country Report Curaçao 19 Apr 2017

Despite some significant economic and social progress, the Caribbean region is being challenged by a rapidly changing global environment. Caribbean economies have lost ground in traditional markets for their products and services, according to a recent research paper published by the UN Economic Commission for Latin America and the Caribbean (ECLAC). The paper, A Framework for Caribbean Medium-term Development, identifies priority areas for reform, including agriculture, transport and telecommunications, all of which have the potential to drive growth. However, our assumption that the external economic environment will become less benign from 2018 raises further risks to the economic outlook for the Caribbean in the medium term.

Regional firms are finding it increasingly difficult to compete globally, owing to a lack of economies of scale, tighter international rules on offshore financial services and a lack of skilled labour. This is reflected in a fall in the region's share of the world market for goods and services, and widening current-account deficits in the majority of countries. According to ECLAC data, Caribbean public debt was on average over 77% of GDP in 2015, acting as a drag on the region's economic growth potential.

As the traditional mainstays of trade and growth shift, small states have to engage in increasingly intense competition to capture and retain markets, particularly in the financial and tourism sectors. New products and services that make intensive use of innovation and skilled labour to meet the specific needs of customers are often identified as the way forward. However, governments across the region have struggled to design policies to address country shortcomings. The task is also complicated by lack of data in many cases, which makes measuring progress difficult.

Small states, big challenges

Improving competitiveness and increasing economic diversity in the Caribbean is a regular theme addressed by international organisations and researchers. The ECLAC research paper identifies a number of development opportunities and examines the adjustments that smaller Caribbean states might make in order to enhance their development prospects.

According to ECLAC, the areas where policy initiatives could have a marked positive impact include agriculture, transport and telecoms. In the case of agriculture, the report highlights that an estimated 50% of imports to the region from the US are consumer food products. These mainly comprise poultry, red meats, dairy products, and processed fruits and vegetables. The high level of food imports suggests that there is ample room to substitute these inflows by boosting local food production and possibly expanding into exports, especially in large territories such as Guyana and Suriname.

Improving intra-regional transport links to facilitate the movement of goods and labour represents another area with potential, and could be an important counterpart to boosting local food output. ECLAC suggests that a new approach to regional air and sea transport is needed, with better incentives for private sector investment or public-private partnerships to absorb some of the initial capital costs. The full liberalisation of telecoms markets to reduce costs and improve infrastructure quality is another policy element still pending in many small states.

Measuring the impact of reform is hampered by lack of data

Measuring and comparing the relative competitive performance of Caribbean economies is made difficult by the lack of priority given to data collection and participation in surveys. The World Economic Forum's Global Competitiveness Report 2016-17 lists only four Caribbean economies out of 138 countries surveyed globally, owing, the report says, to "data shortages".

Only Barbados, Jamaica, the Dominican Republic, and Trinidad and Tobago are included in the survey, with Barbados ranked the highest, in 72nd place. Owing to data shortages, Barbados was not included in the 2015-16 index, but it has dropped several places since ranking 55th out of 144 economies in the 2014-15 index. Trinidad and Tobago has also lost ground, ranking 94th out of 138 economies in 2016-17, compared with 89th out 140 in 2015-16. Jamaica saw an improvement, rising to 75th in 2016-17, up from 86th in the previous year, and the Dominican Republic ranked 92nd, up from 98th previously.

Commonly cited impediments to competitiveness improvement include a poor work ethic in the national labour force, inefficient government bureaucracy, burdensome taxes, restrictive labour laws and limited access to financing. With the exception of Barbados, corruption is also a major problem.

Economic conditions will stay benign in 2017, but the outlook is more uncertain thereafter

The Economist Intelligence Unit's April 2017 global forecast sees global growth bumping up to 2.6% in 2017 (from an estimated 2.2% in 2016). The forecast for 2017 assumes that financing conditions for emerging markets will remain benign and that extremely accommodative monetary policy in Europe and Japan will at least partially offset US interest-rate increases. This will prove supportive for the majority of Caribbean economies this year, especially those that are heavily indebted, but global conditions will start to become more difficult in 2018.

Higher oil prices, together with wage pressures in the US, will contribute to an increase in inflation and erode consumer purchasing power in major tourism markets the US and Europe. Our forecast for the world inflation rate has risen to 4.6% in 2017, up from 3.8% in 2016 and the highest rate since 2011. We expect China to experience a sharp, policy-induced slowdown in 2018 as the government takes measures to rein in credit growth. In 2019 we forecast a business-cycle recession in the US. These developments will weigh on global growth, which will not pick up until 2020-21. This is likely to begin to have an impact on tourism from late 2017.

Political risks also loom on the horizon. Although social and economic ties between the US and most Caribbean economies will remain strong, there is a risk of tension and a deterioration in relations under the US president, Donald Trump. The policies pursued by the president in areas such as trade and migration may have a bearing, although our forecasts assume that Mr Trump will not pursue his more radical campaign pledges.

The UK's decision to leave the EU, which was formally put in motion on March 29th, has also raised multiple risks for both UK Overseas Territories and the broader Caribbean Community (Caricom). The Caribbean region in general will also be affected, as existing aid and investment relations will need to be renegotiated with the UK separately to the EU. A long period of uncertainty will ensue as Britain's foreign, trade and development policy is reoriented.

Caricom leaders are concerned about whether the EU will be able to continue providing aid to the Caribbean region once it loses the UK's large net annual contribution to its budget. One such EU initiative that could be jeopardised is the EUR86m (around US$91m) INTERREG V Caribbean programme to strengthen regional partnerships, which was launched in December 2016. The programme is intended to boost the region's economic competitiveness and will focus on priorities such as employment and innovation, natural hazards, the cultural environment, public health and renewable energy.

Given such uncertainty, and given their extremely open nature and dependence on US demand for goods and services, Caribbean economies are likely to remain fragile in coming years, and the case for reforms and fresh policy thinking will become more urgent.