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Caribbean Faces Economic Challenges after the Fifth Summit of the AmericasWednesday, May 06, 2009 > 09:51:56
The presence of U.S. President Barack Obama, in his first meeting with his hemispheric counterparts, was the focus of attention for Caribbean audiences. Just as important was the possibility of bringing Caribbean perspectives to bear on a variety of issues that affect the entire continent – from security and climate change to the effects of the global financial crisis. On these accounts, the Summit was a resounding success for the region. President Obama committed to meet with CARICOM leaders later in the year to discuss ways of improving U.S.-Caribbean relations, and the Summit called attention to the particular challenges the small states of the region face in terms of issues such as climate change and public security.
This optimistic outlook contrasts sharply with the economic backdrop in which the Summit took place. The small open economies of the Caribbean are extremely reliant on export markets and foreign capital, at a time when global trade has contracted for the first time since the end of World War Two and capital flows are diminishing.
The two mainstays of most Caribbean economies – financial services and tourism – have been seriously affected by the global financial crisis. Tourism revenues have seriously contracted in countries like the Bahamas, where hotel chains have been forced to reduce their labor force as the number of tourist arrivals declines. Although Caribbean banks stayed away from the riskier financial products at the center of the crisis, global financial institutions have an active presence in the region and thus leave open several possible contagion channels. For instance, given the credit squeeze Caribbean economies may confront domestic liquidity problems and thus a rise in interest rates.
Moreover, foreign capital inflows –especially remittances– will probably continue to drop, thus presenting a real danger for many countries in the region that finance their current account deficits through such flows and through foreign borrowing. Indeed, because of high debt-to-GDP levels, many governments in the region have little room for further indebtedness, thus raising the urgency of fiscal reforms and other drastic measures to confront the crisis.
The severity of the challenges the Caribbean confronts calls for renewed regional coordination and concerted action, not just to respond to the crisis, but also to advance on several policy areas that lay the bases for a sustained recovery and growth. One such area is trade. Recent reports from the World Bank and the Organization of American States have highlighted the slow decline in Caribbean competitiveness, the result of product concentration, infrastructure constraints, tariff structure, and several other variables. The Caribbean’s traditional reliance on preferential access to European and North American markets has not led to greater or improved trade performance nor to fast economic growth similar to that experienced by other small, export-oriented economies.
Yet the changing global and regional trade environment offer important opportunities for the region. In spite of controversy over some of its provisions and their implications for consolidation of the single market, the recently concluded Economic Partnership Agreement with Europe widens the scope of liberalized commercial activity to include Caribbean services. Due to the region’s comparative advantage in this sector, the EPA may enable the Caribbean to fully exploit these advantages in the context of a coherent and coordinated trade policy strategy.
A similar arrangement with the United States may be in the region’s best interests. In spite of the recent renewal of the Caribbean Basin Initiative unilateral preferences, the current scheme does not reflect the region’s current competitive advantages or long term economic growth potential. Nor does the current arrangement address the myriad issues in the bilateral relationship, such as regulation of financial services and offshore finance, public security and transnational crime, and disaster management, that have direct economic ramifications for the Caribbean. In this sense, in spite of the financial crisis and widespread reservations about ambitious trade policy goals, the current juncture seems like a propitious moment to study a new trade relationship with the Caribbean’s most important trade and investment partner.
As the current administration of President Obama seems less inclined to follow the traditional free trade agreement model of its predecessors, not to mention impending Congressional revisions of current preferential trade schemes, the possibility of a different type of reciprocal trade agreement between CARICOM and the United States ought to be on the Caribbean’s agenda when it meets with President Obama later this year. The negotiation of this agreement could provide the Caribbean with an important opportunity to rethink its overall trade strategy and achieve higher levels of regional coordination in a very sensitive policy area of the CARICOM.
These are necessary conditions for the consolidation of the Caribbean’s single market and economy project, not to mention a fundamental angle in the region’s pursuit of a more advantageous and competitive position in a (recovered) global economy.