Handbook of Caribbean Economies 2020020292, 2020020293, 9780367210489, 9780429265105

Citation preview

The key issues are evaluated by a distinguished set of authors. A truly pan-Caribbean approach is taken that illustrates conclusively the region’s rich diversity. All-in-all a nicely conceived and instructive volume. Peter Clegg, University of the West of England. Vital for anyone with a professional interest in the region, offering comprehensive analyses of problems ranging from climate change to excessive external debt to lack of diversification that explain why current growth rates are generally sub-par in the Caribbean and why future prospects are so challenging. Peter Passell, Editor-in-Chief, Milken Institute Review.

Handbook of Caribbean Economies

This volume aims to illustrate the uniqueness of the economies of the countries and territories of the Caribbean as well as the similarities they share with other regions. While most countries in the region share many of the characteristics of middle-income countries, theirs is a matter of extremes. Their generally small size suggests a fragility not found elsewhere. While much of the world is beginning to feel some effects of climate change, the Caribbean is ground zero. These factors suggest a difficult road ahead, but the chapters presented in this volume aim to help to spur the search for creative solutions to the region’s problems. The chapters, written by expert contributors, examine the Caribbean economies from several perspectives. Many break new ground in questioning past policy mindsets, while developing new approaches to many of the traditional constraints limiting growth in the region. The volume is divided into four sections. Part I examines commonalities, including issues surrounding small economies, tourism, climate change and energy security. Part II looks at obstacles to sustained progress, for example debt, natural disasters and crime. In Part III chapters consider the specific role of external influences, including the USA and the European Union, the People’s Republic of China, as well as regional co-operation. The volume concludes in Part IV with country case studies intended to provide a sense of the diversity that runs through the region. Robert E. Looney is a Distinguished Professor in the National Security Affairs Department at the Naval Postgraduate School, California. He specializes in issues relating to economic intelli­ gence and economic development in the Middle East, Latin America and Africa. Professor Looney has published 22 books and is the editor of the Routledge Europa Emerging Economies series.

Handbook of Caribbean Economies

Edited by Robert E. Looney

First published 2021 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 52 Vanderbilt Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2021 selection and editorial matter, Robert E. Looney; individual chapters, the contributors The right of Robert E. Looney to be identified as the author of the editorial material, and of the contributors for their individual chapters, has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. Every effort has been made to contact copyright-holders. Please advise the publisher of any errors or omissions, and these will be corrected in subsequent editions. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Names: Looney, Robert E, editor. Title: Handbook of Caribbean economies / edited by Robert E Looney. Description: Abingdon, Oxon ; New York, NY : Routledge, 2021. | Includes bibliographical references and index. Identifiers: LCCN 2020020292 (print) | LCCN 2020020293 (ebook) | ISBN 9780367210489 (hardback) | ISBN 9780429265105 (ebook) Subjects: LCSH: Caribbean Area–Economic conditions–21st century. | Caribbean Area–Economic policy. | Caribbean Area–Economic integration. | Caribbean Area–Foreign economic relations. Classification: LCC HC151 .H36 2021 (print) | LCC HC151 (ebook) | DDC 330.9729–dc23 LC record available at https://lccn.loc.gov/2020020292 LC ebook record available at https://lccn.loc.gov/2020020293 ISBN: 978-0-367-21048-9 (hbk) ISBN: 978-0-429-26510-5 (ebk) Typeset in Bembo by Taylor & Francis Books

For Ginny and memories of Jamaica

Contents

List of figures List of tables List of boxes List of contributors Preface Foreword by Sir Ronald Sanders 1 Introduction Robert E. Looney

xii xv xvii xviii xxvi xxvii 1

PART I

Commonalities 2 An alternative policy approach to growth and stabilization in small open economies DeLisle Worrell 3 Impact of climate change on Caribbean economies Masao- I. Ashtine 4 Caribbean energy security: Regional profile and challenges to integration David Goldwyn and Cory Gill 5 The Caribbean holds its own in global tourism competition DeLisle Worrell

9

11

21

39

59

ix

Contents

PART II

Obstacles to sustained progress

79

6 CARICOM and that vexing issue of size and viability Patsy Lewis

81

7 Debt and fiscal constraints Lester Henry

98

8 Crime, violence and drugs in the Caribbean Sherill V. C. Morris-Francis

108

9 It’s complicated: The Caribbean’s relationship to white-collar crime Kristina Hinds

126

10 Caribbean natural disasters and country/regional responses Robert E. Looney

140

PART III

External influences

159

11 Why and how to use fiscal policy to target the exchange rate DeLisle Worrell

161

12 Venezuela: The descent into a ‘soft state’ Anthony P. Maingot

171

13 The external economic relations of the Caribbean: A comparison between the USA and the European Union Ginelle Greene-Dewasmes and Tony Heron

182

14 China’s increasing influence in Central America and the Caribbean Richard L. Bernal 15 Regional cooperation in Latin America and the Caribbean: New challenges and agendas Cintia Quiliconi and Renato Rivera Rhon

193

204

PART IV

Country case studies

219

16 The Puerto Rican economy Brad Setser and Sergio Marxuach

221

x

Contents

17 Haiti Wenche Iren Hauge

236

18 The Cuban economy: Socialist stagnation with Caribbean characteristics Richard E. Feinberg

249

19 Trinidad and Tobago Lester Henry

264

20 Belize Victor Bulmer-Thomas

276

21 Guyana and the advent of world-class petroleum finds Clive Y. Thomas

289

22 Development and underperformance in the Barbados economy, 1946–2018 DeLisle Worrell

304

23 Suriname Scott B. MacDonald

322

24 The Bahamas: Facing a period of climate change and slow growth Robert E. Looney

338

25 The Cayman Islands Scott B. MacDonald

354

26 Guadeloupe and Martinique in the Caribbean Basin: A comparative analysis of models and trajectories Alain Maurin and Patrick Kent Watson

370

27 The Dominican Republic Susan Pozo and Antonio María Giraldi

393

28 The Jamaican economy: A Caribbean success story at last? Keith Collister and Robert E. Looney

422

29 The Dutch Caribbean Scott B. MacDonald

442

30 Epilogue Robert E. Looney

457

Index

461

xi

Figures

5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8a 5.9a 5.10a 5.11a 7.1 8.1 11.1 11.2 11.3 11.4 11.5 16.1 16.2 16.3 16.4 16.5 18.1 18.2 18.3 18.4 18.5 18.6 19.1 19.2 19.3 xii

Percentage share of arrivals (2014–18) Length of stay by source market Global and Caribbean arrivals, millions Caribbean arrivals by source market, millions Caribbean market share (%), arrivals (millions), price competitiveness index (PCI) Changes in market share versus changes in price Average expenditure per person, US $000, length of stay, days More than 75% from the USA Between 50% and 75% from the USA Countries with at least three source markets providing 15% or more Evaluation matrix CARICOM: total public debt-to-GDP (%) 2000, 2020, 2018 Comparison of homicide rates in the Caribbean and the rest of the world, 1990–2017 The standard model and modification The impact of devaluation on the current account Adjusting the demand to the supply of foreign currency Daily foreign exchange reserves, Central Bank of Barbados Capital inflows, US $ million Puerto Rico versus its Caribbean peers: real GNI per capita in 2018 (2010 US$) Puerto Rico versus its mainland peers: 2018 median household income (nominal US$) Year-on-year change in real GNP: USA versus Puerto Rico Real GNP: USA versus Puerto Rico (indexed to 1990) Puerto Rico Economic Activity Index (indexed to 2000 average) GDP growth (% change) 2010–20 HDI 2019: rankings for Latin American and Caribbean nations Economic development: GNI per capita (PPP) Merchandise trade by country 2018 (imports and exports) Merchandise exports and imports (2009–18) International tourism arrivals (millions) Trinidad and Tobago, FDI (US $ million) 1980–2000 Growth, inflation and unemployment, 1990–2018 Total debt and fiscal balance (as % of GDP), 1980–2018

61 62 66 67 68 69 70 76 76 77 78 100 111 163 164 164 167 168 222 222 227 228 230 250 251 253 257 258 260 266 268 270

List of figures

20.1 21.1 21.2 21.3 21.4 22.1 22.2 22.3 22.4 22.5 22.6 22.7 22.8 22.9 22.10 22.11 26.1 26.2 26.3 27.1 27.2 27.3 27.4 27.5 27.6 27.7 27.8 27.9 27.10 27.11 27.12 27.13 27.14 27.15 27.16 28.1 28.2 28.3 28.4 28.5 28.6 28.7

Belizean GDP p.c. (2010 US$), 1980–2019 GDP annual % change (2007–19) Macroeconomic indicators (2015–19) GDP annual % change (2019–39) GDP annual % change Real growth rates, 1947–2018 Overall balance of payments, % of GDP; foreign exchange reserves, % of minimum Growth versus investment Government revenue, expenditure and balance, % of GDP Fiscal balance, % of GDP Real GDP, Bds $ million GDP per capita, US $ Government expenditure, % of GDP Government contribution to the economy Select taxes to revenue, % Government capital formation, government savings, % of GDP Circle of correlation and projection of countries in the main factorial design of 1993 Circle of correlation and projection of countries in the main factorial design of 2016 An inventory of common endogenous resources for possible use in stimulating local and regional economic development Share of GDP (%) 1970–2018 Composition of the service sector (%) Composition of industrial production (%) GDP and agricultural production (annual change, %) Central government expenditure (2018) Central government balance (2000–18) Inflation rate (CPI) % Real per capital income growth Poverty headcount rates using alternative poverty definitions Gini coefficient by per capita income of households Percentage of households with water infrastructure by quintile Percentage of households with hygienic sanitation Homicides per 100,000 population Quantity of published research on Latin American and Caribbean Nations Personal remittances received by the Dominican Republic (% GDP) Remittances as a percentage of GDP for Latin American and Caribbean countries, 2017 Annual percentage rate of GDP growth Jamaica/Caribbean per capita income patterns, 1980–2019 Unemployment in Jamaica, 1991–2019 Jamaica: remittances as a share of GDP, 1995–2018 Jamaica: tourism share of total exports, 1995–2018 Caribbean governance patterns: voice and accountability, 1996–2018 Caribbean governance patterns: political stability, absence of violence, 1996–2018

278 291 292 294 295 305 306 307 308 309 311 313 315 316 317 317 385 385 388 395 396 397 398 399 400 403 403 407 407 408 409 410 411 413 414 423 423 425 425 427 428 429 xiii

List of figures

28.8 28.9 28.10 28.11 28.12 28.13 28.14

xiv

Caribbean governance patterns: government effectiveness, 1996–2018 Caribbean governance patterns: regulatory quality, 1996–2018 Caribbean governance patterns: rule of law, 1996–2018 Caribbean governance patterns, control of corruption, 1996–2018 Caribbean: patterns of government debt Jamaica: trends in fiscal balances Jamaica: savings-investment imbalance, 1980–2019

430 430 431 432 436 437 439

Tables

4.1 4.2 5.1 5.2 5.3 5.4 5.5 6.1 6.2 7.1 8.1 8.2 8.3 17.1 17.2 17.3 17.4 20.1 20.2 20.3 21.1 21.2 21.3 21.4 21.5 21.6 21.7A

Caribbean renewable energy targets Selected Caribbean natural gas infrastructure Average expenditure per visitor (2014–18), US $000 Average length of stay by destination (days), 2014–18 Available capacity (number of rooms) Occupancy rates, percentage of available rooms Contribution of export services to foreign currency inflows, percentage CARICOM population and area (2018) HDI ranking of CARICOM countries and GDP per capita Caribbean fiscal flexibility indices, 2013–17 Homicide rates per 100,000 inhabitants of Caribbean countries, 2008–17 Caribbean prison population 2003–17 (count/rate per 100,000 population) Major illicit drug producing and/or drug transit countries Percentage of Haiti’s GDP by economic sector Economic indicators Haiti inequality measures, 2017 Personal remittances received (% of GDP) in Haiti Sectoral and final expenditure shares of GDP (%), 1980–2018 Poverty and distribution as a percentage of population, 2002 and 2009 Belize unemployment (%), 1991–2019 Guyana: key socio-economic indicators (most recent year) Guyana’s principal foreign trade and investments agreements Guyana: macroeconomic indicators (2015–19) Guyana: medium-term macroeconomic projections (2020–24) Guyana: government take (estimates) Proven oil reserves and ranking among selected countries Guyana-Suriname Basin (USGS assessment: oil and gas – undiscovered fully risked resources, 2000 and 2012) 21.7B Guyana-Suriname Basin (USGS assessment: oil and gas – undiscovered fully risked resources, 2000 and 2012) 21.8 Government priorities for spending petroleum revenue 22.1 Growth, investment and productivity 22.2 Fiscal correction, 1991 and 2018, % GDP 23.1 Suriname macro-economic indicators 26.1 Growth in real GDP

43 46 61 62 63 65 72 82 82 104 112 114 116 237 238 242 244 277 279 282 290 291 292 293 296 297 297 298 301 305 310 330 380

xv

List of tables

26.2 27.1 27.2 27.3 27.4 27.5 29.1 29.2 29.3

xvi

Economic and social indicators of several countries in the Caribbean area in 2018 Composition of tax revenues Financial development indicators Education statistics for the Dominican Republic, 2017 Infrastructure at home Dominican migrant stock, 2017 The Dutch Caribbean Aruba, Curaçao and St Maarten real GDP growth rates (%) Aruba, Curaçao and St Maarten central government debt/GDP (%)

382 398 401 404 408 413 443 449 450

Boxes

4.1 4.2 4.3

Haiti

40 41 50

xvii

Contributors

Robert E. Looney is a Distinguished Professor in the National Security Affairs Department at the Naval Postgraduate School, Monterey, California. He received his PhD in Economics from the University of California, Davis. He specializes in issues relating to economic intelligence and economic development in the Middle East, Latin America and Africa. He has published 22 books, including Economic Policymaking in Mexico: Factors Underlying the 1982 Crisis, Duke University Press (1985), and Iraq’s Informal Economy: Reflections of War, Sanctions and Policy Fail­ ure, the Emirates Center for Strategic Studies and Research (2007). He has also edited five Routledge handbooks: Handbook of US-Middle East Relations (2009), Handbook of Oil Politics (2012), Handbook of Emerging Economies (2014), Handbook of Transitions to Energy and Climate Security (2017), and Handbook of International Trade Agreements (2018). He is currently the editor of the Routledge Europa Emerging Economies series. Professor Looney is on the board of editors of the International Journal of World Peace and the Journal of Third World Studies. In addi­ tion, he has published over 300 articles in numerous professional journals, and is a regular contributor to the Milken Institute Review, and the World Politics Review. As an international consultant, Professor Looney has provided advice and assistance to the governments of Iran, Saudi Arabia, Japan, Mexico, Panama and Jamaica as well as to the World Bank, the Interna­ tional Monetary Fund, the International Labour Office, the Inter-American Development Bank, SRI International, and the RAND Corporation. Masao- I. Ashtine completed his PhD in 2016 at the University of Cambridge (Cambridge Trust Scholar), where he researched climate change implications for the UK’s wind energy sector. This followed six years at York University, Toronto, where he gained his BSc and MSc degrees in Environmental Sciences and Climate Modelling, respectively. After his PhD, he worked with the renewables company 3E in Brussels as a data scientist intern for the optimization of wind power models across Europe. Masao- Ashtine completed a lectureship at the University of the West Indies in Jamaica in 2019, where he was the research lead for the Alternative Energy Research Group at the Department of Physics. Masao- Ashtine’s work has produced many insights into the renewable energy sector in the Caribbean, which have appeared in a number of journals and peer-reviewed publications. He has now joined the Oxford e-Research Centre at the Uni­ versity of Oxford, working as a Postdoctoral Researcher for Project LEO (Local Energy Oxford­ shire), that aims to increase efficient pathways for local energy systems through flexibility services and marketplace optimization. Masao- Ashtine is also the co-founder and Managing Director of the Journal of Caribbean Environmental Sciences and Renewable Energy. Richard Bernal was educated at the University of the West Indies (UWI), University of Pennsylvania, New School for Social Research and the School for Advanced International xviii

List of contributors

Studies of Johns Hopkins University. He holds BSc, MA, PhD (Economics), and MIPP (International Public Policy) degrees. Prior to UWI, he was a member of the board of directors of the Inter-American Development Bank (2008–16), and was formerly the Chief Trade Negotiator of the Caribbean Community (CARICOM), as the Director-General of the Car­ ibbean Regional Negotiating Machinery for eight years. Dr Bernal was Jamaica’s Ambassador to the USA and Permanent Representative to the Organisation of American States (OAS) from 6 May 1991 to 31 August 2001. Ambassador Bernal has given testimonies to several Committees of Congress (House and Senate) and to the US International Trade Commission on issues of concern to the Caribbean. Prior to his diplomatic posting, he was Chief Executive Officer of a commercial bank. He taught international economics and development economics at the Uni­ versity of the West Indies. Dr Bernal has published over 100 articles in scholarly journals, books and monographs as well as opinion editorials in the Washington Post, the Wall Street Journal and the Miami Herald. Dr Bernal’s books include Globalization, Trade and Economic Development: A Study of the CARIFORM-EU Economic Partnership Agreement (New York: Palgrave Macmillan, 2013). Dragon in the Caribbean: China’s Global Re-Positioning. Challenges and Opportunities for the Caribbean (Kingston: Ian Randle Publishers, 2014, revised 2nd edition, 2016). The Influence of Small States on Superpowers: Jamaica and U.S. Foreign Policy (Kingston: University of the West Indies Press, 2017). With Henry Lowe, Medical and Wellness Tourism: The Potential for Jamaica (Kingston: Ian Randle Publishers, 2019). Victor Bulmer-Thomas is an Associate Fellow in the United States and the Americas Program at Chatham House, Honorary Professor at the Institute of the Americas, University College London, Emeritus Professor of Economics at London University and Honorary VicePresident of Canning House. From 2001 to 2006 he was the Director of Chatham House and from 1992 to 1998 he was the Director of the Institute of Latin American Studies at London University. He edited the Journal of Latin American Studies from 1986 to 1997 and has authored or edited nearly 30 books including The Economic History of Latin America since Independence (3rd edition, 2014), The Economic History of the Caribbean since the Napoleonic Wars (2012) and Empire in Retreat: the Past, Present and Future of the United States (2018). Keith Collister is on the board of the Jamaica Chamber of Commerce, Consolidated Bakeries (Jamaica) and Eppley. He is Director of Special Projects at Sandals Group and Chairman of the Appliance Traders Group Pension Scheme. Previously, Keith Collister held the position of Analyst at Sagicor Life Jamaica. He received a graduate degree from the University of Cambridge and an MBA from Birmingham Business School. His assessments of the Jamaican economy appear regularly in the Jamaica Observer. Ginelle Greene Dewasmes is a PhD candidate at the University of York. Her research work focuses on green energy transitions in small island developing states. Ginelle Dewasmes has worked in the Caribbean as a development consultant for the past seven years with expanding focus on the African, Pacific and other developing country regions. Her research and profes­ sional interests include work in the overall areas of sustainable development, trade facilitation and climate change. Richard E. Feinberg is Professor of International Political Economy at the School of Global Policy and Strategy, University of California San Diego, and a non-resident Senior Fellow at the Brookings Institution. His four decades of engagement with inter-American relations spans government service (in the White House, the Department of State, and the US Treasury), xix

List of contributors

numerous Washington, DC-based public policy institutes, the Peace Corps (Chile), and now in academia. Since 2005 he has been the book reviewer for the Western Hemisphere section of Foreign Affairs magazine. His most recent publications are Open for Business: Building the New Cuban Economy (Brookings Institution Press, 2016) and Nicaraguan Tragedy: From Consensus to Coercion (Wilson Center, Smithsonian Institution, 2019). His previous books include Subsidizing Success: The Export-Import Bank in the U.S. Economy (Cambridge University Press, 1982), The Intemperate Zone: The Third World Challenge to U.S. Foreign Policy (Norton, 1983) and Summitry in the Americas: A Progress Report (Peterson Institute for International Economics, 1997). Cory Gill is an Analyst in Foreign Affairs at the Congressional Research Service, focusing on State Department operations and management issues, including energy and climate diplomacy. He previously worked as a staffer on the Senate Foreign Relations Committee, where he focused on similar issues, and separately as a consultant at Goldwyn Global Strategies, LLC, a boutique international energy consultancy. He holds a bachelor’s degree from the George Washington University and a master’s degree from the Johns Hopkins University. Antonio María Giraldi is a Dominican economist at the Central Bank of the Dominican Republic (CBDR). He graduated with a bachelor’s degree in Economics and Mathematics, and a master’s degree in Applied Economics from Western Michigan University. Antonio Giraldi is currently part of the department of monetary programming and economic research of the CBDR, where he oversees economic developments, both domestic and international, in order to provide insights for the monthly monetary policy meetings. He also conducts applied research on macroeconomic, financial and monetary topics. In addition, he is a Professor at the undergraduate level of the Universidad Iberoamericana and the Pontificia Universidad Católica Madre y Maestra, where he teaches introductory and intermediate macroeconomics and econometrics, as well as economics and statistics for business and finance. David Goldwyn is President of Goldwyn Global Strategies, LLC, an international energy advisory consultancy, and Chairman of the Atlantic Council Global Energy Center’s Energy Advisory Board. He is a globally recognized thought leader, educator and policy innovator in energy security and extractive industry transparency. David Goldwyn served as the US State Department’s special envoy and coordinator for international energy affairs from 2009 to 2011 and Assistant Secretary of Energy for International Affairs (1999–2001), the only person to hold both of the US government’s international energy leadership positions. He also served as National Security Deputy to Bill Richardson, US Ambassador to the United Nations (1997–98) and Chief of Staff to the US Under-Secretary of State for Political Affairs (1993–97). Goldwyn is a member of the US National Petroleum Council and the Council on Foreign Relations. He has been published extensively on topics related to energy security and transparency. He is the co-editor of Energy & Security: Strategies for a World in Transition (Wilson Center Press/Johns Hopkins University Press 2013) and Drilling Down: The Civil Society Guide to Extractive Industry Revenues and the EITI (Revenue Watch Institute, 2008). Goldwyn’s more recent publications include Election 2020: What’s at Stake for Energy (Atlantic Council, 2020); A New Energy Strategy for the Americas (Atlantic Council, 2020); Confronting the Resource Curse: Advice for Investors and Partners (Baker Institute, 2020); and Mexico’s Energy Reforms: The Prospects Under an AMLO Administration Atlantic Council (2018). David Gold­ wyn holds a BA in Government from Georgetown University, an MA in Public Affairs from Princeton University Woodrow Wilson School of Public and International Affairs and a JD from New York University. xx

List of contributors

Wenche Iren Hauge holds a PhD in Political Science and is currently a Senior Researcher at the Peace Research Institute Oslo (PIRO). Her dissertation of 2003 was on Causes and Dynamics of Conflict Escalation: The Role of Economic Development and Environmental Change. A Comparative Study of Haiti, Guatemala, Bangladesh, Senegal, Madagascar and Tunisia. In addition to her com­ parative experience, Dr Hauge has led several projects on Haiti, focusing on different aspects of political crises, economy and natural disasters. One of these is the project Conflict Prevention and Conflict Management in Haiti: Insight from Marginalized Communities, which has an integrated focus on the role of UN forces in Haiti. This project was carried out in cooperation with the Haitian researchers Rachelle Doucet and Alain Gilles. Dr Hauge has also conducted several projects on conflict prevention and peacebuilding in African, Latin American and Asian countries. In 2004 she was involved in the Utstein Peacebuilding Project, a study of the peacebuilding experiences of four countries – Germany, the Netherlands, Norway and the UK – which together constitute the Utstein Group. Lately, she has led several projects focusing on the gender dimension of disarmament, demobilization and reintegration processes, including projects focusing on former child soldiers. Lester Henry is Senior Lecturer in the Department of Economics at the University of the West Indies, St Augustine. He has a PhD in Economics from the University of Massachusetts at Amherst. He also did graduate studies at the University of California San Diego. His under­ graduate studies were done at the University of Wisconsin at Madison and at Brooklyn College where he obtained his bachelor’s degree in Economics with Mathematics and Computer Sci­ ence. He was the recipient of a graduate fellowship of the American Economic Association, 1986–88. Dr Henry has taught at Brooklyn College (CUNY) and the Fashion Institute of Technology in New York, and was a Summer Fellow at the Center for Advanced Study in the Behavioral Sciences at Stanford University. He was also a graduate Assistant at both the Uni­ versity of California San Diego and the University of Massachusetts at Amherst. His areas of interest include International Finance, Capital Flight, Monetary Policy, the Digital Divide and Trade. Tony Heron is Professor of International Political Economy and N8 AgriFood Chair at the University of York. His previous books include The Global Political Economy of Trade Protectionism and Liberalisation (Routledge, 2012) and Pathways from Preferential Trade (Palgrave Macmillan, 2013). More recently, Tony Heron has published work in Contemporary Politics, the European Journal of International Relations, Third World Thematics and Global Policy, among others. Kristina Hinds holds a PhD in International Relations (London School of Economics), an MA in International Relations (University of Kent), a PGDip in University Teaching and Learning (University of the West Indies – UWI) and a BA in International Development Studies (St Mary’s University). She has lectured in Politics, International Relations and Integration Studies at the UWI since 2006. At the UWI, she served as coordinator of the MSc Integration Studies and spearheaded the development of the undergraduate International Relations pro­ gramme which she now coordinates. Dr Hinds has published work on civil society, gender political protest, citizen investor programmes and information and communications technolo­ gies, all in connection to governance in the Caribbean. In January 2019 she published a book entitled Civil Society Organisation, Governance and the Caribbean Community. She is an active member of the International Studies Association having served as the Latin American and Car­ ibbean representative for the Global South Caucus (2015–17), co-chair of the Global South Task Force (2017–18) and as a member of the executives of the Latin America and Caribbean xxi

List of contributors

Section (2019–20) and the Women’s Caucus (2019–20). She is also an involved member within the Caribbean Studies Association where she served as the Programme Chair for the 2020 Con­ ference. Dr Hinds has also played active roles in sport in Barbados as a former national Field Hockey Goalkeeper for Barbados, including playing on the medal-winning 2015 (Pan-American Challenge) National Women’s team. She also has also been involved in sport administration, serving as the Female Vice-President of the Barbados Hockey Federation from 2016–18. Patsy Lewis is Visiting Professor of International and Public Affairs and Director of the Center for Latin American and Caribbean Studies at Brown University. She received her PhD (History) and MPhil (International Relations) from Cambridge University (Trinity College), and a BA from the University of the West Indies (UWI), Jamaica. She specializes in the political economy and development challenges of the Caribbean. Her published work has focused on the Car­ ibbean Community (CARICOM) and the Organization of Eastern Caribbean States, in parti­ cular the role of these regional integration arrangements in addressing the development challenges of Caribbean small states. She has also published on the challenges facing small states in the wake of economic and political crises and natural disasters, migration strategies, trade and development. Her publications include Pan Caribbean Integration: Beyond CARICOM co-edited with Terri-Ann Gilbert-Roberts and Jessica Byron (Routledge, 2018); Grenada: Revolution and Invasion co-edited with Gary Williams and Peter Clegg (University of the West Indies Press, 2015); and Surviving Small Size: Regional Integration in Caribbean Ministates (University of the West Indies Press, 2002). She was previously Professor of Regional Integration and Small States Development at the UWI. Scott B. MacDonald is the Chief Economist at Smith’s Research & Gradings and Senior Associate at the Washington, DC-based Center for Strategic and International Studies. Prior to that, he was the Head of Research at MC Asset Management LLC, a wholly owned subsidiary of Mitsubishi Corporation; Head of Credit and Economic Research at Aladdin Capital Man­ agement in Stamford, Connecticut; Chief Economist for KWR International; Director of Sovereign Research at Donaldson, Lufkin & Jenrette; Sovereign Analyst at Credit Suisse; and an international economic adviser in the Office of the Comptroller of the Currency in Washing­ ton, DC. He is the author or editor of 18 books and numerous articles on economic affairs, covering events in the Caribbean, Latin America, Europe, Asia and North America. He holds a PhD in Political Science from the University of Connecticut, an MA in Asian Studies from the University of London’s School of Oriental and African Studies, and a BA in History and Poli­ tical Science from Trinity College in Hartford, Connecticut. He is also a member of the board and Treasurer of Directors for El Centro Hispano, a non-profit organization. Sergio M. Marxuach is the Policy Director and General Counsel at the Center for a New Economy, a non-profit, non-partisan think tank. Prior to joining the Center, Sergio Marxuach served as Deputy Secretary of Commerce and Economic Development for the Commonwealth of Puerto Rico and as Special Assistant to the Executive Director of the Commonwealth’s Office of Management and Budget. Before joining the Commonwealth government, he was an Associate for five years at the New York City law firm of Curtis, Mallet-Prevost, Colt & Mosle LLP, where he worked mostly on Latin American transactions and international corporate matters, structuring cross-border capital market transactions, and arranging vendor financing and syndicated credit facilities for US multinational firms. Sergio Marxuach has also been invited to testify before several Congressional committees and to brief committee staff members as well as US executive branch officials on matters related to Puerto Rico’s economy and fiscal situation. xxii

List of contributors

Sergio Marxuach has a BA in Economics and Political Science from Yale University, where he was awarded the Henry Edwards Ellsworth Prize for his Senior Essay. He also obtained a JD degree from the Georgetown University Law Center and an MSc in Foreign Service from the Graduate School of Foreign Service at Georgetown University. Anthony P. Maingot was born in Trinidad and educated there and in Costa Rica and Cur­ açao. He received a postdoctoral degree in History at Yale University and was subsequently promoted to Assistant Professor of History and Sociology and Director of the Antilles Research Program at Yale. He was a Founding Professor at Florida International University and retired in 2006. His most recent book is Race and Ideology and the Decline of Marxism in the Caribbean (Gainesville: University Press of Florida, 2015). Alain Maurin is a graduate of the Université de Paris II-Assas (MA, PhD). He is currently Professor of Economics at the University of the French West Indies (UFWI) and Director of the Centre de recherche en économie et droit du développement insulaire, Center for Research in Economics and Law of Insular Development). He served as Director of the Department of Economics from 2003 to 2013 and also as Deputy Dean of the Faculty of Sciences Juridiques et Economiques de la Guadeloupe from 2007 to 2019. He teaches applied economics, econo­ metric modelling and statistics. He is Co-Director of the Master of Applied Economics of the UFWI specialized in Development Engineering and Economic Expertise. His research focuses mainly on the themes of the development of insular territories. He has co-directed several col­ lective books and published numerous articles in French and international economic journals such as the Revue d’Économie Régionale & Urbaine, Hommes & Migrations, Economic Modelling, International Economic Journal, International Research Journal of Finance and Economics, Applied Econometrics and International Development, Business, Finance & Economics in Emerging Economies, Social and Economic Studies, the Journal of Eastern Caribbean Studies and Advances in Management and Applied Economics. Sherill V. C. Morris-Francis, PhD, MSW, BSW, is a Professor and Graduate Coordinator in the Department of Criminal Justice at Mississippi Valley State University. She is also the Director of Academic Assessment at Mississippi Valley State University. Dr Morris-Francis earned her BS and MS degrees in Social Work from the University of the West Indies, Jamaica. In 2009 she earned her PhD in Juvenile Justice from Prairie View A&M University. Dr MorrisFrancis previously worked as an Assistant Dean at the College of Juvenile Justice and Psychol­ ogy at Prairie View A&M University. She also has extensive experience of working with teen mothers and young men ‘at risk’ in Jamaica, and youths in therapeutic foster care and girls in detention in Canada. Dr Morris-Francis is a member of the Academy of Criminal Justice Sci­ ences and is the Co-Chair of the Caribbean Crime Study Group and the current Chair for the Juvenile Justice and Delinquency Section. Her research interests include Program Implementation and Evaluation; Minorities and the Juvenile Justice System; School Factors and Delinquency, Juvenile Mental Health Issues, Female Juveniles, Domestic Violence; and Restorative and Com­ munity Justice. Dr Morris-Francis and colleagues’ most recent publication is a book entitled Crime and Violence in the Caribbean: Lessons from Jamaica (2019). The second book in this series, Youth and Violence and Crime in the Caribbean, was forthcoming in 2020. Susan Pozo is Distinguished University Scholar, Professor of Economics, and the Director of the Global and International Studies Program at Western Michigan University in Kalamazoo, Michigan. She holds a PhD in Economics from Michigan State University and an AB from xxiii

List of contributors

Barnard College. Her research focuses on refugees, immigration policy, international human capital, undocumented migration, remittances, uncertainty, and foreign exchange rates. Susan Pozo’s publications include The Human and Economic Implications of Twenty-First Century Immi­ gration Policy (Upjohn Institute, 2018); ‘An Alternative Approach for Identifying a Hidden Immigrant Population’, Journal of Economics, Race, and Policy 2018; ‘Immigration and Housing: A Spatial Econometric Analysis’, Journal of Housing Economics (2017); ‘Immigration Enforcement, Parent-Child Separations and Intent to Remigrate by Central American Deportees’, Demography (2015). Susan Pozo’s work has been funded by the United Nations, the Inter-American Development Bank, the National Institutes of Health, the Fulbright Foundation and the BBVA. She has held visiting research positions at the Universidad de Montevideo, the Universidad de Salamanca and the University of Oxford. She has also served as President of the of the American Society of Hispanic Economists. Cintia Quiliconi is Professor in the International Studies and Communication Department at FLACSO-Ecuador, and Senior Editor of the Oxford Research Encyclopedia of International Studies. She has a PhD in Politics and International Relations from the University of Southern Cali­ fornia, holds an MA in Politics from New York University, and a BA in Political Science from the University of Buenos Aires. She has been a Fulbright scholar and consultant to various international organizations such as the World Bank, the Inter-American Development Bank and the United Nations Development Programme. She has served as adviser to the Secretariat of Industry and the Secretariat of Agriculture in Argentina. Her publications and research interests focus on international political economy and development, regionalism in Latin America and trade negotiations. Renato Rivera Rhon holds a master’s degree in International Relations from the Institut Barcelona d’Estudis Internacionals and a Research Master’s in International Studies from FLACSO-Ecuador. His research interests focus on Latin American regionalism, international political economy and security. He has represented Ecuador in regional organizations such as the Andean Community, the Organization of American States, the Forum for the Progress of South America (PROSUR) and the Union of South American Nations (UNASUR). Brad W. Setser is the Steven A. Tananbaum Senior Fellow for International Economics at the Council on Foreign Relations. He previously served as the Deputy Assistant Secretary for International Economic Analysis in the US Treasury from 2011 to 2015, where he worked on Europe’s financial crisis, currency policy, financial sanctions, commodity shocks and Puerto Rico’s debt crisis. He was previously the Director for International Economics, serving jointly on the staff of the National Economic Council and the National Security Council. Brad Setser has also been the Director of Global Research for Roubini Global Economics and a visiting scholar at the International Monetary Fund. He is the author of Sovereign Wealth and Sovereign Power (CFR, 2008) and the co-author, with Nouriel Roubini, of Bailouts and Bail-ins: Responding to Financial Crises in Emerging Economies (Peterson Institute, 2004), which draws les­ sons from emerging market financial crises between 1995 and 2003. His work has been pub­ lished in Foreign Affairs, Finance and Development, Global Governance and the Georgetown Journal of International Law, among others. He holds a BA from Harvard University, an MA from Sciences-Po, and an MPhil and a DPhil in International Relations from Oxford University. Clive Y. Thomas is a retired Distinguished Professor of Economics and Director of the Insti­ tute of Development Studies, University of Guyana. He has served as a Presidential Advisor on xxiv

List of contributors

Sustainable Development, Chairman of the Guyana Sugar Corporation and Director of the State Assets Recovery Agency. He has held Visiting Professorships in Africa, Canada, the USA and the West Indies. He has authored/co-authored 30 books and research monographs, and published over 150 academic articles and contributions to books/research monographs. He has received the Cacique Crown of Honour for Contributions to Education in Guyana, and the George Beckford Award for Contributions to Caribbean Economy. Professor Thomas is a regular Sunday columnist for the Guyana Stabroek News and since 2016 has written extensively on development matters, particularly those relating to the oil and gas sector. Patrick Kent Watson is Professor Emeritus at the University of the West Indies, St Augustine, where he served, until his retirement in September 2017, as Professor of Applied Economics and University Director at the Sir Arthur Lewis Institute of Social and Economic Studies. Pro­ fessor Watson also served as Dean of the Faculty of Social Sciences from 1995 to 2003. He holds Master’s and Doctoral degrees in Mathematical Economics and Econometrics from the Université de Paris I (Pantheon-Sorbonne) and a Bachelor of Commerce degree, with Accounting as a principal subject, from the University of Leeds. During Professor Watson’s career, he served as Chairman of the Trinidad and Tobago Securities and Exchange Commis­ sion, Chairman of the North-West Regional Health Authority, Deputy Chairman of the Regulated Industries Commission, Director of the Central Bank of Trinidad and Tobago, and member of the Board of Directors of the International Organization of Securities Commissions. He specializes in, and is published widely on, empirical studies related to the Caribbean economy. DeLisle Worrell is an international economic consultant, a member of the Financial Policy Council of the Bermuda Monetary Authority, a member of the Bretton Woods Committee, Washington, DC, and President of the Association for Barbados-China Friendship. He was Governor of the Central Bank of Barbados from 2009 to 2017. Dr Worrell spent a decade on the staff of the International Monetary Fund, providing policy advice to countries as diverse as Pakistan, Sri Lanka, Bosnia-Herzegovina, Latvia, Tanzania, The Gambia, Haiti and Papua New Guinea, among others. Dr Worrell has had fellowships with Princeton and Yale Universities, the Smithsonian Institution and the Peterson Institute (both in Washington, DC), and the US Federal Reserve. He was General Chairperson of the International Symposium on Forecasting 1997, and a member of the programme committee of the International Economic Association Moscow congress of 1992. Dr Worrell’s publications include Policies for Stabilisation and Growth in Small Very Open Economies (Group of Thirty, Washington DC, 2012), South Pacific and Car­ ibbean Island Economies (with Te’o Fairbairn; Foundation for Development Cooperation, Bris­ bane, Australia, 1996), Economic Policies in Small Open Economies: Prospects for the Caribbean (London: Commonwealth Secretariat, 1992), and Small Island Economies (New York: Praeger, 1987). He has edited a further eight volumes on topics ranging from fiscal sustainability and price formation to Caribbean integration and the economics of small states. Dr Worrell, a career central banker, founded the Research Department of the Central Bank of Barbados in 1973, and he has lectured at several universities. Dr Worrell’s PhD in Economics is from McGill University, Montreal.

xxv

Preface

The past few years have seen a renewed interest in the Caribbean economies. These economies share several characteristics that set them apart from other parts of the world. Their small size, high vulnerability to the effects of climate change, increasing frequency of natural disasters and energy insecurity make many of the policy approaches adopted in other parts of the world ineffective in efforts throughout the region to achieve sustained growth and improved standards of living. The region’s unique blend of impediments to growth has generally resulted in a vicious circle of forces stemming from high levels of debt and severe fiscal constraints. The resulting poverty has facilitated increased crime-related violence and an expanded drug trade, which, in turn, has accelerated the brain drain from the region. While regional integration efforts have attempted to overcome these impediments, the fate of the region remains largely dependent on outside forces beyond its control. Because of their size, nearly all the countries in the Caribbean have been forced to adopt fixed exchange rates whose maintenance often constricts governmental attempts to provide stability to the domestic economy. In recent years, external forces have often worked at cross purposes with some assisting the region’s efforts in restoring growth following the 2008–09 global financial crisis with others under­ mining local efforts. Venezuelan financial support aided many countries in overcoming their energy deficiencies only to find themselves more vulnerable once that country was forced to cut support. US initiatives have been inconsistent, while increased Chinese interest in the region is raising con­ cerns as to that country’s motivations. The legacy of colonialism is still active, but British, French and Dutch assistance efforts are increasingly encountering their own budgetary limits. With these themes in mind, the volume is divided into four main sections. The first explores commonalities throughout the region. This is followed by an assessment of the main obstacles to sustained growth, and the role played by external factors. A final section contains a series of country case studies that explore in depth, each country’s similarity with its regional neighbours as well as those factors that set it apart. Clearly, a book of this scope and sheer length could not have reached completion without the contributions of many individuals. In addition to the volume’s many contributors, special thanks go to my colleagues in the Department of National Security at the Naval Postgraduate School whose help and encouragement proved invaluable. A special thanks goes to the students in my seminars on the Political Economy of Latin America. Greta E. Marlatt of the Naval Postgraduate School Knox Library went far beyond the call of duty to keep me informed of the latest oil developments throughout the course of the writing of this manuscript – a task only she could perform. Alison Phillips was a joy to work with during the copy-editing phase, and her tireless efforts are much appreciated. Most of all, thanks go to Cathy Hartley, Europa Com­ missioning Editor, who conceived of the original study, provided ongoing guidance and most importantly provided good cheer and positive encouragement throughout. xxvi

Foreword by Sir Ronald Sanders

At the time the chapters in this book were being written none of the authors could have envi­ saged the eruption and spread of the coronavirus (COVID-19) that characterized the first quarter of 2020 and looked set to alter the world order, painstakingly built over the past 75 years. The virus emerged in the city of Wuhan in the People’s Republic of China in November 2019. Delays by the Chinese government in dealing with the crisis and reporting it to the World Health Organization (WHO) later resulted in accusing fingers being pointed at Beijing for causing the pandemic.1 China first reported ‘pneumonia of unknown cause’ to WHO on 31 December 2019. On 30 January 2020, WHO declared the coronavirus outbreak to be an epidemic, later calling it COVID-19 on 11 February 2020, and finally characterizing the virus as a pandemic on 11 March 2020,2 by which time the disease had spread across the world. In April 2020, when this Foreword was being written, cases were continuing to grow at a galloping pace and there were already almost 1.8 million infected persons and more than 110,000 deaths globally. By comparison, the Inter-American Development Bank reported that ‘some 8,100 people contracted severe acute respiratory syndrome (SARS) across the globe between November 2002 and July 2003 and 774 died’.3 Also measured in mid-April 2020, the 16 independent Caribbean countries4 had 3,866 con­ firmed cases and 189 deaths.5 These figures showed that the highest number of cases and deaths occurred in the Dominican Republic (2,759 and 135, respectively), while the lowest were in Suriname with 10 confirmed cases and one death. However, it must be emphasized that con­ firmed numbers depended on the availability of test kits, the efficiency of testing persons who contracted the disease and the accuracy of the laboratory results. These were doubtful in many cases. Haiti, for instance, with a population of 11 million people and a paucity of medical resources, reported the unlikely figures of only 33 cases and three deaths. COVID-19 upended the world order, rapidly spreading across the globe in unprecedented magnitude and scope. Its political and economic consequences could last for years, even if the virus itself is controlled and its spread contained. The Caribbean region was among the hardest hit economically, particularly those countries with a high dependence on tourism. As cruise ships stopped sailing, airplanes ceased flying and hotels closed, government revenues declined rapidly even as their expenses increased to prevent infection by the virus and to limit its spread among their populations. Early forecasts for the tourism industry by the World Trade and Tourism Council put global losses of jobs at 75 million and revenues at US $2.1 trillion.6 The adverse economic effects were immediate. Some countries reported to the International Monetary Fund (IMF) and the World Bank that they were being ‘beleaguered by an unex­ pected economic decline that has already stripped us of more than 20% of our GDP in some cases, and the certain prospect of further and prolonged deterioration’.7 Recovery will only be xxvii

Foreword by Sir Ronald Sanders

achieved after a lengthy period during which extensive and costly work will have to be done to restore confidence in travel. That work must start, first, with a vaccine. But, as this Foreword was being written, a vaccine was not even a flicker of light in what appeared to be a long tunnel of medical research. The Caribbean countries, most of which are dependent on tourism, are unlikely to return to their 2019 growth rates for a minimum of three years. Neither can those countries that are less dependent on tourism look forward to the kind of global conditions that would boost their economies. As 2019 neared its end, the IMF forecast positive per capita income growth in over 160 of its 189 member countries. Before the end of the first quarter of 2020, the IMF Managing Director, Kristalina Georgieva, revealed that ‘that number has been turned on its head; we now project that over 170 countries will experience negative per capita growth this year’.8 The Caribbean’s economic fortunes have always been tied to conditions in its principal trading partners in North America and Europe, as many of the chapters in this volume describe. The unemployment rate in the USA, the Caribbean’s largest trading partner, had already reached 13% by 3 April 2020 and it was forecast to peak at 20% before coming down by the beginning of 2021.9 This significant decrease in US employment will have an adverse effect not only on tourism and remittances, but on US consumption of the commodities that the Car­ ibbean exports. That pattern was replicated in the European Union (EU) countries and Britain. In a revised forecast issued on 2 March 2020, before the pandemic worsened, the Organisation for Economic Co-operation and Development (OECD) had downgraded growth in Britain and the EU to 0.8%.10 Significantly, even the gloomy outlook for the global economy was calculated on the basis of the COVID-19 pandemic fading in the second half of 2020, but the IMF Managing Director stressed that ‘there is tremendous uncertainty around the outlook. It could get worse depending on many variable factors, including the duration of the pandemic’.11 The Caribbean, like most parts of the world, including the USA, were not prepared for any epidemic, let alone a virulent one such as COVID-19. The Economist Intelligence Unit revealed that in its 2019 Global Health Security Index it found that ‘the Caribbean scored below the global average, suggesting that the region is particularly vulnerable’.12 This became evident as almost every country in the region scrambled to construct emergency hospital facil­ ities and special quarantine accommodation as well as to secure test kits, instruments for testing, and a range of medical supplies including ventilators, masks and other protective clothing. These costs spiked governments’ expenditure as revenues were depleted both from the loss of export income, especially tourism, and from the national shutdown and curfew measures that contracted domestic economies. Most governments faced massive budgetary and fiscal deficits, seeking relief from the international financial institutions and from rich nations. The response of the latter was poor, notwithstanding a G20 leaders’ pledge, on 26 March 2020, to ‘work swiftly and decisively with the front-line international organizations, notably WHO, the International Mone­ tary Fund, the World Bank, and multilateral and regional development banks to deploy a robust, coherent, coordinated, and rapid financial package and to address any gaps in their toolkit’.13 The USA, which should have been the leader of global action, was prominent in its inaction. Preoccupied with the presidential elections scheduled to take place in November 2020, the rising number of deaths from COVID-19 – the highest in the world – and the declining per­ formance of the economy, the US government and the Congress were both focused on ‘America first’. At the time this Foreword was being written, apart from a statement issued on 7 April 2020 that the US had mobilized ‘US$6 million to provide test kits to Barbados and more than 60 other xxviii

Foreword by Sir Ronald Sanders

countries to fight the spread of COVID-19’14 – less than US $100,000 per country – there had been no announcement by the US government of any initiative to provide funds that would help developing countries, especially those in its immediate neighbourhood, to cope with the grave blows to their economies. Similarly, while on 8 April 2020 the EU announced that €918 million (approximately US $1 billion) would be allocated ‘to support our partners in Latin America and the Caribbean’,15 no details were provided as to which of the 34 nations would be the bene­ ficiaries or on what basis. An inkling of the allocation may have been given, five days before on 3 April, when the EU announced a grant of US $8.6 million to help the independent Caribbean countries to fight the coronavirus outbreak. In fact, that sum works out as roughly US $573,000 for each of the 16 countries, while these countries have had to spend tens of millions from their own coffers. Even China, which aligns itself with the G77 – the world’s developing nations – at the United Nations, and which often asserts its commitment to South-South co-operation, was unforthcoming. Apart from despatching medical supplies to some countries, China announced no proposals for a fund of its own to help vulnerable developing countries to cope with the economic battering they were enduring. China’s response did not match its economic and financial capacity. Yet, as will be discussed in this Handbook, it has considerable loan investments to protect in the region. Up until mid-January 2020, before the announcement of the COVID-19 pandemic and its sweeping harmful effects, oil and gas discoveries in Guyana and Suriname offered the basis for new wealth in the Caribbean and, therefore, attracted greater international attention to the region. In Guyana, oil production by a consortium of foreign companies, led by Exxon Mobil, looked set to transform the country from the second poorest nation (Haiti being the poorest) in Latin America and the Caribbean to one of the richest. The IMF forecast that, by 2025, oil production in Guyana would reach up to 750,000 barrels of oil per day and that, in 2020, its economic growth would jump by 86%. In neighbouring Suriname, which was already an oil producer, new discoveries of significant oil reserves were announced on 7 January 2020 by Apache Corporation and French oil major Total. However, by April 2020, this prospect began to dim partly because of the economic effects of the pandemic, but also because, since February 2020, oversupply of oil by 20% globally, and a decline in oil prices by 55%, looked set to reduce the income expectations of both Guyana and Suriname, at least in the short term. At the time of writing, the situation appeared worse for Guyana, owing to a political crisis whereby a general election held on 2 March 2020 had yet to produce a concrete result over a month later, amid claims by international, regional and local observers that the tabulation of votes by the Guyana Electoral Commission was ‘not credible’ and that a recount, overseen by independent observers, was necessary. US Secretary of State, Mike Pompeo, warned of ‘serious consequences’. At worst, the crisis could render Guyana a ‘rogue state’ and deprive Caribbean Community (CARICOM) countries of the potential economic benefits they might have derived from Guyana’s new fortunes in oil and gas. Remarkably, the leaders of the 15 CARICOM member states did not schedule a meeting to discuss their shared difficulties or to coordinate a regional response to them until 15 April 2020. Up until then, each of them had hustled, individually, to establish national arrangements to cope with containing the coronavirus and protecting the health of their people, and each sought bilateral and multilateral assistance on their own. However, in an IMF/World Bank announcement on 11 April 2020 concerning the developing and low-income countries in the xxix

Foreword by Sir Ronald Sanders

Caribbean that would receive funds from the two institutions’ emergency facilities, only Haiti was named.16 In the absence of immediate international support, Caribbean countries, many of which were already highly indebted, were forced to incur even more debt to cope with the sudden and unbudgeted costs related to COVID-19. But many of them found little comfort in a joint statement issued by the IMF and the World Bank on 25 March 2020 which called ‘on all official bilateral creditors to suspend debt payments from IDA countries that request for­ bearance’, adding that ‘this will help with IDA [International Development Agency] countries’ immediate liquidity needs to tackle challenges posed by the coronavirus outbreak and allow time for an assessment of the crisis impact and financing needs for each country’.17 Of the 16 independent Caribbean countries, only six are IDA countries, defined by their low per capita income.18 The remaining 10 are excluded from access to concessionary financing and are unlikely to secure any suspension of bilateral debt, including by the Paris Club. This situa­ tion will lead to higher levels of public debt and worsening debt-to-GDP ratios, and assuredly default on debt payments. Already, debt levels in some countries are regarded by the IMF and the World Bank as unsustainable, and, ominously, the IMF stated that ‘where we might be unable to lend because a country’s debt is unsustainable, we will look for solutions that can unlock financing’.19 What exactly that means in terms of conditions, including demands for austerity measures and containment of ambition by many governments is left to be seen. But the prospects look, undoubtedly, grim. Even when Caribbean governments get past containment of COVID-19, which, at the time of this writing, had not reached its peak, exceptional efforts will be required to stimulate the economy. However, unlike the wealthy countries of the world (the designation of high per capita income notwithstanding), Caribbean governments do not have myriad resources or tools on which to draw. More than likely, several of them will be forced to reduce the size of their public services and will be unable to provide support to private companies, including wage subsidies and tax holidays, and to the most vulnerable sectors of their populations. In the future, unclear and unpredictable as it now looks, Caribbean countries must begin the urgent work of planning for a new epoch in the world. Even before the challenges presented by the unprecedented magnitude of COVID-19’s effect on their economies, they were con­ fronting the need ‘for creative solutions to the region’s mounting problems’, as Robert Looney aptly puts it in the Introduction to this Handbook. Going forward, their first consideration should be the clear inability of each of them to go it alone, as manifestly demonstrated by their lack of capacity to deal with the health and economic effects of COVID-19. The political and social consequences have yet to be tackled, but they are sure to include increased unemployment, expanded poverty, high crime, social disquiet and disruption and, maybe, even destruction. The need for deepened structures of unity is beck­ oning far more urgently than ever before, including to save some Caribbean states from sliding into the category of ‘failed states’, unable to provide fundamental needs such as economic well-being, health, education, security, order and hope. Dealing effectively in the international community, in particular with the international financial institutions, has also been highlighted as a weakness resulting from the COVID-19 crisis. Stronger collective bargaining internationally would also be well served by deepened structures of unity that could make of CARICOM, by its expansion, a more beneficial institution in which greater emphasis is placed on ‘community’ and less on ‘sovereignty’. The way forward will call for far more collaboration and cohesion. Ideas on how to achieve this are contained in the many knowledgeable contributions in this Handbook. But at the end of the day, the power to effect change rests in the hands of the Caribbean’s political leaders, and xxx

Foreword by Sir Ronald Sanders

their capacity to look to the future through a wider regional lens and not a narrow nationalist prism. Sir Ronald Sanders is Antigua and Barbuda’s Ambassador to the United States of America and the Organization of American States. He is also a Senior Fellow at the Institute of Commonwealth Studies, University of London and at Massey College in the University of Toronto. He previously served as Ambassador to the World Trade Organization and was High Commissioner to the United Kingdom, also an elected member of the Executive Board of UNESCO and President of the Permanent Council of the Organization of American States. He has published widely on Caribbean affairs and on the region in the international community. Washington, DC April 2020

Notes 1 For a discussion of this, see, for instance, Kurt M. Campbell and Rush Doshi, ‘The coronavirus could reshape global order: China is manoeuvring for international leadership as the United States falters’, Foreign Affairs, 18 March 2020, and Simon Tisdall, ‘Power, equality, nationalism: How the pandemic will reshape the world’, The Guardian, 28 March 2020. 2 See www.who.int/emergencies/diseases/novel-coronavirus-2019/events-as-they-happen. 3 Victoria Nuguer and Andrew Powel (eds), ‘Policies to fight the pandemic’, 2020 Latin American and Caribbean Macroeconomic Report, Inter-American Development Bank, https://eur05.safelinks.protection. outlook.com/?url=https%3A%2F%2Fpublications.iadb.org%2Fpublications%2Fenglish%2Fdocument %2F2020_Latin_American_and_Caribbean_Macroeconomic_Report_Policies_to_Fight_the_Pandemic.pdf &data=02%7C01%7C%7Cf2db2a261ae64d91704c08d7de9b2ac2%7C84df9e7fe9f640afb435aaaaaaaaaaaa %7C1%7C0%7C637222630320580721&sdata=G1aKGOeQyIsXOwijPFtjWSlQdrqMtfUQDRNdfCvekr4 %3D&reserved=0 (accessed 12 April 2020). 4 Cuba, the Dominican Republic and the 14 nations of the Caribbean Community (CARICOM) – Antigua and Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Saint Kitts (Christopher) and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Suriname, and Trinidad and Tobago. 5 Source for the figures per country taken from Johns Hopkins Coronavirus Resource Center, https:// coronavirus.jhu.edu/map.html (accessed 12 April 2020). 6 Elizabeth Becker, ‘How hard will the coronavirus hit the travel industry?’ National Geographic, 2 April 2020, www.nationalgeographic.com/travel/2020/04/how-coronavirus-is-impacting-the-travel-industry/ (accessed 12 April 2020). 7 Paul Allen, ‘Antigua seeks international help for Caribbean countries’, Caribbean Business Report, 2 April 2020, https://caribbeanbusinessreport.com/news/antigua-seeks-international-help-for-caribbean-countries/ (accessed 11 April 2020). See also a letter dated 30 March 2020 from Gaston Browne, Prime Minister of Antigua and Barbuda, to Kristalina Georgieva, Managing Director of the IMF and David R. Malpass, President of the World Bank. 8 Kristalina Georgieva, ‘Confronting the crisis: Priorities for the global economy’, 9 April 2020, www. imf.org/en/News/Articles/2020/04/07/sp040920-SMs2020-Curtain-Raiser (accessed 11 April 2020). 9 For a discussion of this, see the New York Post, 10 April 2020, https://nypost.com/2020/04/10/us-can­ expect-6-percent-unemployment-rate-through-2021-economists/ (accessed 11 April 2020). 10 OECD Interim Economic Assessment. Coronavirus: The world economy at risk, 2 March 2020, p. 2, available at https://g8fip1kplyr33r3krz5b97d1-wpengine.netdna-ssl.com/wp-content/uploads/2020/03/oecd-interim­ economic-outlook-under-embargo.pdf (accessed 11 April 2020). 11 Ibid., note 8. 12 Georgieva, ‘Confronting the crisis’. 13 ‘G20 Leaders’ Statement: Extraordinary G20 Leaders’ Summit Statement on COVID-19’, https://g20.org/ en/media/Documents/G20_Extraordinary%20G20%20Leaders’%20Summit_Statement_EN%20(3).pdf. 14 Press release issued by the US Embassy, Barbados, 7 April 2020, https://bb.usembassy.gov/us6­ million-from-united-states-helps-fund-2000-covid-19-tests-for-barbados/ (accessed 12 April 2020).

xxxi

Foreword by Sir Ronald Sanders 15 ‘Coronavirus: EU global response to fight the pandemic’, media statement by the European Com­ mission released on 8 April 2020, https://ec.europa.eu/international-partnerships/news/coronavirus­ eu-global-response-fight-pandemic_en. 16 Reuters, 11 April 2020, https://finance.yahoo.com/amphtml/news/imf-wold-bank-aid-aimed­ 044642415.html (accessed 12 April 2020). 17 ‘Joint statement by the World Bank Group and the International Monetary Fund regarding a call to action on the debt of IDA countries’, 25 March 2020, www.worldbank.org/en/news/statement/2020/03/ 25/joint-statement-from-the-world-bank-group-and-the-international-monetary-fund-regarding-a-call-to­ action-on-the-debt-of-ida-countries. 18 Dominica, Grenada, Guyana, Haiti, St Lucia, and St Vincent and the Grenadines. 19 Georgieva.

xxxii

1 Introduction Robert E. Looney

The chapters in this volume examine the Caribbean economies from several perspectives. Many break new ground in questioning past policy mindsets while developing new approaches to many of the traditional constraints limiting growth in the region. With new challenges identi­ fied, several chapters put forward approaches that may prove to be fruitful in achieving better economic performance. One overriding issue concerns the viability of these economies. Growth in the region has been on a downward trend since the 1980s when gross domestic product (GDP) expanded at an average annual rate of 3.2%. Unfortunately, growth declined to 3.1% in the 1990s, to 2.7% in the 2000s, and finally to 1.7% from 2010–19. Prior to the global financial crisis (1980–2007), growth averaged 3.2%, subsequently falling off to 1.3% (2008–2019). The chapters in this volume address the region’s declining pattern of growth both directly and indirectly with the first set of chapters (Chapters 2–6) examining several commonalities found throughout the region. The next set (Chapters 7–11) examines the obstacles to sustained progress, while a third set (Chapters 12–15) consider the specific role of external influences. Next, a series of individual country studies (Chapters 16–29) provide a sense of the diversity that runs through the region. Finally, Chapter 30 provides a a brief overview of the new chal­ lenges presented by the Covid-19 pandemic. In Chapter 2, DeLisle Worrell argues that policymaking may be at the heart of the region’s poor economic performance. He recommends an alternative to the standard approach to eco­ nomic stabilization and growth policy for small open economies. The conventional view, shared by the International Monetary Fund (IMF), other international institutions, and many orthodox economists, is that a combination of credible inflation-targeting regimes, flexible exchange rates and fiscal sustainability are the core elements of a successful, sustainable policy approach. It is also often contended that this approach is appropriate for all countries, regardless of size. As an alter­ native, DeLisle Worrell proposes a policy package consisting of fiscal management to maintain and improve the international competitiveness of the economy. His approach stresses the need to maximize the inflow of private foreign capital through attractive rates of return, as well as to sta­ bilize inflation expectations by anchoring the exchange rate to an international reserve currency. A growing threat to sustained growth in the region is climate change. As Masao- Ashtine points out in Chapter 3, weaving through the compounded and often daunting complexities of climate change quickly leaves many policymakers and development strategists feeling defeated. 1

Robert E. Looney

One aspect of the current weather extremes and shifting climatologies that is clear, however, is the existence of specific vulnerabilities faced by small island developing states (SIDS). The United Nations (UN) lists 16 Caribbean member countries out of the 38 defined as SIDS. Beginning with the awakening of climate research in the region, Masao- Ashtine traces the his­ torical impacts of changing weather patterns in the region, culminating in today’s worsening pro­ spects. Fortunately, many governments and international financiers are attempting to increase climate resilience through economic reform and energy transformations. In this setting, several questions arise: Who pays? Will tourism survive the coming storms? Can an energy revolution secure the region’s future on the world stage? Masao- Ashtine sheds light on these highly pertinent questions while also calling upon leading research to give an equal sense of hope and warning. Like climate change, energy insecurity is another common feature of most of the region’s economies. In Chapter 4, David Goldwyn and Cory Gill describe the unique characteristics and challenges of energy security in the Caribbean; the recent progress in the development of national and regional ambitions, organizations and strategies; the opportunities the region has for decarbonization through the use of natural gas and renewable energy; and the significant successes achieved in recent years. They conclude with the lessons learned from these experiences and offer suggestions for extending this positive trend. The growth of the tourist industry in the Caribbean is a rich and varied success story. As DeLisle Worrell observes in Chapter 5, for the most part tourism has been a story of private enterprise, with the providers of tourism services pricing their services in line with the quality of service on offer, and, for a majority of countries, adjusting prices in a successful strategy of protecting or increasing their market share. The best performing countries recorded high aver­ age daily expenditure per visitor, full capacity, a growing inventory of accommodation, and strong increase in the number of arrivals. Among the other countries, there is every combina­ tion of high/low average daily expenditure, good and bad value propositions, diversification of source markets, full to low capacity utilization, and large, modest, little or no increase in accommodation. The results ranged from modest to exceptional growth in visitor arrivals, sustaining the Caribbean’s share of world tourism above 2% of the global total. Given the generally small size of the countries in the region, some sort of regional integration is likely to convey many economic benefits. In Chapter 6, Patsy Lewis examines the role that the Caribbean Community (CARICOM) plays in this regard. CARICOM is a 15-member grouping of 16 million people. She concludes that its members would be much worse off if it did not exist. These benefits occur through shoring up member sovereignty by giving voice to issues that affect them and, more generally, in increasing their visibility in the region and international community. Unfortunately, many of the challenges that confront CARICOM in helping to transform regional economies are structural and beyond its control. The next set of chapters examine the role played by specific elements in constraining growth in many of the region’s economies. In Chapter 7, Lester Henry examines the critical issue of debt and fiscal constraints in the CARICOM region. First, the history and evolution of the debt problem in the region from the 1980s to the present day is traced. The nature and structural characteristics of the debt is then explored. In some cases, sizeable external debt has been accompanied by large internal debt, and in others both are at critical levels. After examining the macroeconomic significance and consequences of the debt, the question is asked as to what is the opportunity cost of carrying such high levels of per capita debt? The potential for debt reduction and increased fiscal sustainability is then examined. The final section provides a summary with some policy recommendations on the way forward. Crime, violence, and drugs represent not only a social problem, but also one that undermines economic growth throughout the region. As Sherill Morris-Francis notes in Chapter 8, escalating 2

Introduction

crime trends in the region, especially since the late 1980s, are of grave concern, with some countries boasting the highest crime rates in the world. The situation has imposed high costs on the region, including high levels of insecurity and distrust, presenting challenges to democracy and develop­ ment. She then reviews the crime and violence situation in the Caribbean by first examining the history of colonialism and reviewing some theoretical explanations of crime applicable to the Car­ ibbean. She continues with an overview of crime patterns and trends, looking specifically at homi­ cides, drug and gang activities, and shows that the increased use of firearms has led to higher levels of crime and violence. The consequences and costs are then discussed, and it is shown that in the Caribbean, crime, particularly violent crime, has devastating effects and presents negative costs to society. White-collar crime presents a contrasting difficulty. In Chapter 9, Kristina Hinds notes that the region has become a haven for illicit activities. The chapter’s principal argument is that external imperatives that seek to address the deluge of illegal acts of importance to ‘developed’ countries within Caribbean jurisdictions inform the ways in which such criminal activities are addressed in the region. Caribbean jurisdictions appear to prioritize efforts to address external concerns such as those relating to money laundering, in efforts to rescind the portrayal of the region as a zone of illegality, and the consequences that flow from this. Meanwhile, action against violent criminal activities tend to be more focused on the treatment of crime directly affecting the inhabitants of the region, but leaving high-level white-collar criminal activities that may implicate local business and political elites to be handled with a relatively light touch. Natural disasters, mainly weather-related, represent a looming threat to prosperity in the Caribbean. Unfortunately, the ability to respond to this menace is declining. Domestic resources are often severely limited due to prolonged periods of fiscal deficits and accumulated external debt burdens. International aid, while useful, often arrives after a considerable delay and is mainly focused on short-term issues such as humanitarian needs and repair rather than on longer-term investments that increase resiliency to subsequent disasters. As Robert Looney suggests in Chapter 10, a vicious circle is developing in the Caribbean, whereby inadequate funds for reconstruction lessen resiliency to climate change. The result is incomplete recoveries, which in turn perpetuate and, in some cases, expand large pockets of poverty and thus increased numbers of citizens who are highly vulnerable to the next round of natural disasters. If the circle continues, look for an accelerated depopulation of the region with mounting numbers of climate refugees. He concludes that a reorientation of development strategies will be required if the region is to remain viable. The focus of these programmes should shift towards the construction of sturdier buildings, poverty reduction, targeted educational programmes, and diversification away from an over-reliance on climate-sensitive tourism. Caribbean countries, to remain viable, must look beyond short-term disaster responses and commit themselves to a focus on building self-protective resilience throughout the region. More often than not, exchange rate policies throughout the region have impeded rather than facilitated economic growth. In open economies, the impact of depreciating exchange rates on the purchasing power of incomes is considerable and erodes the savings habit. Exchange rate volatility also discourages investment and may cause financial instability. To overcome these effects, in Chapter 11 DeLisle Worrell proposes an approach to macroeconomic policy that equips the authorities in small open financially integrated economies to target the exchange rate by influencing the volumes of trade in goods and services to attain equilibrium at the target rate. The use of fiscal policy achieves this result. Specifically, the authorities adjust the size of the fiscal deficit and how it is financed to contain the level of aggregate expenditure and the demand for imports that flows from that expenditure. In the longer term, productivity-enhancing measures 3

Robert E. Looney

secure growth in the supply of foreign exchange. The exchange rate anchor keeps domestic infla­ tion in line with world price changes. Moreover, the anchor is a powerful indicator of economic policy success and a persuasive reason to adopt necessary adjustment. One message comes through clearly – a country that can set an exchange rate target and achieve it consistently over time gains credibility. Owing to the small size of Caribbean economies, elements that are external to the region continue to play a significant role, both positively and negatively, in affecting growth and development. Historically, Venezuela, through providing monetary assistance and discounted oil, helped to relieve the financial constraint facing many of the region’s energy-poor countries. However, following Venezuela’s economic collapse, this safety net is no longer present. As Anthony Maingot notes in Chapter 12, the situation in Venezuela is not likely to change any­ time soon as it stems from that country’s political culture of caudillismo and the tendency towards perpetuation in office (continuismo). Following the virtual collapse of the economy under Nicolas Maduro, maintaining the loyalty of the military loyal has meant making use of every source of funding, legal and illegal. Any return to pluralist democratic politics will have to deal with a military and paramilitary accustomed to illegal prebends. In Chapter 13, Ginelle Greene Dewasmes and Tony Heron explore the changing external economic relations of the Caribbean with its two biggest trading partners, the USA and the European Union (EU). They find that in its immediate post-colonial period, the Caribbean received considerable benefits from key US and EU trade policy instruments such as the Car­ ibbean Basin Economic Recovery Act and the Lomé Agreement, respectively. However, amid a changing global landscape, over time the US- and EU-Caribbean relationship has increasingly been portrayed as one of diminished privilege and a steady erosion of preferential treatment. The post-Cold War and World Trade Organization era have ushered in trade policy shifts such as the EU’s Economic Partnership Agreements and former US President Clinton’s attempted ‘Free Trade Area of the Americas’. They conclude that in the present epoch, external devel­ opments such as the election of Donald Trump to the presidency of the USA and Brexit have once more elicited a significant shift in the nature of US- and EU-Caribbean relations. Although the precise implications of these changes are not yet clear, current US- and EUCaribbean relations certainly reflect terms that are increasingly shaped by national rather than regional or global interests. In Chapter 14, Richard Bernal shows that the influence of the People’s Republic of China on the Caribbean is proliferating with many countries in the region shifting their diplomatic ties from Taiwan to the PRC. As a result, the region is trading more with China. It also receives increased aid and investment from that country. While the USA has cautioned against increas­ ing dependence on China, the Trump Administration has yet to develop an effective strategy to combat China’s growing soft power or to address the many challenges currently facing the region. While CARICOM has been an important element in many of the Caribbean countries’ economies, other regional integration schemes may begin to play a significant role in this regard. In Chapter 15, Cintia Quiliconi and Renato Rivera Rhon discuss the theoretical approaches towards Latin American regionalism that have emerged in the past few decades. In particular, they focus on the Union of South American Nations (UNASUR) and the Latin American and the Caribbean Community (CELAC). First, they assess regional cooperation in CELAC and its current stalemate. Their examination of UNASUR highlights the importance of ideological divergence and lack of regional leadership to explain the current crisis facing the organization. They conclude that regional cooperation in Latin America depends on ideological convergence and regional leadership to succeed. 4

Introduction

The final set of chapters examine the economic situation at the country level. While most of these countries share many of the elements noted in previous chapters, each has a unique his­ tory and set of structural factors that set it apart. In Chapter 16, Brad Setser and Sergio Marx­ uach show how the Puerto Rican economy had been declining for many years before Hurricane Maria devastated large parts of the Commonwealth. Owing to this decline, the island’s relationship with the USA was increasingly questioned by many observers in Puerto Rico. The chapter shows how Puerto Rico’s current economic relationship with the USA is not working. It concludes by arguing that restarting Puerto Rico’s economy and putting it on a renewed trajectory of convergence will take more than the completion of the current debt restructuring process and the disbursement of already appropriated federal aid. It will require a fundamental rethinking of how Puerto Rico’s economy fits into the broader US economy. In Chapter 17, Wenche Iren Hauge draws the line from current demonstrations and food riots in Haiti, back to the 1980s, when economic reforms and structural adjustment created a basis for chronic food insecurity in the country. She shows that after these reforms, Haiti became permanently dependent on imported food, particularly on the import of staples like rice, mainly from the USA. Economic mobility is almost impossible for the average Haitian, as a small economic elite controls large segments of the economy. Of critical importance are the links between this Haitian elite and US actors, and the economic support that this elite has received, particularly from the International Republican Institute. She also traces the disastrous effects of a series of natural disasters that have hit the country in recent years. In this regard, international aid to Haiti after the devastating earthquake in 2010, and after the many hurri­ canes, particularly Hurricane Matthew in 2016, was mainly channelled through the UN and international organizations. Unfortunately, very little flowed into agricultural investment or state welfare services. As a result, Haiti remains trapped in a vicious circle of inequality and food insecurity. The Cuban economy has stagnated for years, with its relative international isolation since 1959 imposing high costs. The current situation is not sustainable, and sooner or later, the country must be reintegrated into the global economy. However, as Richard Feinberg notes in Chapter 18, before the country can indeed prosper in this new environment, several constraints must be lifted. First, the US market must be open to the Cuban one, and second, an actual market system must emerge that encourages and rewards private sector activity and innovation. Trinidad and Tobago remains among the most prosperous of the Caribbean islands. Its abundant endowment of oil and natural gas has provided its citizens with a relatively high standard of living. As Lester Henry notes in Chapter 19, from the first year of independence to the present day, successive governments have recognized the need for diversification of the economy. Several initiatives have been tried, including import substitution industrialization along the lines suggested by W. Arthur Lewis. However, there has been minimal success in changing the basic structure of the economy. One result is that since 2010 economic growth remains flat or negative. This pattern of growth occurred despite buoyant energy prices during the period from 2011 to 2014. Public debt, both external and internal, have started to rise once more as government budget deficits have accumulated over the past decade. Inflation and unemployment remain manageable, but foreign reserves are once again being used up in order to protect the exchange rate. As he observes, there is some hope that an amicable resolution of the crisis in Venezuela may result in a much-needed boost in natural gas supply to Trinidad and Tobago’s LNG plants, and this could provide the catalyst for renewed prosperity. The performance of the Belize economy since independence in 1981 has been decidedly mixed. In Chapter 20, Victor Bulmer-Thomas finds that the country’s macroeconomic stability has been preserved with low rates of inflation and responsible monetary policies. GDP growth 5

Robert E. Looney

for the first three decades was in line with the Caribbean average, but GDP per head has fallen since 2008. The proportion of households living in poverty has almost certainly increased since the last survey in 2009, while the rate of unemployment has remained a concern. The high rate of external indebtedness has been of particular concern, making it very difficult for the Belize government to invest in programmes that might improve labour productivity and allow the country to end the stagnation in GDP per head. Victor Bulmer-Thomas concludes that the Belizean economy finds itself in a debt trap that prevents it from growing. The country is not poor enough to qualify for debt relief, but neither is it rich enough to find the necessary resources to restructure its economy to achieve sustainable growth. The playing field for the private sector is not level with small companies unable to compete with those large firms able to access funds abroad and with the leverage to secure substantial tax reductions. In Chapter 21, Clive Thomas explores the implications of the discovery of vast reserves of oil and gas off the coast of Guyana. The chapter begins with an appraisal of Guyana’s pre-petro­ leum performance, which roughly covers the decade ending in 2015. Next, it examines several economic projections for the post-petroleum period, up to the 2030s. Within this framework, a ‘sector analysis’ of Guyana’s emerging petroleum industry is developed. He concludes that with a full ramp-up of production, Guyana’s recoverable reserves will significantly exceed current findings, falling within a range of 13–15 billion barrels of oil equivalent. However, full ramp-up projections may not be reached until the late 2030s In the period since World War II, Barbados has evolved from a desperately poor society, with only a small middle class, to a modern-day economy comprising mostly middle-income earners, and it is ranked by the UN Development Programme as being among those countries which merit inclusion in the highest level of human development globally. In Chapter 22, DeLisle Worrell explains that for the most part this transformation took place in the 1950s and 1960s. After that, economic development gains were modest, and the economy has performed well below its economic potential. DeLisle Worrell then traces the changeover from sugar to tourism as the mainstay of the economy, and the factors that have affected investment and growth. The phases of growth, the pressures on the balance of payments, and the economic crises that have occurred are analysed, and the impact of government policies on growth and economic stability is explored in depth. The chapter concludes with some thoughts on the way forward for Barbados and the Caribbean. Extractive activities such as gold and oil dominate Suriname’s economy. As Scott MacDonald shows in Chapter 23, the government is attempting to reduce that dependence by diversifying the economy’s base. However, this effort is proving to be a significant challenge and could be complicated by any major discovery of offshore oil. He believes that, based on the experience of other developing countries faced with a sudden surge of oil wealth, there is concern that an oil curse may develop. The detrimental effects of oil can be avoided, but it will mean the country gaining better control over its national finances, in particular fiscal policy and debt management. He concludes that fortunately currently concerted efforts are being made to improve the country’s institutional framework, adhere to international norms, and more deeply integrate the country with the wider world. Economic growth in the Bahamas is gradually declining. In Chapter 24, Robert Looney finds that with the onset of climate change, the country is in danger of falling into a vicious circle whereby dwindling government revenues result in slower rates of economic growth, leading to a further reduction in revenues. Increased budgetary pressures result in lower allocations for climate abatement measures that, in turn, expose the country to more climate-related damage, which further reduces growth and government revenues. He concludes that the situation is not 6

Introduction

hopeless, but that the government must make a concerted effort to prepare for what lies ahead, or the country will experience a long-term decline. The Caymanian economy has enjoyed considerable success in the first two decades of the twenty-first century, despite substantial challenges. In Chapter 25, Scott MacDonald notes that those challenges include making the territory’s tourist sector one of the most competitive in the Caribbean and maintaining the offshore financial centre as one of the world’s major hubs for such services. Throughout the developmental process, the Caymans have sought to remain competitive and are usually proactive in their approach. Looking to the future, he believes that the Caymans will have to consider further ways to maintain a role in the global financial system, including fintech and extending what can be done in back-office operations (which remain essential). In Chapter 26, Patrick Watson and Alain Maurin argue that for both the French dependent territories and the independent countries institutional reform is a necessary condition for more harmonious development. In the case of the French territories, the failure of institutions takes the form of cumbersome bureaucracies that hinder their potential. Reforms require the simpli­ fication of the governance structures and the economic regulation of markets. In the case of the independent countries, progress lies in the deepening of the integration movement. New institutions will be required to reach higher levels of technical competence and a degree of sustainable economic development than possible on an individual basis. Over the past half-century, the Dominican Republic’s economy has changed significantly with a 20 percentage point decline in agriculture’s share of total output mirrored by a 20 per­ centage point increase in the share of services output. During the same period the country has achieved overall growth in real per capita income of about 3.26% per annum. However, as Susan Pozo and Antonio María Giraldi in point out in Chapter 27, despite this persistent growth, there are areas of concern that warrant consideration if the Dominican Republic is going to continue on this path. These involve improvements in transparency, facilitation of research on the Dominican economy, continued efforts in investments in human capital, and working toward the inclusion of migrants and their descendants into the economy, whose exclusion simply reduces the economy’s resources. In November 2019, after years of stagnant growth and failed IMF programmes going back to the 1970s, Jamaica was able to complete two consecutive programmes in spectacular fashion. As Keith Collister and Robert Looney show in Chapter 28, the factors leading up to this reversal in the country’s fortunes mostly involved creative home-grown solutions to offset the harsh effects of austerity. Still, they argue, much more needs to be done. There has been little pro­ gress in critical areas of governance, and, unable to develop a vibrant manufacturing base, the economy has become over-dependent on tourism. Furthermore, the government has limited scope within its fiscal and monetary programmes to buffer the economy from external shocks such as the pending global recession. The Dutch Caribbean has a long history in the Americas, and has played an important role in the development of commerce in the region, involving international finance and the global oil industry. Like the Netherlands, the Dutch islands have maintained significant external exposure. In a sense, the international system is their ‘bread and butter’ business. In Chapter 29, Scott MacDonald finds that in times of extended globalization, this has served the islands well. However, in times when the world has moved to less trade and cross-border investment and movement of people, the Dutch islands have been severely challenged. He concludes that the 2020s are likely to be testing times again for the Dutch Caribbean. Overall, the chapters in this volume illustrate the uniqueness of the Caribbean economies as well as the similarities they share with other regions. While most countries in the region share 7

Robert E. Looney

many of the characteristics of middle-income countries, theirs is a matter of extremes. Their generally small size suggests a fragility not found elsewhere. The Caribbean also shares the pat­ tern of mediocre growth with low productivity, but the scope for improvement in either seems more limited than elsewhere. While much of the world is beginning to feel some effects of climate change, the Caribbean is ground zero. These factors suggest a challenging road ahead made even more difficult with the worldwide onset of the coronavirus (COVID-19) and subsequent global recession. Less assistance will be available from outside the region, while at the same time exports, especially tourism, will suffer a sharp decline. There will be a need for innovative home-grown solutions that can adapt to this rapidly deteriorating external environment. The chapters in this volume provide a starting point to understanding these challenges and the need for increased cooperation throughout the region to weather the violent economic storms that lie ahead.

8

Part I

Commonalities

2 An alternative policy approach to growth and stabilization in small open economies DeLisle Worrell

For better or worse, the International Monetary Fund (IMF) has become the modern oracle of economic policy advice and analysis. The Fund’s view on the economic strategies of all coun­ tries is reflected in its own publications, in the design of national economic strategies that attract Fund assistance and finance, and in its staff reports on member countries. The analysis which underpins the Fund’s view is also reflected in the analysis and comment by the media, think tanks and universities around the world. A succinct summary of this orthodoxy with respect to desirable policies for growth and adjustment is offered in Carney (2019). That strategy is a combination of the establishment of credible inflation targeting regimes, maintaining flexible exchange rates, fiscal sustainability, developing an effective macroeconomic toolkit to curtail the damaging extremes of financial cycles and developing deep capital markets. The orthodoxy insists that this suite of policies will be conducive to growth and to maintaining economic stability in any country, irrespective of size. This chapter recommends an alternative policy approach to growth and economic stability in small open economies, one that is sensitive to the economic structure of such economies. The small open economy grows by attracting international investment, drawn by the competitive rates of return on offer for investment in the domestic economy. The main focus of growth policies, therefore, must be to maintain and improve international competitiveness. The first section of this chapter is devoted to policies to improve competitiveness in small open economies, drawing on Caribbean examples. Economic growth is best assured in an environment of low and stable inflation. In place of the orthodox policies of inflation targeting with an independent central bank, we recommend targettng the exchange rate, the principal source of inflation in the small open economy, with the use of fiscal tools. This approach, which I fully articulate in Chapter 11 in this volume, is briefly summarized in the second section of this chapter. The third section is an analysis of the weaknesses of the orthodox approach to stabilization and growth policies. The efficacy of the orthodox strategies may be questioned even in large advanced countries, but that is not our concern here; we focus on the reasons why small open economies are unable to deploy the standard suite of policies, except for fiscal policies. 11

DeLisle Worrell

Competitiveness is the key to economic growth This chapter advances the argument that policies to maintain and enhance international com­ petitiveness are key to unlocking the growth potential of small open economies like those of the Caribbean. Although Caribbean economies are small, they can interest foreign financiers in any investment project which offers an internationally competitive rate of return. The task of domestic policymakers is to stimulate such investment by identifying the factors which make the economy stand out in the international market, and to provide incentives and support for investment in those competitiveness-enhancing qualities. Policymakers also need to identify the domestic barriers to investment and growth, and find ways to overcome them.

Investment drives growth in the small open economy As investors seize opportunities to make profits in tourism, agriculture, manufacturing, services, transport, renewable energy and other competitive activities, they create additional capacity, which promotes employment and growth. There is no limit to the international demand for Caribbean products and services that offer value for money to foreign consumers. These are the products that provide the foreign exchange on which economic growth depends. There is never a shortage of finance for investments which are clearly profitable, undertaken by companies with strong balance sheets. However, it is often the case that there is insufficient finance for investments in infrastructure, health, education, public order and other public ser­ vices which may not offer opportunities for private investors to make a competitive rate of return. As we shall see, these are all desirable investments to provide public services that impact the country’s economic competitiveness. This is where fiscal policy comes to bear: govern­ ments’ revenue, expenditure and financing policies play a vital role in the growth strategy, through providing the infrastructure and public services that by their nature cannot attract private investment that seeks a competitive market return. On the revenue side, fiscal policy should provide incentives for investment in foreign exchange earning activities, and taxes should be structured to have a modest redistributive effect on incomes. Government services should be delivered with tolerable levels of effi­ ciency, by international standards. All Caribbean countries suffer from public services that are well below acceptable standards, and this is a serious brake on investment. Governments should also provide performance-related finance and other support for small and mediumsized enterprises (SMEs) and for innovations in which the private sector has first shown interest. Experience has taught us that our governments are hopeless at identifying the potential for competitive new investment. Instead, governments should target promising activities in which there is already serious private sector interest. Protection of the most vul­ nerable in society through suitable safety nets should also be a priority of government spending. The management of fiscal resources to achieve these objectives simultaneously, while respecting the preferences of a substantial majority in society, is a matter on which the academy offers governments little by way of practical guidance, even though it is a central concern of actual political economy. The financing of government expenditures matters for competitiveness and investment because it may affect foreign reserves and the stability of the exchange rate. An exchange rate which is subject to capricious changes is a major deterrent to investors, because of the resulting uncertainty of wages and prices. When this happens, expected returns on investment become less predictable, and returns to domestic investment become less attractive compared to what may be available in competing markets. 12

Growth and stabilization in small open economies

Government borrowing causes a fall in foreign reserves when governments need more financing than private lenders at home and abroad are willing to provide. That invariably results from overspending by governments on wages, subsidies and other recurrent expenditures. Such expenditures should always be met fully out of tax revenues, with a small percentage of all revenues remaining as savings to help with funding capital expenditure. By managing their budgets in this way governments ensure that all borrowing is devoted to investment that adds to public wealth. That provides governments with the wherewithal to service the borrowing which was used to finance the public investment. If governments manage their budgets in this way, they will be able to fully finance public investment with a combination of domestic and foreign borrowing, from official institutions and by the issue of domestic and foreign currency bonds. Financiers will be happy to buy bonds at competitive interest rates that remain affordable because prudent fiscal management ensures governments of a favourable ‘investment-grade’ credit rating. However, governments will begin to encounter problems when it becomes necessary to borrow in order to cover shortfalls in revenues to cover the recurrent costs of government operations. Private financing will soon dry up as investors question governments’ ability to service debt which adds nothing to public assets. Officials then resort to the central bank for the funding needed. Central bank lending is problematic, because the central bank’s funding is in domestic currency. However, when this money is spent, whether on wages, purchases or transfers, it generates a demand for imports, as do all expenditures in small open economies. Securing the foreign currency from a country’s central bank to purchase additional imports subtracts from the bank’s foreign reserves. If the overspending on governments’ current account persists, the loss of foreign reserves triggers a devaluation of the currency. Fiscal policy that respects the Golden Rule,1 i.e. setting aside enough tax revenue in current account savings to cover downswings, remains the surest protection for the stability of the exchange rate, and a strong incentive for investment and growth.

All investment in the small open economy requires foreign finance All investment in countries as small as those in the Caribbean requires finance in foreign cur­ rency to purchase equipment, vehicles, materials, fuels and other inputs from abroad, for each new project. This is true whether the project is large or small, private or public, for domestic production or export. It follows that all investment of necessity requires a substantial proportion of foreign finance. The implications of this obvious circumstance are not well understood. Everyone laments the low domestic savings ratios in the Caribbean, and there are regular exhortations to increase domestic savings, supposedly in order to stimulate growth. However, domestic savings are in local currency; in order to make an investment the saver has to acquire foreign currency in addition to (or in exchange for) their savings, because their domestic cur­ rency cannot be used to pay for the imports they need. On the other hand, foreign currency can be used to buy domestic goods and services if domestic savings are in short supply. It then follows that there can never be a shortage of finance for competitive investment in the small open economy – if local savings are insufficient, foreign financiers are happy to step in to take advantage of the competitive rate of return on offer. Equally, domestic entrepreneurs who are well established and of good standing never have any difficulty in securing foreign funding to cover the imports needed for their investments. It is the competitiveness of investment projects, not the supply of domestic finance, which limits the rate of investment in well-established areas of activity. There are, however, important areas that banks and financial institutions will not fully take care of, and where government 13

DeLisle Worrell

policy intervention is needed. These include innovative projects, investment in public goods, and SMEs.

Official support for innovation Of all the new activities that are under active consideration in the region, renewable energy is the sector that has the greatest potential for accelerating Caribbean growth. With a combination of solar, wind, thermal, biogas and hydropower, many Caribbean nations can switch all their power needs to renewable sources, using established, proven technologies for electricity gen­ eration, transportation and power. However, no Caribbean country has developed the roadmap and long-term action plan that would put it on a path to 100% renewable power.2 In the absence of a roadmap that is published by a government and endorsed by the population at large, and of an action plan that provides annual checkpoints to measure progress towards the target, the 100% goal will not be achieved. A second area that is yielding significant growth for the Caribbean is culture. It is a fact of life in our small economies that any activity that rises to a level of national economic significance must of necessity be aimed at an audience beyond the national boundary. Caribbean cultural products do have a global audience, and have had an international following since the earliest days of sound recording. Nowadays, Caribbean music is consumed worldwide; Caribbean singers and musicians have achieved legendary status; Trinidad has redefined the street festival and provided the world with a fabulous new musical instrument of fascinating complexity (the steel pan); Caribbean writers are household names in English literature; and Caribbean islands offer singular cultural experiences of many varieties. All told, the income earned by Caribbean cultural practitioners annually must surely be considerable and the numbers employed significant. However, in the national accounts of Caribbean countries, the contribution of culture does not appear. That is because of the way the accounts are prepared. In the tourism sector, the consumer comes to the product, a holiday in the Caribbean; in the cultural sector, the musician travels to their overseas gig, and the writer publishes in London, Toronto or New York. Their earnings may or may not come to the Caribbean, even if that is where they live, but that does not matter because, whether they live in the Caribbean or abroad, their business calls for fre­ quent foreign travel and involves the purchase of computers, equipment and supplies which must be sourced abroad. Even though their lifestyle and quality of life depends mainly on the consumption of foreign goods and services, wherever they reside, if they live in the Caribbean their consumption is included in the country’s gross domestic product (GDP), and if they live abroad it is not, because of the way GDP is measured. The fact that we measure cultural income inappropriately leads government policy astray. Caribbean governments aspire to national policies for the development of cultural industries, with no clear idea of what such policies might consist. Common sense suggests that the way forward is to obtain feedback from successful cultural practitioners as to their future plans and aspirations, and to collaborate through regional collaborative mechanisms to facilitate these activities in whatever way seems most effective. Once again, a roadmap which is widely endorsed and an action plan with annual markers for progress are essential. In the case of the cultural industries, both the roadmap and the action plan would need to be regional in scope. There is much that might be done along similar lines to sharpen the Caribbean’s competitive edge in tourism, internationally traded services, agriculture and manufacturing. Examples include seed funding for eco- and heritage tourism, providing design and customer orientation services for international companies, and promoting Caribbean branding of quality rums and 14

Growth and stabilization in small open economies

value-added products. What is required of our governments is to take the lead from successful private entrepreneurs, large and small, and to offer the support these pioneers need, conditional upon the achievement of performance targets.

Public services There is consensus among Caribbean societies that services such as law and order, primary education, health and sanitation should be available to all, regardless of income, physical ability or mental acuity. Exactly where the boundary of public services lies varies from country to country, and both the outer bound and the quality of services provided depend on average incomes, the efficiency of the public service, and the social consensus on the balance of the burden of taxation and the quantity and quality of public services provided. The public services that matter for competitiveness and growth include roads, ports, airports, waste management systems, public utilities, transport and communications. The two most widely cited reports on international competitiveness are the World Bank’s Doing Business Report and the World Economic Forum’s Global Competitiveness Report. The World Bank assesses a government’s administrative ability in processes affecting the establishment and operations of businesses, including trade and taxation. All Caribbean countries score badly in the World Bank’s assessment. The more comprehensive assessment by the World Economic Forum includes analysis of roads, ports, air transport, electricity supply and overall infrastructure; legal and judicial systems and processes; health and education; labour and goods market efficiency; financial market development; business sophistication; and innovation and technological readi­ ness. In addition, there are criteria of market size, where the Caribbean is at a permanent dis­ advantage, and the macroeconomic environment, which has been deteriorating across the Caribbean. There is a general lack of appreciation in Caribbean leadership about the nature of this pro­ blem. The deterioration in all the areas listed in the previous paragraph is widespread and obvious. Throughout the Caribbean, citizens are confronted with examples of government ineffectiveness and inefficiency on a daily basis as they go about their business. Our govern­ ments have been promising improvements in public sector performance for two decades or more, but services continue to deteriorate. It should by now be clear that the policies that have been tried to date are ineffective. They consist of changes in legislation, adding additional staff and purchasing computers and software. However, there has been no change in how govern­ ments are organized, and incentive and compensation systems for public servants have fallen far below comparable levels in the private sector, as well as for international and government agencies abroad from whom the Caribbean might hope to attract senior officers. The change that is required must be thorough-going, involving entirely new organizational processes, the replacement of senior personnel in the public sector, a drastic reduction in numbers, and entirely new compensation systems appropriate to attract candidates having an international level of skill.

Small and medium-sized enterprises SMEs provide a significant proportion of jobs in most market economies, and they act as an essential lubricant for the labour force, easing transitions due to new technology or changing market forces. When companies fold, some employees go into business for themselves; small security firms provide employment for many retirees who need to supplement their pensions; and restaurants and the gig economy offer entry level and part-time jobs for people who need 15

DeLisle Worrell

flexibility or a toehold in the job market. These are a few examples of the ways in which SMEs act as a catalyst for labour force adaptation to change. Despite their importance, SMEs are ephemeral creatures, with a short average life span and a high failure rate. Even small family enterprises of long standing seldom survive the death of the founder. In order to ensure the vibrancy of the SME sector, given its important role, govern­ ments need to offer significant support, often including finance and guarantees. Experience suggests that this is best done via independent non-governmental organizations.

Growth-promoting strategies for Caribbean governments The most important growth-inducing strategy needed of Caribbean governments is the mod­ ernization of the public service to achieve internationally accepted levels of efficiency. The performance benchmarks should be small economies that are in the highest category of devel­ opment in the annual Human Development Report, countries such as Ireland, Iceland, Singapore, Luxembourg, Malta and Cyprus. The failure of repeated attempts to reform the public sectors to date teaches us that Caribbean governments, and the international institutions they have hitherto depended on, lack the knowledge, experience and capacity to guide the Caribbean public sector towards successful implementation of the change that is needed. Caribbean gov­ ernments must seek relevant expertise from the world’s leading international consultants, choosing those who have experience with small countries with very high human development, such as those just mentioned. The extent of reform required will necessitate a medium-term action plan for implementation, with performance criteria related to the elements of the Doing Business Report and the Global Competitiveness Report. Such reforms will result in a much smaller number of employees in the public sector. Public servants will be more highly skilled and better paid, particularly at the higher levels of expertise. At the top of the public service there should be a handful of officers of international standing, whose remuneration must be adequate to recruit the calibre of person needed to build and maintain the credibility of the new, efficient public service. The process of con­ verting our currently under-resourced, ineffective and largely demoralized public service into one that compares favourably with Ireland, Iceland and Singapore will need to be carefully prepared for, managed and financed, to ensure that livelihoods are not destroyed in the process.

Policies for stabilization in the small open economy Variation in the exchange rate is the principal source of inflation and price volatility in small open economies. Countries with a small land area as well as a small population and/or GDP will need to import fuels, food, raw materials, machinery and equipment and consumer dur­ ables – in effect, the entire range of modern consumption items, apart from the limited range of tradables from which they derive their foreign earnings. Countries with a large land area and small population and/or GDP are no different. They may be endowed with an excess of fuels and raw materials, but prices are largely at the mercy of the exchange rate, nonetheless. The reason is that the international prices of fuels and other commodities are set in US dollars, so these countries’ exchange rates tend to vary according to commodity prices. Domestic prices also vary according to the exchange rate as with other small economies, but the impact is positive for any increase in the price of the commodity which the country exports. It follows that the focus for inflation control and price stability in small open economies has to be on the exchange rate. The foreign exchange market, like any other market, clears when 16

Growth and stabilization in small open economies

sellers and buyers exchange the quantity they offer or need, at a price which is acceptable to both parties. The orthodox approach seeks to achieve this equilibrium by means of price – i.e. exchange rate – adjustment. In the next section of this chapter, we explain why this option is not available to policymakers in the small open economy. It is generally believed that the for­ eign exchange market cannot be brought into equilibrium through policies to affect the quan­ tity of foreign exchange. This is true of the supply in the short term; in the longer term, the supply of foreign exchange may be increased through enhancing competitiveness, attracting investment and adding productive capacity in the tradable sectors, but in the immediate cir­ cumstances it is usually impossible to increase the supply. Furthermore, an increase in domestic interest rates is unlikely to attract financial inflows in circumstances where there is a perceived inadequacy of supply in the foreign currency market. It is possible, however, to equilibrate the foreign exchange market by reducing the demand for foreign currency to the amount of the available supply, using fiscal policy. That is achieved by fiscal contraction sufficient to reduce aggregate demand and imports by enough to bring the market into balance. Because the response to fiscal measures is not instantaneous, monetary policy may be used as a stopgap, to buy time for the fiscal measures to take full effect. A fra­ mework for the design of institutional arrangements to facilitate the joint policy action which this requires is described in Worrell (2000), and the Barbados experience with this framework is described in Worrell et al. (2003) and in Chapter 11 in this volume. Barbados has had qualified success with the use of this approach to maintaining an exchange rate peg since 1975. The foreign exchange market has been kept stable during this period, except for three episodes, the most recent of which remains unresolved. In every case the pressure on the exchange rate was the result of politically motivated surges in government expenditure, in the context of a forthcoming general election. Having successfully gained a new five-year mandate in 1981, with the help of a surge in government spending, the Tom Adams administration applied the fiscal brakes in 1982, and boosted foreign reserves with the help of an IMF loan (Worrell 1987: 87–88). The balance of foreign currency inflows and outflows was secured, and confidence in the peg was maintained. The second occasion on which an unsustainable rise in public spending in advance of an election caused pressure on the foreign exchange market and a loss of foreign reserves was in 1991. On this occasion capital flight and a perilously low level of foreign reserves meant that a sharp cut in public expenditure was called for. The Erskine Sandiford administration rose to the challenge, and balance was returned to the external accounts by the mid-1990s. The foreign exchange market remained stable, and the peg secure, until the global financial crisis of 2008 brought with it a decline in foreign investment in Barbados, with the collapse of the UK demand for second homes in Barbados. On this occasion, corrective fiscal policies were relaxed with the untimely death of Prime Minister Thompson, resulting in a prolonged period of foreign exchange uncertainty. At the time of writing, the exchange rate peg remains under threat; foreign reserves have been boosted with the help of finance from the IMF and other international financial institutions, but foreign investment inflows remain below expectations. The Barbados experiment may be considered a qualified success. Policymakers have an effective framework for stabilizing the balance of payments, maintaining confidence in the exchange rate peg, and thereby assuring low and stable inflation. However, the Barbados experience demonstrates that fiscal dominance is a fact of life in a liberal democracy: the gov­ ernment has the tools to manage aggregate demand, but the temptation to prime the pump in advance of an election always proves irresistible, whenever the current administration is apprehensive about its prospects in that election. 17

DeLisle Worrell

Orthodox policies are largely ineffective in the small open economy Although it is now widely accepted that size matters in many areas of social, economic and environmental policy (Briguglio 2018), the orthodoxy maintains that the standard suite of macroeconomic policies designed for the world’s largest economies is appropriate for the man­ agement of small open economies. This is despite the wealth of evidence to the contrary. Dis­ satisfaction with the consequences of IMF orthodoxy during the 1990s crisis have led Asian countries to shy away from the Fund ever since, and to develop a regional financial support mechanism in the form of the Chiang Mai Initiative (Berglöf 2018). In addition, despite exhortations from orthodox thinkers to float their domestic currency, most small countries in Europe, Africa, Latin America and Asia have chosen to continue to manage their exchange rates in some way. A credible inflation targeting regime with an operationally independent and accountable central bank at the core is first on Mark Carney’s list of policies to ‘keep one’s own house in order’ (Carney 2019: 6). My own view is that this is questionable policy in any country. The effectiveness of official policy depends on its credibility in the eyes of economic agents; if monetary and fiscal policies are not coordinated, markets are confused, and the outcomes are unpredictable. Whatever its merits in large industrial countries, monetary independence is impossible in the small open economy, where the main source of additions to the money supply is balance of payments surpluses. The only domestic source of additional money is cen­ tral bank lending to the public sector. This is never sustainable, because it drains foreign reserves and ultimately leaves the central bank with too small a war chest to manage the exchange rate. In the small open economy, the central bank’s policy tools are of limited efficacy, whatever the stage of development of the financial market. In fully developed financial markets, open market operations may affect the inflow and outflow of finance, but in perverse ways. Much depends on the credibility of fiscal policy. If fiscal policy is credible and the central bank engi­ neers a fall in interest rates to encourage more lending, there may be an outflow of finance instead, because domestic rates will have become uncompetitive with foreign rates, after taking account of the country premium. If the aim is to curb excessive spending or a credit boom, the perverse result may be an influx of new money, attracted by an interest rate that is now more attractive than the competition. In the absence of credible fiscal policy, monetary policy loses all effectiveness. In these cir­ cumstances monetary tightening is called for, but even large increases in interest rates will fail to have an impact on domestic credit and spending. The money supply will invariably tighten significantly, as a result of capital flight triggered by apprehension about the consequences of the fiscal policy, whatever the central bank’s monetary stance. The tools available to monetary authorities in underdeveloped financial markets have all proved to be distortionary or without effect. Credit limits, cash reserve requirements, direct lending, foreign currency rationing have all been tried, in many countries and circumstances. Where they have had an impact, it has been to aggravate economic contraction and price instability. The second orthodox policy recommendation is for flexible exchange rates. Even the IMF now acknowledges that small open economies are obliged to manage their exchange rates, however. For small open economies where there is a high pass-through of devaluation to domestic inflation, an IMF policy paper published in 2012 recommends a dual targeting arrangement, whereby monetary policy would be used to target inflation, and the central bank would buy and sell foreign exchange to stabilize the exchange rate, taking measures to ensure that those sales do not affect the domestic money supply (Ostry et al. 2012).

18

Growth and stabilization in small open economies

As with all orthodox approaches to exchange rate management, there is a failure to acknowledge the extent to which the supply of foreign exchange depends on the credibility of fiscal policy. If doubt arises about fiscal sustainability, capital flight drains the foreign currency market of adequate supplies, and the central bank will have inadequate resources with which to intervene to manage the exchange rate. In these circumstances, even large increases in the interest rate will not stem the outflow. That is why the only feasible option for managing the exchange rate is through forward-looking fiscal policy, designed to maintain a store of foreign reserves adequate to defend the exchange rate, even under pessimistic expectations. The burden of the argument in this chapter is that, for the small open economy, it all boils down to the third element in the orthodox policy suite – fiscal sustainability.3 For the small open economy, fiscal sustainability is defined most realistically by the impact on the balance of external payments. A trajectory of fiscal deficits becomes unsustainable when the central bank’s foreign reserves fall below a level which gives the foreign exchange market confidence in the authorities’ ability to manage the exchange rate (Worrell et al. 2015). With suitable forecasting and monitoring tools, close collaboration between the monetary and fiscal authorities, and the political will, exchange and price stability can be achieved. If, in addition, a government pro­ vides finance and incentives to strengthen the country’s international competitiveness, it will have completed a practical framework for effective policy for growth and economic stability, whatever the vagaries of the international economic environment.

Notes 1 The ‘Golden Rule’ states that over the economic cycle, a government will borrow only in order to invest and not to fund current spending. James Chen, ‘The Golden Rule of Fiscal Spending Defined’, Investopedia, 25 March 2018, www.investopedia.com/terms/g/golden-rule.asp. 2 The Central American country of Costa Rica generates almost all (98%) of its electricity from renew­ able sources, mostly hydro, but also geothermal, biomass, solar and wind (Lindsay Fendt, ‘All That Glitters Is Not Green: Costa Rica’s Renewables Conceal Dependence on Oil’, The Guardian, 5 January 2017, www.theguardian.com/world/2017/jan/05/costa-rica-renewable-energy-oil-cars). However, that constitutes only about half of the country’s total energy needs. 3 The orthodox policy suite also includes ‘an effective macroprudential toolkit’, by which is meant measures to tighten credit restrictions during periods of rapid credit growth. However, macroprudential policies are unproven and face an insurmountable practical difficulty: how fast must credit expansion be to be considered ‘rapid’, how firmly should brakes be applied if growth is ‘too rapid’, and which tools are effective in curbing credit without severely distorting financial markets?

References Berglöf, Erik (2018) ‘The evolution of globalization’, Project Syndicate, 21 September. Blanchard, Olivier, Dell’Ariccia, Giovanni and Mauro, Paolo (2010) ‘Rethinking macroeconomic policy’, IMF Staff Position Note, Washington, DC, IMF. Available at www.imf.org/external/pubs/ft/spn/ 2010/spn1003.pdf. Briguglio, Lino (2018) Handbook of Small States: Economic, Social and Environmental Issues, Oxford and New York: Routledge. Carney, Mark (2019) Push, Pull, Pipes: Sustainable Capital Flows for a New World Order, Washington, DC: Group of 30. Ostry, Jonathan, Ghosh, Atish and Chamon, Marcos (2012) ‘Two targets, two instruments: Monetary and exchange market policies in emerging market countries’, IMF policy paper, February, Washington, DC: IMF. Available at imf.org. World Bank (2020) Doing Business 2020, Washington, DC: World Bank. Available at http://documents. worldbank.org/curated/en/688761571934946384/pdf/Doing-Business-2020-Comparing-Business-Regulati on-in-190-Economies.pdf.

19

DeLisle Worrell World Economic Forum (2019) Global Competitiveness Report 2019: How to End a Lost Decade of Productivity Growth, 9 October, Geneva: World Economic Forum. Available at www.weforum.org/reports/how­ to-end-a-decade-of-lost-productivity-growth. Worrell, DeLisle (1987) Small Island Economies: Structure and Performance in the English‑Speaking Caribbean since 1970, New York: Praeger. Worrell, DeLisle (2000) ‘Monetary and fiscal coordination in small open economies’, IMF Working Paper Number 00/56, March, Washington, DC: IMF. Available at imf.org. Worrell, DeLisle (ed.) (2015) Fiscal Sustainability and Debt in Small Open Economies: An Application to the Caribbean, St Augustine: Caribbean Centre for Money and Finance. Worrell, DeLisle, Codrington, Harold, Craigwell, Roland and Greenidge, Kevin (2006) ‘Economic resi­ lience with an exchange rate peg: The Barbados experience 1985–9’, in Lino Briguglio, Gordon Cor­ dina and Eliawony J. Kisanga), (eds) Building the Economic Resilience of Small States, Msida and London: University of Malta and Commonwealth Secretariat.

20

3 Impact of climate change on Caribbean economies Masao- I. Ashtine

Introducing a rapidly changing region ‘Sun, sand, sea’. This is the slogan upon which the Caribbean has come to rely and from which it has profited in recent decades. Pristine coastlines have drawn millions of people to the region and many of the 25 political island entities benefit from a stable, and most importantly, pre­ dictable climate. However, climate change is throwing all measures of advanced warning out of the window and the Caribbean is facing everything but an easily forecasted future. Many islands are pushing for change at uncomfortable speeds, but first we need to understand why, who’s doing the pushing, and who’s waiting at the finish line. The region covers a vast area. It spans over 1 million square miles and therefore experiences the opposite of a uniform climate. The north-western islands (the Bahamas archipelago, Cuba, Jamaica, etc.) enjoy a drier, tropical maritime climate for most of the year with temperatures resembling those found in mountainous regions (snow has been recorded on the peaks of Pico Duarte in the Dominican Republic, where temperatures can fall as low as 0°C in the winter months).1 Their southern neighbours, which are only 10–15 degrees in latitude apart, can expect a wetter and heat-driven climate all the year round. To the average citizen, Barbados usually seems dry, whereas Trinidad and Tobago is often humid, with each country sharing var­ iants of seasons and climate regimes. During the hurricane season (officially June–November), the Caribbean becomes more homogeneous in its weather patterns with many of the islands keeping a watchful eye on these systems which begin their journey off the sub-Saharan western coast of Africa. The 1981–2010 median for Atlantic storms (12.0) is regarded as a climatological standard; the 2017 season with its 17 named storms was an extreme.2 This season will be forever in the minds of the inhabitants of Caribbean countries and many are scrambling to recalibrate their expectations for hurricane systems in a changing climate. Meteorologists will stop at this point to clarify a common misconception in the climate sci­ ences: weather is not climate, and vice versa. When a climate is said to have an annual high of 32°C and a low of 22°C, one should not be alarmed if temperatures average 38°C for a week, or if the wet season occasionally experiences a low of 15°C. Climate change does not refer to these diurnal/short-term variations in atmospheric conditions. Such changes are assigned under the term ‘weather’ and our lives are greatly influenced by it. Meteorologists sit and stare 21

Masao- I. Ashtine

perplexedly at their computer monitors when weather wedges extreme outliers in that persist over time, shifting the overall climatology of a region. In 2019, record-breaking extreme weather was experienced all around the globe, and the Caribbean was no different.3,4 Droughts, heat waves and flash flooding are becoming more frequent in the region, and the many anec­ dotal tales that are told about the Caribbean’s climate will soon have to change. Extreme weather events have crippled an already sluggish economic zone, although some research has been conducted that shows that reinvested capital resulting from disasters can lead to short-term boosts in the gross domestic product (GDP) of low-income islands.5 The Caribbean is no stranger to weather extremes, however. Between 2013 and 2016 droughts scorched the islands for an extended period, pushing over 2 million people into a state of food insecurity (for example Haiti lost almost 50% of its crop yield).6,7 Floods destroyed thousands of hectares of arable land and uprooted hundreds of homes with ease following intense rainfall in Trinidad in 2018, thereby affecting over 150,000 people, or almost 11% of the population.8 Weather extremes differ from their climatological cousins through statistical contextualiza­ tion. These upper tails of weather events are becoming more intense and more frequent sug­ gesting underlying climate changes in the region. Tornadoes have been recorded in recent times but if such events still fall within their ‘1 in 100-year’ category of frequency, then they can be treated as an expected weather phenomenon. But what happens when predictions fail us, and the unprecedented changes taking place in the Caribbean push island economies into uncom­ fortable territory? While farmers might once have expected rain to fall during a particular month, now they see high pressure systems bringing clear skies.9 Tourists may not complain about blue skies and bright sunshine, but marine parks that have long recorded an abundance of diversity are now seeing extreme die-offs that confuse the most seasoned of fishermen.10 Environmental stresses faced by the region’s forests ripple these negative feedbacks along com­ plex ecosystem webs that in turn support its agricultural and logging industries, and equally, if not more importantly, its water systems.11,12 The economies of the Caribbean islands are supported by a historically constrained backbone, with each vertebra representing unique attributes such as ‘diverse’, ‘vulnerable’, ‘strained’ and ‘exploited’. Weakened by an ageing infrastructure, declining levels of environmental protection and political ineptitude, the Caribbean economic giants have, however, made impressive pro­ gress in an unfavourable post-colonial system. Yet they remain vulnerable at this stage of their infancy, particularly to climate change which threatens to derail the predictable weather patterns around which the region has built its economies. This vulnerability is exacerbated by Caribbean economies that have failed to diversify, remaining loyal to tourism which in 2018 accounted for over US $62 billion and 15% of the Caribbean’s GDP.13 With the arrival of 29.9 million for­ eigners into the region in 2018, bringing in over $38.3 billion in revenue, climate change is eroding the very reasons why tourists have flocked to the Caribbean for many decades. Every race separates the winners and the losers, even those that have pushed beyond the limits of their endurance to finish alongside the leaders. Climate change comes with prejudice and lesser developing countries will feel the brunt of its impact causing small island developing states (SIDS) and Caribbean nations to wake up to the reality of a more insecure future. Jamaica is leading in the region with its daunting renewable energy (RE) targets, installed capacities and investments, while in the wake of the devastation inflicted by Hurricane María, Dominica is picking up the pieces and gluing them back together with climate resilience at the core of its recovery model.14 However, Trinidad and Tobago lags behind, riding on the coat-tails of its economic powerhouse – oil. Sheer political absenteeism in recent decades on the twin-island state has left the economy largely dependent on fossil fuels (accounting for approximately 45% of GDP).15 Oil-drenched politics are difficult to change, however, and shifting an energy sector 22

Impact of climate change on Caribbean economies

to employ more RE systems is even harder when electricity costs approximately US $0.05 per kWh, almost 83%–88% lower than the regional average.16 Not only does Trinidad and Tobago suffer from internal inertia, but as the leading exporter of liquified natural gas (LNG) to the USA (in 2018 86% of LNG imports to the USA came from Trinidad and Tobago alone), economic models have international pressures which are further exacerbated by widening gaps created by the Venezuelan crisis (when the country experienced a significant decrease in oil production) and the discovery of oil in Guyana.17,18,19 It is easy to sympathize with climate activists and many in the Caribbean often romanticize the prospects for a cleaner, environmentally protected region. However, years of rigid eco­ nomic models that operate in complicated geopolitical environments and governments that are resistant to change cannot tip the scales that easily in favour of climate action and reform. This chapter will explore how the region is burdened by climate change and looks at those econo­ mies that will be the most affected in the near future. Research reviewed here will examine which industries need to innovate the most, and will discuss the current fight for ‘climate reparations’ by SIDS in the Caribbean. It will hint at hope for the region where climate change may actually have its upsides for some, but on the other hand the staggering quantification of loss will demand action in a rapidly changing economic zone.

Which Caribbean nation states are particularly vulnerable? Trinidad and Tobago is certainly one of the Caribbean’s economic giants. With a GDP per head of almost US $16,800 in 2018, and rich oil reserves that have flooded the country since 1901 through its commercial operations, the twin-island state has enjoyed much higher levels of economic prosperity than its neighbours, despite tourism’s contribution to GDP having fallen to a very low level (approximately 7.6% in 2019).20,21,22 Oil prices have seen massive shocks in recent years and in 2016, the price of oil stood at a low of $27.88 per barrel (bbl) on the Brent Crude Oil index, forcing Trinidad and Tobago into a precarious economic situation in an already politically unstable environment.23 However, the long and complicated dance with oil and gas has remained fairly stable for over 100 years owing to Trinidad and Tobago’s southerly position along the Caribbean archipelago where hurricanes pass over only infrequently, but this is changing. Climate change may act faster than any ‘peaking’ oil stimulus and the country’s climate is going through many record-breaking extremes with recent island-wide flooding, storm surges in Tobago, and increased tropical storm activity. The twin-island nation state that prides itself as being the home of the Caribbean Carnival may see its tourist numbers drop even further if visitors are now expected to masquerade through a flooded capital. Jamaica’s dependency on tourism is much greater than that of Trinidad and Tobago, with approximately 34% of the country’s GDP being kept afloat by visitor numbers each year, and therefore shifting weather patterns will have a more significant impact on its economy in more immediate timelines.24 Jamaica’s agriculture sector is of particular importance, and in 2017 it accounted for 3.4% of the country’s GDP, almost twice that of the world average, thus putting its economy even more at the mercy of capricious weather.25 Given the increased impact of droughts and water scarcity, Jamaica is pushing more drastic measures through government and policy to bolster resilience to a changing climate. Unlike many of its rich neighbours (the Cayman Islands, the Bahamas, etc.), climate change could have a disastrous impact on Jamaica, despite the country’s currently booming economy. The smaller islands are in a similarly precarious situation that could worsen sooner rather than later. Barbados has recognized the urgent need for reform and Mia Mottley’s Barbados Labour Party government that came to power in 2018 has been swift to draft new plans for energy 23

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restructuring and climate resilience. With a bold objective of 100% RE generation by 2030 (it should be emphasized that in 2019 the figure stood at an uncomfortable 3.5%) the government views energy security as a prime objective in the coming decade, a stance that must be applauded and cautiously directed at the same time.26 GDP per capita statistics are often under- or over-inflated depending on the source, but it has long been recognized that, like Barbados, the Bahamas is one of the richest Caribbean nation states. Standing as an outlier in comparison to Jamaica, the Bahamas’ GDP per capita stood at US $31,800 in 2017, almost twice as much as that of Barbados in the same year.27 In 2019 tourism accounted for over 50% of the island’s GDP, according to government sources, and depending on to whom you speak, the fact that Hurricane Dorian did not hit the capital of Nassau, spared the Bahamian economy.28 Yet with so much hinging on the tourism sector, increased hurricane intensity and further variability in hurricane forecasts and tracks, could have disastrous consequences for the powerhouses of the Caribbean. Antigua and Barbuda is still reeling from the horrors of Hurricane Irma in 2017, and the need to rebuild resilient, hurricane-resistant infrastructure should be clearly stated in all policy documents. The combined effect of the natural and economic destruction inflicted by extreme events in the region has resulted in greater outward migration and an increased number of climate refu­ gees in the region. Perhaps the most existential threat to Caribbean productivity, particularly for the low-lying islands and nations, is that of sea level rise. The mountainous character of many of the islands, among many socio-economic factors, has seen a flourishing of coastal towns and cities in the region pre- and post-colonization. These once idyllic communities are now under constant threat from rising sea levels, storm surges and flooding, with many countries not having the necessary policies and mechanisms in place to adequately address climate-induced migration.29 Not even the region’s high-earners may be able to survive the imminent threat posed by climate change.

Winds … and rain of change How are the Caribbean’s long-term weather patterns evolving in the twenty-first century? This is a question that many climatologists in the region are grappling with because there are farreaching implications. We will never be able to know to an exact degree – not in the near future certainly – in which direction the wind will blow next year or how just much our rivers will rise and fall in two months’ time, but models are becoming increasingly more able to forecast our climate accurately. The Intergovernmental Panel on Climate Change (IPCC) special report on the impact of global warming of 1.5°C above pre-industrial levels and related global greenhouse gas emission pathways stirred academics and the private sector alike with its uncomfortable message about the impact of a warming climate and, more specifically, the time frame within which change needs to happen. Caribbean scientists advocated strongly for the report and were integral in provided providing data, pushing for a target of 1.5°C instead of the initial 2°C.30 There are significant differences for the Caribbean where global warming between 1.5°C and 2°C is concerned, given that higher temperatures are expected to lead to almost year-round warm weather, longer hot and dry spells, greater portions of the region being under drought, increased occurrences of extreme drought conditions, and a transition to drier average conditions for the entire region. The Paris Agreement, which entered into force in 2016, was signed by all 16 of the Car­ ibbean United Nations (UN) Framework Convention on Climate Change member states, and has played an instrumental role in adapting, mitigating and financing the fight against climate 24

Impact of climate change on Caribbean economies

change in the region, but some changes are already underway. Previous studies have shown that the frequency of warm days and nights and extreme high temperatures (heatwaves) have increased with statistical significance between the study period of 1986–2010.31 Furthermore, the number of cool days and nights within the Caribbean occurs at a lower rate, which has large-scale ramifications for many industries. Cooling the region will come at a high cost, and so too will be controlling the region’s water supply. The research on future levels of precipitation is less understood as climate models do not show a strong statistical signal in either direction.32 However, Taylor et al. (2018) have assessed the atmospheric conditions that the Caribbean can expect in the event of an increase in global warming from 1.5°C to 2°C and found that the region risks becoming predominantly drier (a rise of 5%–15% compared to the present day), with a much greater frequency of drought.33 However, if temperatures remain at a rise of just under 1.5°C, much of the region can expect wetter conditions, thus marking the 1.5°C threshold a tipping point for precipitation. Going forward, they postulate through their research that at 2.5°C warmer global temperatures, there will be an intensification of the changes experienced under a 2°C warming. Interestingly, the authors’ argument for a shift in rainfall patterns between 1.5°C (wet) and 2°C (dry) for parts of the Caribbean strengthens the point that climate change will have an impact on the islands and their economies in varying ways. Not all of the islands will be affected by drought, so while there might be flooding in Grenada, Jamaica could be more parched than its population can bear. It is not only the intensity of events that concerns scientists, but changes in climate characteristics such as the annual ‘start’ and ‘end’ dates of the rainy season can leave farmers reeling to cope with variable conditions.34,35 These nuances make the effective com­ munication of climate change to Caribbean policymakers challenging, yet extremely important. There is no one easily traceable connection between cause and effect and implications vary across spatial and temporal scales. The Caribbean’s climate is linked to many larger-scale atmo­ spheric systems such as the El Niño phenomenon, adding further complexity in modelling aspects such as the region’s future water resources.36 Stronger and more consistent winds may strengthen the argument for increasing the devel­ opment of wind farms in the Caribbean, but other stakeholders in this information see the potential of more extreme weather and associated risk. Wetter regions under a 1.5°C warming scenario may see added advantage for hydropower systems, while bringing reduced and variable solar power output due to more overcast days. Climate change is not esoteric, but equally it is complex, and we quickly need to toss out any cookie-cutter narrative of the changes we can expect in the Caribbean as the research shows a messy transition ahead. Yet, the region is fighting to protect its populations and economies through informed policy decisions. Research tools such as the CARIWIG Portal are helping regional scientists to better understand the region’s risk to flooding, while the Caribbean Assessment Regional DROught tool (CARiDRO) is being implemented to better inform the region’s agricultural sectors of pending drought risk.37,38 In order to have a proper handle on the impact of climate change on the Caribbean’s economies, greater investment and collaboration needs to be injected into these regional projects that aim to better understand our changing systems.

Tourism in 2050? Yes, tourism will exist in the Caribbean in 2050, but how can we expect this major ‘bread and butter’ industry to change under varying weather patterns? The World Travel and Tourism Council reports that in 2018 tourism accounted for 15.5% of the combined Caribbean island economy, and provided 2.4 million jobs, with an average of US $35.4 billion in visitor spending.39 25

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However, in the period following the Great Recession (2008–10), global financial shocks greatly reduced tourism in the Caribbean (for example, Saint Kitts (Christopher) and Nevis witnessed a decline of approximately 20% in tourist arrivals in 2009).40 The economies of many Caribbean islands, particularly the smaller islands that are more dependent on tourism, were negatively affected by the Great Recession, but many have recovered in tandem with increasing GDP indices from the USA, the United Kingdom and Canada, for example. Climate change does not manifest itself in sudden shocks in the same manner as global recessions, but will increasing extremes and hurricane intensity bring the giant economic sector of tourism to its knees? Or will the Caribbean adapt tourism so that it is able to retain its global position as an attractive destination? At present, 15.5% of the region’s GDP is reliant on the islands’ ability to innovate. Not only was St Kitts and Nevis troubled by the Great Recession, but 2008 also saw the arrival of Hurricane Omar which devastated the island’s hotel industry, thus highlighting the impact of natural and economic factors on Caribbean tourism.41 This pales in comparison with Hurricane Ivan which struck the island of Grenada in 2004 causing an estimated US $1 billion in damage, one of the most destructive hurricanes ever to hit the Caribbean.42 Before having suffi­ cient time to recover, Grenada was hit again in 2005 (less than a year after Ivan), this time by Hurricane Emily, resulting in devastation that came with a price tag of approximately $110 mil­ lion.43 Thus, increasing hurricane intensity poses one of the largest threats brought about by cli­ mate change to the Caribbean, and it is uncertain how tourism-dependent economies will adapt. Hurricanes have always occurred in the region and despite events such as Hurricane Ivan in 2004 and the tumultuous 2017 hurricane season, tourism in the Caribbean goes on. As seen with the Great Recession in 2008, economic and employment factors in source countries such as the USA and Canada will have a more immediate impact on Caribbean tourism. The more pertinent question, therefore, is not will tourism survive in 2050 based on climate projections, but how will tourism adapt to the Caribbean’s future scenarios? Stressed ecosystems, dwindling water resources and declining agricultural productivity will challenge the economic models that established many Caribbean islands as global leaders in the tourism industry. Increased drought and flooding will cause food price shocks due to heavier imports, and ocean acidification and warming will completely change the ‘sun, sand and sea’ model as coral reefs experience mass die-offs.44,45,46 A pesky invasive visitor to many beaches in the region, the Sargassum seaweed, is causing millions of dollars in damage to Caribbean economies as the foul-smelling seaweed incapacitates large resorts that are unable to cope with the quantity washing up on their shores.47 The impact of climate change on the tourism sector is daunting. Sea level rise, coast­ line erosion and drought-stricken environments are just a few of the considerations governments must factor into their long-term visions. Recovery and resilience must be built into the Caribbean model of tourism if it is to encourage positive growth and sustainability in the twenty-first century and beyond. Although climate models lay out a bleak scenario for the Caribbean’s weather and ecosystems as early as 2050, strong efforts to push adaptation and mitigation strategies are key to ensure that tourism, whatever it may look like mid-century, continues to prop up Caribbean economies as they transition to more resilient and sustainable economic models. It is also important to remember that tourism ipso facto often erodes the very foundation of sustainability in the Caribbean through its associated activities. Increasing air traffic and visits are carbon-intensive, cruise ships are notorious polluters of the sea and air, and many tourists and resorts inadvertently stress the Caribbean’s ecosystem through their damaging daily opera­ tions.48 Thus, sustainability and climate resilience need to be carefully threaded into the very fabric of the tourism sector itself. 26

Impact of climate change on Caribbean economies

Intensity and hurricanes Hurricanes have always been synonymous with the Caribbean. Falling leaves and colder con­ ditions beset the northern latitudes at the same time as the mid- and low-level tropics are frantically preparing for a potential Category 5 hurricane system. Known as typhoons in the Far East and as hurricanes in the Atlantic basin, the latter tropical systems have plagued the Car­ ibbean’s development for centuries. The Great Hurricane of 1780 is still recorded as one of the deadliest hurricanes to have struck the Atlantic basin, wreaking havoc on the Lesser Antilles at a time when the nature and scientific understanding of hurricanes were much more limited. Hurricane María in 2017 devastated the Puerto Rican economy and energy systems, but more than 100 years earlier, the San Ciriaco Hurricane brought the same level of devastation and was recorded as the second longest-lived hurricane in the Atlantic basin. Currently, that title changes hands more regularly with hurricanes such as Irma and Dorian breaking many records in 2017 and 2019, respectively. Although hurricanes have always kept the region in a state of high alert, climate change is making them even more difficult to predict and endure. The Caribbean is already experiencing more weather extremes. Meteorologists believe that climate change is making hurricanes more frequent and powerful over the Atlantic Ocean.49,50 The uptick in severe weather is costly. According to the United Nations, the 2017 hurricane season cost the Caribbean countries and the United States US $92 billion in damage with Irma, María and José leaving islands like Barbuda, Dominica and Puerto Rico completely incapaci­ tated by their passage.51 Hurricane Dorian in 2019 saw the Bahamas become the centre of global attention as the hurricane slowly ripped through the island chain as one of the strongest hurricanes on record in the Atlantic basin. Grand Bahama and Abaco were the worst affected with over 50 recorded deaths and approximately 7,000 people listed as being in need of humanitarian assistance.52 Climate change is a profoundly unpredictable process and that makes it harder for climate models to correctly identify not only the direct cause of increased annual intensities, but the frequency of hurricanes in the Atlantic.53 Computer models are known to be inherently imperfect predictors and although powerful in the insight they provide Caribbean countries, meteorologists and planners, the region is experiencing unprecedented changes that are often difficult to resolve fully in climate models. Tracking hurricanes is another important process, allowing governments to ramp up measures and resources in advance of their arrival, but this too has been scuttled by a rapidly changing climate, with different warming scenarios having an impact on the intensity and movement of these hurricanes.54 Increased variability in the tracks of hurricanes is particularly harrowing when viewed in the light that new countries and economies that were once at low risk from such systems (Guyana and Trinidad and Tobago for instance) may become increasingly vulnerable to these weather extremes. With sea level rise seen as one of the most widely recognized climate change induced threats to low-lying island states in the Caribbean, storm surges will have a major economic impact on the region given that in countries such as Trinidad and Tobago, the Bahamas and Guyana, much of the land lies below sea level.55,56 Hurricanes thus work in tandem with other climate extremes to drive the Caribbean further into unknown territory and planning. It is clear that hurricanes pose a considerable threat to Caribbean economies and their devel­ opment thereof, but some studies are probing further in order to determine the preparedness of Caribbean economies in post-disaster recovery.57 In their study, Robinson and Bangwayo-Skeete (2016) looked at the impact of storm systems on the Caribbean Stock Exchanges, concluding that the passage of major hurricanes between 2001–15 had no direct impact on the Bahamian and Eastern Caribbean stock markets. Jamaica, however, experienced stock market shocks which were

27

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approximately 10 times worse than initial accounts for economic losses would suggest, making Jamaica one of the most economically vulnerable islands in the region.58 Although Eastern Car­ ibbean stock markets may provide investor confidence during times of extreme events, another study by the International Monetary Fund (IMF) reports that the debt-to-GDP ratio rises by an average of almost 5 percentage points in the year that a storm strikes.59 Although Robinson and Bangwayo-Skeete (2016) account for the limitations in stock markets as indices of economic resilience, they highlight the economic disparities in the region that expose some countries to the impact of climate change more than others. Another IMF report states that advanced economies are better equipped to absorb the cost of disasters such as hurricanes because generally they have access to private insurance, higher domestic savings and more robust market financing.60 Laframboise and Acevedo (2014) suggest that climate change-related natural disasters can mire a Caribbean country’s economy in debt, using the case of Hurricane Ivan and Grenada to demonstrate this point. With damages totalling 150% of GDP, the Grenadian debt-to-GDP ratio rose by 15 percentage points in just one year, to 95%, a burden that continues to beset the island to this day. Thus, Caribbean islands must quickly build resilience into their economic models and RE systems, and exposing initial economic risk from damage incurred by hurricanes can mitigate delays in recovery from natural disasters. Ageing infrastructure, poor energy systems and limited management of risk through robust fiscal policies leave the Caribbean region in jeopardy to climate change and its impacts such as increased hurricane intensities.

Securing the region’s energy: the rise of renewables The rise of renewables is synonymous with the decline of fossil fuels, but the Caribbean has not always had an amorous relationship with low-carbon economies. The region is heavily bur­ dened and stressed by the undulations of oil prices that can send Caribbean economies into shock-responsive actions. Many islands in the region spend a large amount of their GDP on oil imports (in 2015 this averaged 8.74% among 13 island countries) and are at the mercy of global politics and oil superpowers as they aim to develop under stable fuel costs.61 Trinidad and Tobago has escaped this dependence on oil entering its ports, with Trinidadian oil production removing the hindrances of higher energy costs to development, even exporting a significant number of barrels of oil to many other countries (between 1994 and 2019 oil production averaged 108 bbl/D/1K).62 Although Guyana expected its GDP to increase by 86% in 2020 after Exon struck some of the world’s largest oil reserves off its coasts, many islands have con­ tinued to suffer as a result of asphyxiating energy prices.63 In 2015 Trinidad and Tobago enjoyed (arguably blindly because of expensive government subsidies) an electricity cost of US $0.04 per kWh, while other countries such as Grenada and Dominica saw costs of $0.43 and $0.38/kWh, respectively to power their economies (electricity prices).64 In the same year, Grenada spent 18% of its GDP on fuel imports. The wide variation in oil prices (the highest costs were recorded in the early 2000s), vulnerability to climate change, and a need for more sustainable and cleaner futures demand a shift from oil and other imported fuels in the region. Caribbean economies depend on improvements in energy security to build resilience and reduce the leverage of global oil prices. Despite the currently troubled waters, the Caribbean had a much earlier start with RE sources than most regions. Hydropower played an integral role in the development of Britain’s economic island powerhouses during the colonial period, but hydro systems assumed a more important position in energy security once independence swept through the region.65,66 Rising oil prices led to an increase in the use of hydropower as an alternative source of power in the 28

Impact of climate change on Caribbean economies

1960s and 1970s. However, when natural gas became a more affordable alternative in the 1980s around the world and in the Caribbean, there was a ‘dash for gas’ and the region as a whole witnessed a downturn in hydropower development.67 Some countries scaled up hydropower at an early stage, however, with Belize and Suriname having an installed capacity of 102 MW and 194 MW respectively in 2018, largely owing to a few large utility-scale hydropower plants.68 Hydropower is but one RE system, however, and the Caribbean has ramped up the other two giants, wind and solar power. The early 1970s also saw the rise of solar water heaters in Bar­ bados, a policy that has been consistently applauded in the region.69 Smaller projects include the wind turbine installation on the island in the parish of Saint Lucy, with other islands such as Jamaica experimenting with small wind turbine systems, installing the first grid-connected wind turbine (225 kW capacity) at Munro College in 1996.70 In 2016 a 36-MW wind farm was installed in the parish of Saint Elizabeth, Jamaica, at the time one of the biggest private renewable energy projects in the region. The Caribbean has made significant leaps in utility-scale RE installations over the past 20 years and countries such as Jamaica are leading the way. Jamaica is a strong example of pushing the boundaries on con­ ventional energy generation. The largest wind farm in the English-speaking Caribbean, at Wigton, was commissioned in 2004 and installed in phases, while the largest solar plant in the same category was commissioned in 2019 and produces 51 MW of power, bringing Jamaica’s renewable generation to approximately 20%. The island has not stopped there, bolstering efforts in energy security with the construction of an innovative 24.5 MW flywheel and Li-ion battery system in 2019.71 Jamaica and Barbados are also building climate resilience through the trans­ port sector, investing heavily in the deployment of electric vehicles (EVs) in both the private and public sectors.72,73 With over 300 EVs on the road in Barbados in 2019 and plans to electrify the Jamaican public transport system, there are clear indications that the region is waking up to the need to build ‘climate-smart’ economies. It is not just the English-speaking Caribbean that is leading the way. Cuba and the Domin­ ican Republic top the charts in terms of installed capacity of RE systems with 669 MW and 1,017 MW, respectively.74 The following statistics put these achievements in perspective: the Dominican Republic has the largest installed capacity in the Caribbean, with approximately 33,900% more than Trinidad and Tobago; Cuba comes a close second, having 216% more RE capacity than its five nearest neighbours combined (Turks and Caicos, Haiti, Jamaica, the Cayman Islands and the Bahamas).75 The Dominican Republic has the largest solar farm (Montecristi Solar) in the Caribbean, accounting for an impressive capacity of 58 MW. The country is not stopping there. In May 2019 the Comisíon Nacional de Energía announced the launch of a further 12 approved projects that were expected to increase the generation of RE by 874 MW through a mix of systems including geothermal, wind and solar.76 Utility is not the only means through which Caribbean governments are improving energy systems, however. Consumer-based projects and installations are making the Caribbean islands much more resilient and the opening up of markets on islands such as Curaçao with Feed-inTariffs for instance (example of early adoption) will foster more decentralized energy generation in the region.77 The installation of more community and consumer-based RE systems can increase access to energy, improve rural electrification, and add significant robustness to the economy to bounce back after natural disasters and system-wide failures in the national grid, the true definition of ‘resilience’. There are losers in this race, however, both for utility- and local-scale installations, and the region is not as homogenous in the energy transition as many would hope. Diverse funding streams, conflicting national priorities, short-term political visions and differing economies of scale have left many outliers scattered along the way despite the Caribbean’s general trend upwards to increasing energy security through low-carbon alternatives. 29

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Accelerated action The Caribbean Climate-Smart Accelerator, launched in 2018 by a coalition that included the founder of the Virgin Group, Sir Richard Branson, was one of the first multilateral and co­ financed climate change funds in the Caribbean. After Hurricanes Irma and María tore through the Caribbean in 2017, devastating dozens of islands (including Sir Richard’s private Necker Island), Branson called for a ‘Caribbean Marshall Plan’.78 Branson’s programme initi­ ally intended to unite large financiers and world powers to address resilience in the Caribbean, but now comprises 26 countries, more than 40 private sector partners and a host of celebrities who have joined forces in order to stimulate, and as the name states, accelerate a more cli­ mate-resilient region. In a recent AmericasBarometer survey by Vanderbilt University, it was found that 42% of US respondents believed climate change to be a very serious problem, whereas among the 10 Caribbean countries surveyed over 55% of respondents agreed the same; five of those 10 polled above 70% in agreement.79 The Caribbean people clearly view climate change as a looming threat to their daily lives and economies and the Accelerator aims to restructure the region’s socio-economic underpinnings to become ‘climate-smart’. How exactly does one build intelligence into a region to prepare it for climate change? This is a difficult question, but some countries such as Dominica are leading by example. In 2016 the tiny island of Dominica generated almost 28% of its electricity from wind, hydropower and other renewable sources, a strong contrast to a meagre 0.3% of electricity produced by Trinidad and Tobago (the Caribbean’s main oil exporter).80 However, the 2017 hurricane season compelled Dominica to adopt a much more accelerated plan following the devastating passage of Hurricane María. In an effort to diversify its energy sources away from diesel, Dominica’s government secured US $30 million from the international Climate Invest­ ment Fund and a further $90 million from the United Kingdom to invest in geothermal energy. Among its many other climate initiatives, the country plans to generate 90% of its electricity needs from renewables by 2029, and has been celebrated internationally for its government’s efforts to become the world’s first climate-resilient country.81 These policies are clear examples of what Sir Richard Branson and many Caribbean leaders call ‘climate-smart’, and while they prepare countries for extreme weather, they also create jobs and boost key industries. The end goal of the Accelerate programme is to develop Car­ ibbean economies that are custom-built for a future on a warming planet. However, many islands had in fact already embarked on this journey before the ravages of the 2017 hurricane season saw the ushering in of Branson’s ‘Marshall Plan’. Jamaica and Barbados have ambitious RE plans (see above) and many islands were among the first advocates and signatories of the Paris Agreement. However, financing these plans has always been a challenge and gaining access to the plethora of international funding agencies has left many government bodies struggling to meet strict criteria in a saturated and competitive environment. The Accelerator programme aims to speed up this process but many Caribbean economies do not have the luxury of time.

‘Your CO2, your cost’ Colleagues, we are just starting to fully grasp the scale of the adaptation financing needs as cli­ mate related events become more frequent and severe. … Last year, when the SecretaryGeneral asked me to partner with President Macron of France in undertaking the political advocacy required to mobilise the sums needed to support the implementation of the Paris Agreement, I thought it was a very tall order. Today, thanks to the increased ambition and 30

Impact of climate change on Caribbean economies

commitment shown by countries such as France, Norway, the United Kingdom and Germany, I am filled with hope that we are on the right track. The Most Honourable Prime Minister of Jamaica, Andrew Holness82

It hasn’t always sounded this cordial in the press room. Climate change questions have been subject to fierce argument by politicians on both sides of the debate. The developed nations sit firmly on their hands and draw their purse strings tighter. Meanwhile, the developing nations voice their concern that their development cannot be controlled by wealthier and well-matured economies. Stuck in the middle of these heated political battles, ratifications and sanctions are their vulnerable small island counterparts which not only are struggling to bolster their econo­ mies but are facing the full force of climate change. With many islands such as Vanuatu, Kiribati and others in the Central and South Pacific already facing the calamitous impact of sea level rise, many low-lying Caribbean islands are quickly waking up to the need to respond to this threat to their very existence. But who will pay to mitigate the effects of climate change? With climate change stirring many fears about economic security in the region, can the Caribbean afford the bill? Hinkel et al. (2014) purport that without any significant action, sea level rise – just one major impact of a changing climate – could cost the world’s economy up to US $100 trillion per annum by 2100. The estimated gross world product for 2018 was less than $90 trillion.83 It is not just sea level rise that is of concern. In the event of global warming reaching 4°C, it is predicted that tropical storms and cyclones will cost the Caribbean region up to $350–$550 million per annum by 2100.84 The combined costs of climate change far surpass the Caribbean countries’ overall economic output and resources, and naturally they will turn to the more advanced economies for help with footing the bill. It is highly likely that the devel­ oped nations have caused much of the anthropogenic effects of climate change through indus­ trialization. Economic powerhouses such as the USA and the UK have also heavily profited from the deliberate suppression of the Caribbean region during the colonial era while going on to become some of world’s largest CO2 emitters (in 2017 the USA was the world’s second highest emitter of CO2 with nearly 5.3 billion metric tons of CO2 accounting for 15% of total global emissions).85 The People’s Republic of China has the world’s highest levels of CO2 emissions, but it would surprise many to know which countries come in at first and second for per capita emissions. Trinidad and Tobago firmly holds second position in the world since 2006, behind Qatar, for CO2 emissions per capita (30 metric tons per capita in 2017) and this oil-rich Car­ ibbean nation stands squarely juxtaposed in the climate debate.86 Developing countries can be now seen as major polluters as more are lifted out of the low-income status and development is on the rise (11 lesser-developed countries were among the top 20 CO2 emitters in 2017).87 However, can they be expected to equally contribute to the fight against climate change too? Many observers argue that the Caribbean is inadequately prepared to tackle the economic severity of climate change without the support of accessible financial pipelines and investment funds from developed countries and major financial agencies. Mia Mottley, the Prime Minister of Barbados, rightly stated to the 74th UN Assembly: We don’t come as a proud people asking for handouts. What we want, what we need, is fiscal and policy space to achieve sustainable development, and be nimble to adapt in ways that allow us to be true and faithful to the task in ways to bring prosperity to our people.”88 She was right. Caribbean government leaders have made it explicitly clear over the past decade that they will continue to urge funding bodies to help to finance their pathways to achieving 31

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the 17 UN Sustainable Development Goals. Many have come willingly to these calls. Leading agencies and international bodies, including the IMF, the World Bank, the Rocky Mountain Institute and even the United Arab Emirates, are all pushing for the region’s development with much less political pressure as seen in previous decades (as with Jamaica’s IMF loans that left the economy burdened for over two decades). Even though the Caribbean is embracing the fresh rush of investors into the region, ‘at arm’s length’ is a term that should not fall on deaf political ears. Controversial programmes such as China’s Belt and Road Initiative may come with very little political interference and seemingly ‘no strings attached loans’ but the strategic push of China globally and within the Caribbean has been well documented. Increasing island con­ nectivity and infrastructure can build resilience to climate change, but as was seen in the case of Jamaica, when that comes with a price tag of 500–1,200 acres of land and a 50-year commission of tolls from the road linking north and south Jamaica known informally as the ‘Beijing High­ way’ that was constructed with Chinese aid, has resilience come with reduced economic security?89,90 Let us end this section by noting that often it is not the question of ‘who is going to pay? that bogs down the Caribbean region’s leaders and researchers, but how to make the billions of dollars of international aid more accessible and fairly distributed within the Caribbean (the region is often lumped together with Latin America for instance, which is in itself an iniquitous comparison). The hurdles of bureaucratic proposals and grants often inundate agencies that are already stretched too thinly and are understaffed. The key to ensuring a less vulnerable Car­ ibbean in the near future may lie in streamlining financial aid to the region, reducing the con­ straining and unnecessary competitiveness, and opening up funding grants to new streams of climate financing. Seychelles, for instance, undertook a ‘debt-for-nature’ financing deal with the Nature Conservancy in 2018, gaining much-needed investment capital and debt restructuring while protecting 30% of its national waters in return, with 15% being listed as ‘no-take’ zones.91 Will the Caribbean be able to innovate its climate financing in a similar manner in order to overcome decades of constraint?

The economy of the everyday This chapter has thus far highlighted the vulnerability of the Caribbean economies to climate change and the manifold implications thereof. However, nothing demonstrates the urgent need for economic restructuring and the building of resilience like the nature of the ‘Caribbean everyday’ in 2050 and beyond. It is only when we take these blistering statistics and evidence of political ineptitude and place them in the context of the vulnerability of ‘everyday’ and the ‘not everyone is equally affected’ does the full picture refocus to help us to better understand the issues at hand. The region’s economies are increasingly being shaped by closely interconnected aspects of volatile job security, the possibility of large numbers of climate refugees, and even gender disparities owing to climate change. Take climate refugees, for instance, who are expected to number hundreds of millions globally by the end of this century. A fragment of a country’s economy can be viewed as being uprooted when a person flees due to the dire economic/environmental state of their region. Equally, mass migration and the overwhelming number of climate refugees can bring complex difficulties to their host countries as they seek a better way of life. Owing to the limitations of space, this section will not examine in-depth the intricacies of climate migration, but it is very important to note that climate migration poses a major threat to the Caribbean economies. Over 50% of the region’s population live within 1.5 km of the coast, and many islands have low-lying coastal regions with mountainous and often protected interiors, therefore the 32

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pinching of communities away from the coastlines by rising sea levels will have a dire effect on socio-economic stability.92 Both inter- and intra-migration will bring many countries which have poor regulations and policies to their proverbial knees as they are overwhelmed by increasing numbers of people seeking ‘climate asylum’ in the Caribbean, accompanied by massive drains on their economies as they inevitably relocate outside of the region completely. These are not warnings of distant futures. During the 2017 hurricane season some 160,000–175,000 Puerto Rican locals relocated to the USA less than a year after the devastating passage of Hurricane María (the worst recorded for the period 1941–2018).93,94 That same hurricane also displaced one-fifth of Dominica’s population (i.e. 15,000–20,000 inhabitants) within a month of its passage.95 Some may return to their homes in the short term but given the increasing intensity of these tropical systems, many climate migrants in the Caribbean will become permanently displaced as their communities struggle with Herculean post-disaster recoveries. Some Caribbean countries may be able to absorb a proportion of these climate migrants temporarily, albeit that these same islands may themselves be victims of climate change with concomitant incapacitated systems and resources. Trinidad and Tobago may be a high-income economy, but its recent affairs in connection with the Venezuelan crisis have left the govern­ ment controversially handling immigration into the country. The twin-island state has failed to implement effective policy which addresses the sharp increase in migrant workers and people seeking asylum from Venezuela. Tensions will continue to rise throughout the region if Car­ ibbean Community (CARICOM) member states do not tackle crucial migration policies. The increasingly toxic stance of more developed neighbours such as the USA towards migration pose a large threat to economic opportunity in post-disaster environments as Caribbean migrants are not the only ones knocking on their doors. The gradual breakdown of socio­ economic relations and human functioning will undermine the very foundation of fragile Car­ ibbean economies, resulting in a proliferation of black markets, rising unemployment, further environmental degradation due to debilitated communities and resources, and the overall slumping of productivity and output within the region. The cyclical nature of migration will be difficult to break. Farmers selling and abandoning their flooded or parched fields in increasing numbers to seek opportunities abroad will drive food prices up owing to heavier importation bills, thus further weakening the economy and enhancing economic push factors. The arrival of more frequent storms could force many Car­ ibbean islands deeper into debt, rendering them even more vulnerable to the following year’s hurricane season. Worsening weather extremes will cause disruptions to the region’s energy infrastructure, and even the RE systems will need to adapt and become more resilient.96 The emigration of young professionals and academics abroad (known as a brain drain) due to reduced economic prosperity and job opportunities will have a negative effect upon even the sturdiest of economies. History has provided many examples of the impact of environmental stresses on economic stability, and widespread conflict and unrest can start with barren fields, although caution must be exercised when attributing large-scale socio-economic collapse to anthropogenically induced climate change.97 Nevertheless, further unrest and greater economic downturns will not only increase emigration from the Caribbean, but equally it will reduce immigration and discourage visits to the region. Fewer tourists will wish to visit recently bat­ tered beaches and damaged resorts, they will have less money to spend as inflation and food prices soar, and even fewer still will board planes destined for a region that potentially has been red-flagged by their home countries as ‘socially and economically unstable’. The vulnerabilities to climate change become more poignant and urgent when viewed in the context of unequal consequences. Unfortunately, climate change and the impact thereof are 33

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prejudicial by nature, preying on the most vulnerable communities and those unable to weather its storms. Interestingly, a recent study has rooted this argument in the Caribbean’s colonial past, referencing the impact of Hurricane Dorian on the Bahamas in 2019 whereby residents in the same community were affected in varying ways by the same hurricane depending on access to housing that had been intentionally weather-proofed decades ago. Von Meding et al. (2019) aptly state that ‘Disasters are not “natural events”; they are long-term processes of accumulated risk and impact’, highlighting that these extreme events in the Caribbean become disasters through a differential lack of preparedness.98 The poor will always face the brunt of climate change owing to the fact that they live in high-risk areas (low-level coastal regions, flood plains, etc.) and to their heightened dependence on ecosystem services for their livelihoods.99 A growing field in climate studies is the understanding of marginalized communities within climate-related disasters and the impact that they have on people. Women, children, the elderly and differently abled citizens will experience climate-related disasters with more adverse consequences as gender-, age- and ability-insensitive policies fail to recognize their increased vulnerability. The outlook is not entirely bleak, and the fate of the Caribbean largely lies in the political order of the day. It is clear that climate change will have an irrevocable impact on Caribbean economies if inaction continues, but the region is undergoing considerable change. This chapter has taken the reader through the complexities of the Caribbean both historically and within present-day constraints but has also highlighted low-hanging opportunities for building climate resilience. Islands in the region can become ‘climate-smart’ models through the fortification and overhaul of ageing energy infrastructure, strengthened and accessible financial systems, increased investment in research and policy innovation, and the protection of their most vulnerable com­ munities. Many SIDS across the world are being forced to do the same. With some island states like Kiribati even buying land on other islands as a sort of ‘climate insurance’ policy as their communities are literally being washed away, not all SIDS have the luxury of a period of grace in which to take action.100 The Caribbean will need to put innovation at its political and financial core if its economies are to survive until the end of the century and beyond intact. Climate change will have an impact on the very nature of what is seen as the ‘everyday’ in the Caribbean, and our anecdotal vision of ‘sun, sand and sea’ will be revised with many islands experiencing ‘sargassum, scorch and swells’. While some in the Caribbean will temporarily benefit from the vagaries of climate change and its uneven distribution of weather-related phenomena, overall, the region risks suffering greatly without urgent and collaborative action. As the region’s islands sink into the sea, innovation will be needed to keep its fragile economies afloat.

Notes 1 E. Cano, A. Cano-Ortiz, S. Del Río González, J. Alatorre Cobos, and A. Veloz (2012) ‘Bioclimatic map of the Dominican Republic’, Plant Sociology, 49(1), 81–90. 2 P. J. Klotzbach, C. J. Schreck III, J. M. Collins, M. M. Bell, E. S. Blake and D. Roache (2018) ‘The extremely active 2017 north Atlantic hurricane season’, Monthly Weather Review, 146(10), 3425–43. 3 NOAA (2019) Assessing the Global Climate in June 2019, www.ncei.noaa.gov/news/global-clima te-201906 (accessed 8 August 2019). 4 LOOP News (2019) ‘Hot spell hits Jamaica as Kingston reaches record temperature’, www.loopjama ica.com/content/hot-spell-hits-jamaica (accessed 8 August 2019). 5 P. S. Mohan, N. Spencer and E. Strobl (2019) ‘Natural hazard-induced disasters and production efficiency: Moving closer to or further from the frontier?’ International Journal of Disaster Risk Science, 1–13. 6 D. A. Herrera, T. R. Ault, J. T. Fasullo, S. J. Coats, C. M. Carrillo, B. I. Cook and A. P. Williams (2018) ‘Exacerbation of the 2013–2016 Pan‐Caribbean drought by anthropogenic warming’, Geophysical Research Letters, 45(19), 10–619.

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7 Food and Agriculture Organization of the United Nations (FAO) (2016) El Niño Response Plan: Haiti, Rome: FAO, www.fao.org/fileadmin/user_upload/emergencies/docs/1_web_FAO%20El% 20Nino%20Response%20Plan_final.pdf (accessed 8 August 2019). 8 UN Office for the Coordination of Humanitarian Affairs (OCHA) (2018) ‘Trinidad and Tobago: Floods and landslides due to intense rains’, https://reliefweb.int/report/trinidad-and-tobago/trinidad­ and-tobago-floods-and-landslides-due-intense-rains-23-10-2018 (accessed 8 August 2019). 9 Z. Guido, T. Finan, K. Rhiney, M. Madajewicz, V. Rountree, E. Johnson and G. McCook (2018) ‘The stresses and dynamics of smallholder coffee systems in Jamaica’s Blue Mountains: A case for the potential role of climate services’, Climatic Change, 147(1–2), 253–66. 10 J. Jackson, M. A. R. Y. Donovan, K. Cramer and V. Lam (2014) ‘Status and trends of Caribbean Coral Reefs: 1970–2012’, Global Coral Reef Monitoring Network, Washington, DC: International Union for the Conservation of Nature Global Marine and Polar Program. 11 S. J. Fain, M. Quiñones, N. L. Álvarez-Berríos, I. K. Parés-Ramos and W. A. Gould (2018) ‘Cli­ mate change and coffee: Assessing vulnerability by modeling future climate suitability in the Caribbean island of Puerto Rico’, Climatic Change, 146(1–2), 175–86. 12 N. B. Schwartz, A. M. Budsock and M. Uriarte (2019) ‘Fragmentation, forest structure, and topography modulate impacts of drought in a tropical forest landscape’, Ecology, 100(6), e02677. 13 World Travel and Tourism Council (2019) Country Analysis Data, www.wttc.org/economic-impact/ country-analysis/country-data/ (accessed 8 November 2019). 14 J. Popke and C. Harrison (2018) ‘Energy, resilience, and responsibility in post-Hurricane Maria Dominica: Ethical and historical perspectives on “building back better”’, Journal of Extreme Events, 5(4), 1840003. 15 Z. Khan and A. A. Khan (2017) ‘Current barriers to renewable energy development in Trinidad and Tobago’, Strategic Planning for Energy and the Environment, 36(4), 8–23. 16 The Energy Chamber of Trinidad and Tobago (2017) ‘Understanding the energy subsidy in Trini­ dad and Tobago’, https://energynow.tt/blog/understanding-the-electricity-subsidy-in-tt (accessed 10 December 2019). 17 United States Energy Information Administration (2019) ‘U.S. natural gas imports by country’, www.eia.gov/dnav/ng/NG_MOVE_IMPC_S1_A.htm (accessed 10 December 2019). 18 R. E. Ellis (2017) ‘The collapse of Venezuela and its impact on the region’, Military Review, 97(4), 22. 19 A. Ali and P. Schena (2018) ‘Look before you leap: Harvesting oil wealth in Guyana via a sovereign wealth fund’, Harvard International Review, 39(2), 62–63. 20 World Bank, ‘Country Analysis Data’, https://data.worldbank.org/indicator/NV.AGR.TOTL.ZS (accessed 8 November 2019). 21 T. M. Boopsingh and G. McGuire (eds) (2014) From Oil to Gas and Beyond: A Review of the Trinidad and Tobago Model and Analysis of Future Challenges, Lanham, MD: University Press of America. 22 World Travel and Tourism Council. 23 Macrotrends (2019) ‘Brent Crude Oil Prices: 10 Year Daily Chart’, www.macrotrends.net/2480/ brent-crude-oil-prices-10-year-daily-chart (accessed 3 December 2019). 24 World Travel and Tourism Council. 25 World Bank, ‘Country Analysis Data’. 26 T. Rogers, M. Ashtine, R. K. Koon and M. Atherley-Ikechi (2019) ‘Onshore wind energy potential for Small Island Developing States: Findings and recommendations from Barbados’, Energy for Sustainable Development, 52, 116–27. 27 World Bank, ‘Country Analysis Data’. 28 Government of the Bahamas (2019) ‘Economic Environment’, www.bahamas.gov.bs/ (accessed 8 November 2019). 29 A. Thomas and L. Benjamin (2018) ‘Policies and mechanisms to address climate-induced migration and displacement in Pacific and Caribbean small island developing states’, International Journal of Climate Change Strategies and Management, 10(1), 86–104. 30 M. A. Taylor, L. A. Clarke, A. Centella, A. Bezanilla, T. S. Stephenson, J. J. Jones, J. D. Campbell, A. Vichot and J. Charlery (2018) ‘Future Caribbean climates in a world of rising temperatures: The 1.5 vs 2.0 dilemma’, J. Climate 2018, 31, 2907–26, https://doi.org/10.1175/JCLI-D-17-0074.1. 31 T. S. Stephenson, L. A. Vincent, T. Allen, C. J. Van Meerbeeck, N. McLean, T. C. Peterson, and J. R. Boekhoudt (2014) ‘Changes in extreme temperature and precipitation in the Caribbean region, 1961–2010’, International Journal of Climatology, 34(9), 2957–71.

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Masao- I. Ashtine 32 Ibid. 33 Taylor et al. ‘Future Caribbean climates in a world of rising temperatures’. 34 I. Gouirand, M. R. Jury and B. Sing (2012) ‘An analysis of low-and high-frequency summer climate variability around the Caribbean Antilles’, Journal of Climate, 25(11), 3942–52. 35 T. L. Allen and B. E. Mapes (2017) ‘The late spring Caribbean rain‐belt: Climatology and dynamics’, International Journal of Climatology, 37(15), 4981–93. 36 I. Gouirand, V. Moron, Z. Z. Hu and B. Jha (2014) ‘Influence of the warm pool and cold tongue El Niños on the following Caribbean rainy season rainfall’, Climate Dynamics, 42(3–4), 919–29. 37 A. Mandal, T. S. Stephenson, A. A. Brown, J. D. Campbell, M. A. Taylor and T. L. Lumsden (2016) ‘Rainfall-runoff simulations using the CARIWIG Simple Model for Advection of Storms and Hurricanes and HEC-HMS: Implications of Hurricane Ivan over the Jamaica Hope River watershed’, Natural Hazards, 83(3), 1635–59. 38 A. Centella, A. Bezanilla, A. Vichot and M. Silva (2017) CASE STUDY: CARiDRO The Caribbean Assessment Regional DROught Tool, https://cdkn.org/resource/case-study-caridro-caribbean­ assessment-regional-drought-tool/?loclang=en_gb (accessed 9 November 2019). 39 World Travel and Tourism Council. 40 M. N. Laframboise, N. Mwase, M. J. Park and Y. Zhou (2014) Revisiting Tourism Flows to the Caribbean: What Is Driving Arrivals? No. 14–229, Washington, DC: IMF. 41 Ibid. 42 C. J. Robinson and P. Bangwayo-Skeete (2016) The Financial Impact of Natural Disasters: Assessing the Effect of Hurricanes and Tropical Storms on Stock Markets in the Caribbean, available at SSRN 2845429. 43 Ibid. 44 C. J. Randall and R. van Woesik (2015) ‘Contemporary white-band disease in Caribbean corals driven by climate change’, Nature Climate Change, 5(4), 375. 45 C. M. Eakin et al. (2010) ‘Caribbean corals in crisis: Record thermal stress, bleaching, and mortality in 2005’, PLoS ONE 5, e13969. 46 M. D. Spalding and B. E. Brown (2015) ‘Warm-water coral reefs and climate change’, Science, 350(6262), 769–71. 47 K. Langin (2018) ‘Seaweed masses assault Caribbean islands: Scientists scramble to explain unusual bloom of Sargassum weed’, https://science.sciencemag.org/content/sci/360/6394/1157.full.pdf (accessed 9 November 2019). 48 R. A. Klein (2011) ‘Responsible cruise tourism: Issues of cruise tourism and sustainability’, Journal of Hospitality and Tourism Management, 18(1), 107–16. 49 J. B. Elsner, J. P. Kossin and T. H. Jagger (2008) ‘The increasing intensity of the strongest tropical cyclones’, Nature, 455(7209), 92. 50 Reuters (2018) ‘Hurricane forecasters see above-average 2018 U.S. storm season’, www.reuters. com/article/us-weather-hurricanes-forecasts/hurricane-forecasters-see-above-average-2018-u-s-storm­ season-idUSKCN1HC2CB (accessed 22 November 2019). 51 The Independent (2018) ‘Hurricanes Harvey, Irma and Maria pushed natural catastrophe insurance costs to a record high last year, study shows’, www.independent.co.uk/news/business/news/hurricane-harvey­ irma-maria-insurance-cost-natural-catastrophes-record-high-2017-a8297696.html (accessed 22 Novem­ ber 2019). 52 Shelter Box (2019) 2019 Hurricane Dorian: Key facts and FAQs. www.shelterbox.org/disasters-exp lained/hurricane-dorian?gclid=CjwKCAiAzuPuBRAIEiwAkkmOSESgYod-z8RQe9vRPlWhElVS BQMcvWKcNuZgPojAdFtyeVgGEdtZkBoCDVcQAvD_BwE (accessed 22 November 2019). 53 G. H. Roe and M. B. Baker (2007) ‘Why is climate sensitivity so unpredictable?’ Science, 318(5850), 629–32. 54 H. A. Ramsay, S. S. Chand and S. J. Camargo (2018) ‘A statistical assessment of Southern Hemi­ sphere tropical cyclone tracks in climate models’, Journal of Climate 31(24), 10081–104. 55 Intergovernmental Panel on Climate Change (2014) Climate Change 2014: Impacts, Adaptation and Vulnerability: Part A: Global and Sectoral Aspects, vol. 1: Global and Sectoral Aspects: Working Group II Contribution to the IPCC Fifth Assessment Report, Cambridge: Cambridge University Press. 56 B. G. Reguero, I. J. Losada, P. Diaz-Simal, F. J. Mendez and M. W. Beck (2015) ‘Effects of climate change on exposure to coastal flooding in Latin America and the Caribbean’, PLoS ONE, 10(7), e0133409. 57 C. J. Robinson and P. Bangwayo-Skeete (2016) The Financial Impact of Natural Disasters: Assessing the Effect of Hurricanes & Tropical Storms on Stock Markets in the Caribbean, available at SSRN 2845429.

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58 Ibid. 59 S. A. Mejia (2014) Debt, Growth and Natural Disasters: A Caribbean Trilogy. No. 14–125. Washington, DC: IMF. 60 N. Laframboise and S. Acevedo (2014) ‘Mother Nature’, Finance & Development, 51(1), 45. 61 A. Ochs, M. Konold, K. Auth, E. Musolino and P. Killeen (2015) Caribbean Sustainable Energy Roadmap and Strategy (C-SERMS): Baseline Report and Assessment, Washington, DC: Worldwatch Institute. 62 Trading Economics (2019) Trinidad and Tobago Crude Oil Production, https://tradingeconomics.com/ trinidad-and-tobago/crude-oil-production (accessed 10 December 2019). 63 Bloomberg (2019) Can Guyana Survive Striking It Rich?www.bloomberg.com/opinion/articles/ 2019-11-05/guyana-s-new-oil-riches-come-with-big-risks-attached (accessed 9 December 2019). 64 D. Gay, T. Rogers and R. Shirley (2018) ‘Small island developing states and their suitability for electric vehicles and vehicle-to-grid services’, Utilities Policy, 55, 69–78. 65 M. Meniketti (2009) ‘Boundaries, borders, and reference points: The Caribbean defined as geo­ graphic region and social reality’, International Journal of Historical Archaeology, 13(1), 45–62. 66 D. V. Armstrong (1999) I, Too, Am America: Archaeological Studies of African-American Life, Charlot­ tesville: University of Virginia Press, pp. 173–192. 67 J. Millan (1999) The Future of Large Dams in Latin America and the Caribbean: IDB’s Energy Strategy for the Region, Washington, DC: IDB, http://cdi.mecon.gov.ar/bases/docelec/mu2005. pdf (accessed 26 May 2020). 68 International Renewable Energy Agency (2019) Renewable Capacity Statistics 2019, www.irena.org/ publications/2019/Mar/Renewable-Capacity-Statistics-2019 (accessed 16 November 2019). 69 W. Bugler (2012) ‘Seizing the sunshine: Barbados’ thriving solar water heater industry’, Climate and Development Knowledge Network, https://cdkn.org/wp-content/uploads/2012/09/Barbados-Inside Story_WEB.pdf (accessed 26 May 2020). 70 C. Powell (2015) ‘REdiscover: Munro College Wind Turbine (Jamaica)’, https://xenogyre.com/ 2015/06/20/rediscover-munro-college-wind-turbine-jamaica/ (accessed 14 November 2019). 71 M. Hutchins (2018) ‘Construction begins on hybrid storage facility in Jamaica’, www.pv-magazine. com/2018/03/05/construction-begins-on-hybrid-storage-facility-in-jamaica/ (accessed 15 Novem­ ber 2019). 72 Gay et al. (2018) ‘Small island developing states and their suitability for electric vehicles and vehicleto-grid services’. 73 M. Ashtine, R. Koon Koon, D. Grant and A. Maharaj (2018) ‘Advancing the Caribbean energy land­ scape: A comprehensive review of the state of electric vehicles and storage systems’, Conference Pro­ ceedings, the Caribbean Academy of Sciences, University of the West Indies, Mona, 29 November. 74 International Renewable Energy Agency (2019) Renewable Capacity Statistics 2019. 75 Ibid. 76 BNAmericas (2019) ‘Dominican Republic grants 12 new provisional concessions’, www.bnamericas.com/ en/news/dominican-republic-grants-12-new-provisional-concessions (accessed 23 November 2019). 77 Bureau Telecommunicatie en Post (2019) ‘Feed-in tariffs’, https://btnp.org/sectors/energy/elec tricity/tariffs/feed-in-tariffs/ (accessed 23 November 2019). 78 The Washington Post (2017) ‘Richard Branson: Devastated Caribbean islands need a “Marshall Plan” after Irma’, www.washingtonpost.com/news/worldviews/wp/2017/09/11/richard-branson-decima ted-caribbean-islands-need-a-marshall-plan-after-irma/ (accessed 8 November 2019). 79 C. Q. Evans and E. J. Zechmeister (2018) Education and Risk Assessments Predict Climate Change Concerns in Latin America and the Caribbean, Latin American Public Opinion Project, Nashville: Vanderbilt University. 80 Economic Commission of Latin America and the Caribbean (2016) ‘Dominica is CARICOM fore­ runner in renewable energy use, latest ECLAC report reveals’, www.cepal.org/en/news/dominica -caricom-forerunner-renewable-energy-use-latest-eclac-report-reveals (accessed 9 November 2019). 81 Commonwealth of Dominica (2019) ‘International media in awe of resilient Dominica’, https:// cbiu.gov.dm/international-media-in-awe-of-resilient-dominica/ (accessed 9 November 2019). 82 Jamaica Information Service (2019) ‘Statement by the Prime Minister of Jamaica the Most Hon­ ourable Andrew Holness, ON, MP at the High-Level Luncheon: An Urgent Call for Countries to Partner for Climate Action New York’, 22 September, https://jis.gov.jm/speeches/statement-by-the­ prime-minister-of-jamaica-the-most-honourable-andrew-holness-on-mp-at-the-high-level-luncheon­ an-urgent-call-for-countries-to-partner-for-climate-action-new-york-september-22-2019/ (accessed 5 December 2019).

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Masao- I. Ashtine 83 J. Hinkel, D. Lincke, A. T. Vafeidis, M. Perrette, R. J. Nicholls, R. S. Tol, B. Marzeion, X. Fett­ weis, C. Ionescu and A. Levermann (2014) ‘Coastal flood damage and adaptation costs under 21st century sea-level rise’, Proceedings of the National Academy of Sciences, 111(9), 3292–97. 84 W. Moore, W. Elliott and T. Lorde (2017) ‘Climate change, Atlantic storm activity and the regional socio-economic impacts on the Caribbean’, Environment, Development and Sustainability, 19(2), 707–26. 85 Our World in Data (2018) ‘CO₂ and greenhouse gas emissions’, https://ourworldindata.org/co2­ and-other-greenhouse-gas-emissions (accessed 3 December 2019). 86 Ibid. 87 Ibid. 88 Office of the Prime Minister, Barbados (2019) ‘Statement at UNGA 74’, https://pmo.gov.bb/2019/ 09/27/statement-at-unga-74/ (accessed 9 December 2019). 89 D. Zhang, D. Leiva and M. Ruwet (2019) ‘Similar Patterns? Chinese Aid to Island Countries in the Pacific and the Caribbean’, http://dpa.bellschool.anu.edu.au/experts-publications/publications/ 6810/ib-201909-similar-patterns-chinese-aid-island-countries. 90 H. J. Godoy (2018) ‘New Pirates in the Caribbean?’ ReVista, 18(1), 53–1A. 91 J. J. Silver and L. M. Campbell (2018) ‘Conservation, development and the blue frontier: The Republic of Seychelles’ debt restructuring for marine conservation and climate adaptation program’, International Social Science Journal. 92 M. A. Mycoo (2018) ‘Beyond 1.5 C: Vulnerabilities and adaptation strategies for Caribbean small island developing states’, Regional Environmental Change, 18(8), 2341–53. 93 J. Hinojosa and E. Meléndez (2018) ‘Puerto Rican exodus: One year since Hurricane Maria’, https:// centropr.hunter.cuny.edu/research/data-center/research-briefs/puerto-rican-exodus-one-year-hurricane­ maria (accessed 9 December 2019). 94 E. Meléndez and C. R. Venator-Santiago (2018) ‘Puerto Rica: Two years after Hurricane Maria’, https://centropr.hunter.cuny.edu/sites/default/files/PDF_Publications/pr_twoyearsmaria_final.pdf (accessed 9 December 2019). 95 The New Humanitarian (2017) ‘Exodus from hurricane-hit Dominica as recovery remains elusive’, www.thenewhumanitarian.org/feature/2017/10/18/exodus-hurricane-hit-dominica-recovery-remains­ elusive (accessed 9 December 2019). 96 C. Burgess and J. Goodman (2018) Solar under Storm. Boulder, CO: Rocky Mountain Institute. 97 J. Selby, O. S. Dahi, C. Fröhlich and M. Hulme (2017) ‘Climate change and the Syrian civil war revisited’, Political Geography, 60, 232–44. 98 J. Von Meding, D. O. Prevatt and K. Chmutina (2019) ‘Risk rooted in colonial era weighs on Bahamas’ efforts to rebuild after Hurricane Dorian’, The Conversation, https://theconversation. com/amp/risk-rooted-in-colonial-era-weighs-on-bahamas-efforts-to-rebuild-after-hurricane-dorian­ 125548 (accessed 9 December 2019). 99 M. MacLennan and L. Perch (2012) ‘Environmental justice in Latin America and the Caribbean: Legal empowerment of the poor in the context of climate change’, Climate L., 3, 283. 100 J. Ellsmoor and Z. Rosen (2016) ‘Kiribati’s land purchase in Fiji: Does it make sense’, Devpolicy blog from the Development Policy Centre, https://devpolicy.org/kitibatis-land-purchase-in-fiji­ does-it-make-sense-20160111/ (accessed 9 December 2019).

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4 Caribbean energy security Regional profile and challenges to integration David Goldwyn and Cory Gill1

Introduction The nations of the Caribbean are heterogeneous in culture, geography, geology and market size and structure.2 Yet by almost any metric, the overwhelming majority of them are energy inse­ cure. Traditional definitions of energy security focus on the affordability and availability of energy, namely the adequacy of energy supply to satisfy demand.3 More modern definitions think of energy as a system and add the need for the reliability and sustainability of energy supply.4 The Caribbean today remains highly dependent on fossil fuels and vulnerable to dis­ ruptions of fuel and power supply from extreme weather and market volatility. Furthermore, the region’s economies suffer from electricity prices that are far higher than its Organisation for Economic Co-operation and Development neighbours. Yet even in the face of such difficulties, evidence is emerging that indicates that the region is making progress towards bolstering its energy security. Thanks to enlightened national leadership, technological advancements, improvements in national investment frameworks, and driven in no small measure by natural and geopolitical misfortune, regional and subregional energy security strategies and policies are evolving, and energy security is improving. As we will demonstrate, the unique characteristics of Caribbean nations defy region-wide solutions. Yet subregional and national approaches, backed by the capacity, technical and financial support of regional and multilateral organizations and some national governments, have shown success. This chapter describes the unique char­ acteristics and challenges of energy security in the Caribbean; the recent progress in the devel­ opment of national and regional ambitions, organizations and strategies; the opportunities the region has for decarbonization through the use of natural gas and renewable energy; and the major successes achieved in recent years. We conclude with the lessons learned from these experiences and suggestions for extending this positive trend.

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David Goldwyn and Cory Gill

Box 4.1 The International Energy Agency (IEA) defines energy security as ‘the uninterrupted availability of energy sources at an affordable price’.5 It adds that short-term energy security concerns focus on the ability of the energy system to react promptly to sudden changes within the supply-demand balance, while long-term concerns deal more directly with timely investments to provide energy supplies in a manner consistent with economic development and sustainable environmental needs. Many obser­ vers note that the absence of energy security entails ‘negative economic and social impacts of either physical unavailability of energy, or prices that are not competitive or are overly volatile’.6

Characteristics of the Caribbean from an energy perspective The 16 nations of the Caribbean are unique and heterogeneous in culture, language and natural resources. From an energy perspective, their size, resource endowment, oil dependency, ageing high carbon infrastructure, vulnerability to extreme weather, and lack of creditworthy off-takers capable of entering into long-term contracts with the private sector provide both challenges and opportunities for energy security solutions.

Market size and resource base The nations of the Caribbean, from a global markets perspective, are generally small in population, geographic area, energy demand and national income.7 Their geographic isolation from one another due to their status as islands (with the exception of Belize, Guyana and Suriname) makes these markets hard to aggregate. Space for utility-scale wind farms and solar arrays is often limited, and the private sector frequently views investment opportunities as capable of delivering only limited returns. Furthermore, Caribbean countries mostly have small fossil fuel natural resource endowments. Only Trinidad and Tobago and Guyana are, so far, significant hydrocarbon provinces.8 Yet neither is a major contributor to regional energy supply. Liquefied natural gas (LNG) supplies in Trinidad and Tobago are already contracted to off-takers outside the region, while the Guyanese government has yet to finalize a strategy for the use of associated gas from offshore oil production. At this time, the government does not expect associated gas to penetrate the domestic market until around 2023 or to be available in large volumes until 2035.9 Caribbean countries all have significant renewable resource potential, yet the nature of that prospectivity varies. Many of the islands of the Lesser Antilles sit atop some of the world’s most prospective geothermal reservoirs. If properly developed, these geothermal resources would be sufficient to fuel power plants ranging between 10 MW and 30 MW in size to meet baseload energy needs, while also allowing some islands to export power to their neighbours through undersea connection cables.10 The Caribbean is also an excellent solar province, as nine of the region’s larger economies have high solar prospects with a collective potential of 2,526 MW.11 Belize, the Dominican Republic, Haiti and Suriname have significant installed hydropower capacity, although hydropower potential for many other islands is low.12 The region’s wind energy prospects are more diffuse, as only two of the nine larger economies have high wind energy potential (Bar­ bados and St Lucia) while many others have more moderate prospectivity.13

Oil dependency and high electricity tariffs Despite decades of efforts at diversification, the Caribbean remains highly dependent on imported oil. This owes in large part to years of regional dependence on concessional oil 40

Caribbean energy security

financing through Petrocaribe, a programme established by the Venezuelan government in 2005 to offer generous financing that enabled Caribbean states to purchase Venezuelan crude oil and petroleum products on credit. By providing these countries with budget support, their incentive to move away from petroleum products for power generation was stifled as neither market-priced natural gas nor renewable energy could compete on an equal footing with credit-supported oil. Even as Venezuela has proved increasingly unable to provide this support due to its economic collapse, in 2016 imported petroleum products accounted for about 87% of the Caribbean’s primary energy consumption (with the exception of Trinidad and Tobago and Suriname, both of which are oil producers).14 These imports, in particular heavy fuel oil and diesel for power generation and transportation, leave the region exposed to oil price volatility. This exposure is a significant contributing factor to the region’s high electricity tariffs, which increased by 80% from 2002 to 2012 and have at times exceeded $0.30 per kWh, around 2.5 times the average electricity cost in the USA.15 Other interrelated factors enabling persis­ tently high electricity tariffs include reliance on old, inefficient power generation infrastructure and lack of investment in transmission and distribution, which have limited the capacity of regional utilities to curb significant technical and transmission losses in the power grid.

Extreme weather The Caribbean faces additional energy security vulnerabilities, many of which are derived from risks pertaining to its exposure to hurricanes or other extreme weather events capable of destroying key infrastructure and depriving the region of energy and electricity supplies for long periods. Among the most dramatic illustrations of this challenge are the effects of Hurricane Maria, which caused the widespread destruction of energy infrastructure in both Dominica and Puerto Rico in September 2017 and brought about months-long power outages on both islands, and Hurricane Dorian, which devastated the Bahamas in August 2019. Recent scientific research suggests that the increase in intense North Atlantic hurricane activity is due at least in part to climate change. The Caribbean appears likely to face storms similar in impact to these and others, which have caused billions of dollars in damage, including a devastating effect on the energy infrastructures of affected countries.16

Box 4.2 Haiti World Bank data indicates that while the average electrification rate of Caribbean countries exceeds 90%, in Haiti 55% of the population (6.2 million people) lack access to electricity.17 Given that the number of Haitians without access to power exceeds the population of every Caribbean country with the exception of Cuba and the Dominican Republic, this issue should be perceived as a region-level concern.

Lack of creditworthy off-takers Many Caribbean economies have no sovereign credit rating, while others have ratings below investment grade.18 Some of the Caribbean’s electricity transmission and distribution companies have sub-par payment histories, rendering it difficult for them to access credit and presenting risk for private investors that they will be unable to honour contracts to purchase LNG cargoes or fulfil power purchase agreements (PPAs). Such firms are likely to need to access credit 41

David Goldwyn and Cory Gill

through a facility with a willing multilateral lender to provide necessary assurances to private investors. These challenges are especially evident on islands with state-owned utilities, such as the Bahamas and St Kitts and Nevis. Over the medium and longer term, the balance sheets of the region’s power utilities may benefit as greater penetration of natural gas and renewables shields them from oil price volatility and potential future technological advancements in renewables places further downward pressure on energy prices.19 While these challenges are significant, there are clear underutilized opportunities to enhance Caribbean energy security by transitioning to lower carbon and cheaper power and transportation fuels like natural gas, expanding renewable power generation, and improving resilience by introducing decentralized power generation. To alleviate obstacles posed by the lack of economies of scale in the region, national governments should, whenever pos­ sible, collaborate together and with external stakeholders to create natural gas hubs and bundle renewable energy projects. If the states of the region are capable of summoning the requisite political will to bring about a genuine energy transition and work in concert with one another in doing so, they will maximize prospects for positive change that allows for lower electricity prices, less fuel dependence, and more rapid decarbonization of Caribbean economies.

Progress in institutional development In recent years there has been important progress in addressing the energy security vulner­ abilities that the Caribbean faces. Five key factors have been the dramatic increase in national government leadership and attention to these issues, regional-level engagement, greater atten­ tion and focus from bilateral and multilateral stakeholders, improvements in technology, and the increasing appreciation of the region’s geopolitical significance.

Increased national government leadership All the independent Caribbean island states are signatories to the Paris Agreement. Caribbean participation in the Paris Agreement in part reflects widespread acknowledgement of the islands’ vulnerability to the effects of climate change and the need to implement meaningful mitigation and adaption strategies. In addition, the states of the region are seeking to leverage opportunities afforded by the Paris Agreement that commit developed countries to providing financial resources to assist developing countries in meeting their renewable energy targets specified in their nationally determined contributions (NDCs).20 Many Caribbean countries have indeed set ambitious, laudable goals for the adoption of renewable energy under this framework – for example, St Lucia, which in recent years has been almost entirely dependent on imported pet­ roleum products for electricity generation, has a target in place for renewable resources, namely geothermal, wind and solar energy, to comprise 50% of its electricity generation mix by 2030.21 Similarly, Barbados in its NDC is planning for renewable energy to account for around 65% of its peak electricity demand by 2030 (in 2019 Barbados issued a new National Energy Policy calling for a 100% renewable energy sector on the island by 2030, a goal that is likely to be reflected in its next NDC) and intends to reach this goal through several means, including addi­ tional deployment of both central and distributed solar and wind energy, and the use of landfill gas for energy generation.22 It is no coincidence that both countries are among the leaders in the region with regard to successfully executing renewable energy projects with international partners. Barbados was, for instance, among the first countries to complete a renewable energy project under the US $50 million United Arab Emirates (UAE)-Caribbean Renewable Energy Fund, 42

Caribbean energy security Table 4.1 Caribbean renewable energy targets24

Country

Target (2030)

Antigua and Barbuda Bahamas Barbados Belize Dominica

50 MW of electricity from renewables Renewable energy comprises at least 30% of the energy mix Renewable energy meets 65% of total peak electricity demand Renewable energy accounts for 85% of electricity generation Reduce energy industry emissions by 98.6% from 2014 levels princi­ pally through harnessing geothermal resources Reduce emissions by 25% from 2010 levels 30% reduction in emissions through electricity production by 2025; 10% of which is achieved through renewables 100% renewable power supply (by 2025) Renewable energy comprises 47% of the electricity mix Renewable energy comprises 20% of the primary energy mix 100% renewable energy grid penetration Increase the use of renewable energy by 50% Renewable energy comprises 50% of the electricity generation mix Reduce emissions by 22% from business as usual (by 2025) Share of electricity from renewable resources exceeds 35% Reduce emissions in the power generation, industrial, and transpor­ tation sectors by 15% from business as usual

Dominican Republic Grenada Guyana Haiti Jamaica Montserrat St Kitts and Nevis St Lucia St Vincent and the Grenadines Suriname Trinidad and Tobago

which financed two small power plants with a combined capacity of 850 kW that displace around 975 metric tons of CO2 each year.23 While the renewable energy targets of some Caribbean states may appear unrealistic, each target does send a strong market signal indicating to the private sector the region’s willingness to bring about a significant energy transition.

Regional leadership Caribbean states have long understood the importance of energy sector coordination and have formulated their national-level renewable energy goals in the context of the broader targets of the Caribbean Community (CARICOM), as approved by member states in 2013, for renewable energy to comprise 28% of CARICOM’s energy mix by 2022 and 47% by 2027.25 CARICOM began its work to develop a regional energy strategy in 2002 and member states approved a regional energy policy in 2013. Its major features are a shift to greater use of sustainable energy sources; the modernization of national regulatory frameworks to allow for the sale of excess power to the grid by both small-scale renewable energy operators and commercial enterprises; and more efforts to update the region’s ageing transmission and distribution infrastructure. This policy also prioritizes actions to promote more robust regional energy trade, strengthen energy sector human capital expertise and institutional capacity, coordinate approaches for leveraging financial mechan­ isms to develop new energy sources, and increase technology transfer and information sharing.26 In 2015 CARICOM member states approved the CARICOM – Sustainable Energy Roadmap and Strategy (C-SERMS), which is a platform managed by the CARICOM Secretariat through which member states implement the regional energy policy through collaboration with several partners including the development community, the financial services sector, civil society, and academic 43

David Goldwyn and Cory Gill

institutions. These stakeholders provide input primarily through several working groups, which focus on matters such as capacity building and research, finance, and policy and regulation.27

Greater attention from bilateral and multilateral stakeholders Over the past decade, both bilateral and multilateral stakeholders have demonstrated increased attention to the Caribbean energy sector. In 2009 Western Hemisphere governments launched the Energy and Climate Partnership of the Americas (ECPA), which, they maintained, reflected both the reality that energy challenges were among the most the important issues the region would have to address as well as the need to cooperate with one another to work towards a sustainable energy future. ECPA currently serves as a forum through which regional governments share information and best practices while also collaborating on initiatives focused on areas such as renewable energy and the efficient use of fossil fuels.28 In 2014 the USA launched the Caribbean Energy Security Initiative (CESI), which seeks to transform the Caribbean’s electricity sector through a suite of pathways that reflect the needs of different national markets, such as targeted loans, guarantees and other credit enhancements; technical support to help the states of the region to develop more competitive regulatory models; and donor coordination efforts to identify shared priorities to ensure that regional projects have the maximum impact. Since the initiation of CESI, the USA has financed over US $120 million in energy deals in the region.29 Under the auspices of CESI, the USA has administered the Caribbean Clean Energy Program to assist both Jamaica and Eastern Caribbean countries in developing policies, regulations and incentives to promote stronger enabling environments for clean energy development, energy efficiency, and the integration of renewable energy into their energy mixes.30 Furthermore, in October 2019 the USA announced a new $25 million loan guarantee under CESI to facilitate energy investments across the Caribbean, with a focus on small-scale, non-oil energy projects and energy efficiency programmes.31 Other bilateral partners have also stepped up to a greater extent in recent years – for example, in 2019 the UAE began financing solar projects in the Bahamas, Barbados and St Vincent and the Grenadines through its $50 million UAE-Caribbean Renewable Energy Fund.32 On the multilateral side, with financing of around $200–$600 million per year in loans and $5–$15 million per year in grants, the Inter-American Development Bank (IDB) has emerged as a knowledge centre and financing hub for Caribbean energy projects. The IDB has commissioned studies and supported programmes focused on bringing greater shares of LNG and geothermal energy to the region and, separately, improving governance and reducing losses in the power sector.

Improvements in technology Two factors that are facilitating energy transition in the Caribbean are the falling cost of renewable energy and the advent of floating storage and regasification units (FSRUs) for LNG. The dramatic fall in the price of utility-scale solar energy, wind power and battery storage make these sources of generation cheaper than fuel oil at current prices if the capital cost of acquisi­ tions can be overcome. Price declines have also made distributed generation more financially feasible. FSRUs lower the cost of entry for economies that seek access to gas, although to date these benefits have been limited to the Dominican Republic and Jamaica due to their larger, more industrialized economies and greater energy demand compared to their peers, in effect enabling them to benefit from economies of scale. A diesel-fired power plant can convert to natural gas, or to dual fuel with the ability to burn oil or gas, and can be supplied by an FSRU with a much smaller volume and lower cost than a traditional onshore regasification unit.

44

Caribbean energy security

Increasing appreciation for the geopolitical significance of the region The Caribbean is a region of major significance to the USA because of their deep cultural ties, close proximity and mutual expatriate populations. But US engagement in the Caribbean has been episodic. In recent years, attention has revived over common concern about climate change and geopolitical competition for regional influence from Venezuela and now the Peo­ ple’s Republic of China. Venezuela’s willingness to provide economic support for the region through Petrocaribe for nearly 20 years won it political loyalty from many nations. The decline of Venezuela has raised concerns about economic dislocation in the region and potential migration concerns as the ripple effects of Venezuela’s internal crisis persist. Meanwhile, China’s Belt and Road Initiative has reached Jamaica and potentially other neighbours, thus raising questions about Beijing’s geopolitical intentions. All these factors have helped to revive focus on the Caribbean by both Democratic and Republican administrations.

Opportunities in natural gas and renewable energy Natural gas has received significant consideration as a potential baseload fuel that some Caribbean islands could utilize in place of imported petroleum products. Although considered a fossil fuel, natural gas emits around 27% less carbon dioxide (CO2) than diesel fuel.33 Furthermore, given the projected global oversupply of LNG in the medium term and what is expected to be the longterm availability of low-priced natural gas in the USA (which is the most likely supplier to an emergent Caribbean market), the Caribbean could realize significant savings from switching to natural gas and would no longer be exposed to the price volatility inherent to the global oil market.34 The IDB has been particularly engaged on this subject, conducting assessments in 2015 and 2019 which found that LNG was the most likely alternative for introducing natural gas in the region, as technology enabling LNG deliveries to small Caribbean islands is mature and available and also provides greater protection against counter-party risk than pipelines, which connect only to a limited number of supply and demand points.35 These studies also found that LNG was likely to serve as the least-cost technical option for delivering natural gas and that the US Gulf Coast would probably be the lowest-cost supplier to the region.36 Additionally, they indicated that the use of a ‘hub and spoke’ approach, wherein a private company or a group of companies create a regional distribution hub in the region that serves as a source of large purchases of LNG from which smaller volumes are subsequently re-exported to off-takers in nearby countries, could be the most efficient means for the Caribbean to access LNG.37 The results of these studies clearly demonstrate the incentives of regional cooperation with respect to developing a Caribbean natural gas market. To date, progress has been most evident in the Dominican Republic and Jamaica, where the ongoing buildout of LNG import terminals and the construction of gas-fired power plants could serve as the groundwork for a broad regional transition.

The Dominican Republic and Jamaica lead the way on LNG While the Dominican Republic and Jamaica were once anchor clients of Petrocaribe, in recent years they have attracted significant private sector financing for a conversion from oil to natural gas as a baseload fuel for power generation. Their success owes in part to domestic energy demand, which far exceeds other states of the region, allowing them to benefit from economies of scale and leaving off-takers better positioned to purchase commercial volumes of LNG.38 Additionally, the Dominican Republic developed a comprehensive legal and regulatory frame­ work for natural gas that governs natural gas exploration and importation, licensing protocols for

45

David Goldwyn and Cory Gill

marketing natural gas, and several incentives for its increased use. Jamaica, which began utilizing natural gas several years later, has a less comprehensive regulatory framework in place but is looking to expand relevant provisions.39 As the regional natural gas market continues to emerge, opportunities are developing for smaller Caribbean states to take advantage of their newfound proximity to LNG supplies and the infrastructure needed to supply gas to their own shores.

The Dominican Republic example The AES Corporation, a global power company that currently carries out power generation and/or distribution in 15 countries, began operations in the Dominican Republic in 1997. The company’s Andres onshore LNG import terminal, the first of its kind in the region, was commissioned in 2003.41 According to AES, the Andres facility currently supplies approximately 40% of the Dominican Republic’s energy demand. The company has sought to maximize value by staking out market share in the power sector, maintaining an 85% stake in gas-fired power plants with capacities of 358 MW and 319 MW, respectively, and entering into PPAs with the state-owned distribution company. These agreements appear commercially sound, as they are indexed to Henry Hub to ensure that changes to the LNG purchase prices are passed on to consumers.42 Consumers also pay additional, regularly adjusted service fees that reflect the point of delivery for the natural gas (these fees comprise terminal fees, truck loading terminal fees and transportation fees).43 Even with these measures in place, the Dominican Republic’s electricity prices are lower than those of its Caribbean neighbours due to its far more diverse energy mix.44 In addition to power sold via PPAs, AES provides natural gas directly to around 50 industrial and commercial clients throughout the Dominican Republic, two third-party power plants, and around 15,000 natural gas vehicles in the country.45 In November 2018 AES noted that it was utilizing nearly all of the capacity of the Andres terminal.46

The Jamaican approach Long dependent on crude oil and petroleum product imports to meet power demand, Jamaica began engaging in concerted efforts to introduce natural gas into its energy mix in the 2000s.47 After a few false starts, in 2015 the Jamaica Public Service Company (JPS), Jamaica’s partially state-owned integrated electric utility, signed an agreement with New Fortress Energy (NFE) to supply gas to the 145-MW Bogue power plant on the country’s north-west coast. As part of the agreement, JPS assumed responsibility for converting the power plant from diesel to natural gas. While NFE initially contemplated supplying the Bogue power via International Organisation Table 4.2 Selected Caribbean natural gas infrastructure40

Location

Asset

Capacity

Barbados

Woodbourne LNG Import Terminal Andres LNG Import Terminal DPP (Los Mina) Power Plant Andres Power Plant Old Harbour Terminal Montego Bay Terminal Bogue Power Plant Old Harbour Power Plant

< 15,000 MMBtu/day (processing capacity)

Dominican Republic Dominican Republic Dominican Republic Jamaica Jamaica Jamaica Jamaica

46

160,000 m3 (storage capacity) 358 MW 319 MW 500,000 MMBtu/day (processing capacity) 61,000 MMBtu/day (processing capacity) 145 MW 190 MW

Caribbean energy security

for Standardisation (ISO) containers delivered from its liquefaction, storage and production facility in southern Florida, it eventually decided to charter a Floating Storage Unit (FSU), which it positioned in southern Jamaica. NFE chartered a smaller LNG vessel to lift cargoes from the FSU, from which regasified LNG was ultimately delivered to the Bogue plant via pipeline.48 NFE has also reached an agreement to supply gas to a recently constructed 190-MW gas-fired power plant at Old Harbour Bay in southern Jamaica. NFE chartered a new FSRU to supply the plant in December 2018, and the Old Harbour plant came online in 2019.49 Jamaican officials forecast that these developments will result in natural gas comprising 45% of Jamaica’s energy mix and exceeding the market share of crude oil and petroleum products, which are expected to account for around 40%.50 As with AES in the Dominican Republic, NFE has managed to negotiate commercially viable contracts with public utilities and industrial end-users in Jamaica.51 JPS has ambitious plans to decommission all of its power plants that run on heavy fuel oil in the next few years or convert them to gas-fired facilities, and the company projects that natural gas will account for 65% of generated power for the national grid by 2020 and for 80% by the end of 2023.52

Opportunities for regional synergies The Dominican Republic and Jamaican examples show that once natural gas is introduced into a country to support a large consumer, opportunities to supply other industries, the transporta­ tion sector or other power plants can emerge. The 2015 and 2019 IDB studies assessing the feasibility of natural gas as an alternative fuel to reduce fuel oil dependence in the Caribbean demonstrate the value of natural gas substitution, imported as LNG via a regional distribution hub, for fuel oil in lowering power prices and carbon emissions. While this approach could enable the Caribbean countries to work together to address many of the challenges associated with financing and commercial arrangements that may otherwise impede access to natural gas for some of the states of the region, Caribbean nations or their utilities would be required to secure financing required to backstop an LNG supply contract and provide for the construction of all necessary infrastructure to deliver LNG to each market. This approach may be too chal­ lenging. LNG purchase and sale contracts generally run for 15–20 years and often require a guarantee of payment. Assuming that sellers would require a guarantee reflecting 1–2 years of the cost of natural gas deliveries to the country in question, the IDB has estimated that required guarantees for smaller Caribbean countries would probably range between US $70 million and $140 million. The poor credit ratings of most off-takers and governments of smaller Caribbean countries will make it difficult for them to secure commercial financing to cover these guaran­ tees. Similar challenges are likely to surface with respect to financing both the construction of regasification facilities and the conversion of existing power plants to natural gas. Another pathway may be for Caribbean nations to be open to fuel competition so that suppliers are motivated to find ways to deliver gas to the smaller economies and seek support for regasi­ fication. Barbados initially demonstrated interest in this approach, reaching an agreement with the IDB for a US $34 million loan that, in addition to increasing the use of renewable energy sources, would have also financed a capacity expansion for the country’s LNG regasification facility at the Woodbourne terminal.53 This was the IDB’s first loan aimed at promoting LNG in the Caribbean. However, Barbados subsequently changed course and is now seeking to phase out domestic consumption of natural gas by 2030 as part of a broader effort to achieve a 100% renewable energy mix.54 Prior to this policy adjustment, AES had reached an agreement to supply LNG to Barbados from the Andres terminal via ISO containers, the first such supply 47

David Goldwyn and Cory Gill

agreement that AES Dominicana reached with an additional Caribbean country. The case of Barbados thus demonstrates that while the market is capable of providing natural gas supplies when a country expands its ability to receive them, the potential for the further proliferation of natural gas depends in large part on the actions of interested countries themselves. If Barbados and other islands lacking access to non-intermittent renewable baseload fuels face continued difficul­ ties in implementing a comprehensive transition to renewable energy due to storage technology limitations, they may choose to revisit the idea of opening their markets to natural gas imports.

Renewable energy: prospects and challenges Despite adopting robust targets, Caribbean states maintain an uneven patchwork of legal and regulatory frameworks to incentivize renewable energy development.55 For example, of the five Caribbean islands with the highest potential to utilize geothermal energy as a baseload fuel (Dominica, Grenada, St Kitts and Nevis, St Lucia, and St Vincent and the Grenadines), three have established laws requiring an independent regulator for the electricity sector but only one has a separate regulatory entity in place.56 Similarly, Deloitte found in its 2019 survey of mostly Western Caribbean countries (with the exception of St Kitts and Nevis and St Lucia, which were also included) that while most of them had processes in place for the licensing of independent power producers (IPPs) and the negotiation of PPAs, some countries still needed to improve their efforts to facilitate bankable off-take agreements that would enable IPPs to access capital markets.57 The Deloitte study further indicated that five of the nine surveyed countries offered some form of fiscal incentives, such as tax exemptions, tax rebates or reduced import duties, that are intended to bolster renewable energy development or interconnection standards to define how distributed generation systems could be connected to the grid.58 While much work remains to be done in addressing these challenges, promising developments in the geothermal, wind and solar energy sectors in recent years demonstrate the significant benefits that the states of the region can derive from adopting greater shares of renewable energy into their energy mixes and the indispensable role that international stakeholders are playing in moving these efforts forward.

Geothermal energy: significant progress toward a regional approach Dominica, Grenada, St Kitts and Nevis, St Lucia, and St Vincent and the Grenadines are most prominent among the islands of the Lesser Antilles that are in close proximity to world-class geothermal reservoirs capable of both providing a source of baseload energy and setting the basis for a subregional power market. Unlike intermittent renewable energy resources such as wind and solar, geothermal energy harnessed as steam through heat radiating from the centre of the Earth is capable of serving as a baseload source of electricity in locations where it can success­ fully be exploited. Yet geothermal energy plays a fairly limited role in the global electricity mix, as most reservoirs around the world are too far from the Earth’s surface to be technologically and economically feasible to exploit.59 While the Eastern Caribbean has had known geothermal reserves for many decades, sustained efforts to harness them and lay the framework for an integrated subregional energy market have surfaced only in recent years. The benefits of developing these reserves are well known. A 2017 study carried out by the IDB noted that geothermal energy would yield significant energy security benefits, as the aforementioned five most prospective countries all rely on imported fuel oil for at least 75% of their electricity demand and suffer from high electricity tariffs.60 The study also revealed that while current electricity tariffs in these five states total an average of US $0.34 per kWh, the average levelized cost for a 10–20 MW geothermal power plant in the region would range between $0.08 and $0.15 per kWh.61 Geothermal energy also affords 48

Caribbean energy security

certain resilience benefits, as its disposition as an underground resource means that access cannot be lost due to extreme weather events and the technology exists to design aboveground infrastructure with enhanced resiliency features in mind.62 Despite these clear benefits, Caribbean states have faced several significant barriers to developing their geothermal resources, including high capital costs, high degrees of uncertainty for private sector developers in the early stages of development, lack of government access to credit, dependence on Petrocaribe, and limited government expertise in this area.63 Yet significant progress is now evident, as political leaders within these countries are now engaging closely with international partners to find means to unlock their geothermal resource endowments and chart the course to more secure energy futures.

The Dominica example Among the five Eastern Caribbean states with significant geothermal energy potential, Dominica has moved the most expeditiously in developing its resources. By 2017 the country had promul­ gated the Geothermal Resource Development Act, which provides a legal and policy framework governing the use of geothermal resources in the country; completed expansive exploratory dril­ ling efforts; finished key environmental impact studies; and drilled an 11-MW production well financed by the French Development Agency.64 With technical assistance from the World Bank, the government of New Zealand, and the Clinton Climate Initiative, the Dominica government developed plans to construct a 7-MW geothermal power plant to feed domestic demand and, subsequently, a 40–100-MW geothermal plant to export electricity to Guadeloupe and Martini­ que, both of which are nearby French territories that have shown interest in importing power from Dominica, via undersea cables.65 On March 19, 2019, the World Bank approved a landmark US $27 million project to support construction of the 7-MW plant. The World Bank maintains that while only the private sector is capable of providing financing at a requisite scale to allow construction of a larger-scale geothermal power plant capable of exporting electricity to neigh­ boring islands, successful development of the smaller 7-MW plant will demonstrate the capability of Dominica’s geothermal resources and help to attract private investment for the larger plant.66 To this end, the project also includes a technical assistance component focused on identifying appropriate means to develop the larger power plant, including through additional geological surveys and scientific studies to better identify the boundaries of the country’s major geothermal field, a feasibility study to confirm the viability of constructing the larger plant, and the develop­ ment of market outreach to solicit private sector interest in the project.67 Box 4.3 describes the progress being made in developing geothermal resources in St Vincent and the Grenadines.

The importance of multilateral assistance The Dominica example highlights the critical role that supporting countries and multilateral organizations and bilateral support play in laying the foundation for overcoming long-standing barriers to investment in geothermal energy. Other countries have benefited as well. For example, Guadeloupe, which is an overseas department of France that comprises six inhabited islands in the Lesser Antilles, had French government resources to develop the subregion’s sole operating geothermal plant. Among the most effective international assistance programmes are those that assume a systemic approach that encompasses the entire subregion. In 2015 the IDB and the Caribbean Development Bank (CDB) created the Sustainable Energy Facility (SEF), which comprised a US $71.5 million loan and grant packages that also drew on resources from 49

David Goldwyn and Cory Gill

the World Bank’s Clean Technology Fund and the Global Environment Facility.68 The IDB and the CDB note that the SEF, which was expanded to include an additional $85.6 million in December 2018, is designed to help de-risk geothermal energy projects and make them more attractive to the private sector, while also better ensuring that Eastern Caribbean governments are able to select capable private sector partners without burdening themselves with excessive debt.69 The SEF has also been paired with the CDB’s GeoSmart initiative, which seeks to make grants available to enable Eastern Caribbean governments to enter into public-private partnerships with private developers and finance their share of early-stage exploratory geo­ thermal drilling activities. The Green Climate Fund, which was established under the auspices of the United Nations Framework Convention on Climate Change and is tasked with helping states parties to the Paris Agreement carry out energy transitions necessary to support the goal of keeping climate change below 2 degrees Celsius, was among the new donors that elected to support the SEF in 2018.70

Box 4.3 St Vincent and the Grenadines secured US $27 million in funding from the SEF and became the first country to benefit from GeoSmart in 2019 after demonstrating a sustained commitment to developing its geothermal resources in line with international best practices. When it became apparent that St Vincent’s challenging geography would make it more difficult for the island to attract geothermal investment than some of its neighbours, the government reoriented its approach from primarily seeking grants to entering into a public-private partnership. The gov­ ernment entered into a consortium with firms including Reykjavik Geothermal in 2013 and later structured an agreement to incentivize its partners to fund a large share of costly upfront invest­ ments in exchange for an exclusive right to negotiate with the government to develop the project and agree to a power purchasing price with VINLEC, the state-owned utility, under an IPP frame­ work. It is in this context that the government secured funding from the SEF and other sources to help finance its share of the consortium’s costs.71

Wind and solar While natural gas and geothermal energy are emerging as potential substitutions for oil as a baseload fuel source for power generation in the Western and Eastern Caribbean, respectively, the broader region is also seeking to leverage its considerable wind and solar resource endow­ ments. Both wind and solar energy offer the Caribbean several energy security and resilience benefits. Many of these benefits derive from the fact that while fossil fuels are generally fed into the electricity grid through large, centralized power plants, renewable energy can be deployed in much smaller units to protect against the risk that a single point of failure will render largescale power outages.72 Wind and solar installations can be built in a wide variety of plant sizes, feeding power into either centralized transmission infrastructure or distributed systems. Fur­ thermore, distributed energy options such as residential or community solar panels can further strengthen grid resilience and alleviate the stress that transmission infrastructure often faces when extreme weather events occur. In this vein, both wind turbines and solar photovoltaic panels have in many cases demonstrated both their resilience in the face of extreme weather events and their value in providing critically needed access to power in the early days of reconstruction efforts. Wind turbines in South Texas, USA, suffered only limited damage during Hurricane 50

Caribbean energy security

Harvey in 2017, and wind generation actually increased in the days following the storm.73 This is not to suggest that distributed energy is a panacea with respect to resilience challenges – solar farms in Haiti suffered significant damage wrought by Hurricane Matthew in 2016. Yet lessons learned following Hurricane Matthew were applied in the repair of solar infrastructure there, which may render distributed solar more resilient when future hurricanes surface.74 Renewable energy solutions are also among those first deployed to ensure access to electricity following hurricanes or other extreme weather events. For example, after Hurricane Maria largely destroyed Puerto Rico’s power grid, solar power, energy storage solutions and microgrids were used to provide electricity to critical facilities including hospitals and emergency services. Resi­ dential solar has been identified as a particularly important component for increasing Puerto Rico’s overall resilience to future extreme weather events.75 Renewable energy investments in the Caribbean have increased rapidly in recent years, and the CARICOM member states now have a collective total of 594 MW of total renewable energy installed capacity. The Dominican Republic (which is not a member of CARICOM) and Jamaica lead the region in installed capacity in both absolute terms, (810.7 MW and 151.1 MW, respec­ tively) and as a share of their respective energy mixes (22% and 15%).76 While these two countries derive a considerable share of their renewable energy from hydropower and continue to expand their hydropower generation capacities, both the Dominican Republic and Jamaica and the region as a whole are increasingly seeking to diversify away from hydropower towards more wind and solar resources.77 To date, the Dominican Republic and Jamaica, along with the Bahamas, are perceived as having among the region’s most robust enabling environments for wind and solar energy investment. Efforts by these countries to make themselves attractive for renewable energy investment have not gone without notice, as the private sector, with support from bilateral and multilateral donors and development finance institutions, are increasingly allocating capital to these markets. For example, in January 2015 the U.S. Overseas Private Investment Corporation (OPIC), the International Finance Corporation, and the Canadian government provided a com­ bined US $62.7 million in loans to BMR Jamaica Wind Limited for the construction of a 36-MW capacity wind farm.78 In addition to contributing to the loan, OPIC also provided political risk insurance coverage of $34 million. The wind farm was completed the following year, and OPIC awarded BMR its 2016 Impact Award for renewable resources in recognition of the project’s success.79 Elsewhere in the region the UAE, through its UAE-Caribbean Renewable Energy Fund, agreed in 2017 to fully fund the construction of a 925-kW solar photovoltaic (PV) plant in the Bahamas, which is the country’s first utility-scale PV plant and feeds electricity into the national grid.80 UAE officials note that the project, which entered into service in 2019, has demonstrated a strong business case for additional renewable energy projects in the country, while Bahamian officials have signalled that they will pursue more solar power initiatives.81

Recommendations and lessons learned To date, the Caribbean region has made promising yet uneven progress in making the transition to a more sustainable, secure and resilient energy future. Fortunately for those states that are seeking to advance in this area but are at an earlier stage of progress than some of their peers, clear examples of success exist in the region that they can seek to adapt to their own national circumstances. Indeed, those states that have gone the furthest in their transition have carried out similar initiatives, including the creation of robust strategic plans and targets for natural gas and/or renewable energy development that provide a clear signal to potential private sector investors; fiscal incentives such as tax exemptions for the import of natural gas and/or renewable 51

David Goldwyn and Cory Gill

energy technologies and tax deductions for self-suppliers; and regulations allowing licensing of IPPs and the negotiation of PPAs with utility companies, and separately, the use of net metering and feed-in tariffs to compensate generators of wind and solar power for the energy they pro­ vide to the grid.82 As the region moves forward, states would be well-advised to keep in mind the following observations and lessons learned:











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Get the framework right. The Caribbean states have made significant progress, through both national government efforts and engagement in international fora, in setting targets to diversify their energy mixes and creating concrete strategies to put them on pathways to meet these targets. However, more work remains to be done. A new major market assessment of energy investment potential in the Caribbean noted that while many states of the region have made remarkable progress in recent years to develop improved enabling environments for renewable energy investment, there was still ‘an uneven patchwork of legal and regulatory frameworks’ that hindered further development.83 This is the case with respect to natural gas as well, as the same assessment concluded that the maturity of the Caribbean states’ natural gas frameworks ‘varie[d] greatly’.84 In some cases, limited action may reflect the view of some governments that natural gas should be considered only as a transition fuel that they would utilize temporarily while moving towards a 100% renewable energy future.85 Yet it remains unclear when a complete transition to renewable energy may be possible for countries without access to the region’s baseload geothermal resources, as persistent intermittency challenges with wind and solar energy resources and the absence of economic large-scale energy storage technology indicates that these countries will need a backstop for years to come. Fortunately, if these governments are able to summon the political will to enhance their regulatory frameworks, their regional peers (including Tri­ nidad and Tobago, Jamaica and the Dominican Republic) offer clear examples of best practices required to attract investment. Build administrative capacity. Caribbean governments need to strengthen their administrative knowledge to conduct sector reform and manage new investment relationships. While regional stakeholders have recognized this reality and are working to improve in this area through programmes such as the USA’s Caribbean Clean Energy Program and the CDB’s Geosmart Initiative, this task poses significant challenges. Recent studies analysing the Car­ ibbean’s geothermal and natural gas markets found that limited government technical exper­ tise regarding emerging technology, negotiating commercial arrangements, and available financing options risked hindering the spread of these fuels in the region.86 Furthermore, many of the energy initiatives that CARICOM and the individual governments themselves have identified as beneficial to the region include significant upfront capital investments that are beyond the capabilities of the Caribbean states.87 This necessitates that the states of the region continue to engage with international partners and the private sector to attract capa­ city building support to attract and manage additional capital inflows from outside the region. Evidence demonstrates the market can work. Despite persistent challenges, recent developments suggest that potential remains for the expansion of a Caribbean natural gas market by purely commercial players. Both AES and NFE have the capacity to leverage their existing infrastructure to facilitate the re-export of LNG to other markets in the region and are actively exploring appropriate means for doing so.88 Although AES is utilizing nearly the full capacity of the Andres terminal, the company has considered adding a second storage tank that could be used primarily for re-exports. Regional cooperation versus integration. The burden of small markets, limited resources and scarce administrative capacity would suggest that regional integration would be a wise

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course. In some areas this can be practical, such as lowering the information cost to new investors by harmonizing regulatory frameworks, adopting best practices realized in Car­ ibbean states that have had success, and pooling shared resources to support more efficient development. Natural gas consumers might even form a club or pooling arrangement to negotiate better pricing. Over the longer term, sustained regional cooperation might even help to facilitate the emergence of regional supply chains, which would confer greater economic and social benefits from the energy transition such as more job creation. But inter-state cooperation is more practical at the subregional level. The Dominican Republic and Jamaica have the size and scale to enable the re-export of natural gas, but only to Western Caribbean countries in closer proximity to those islands, such as the Bahamas, Belize, Guyana, Haiti and Suriname. Among the Eastern Caribbean states, only Barbados, which has its own natural gas reserves, is viewed as a potential participant in a regional natural gas market. Geothermal energy is a potential baseload fuel for the Eastern Caribbean islands, as they are located in a volcanic area with ample potential for commercial-scale geothermal development and are located in close enough proximity to one another that electricity could be transited from one island to the next via subsea cables. But aggregating projects at a regional scale is much harder, as distance and topography make electricity transmission expensive and administratively complex. Resilience may change the strategy. The main focus of Caribbean energy security strategy has been on new forms of baseload power, conversion of utility-scale power plants from diesel or heavy fuel oil to gas and installation of wind farms or solar arrays. But climate change may require a shift in strategy to more decentralized forms of generation and large-scale, costly efforts to harden legacy infrastructure in order to ensure that hotels, hospitals and other key providers of services can function when extreme weather disables central power stations. Improving the region’s resilience has clear economic implications: in 2018 the World Bank estimated that the occurrence of a hurricane and its associated impacts ren­ dered losses equivalent to 2.5% of the GDP of a small island Caribbean state.89 The need to bolster resilience was a key lesson from the damage Hurricane Maria inflicted on Puerto Rico and may inform the recovery strategy in the Bahamas in the wake of Hurricane Dorian. The indispensable role of external support. The important progress the region has seen in extending access to natural gas, increasing the share of renewable energy and attracting investment in geothermal energy would not have been possible without support in capacity building, technical assistance, and financing from MDBs and supporting nations. Donor coordination has improved. But the scale of the transformation required is immense and will require decades to accomplish. The high level of attention that the Caribbean now enjoys from the USA, the European Union, the World Bank and the IDB must be sustained.

Notes 1 The views expressed herein by Cory Gill are those of the author and are not presented as those of the Congressional Research Service or the Library of Congress. 2 For the purposes of this chapter, the Caribbean region includes the 15 member states of CARICOM, which are as follows: Antigua and Barbuda, the Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, Saint Lucia, Saint Kitts (Christopher) and Nevis, Saint Vincent and Grenadines, Suriname, and Trinidad and Tobago. Although the Dominican Republic is not a member of CARICOM, it is included as a Caribbean state in the scope of this chapter. 53

David Goldwyn and Cory Gill 3 International Energy Agency, ‘What is energy security’, www.iea.org/topics/energysecurity/whatis energysecurity/ (accessed 22 August 2019). 4 For example, see G7 Rome Energy Ministerial Meeting, Rome G7 Energy Initiative for Energy Security, 6 May 2014, www.g8.utoronto.ca/energy/140506-rome.html. 5 The IEA definition’s focus on uninterrupted, affordable energy supplies demonstrates the challenge wherein the intermittent nature of wind and solar power, the two largest renewable energy resources, demands the continued use of non-renewable energy to balance power grids and ensure access to supply when wind and solar fluctuations occur. One promising source of grid flexibility is energy storage, although storage technologies must advance further and costs must decline to allow for the emergence of cost-competitive, 100% renewable energy grids. One recent study carried out by MIT and published in September 2019 suggests that energy storage capacity costs would have to decline by around 90%, to about $20 per kWh. However, others suggest a more modest cost target of around US $150–$200 per kWh for a decarbonized grid to be cost-competitive. See Micah S. Zeigler, Joshua M. Mueller, Gonçalo D. Pereira, Juhyun Song, Marco Ferrara, Yet-Ming Chiang and Jessika E. Trancik, ‘Storage requirements and costs of shaping renewable energy toward grid decarbonization’, Joule, 3(9), 18 September 2019, pp. 2134–53, www.sciencedirect.com/science/article/abs/pii/ S2542435119303009?via%3Dihub; and David Roberts, ‘Getting to 100% renewables requires cheap energy storage. But how cheap?’ Vox, 20 September 2019, www.vox.com/energy-and-environment/ 2019/8/9/20767886/renewable-energy-storage-cost-electricity. 6 For additional perspectives, see G7 Rome Energy Ministerial Meeting, Rome G7 Energy Initiative for Energy Security. 7 Populations range from around 50,000 in St Kitts and Nevis to nearly 11,000,000 in Haiti. Gross domestic product (GDP) per capita ranges from US $1,800 in Haiti to about $34,000 in Montserrat. For comprehensive statistics, see the CIA World Factbook at www.cia.gov/library/publications/the-world-factbook/. 8 Barbados also produces limited volumes of natural gas, and its production is in decline. For data, see US Energy Information Administration, International Energy Statistics, Gross Natural Gas Production, www.eia.gov/beta/international/rankings/#/?pid=3&tl_id=3002-A&cy=2015. In addition, the gov­ ernment of Suriname is seeking to raise funds to develop its offshore drilling programme given recent oil discoveries in Guyana. For example, see Ank Kuipers, ‘Eyeing offshore discovery, Suriname’s state oil company plans bond sale’, Reuters, 15 August 2019, www.reuters.com/article/suriname-oil/eyeing­ offshore-discovery-surinames-state-oil-company-plans-bond-sale-idUSL2N25B1RA. 9 ‘Use of associated gas as base fuel still on cards – Dr Bynoe’, Guyana Times, 25 March 2019, https:// guyanatimesgy.com/use-of-associated-gas-as-base-fuel-still-on-cards-dr-bynoe/; Navendra Seoraj, ‘Natural gas for domestic demand by 2023’, Guyana Chronicle, 7 November 2019, http://guyana chronicle.com/2019/11/07/natural-gas-for-domestic-demand-by-2023. 10 Christiaan Gischler, Nils Janson, Camila González, María Jimena and Córdoba Scarlett Santana, Unlocking Geothermal Power: How the Eastern Caribbean Could Become a Geothermal Powerhouse, Washington, DC: Inter-American Development Bank, June 2017, p. 8. 11 Deloitte Financial Advisory Services, Market Overview and Opportunities: The Renewable Energy, Energy Sto­ rage, and Energy Efficiency Sectors in the Caribbean, prepared for the US Department of State, July 2019, p. 4. 12 Alexander Ochs, Mark Konald, Katie Auth and Evan Musolino, Caribbean Sustainable Energy Roadmap and Strategy: Baseline Report and Assessment, Worldwatch Institute, 2015, p. 58; Deloitte Financial Advisory Services, Market Overview and Opportunities, p. 4 13 Ibid., p. 5 14 For more information about Petrocaribe, see David Goldwyn and Cory Gill, Uncertain Energy: The Caribbean’s Gamble with Venezuela, Atlantic Council, 16 July 2014, www.atlanticcouncil.org/uncerta in-energy-the-caribbean-s-gamble-with-venezuela/; and David Goldwyn and Cory Gill, The Waning of Petrocaribe? Central America and Caribbean Energy in Transition, 3 May 2016, www.atlanticcouncil.org/ wp-content/uploads/2016/05/Petrocaribe.pdf. 15 Deloitte Financial Advisory Services, Technical Assistance for Caribbean Energy Security Initiative Guarantee Program, July 2019, p. 2. 16 For example, see Christopher Burgess, Justin Locke and Stephen Doig, ‘Rebuilding the Caribbean for a resilient and renewable future’, Rocky Mountain Institute, 15 September 2017, https://rmi.org/ rebuilding-caribbean-resilient-renewable-future/. 17 ‘Haiti – Energy’, 14 February 2019, www.export.gov/article?id=Haiti-Energy; World Bank, ‘Access to electricity (% of population)’, https://data.worldbank.org/indicator/EG.ELC.ACCS.ZS?locations= DO&view=chart.

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18 Deloitte Financial Advisory Services, Dominican Republic Natural Gas Conference, Technical Assistance for Caribbean Energy Security Initiative Guarantee Program, June 2019. 19 Naki Mendoza, ‘Viewpoint: Liquefied natural gas solidifies its place in Panama’, Americas Society/ Council of the Americas, 27 September 2018, www.as-coa.org/articles/viewpoint-liquefied-natural­ gas-solidifies-its-place-panama. 20 Nationally determined contributions illustrate each Paris Agreement signatory’s efforts to reduce their carbon emissions and adapt to the impacts of climate change. The Paris Agreement requires each state party to prepare, communicate and maintain successive NDCs that illustrate what the state intends to achieve. See United Nations Framework Convention on Climate Change, ‘Nationally Determined Contributions (NDCs)’, https://unfccc.int/process-and-meetings/the-paris-agreement/nationally­ determined-contributions-ndcs. 21 Government of Saint Lucia, ‘Intended Nationally Determined Contribution under the United Nations Framework Convention on Climate Change’, communicated to the UNFCCC on 17 November 2015, p. 5, https://www4.unfccc.int/sites/ndcstaging/PublishedDocuments/Saint%20Lucia%20First/ Saint%20Lucia%27s%20INDC%2018th%20November%202015.pdf 22 Government of Barbados, ‘Intended Nationally Determined Contribution’, communicated to the United Nations Framework Convention on Climate Change on 28 September 2015, p. 5, https:// www4.unfccc.int/sites/ndcstaging/PublishedDocuments/Barbados%20First/Barbados%20INDC% 20FINAL%20September%20%2028,%202015.pdf. 23 Masdar, ‘Barbados Caribbean Renewable Energy Fund’, https://masdar.ae/en/masdar-clean-energy/ projects/barbados-caribbean-renewable-energy-fund. 24 United Nations Framework Convention on Climate Change, ‘NDC Registry (Interim)’, https:// www4.unfccc.int/sites/NDCStaging/Pages/All.aspx (accessed 1 October 2019); World Bank, ‘Inten­ ded Nationally Determined Contributions (INDCs), http://spappssecext.worldbank.org/sites/indc/ Pages/Content_Brief.aspx (accessed 1 October 2019); ‘Montserrat Renewable Energy Project A Monumental Step Toward Sustainability’, Rocky Mountain Institute, 24 April 2019, https://rmi.org/ press-release/montserrat-renewable-energy-project/. 25 Ochs et al., Caribbean Sustainable Energy Roadmap and Strategy, pp. 19, 89. 26 CARICOM, ‘CARICOM Energy Policy’, https://energy.caricom.org/portfolio-items/caricom-energy­ policy/ (accessed 11 August 2019). 27 CARICOM Energy, ‘C-SERMS’, http://c-serms.org. 28 Energy and Climate Partnership of the Americas, Guiding Principles, www.ecpamericas.org/assets/Site_ 18/files/ECPA%20Ministerial%20Tab/2017/First%20preparatory%20meeting/ECPA_Guiding_Principles­ final.pdf (accessed 22 September 2019). 29 White House (Obama Administration), ‘Fact sheet: Promoting Energy Security in the Caribbean’, 19 June 2014, https://obamawhitehouse.archives.gov/the-press-office/2014/06/19/fact-sheet-prom oting-energy-security-caribbean; US Department of State, ‘Caribbean Energy Security Initiative (CESI)’, www.state.gov/caribbean-energy-security-initiative-cesi/ (accessed 22 September 2019). 30 US Agency for International Development, ‘Jamaica: Caribbean Basin Security Initiative’, March 2018, www.usaid.gov/sites/default/files/documents/1862/Presidential_Initiatives_Facts-Overview_MARCH_ 2018.pdf. 31 US Department of State, ‘Caribbean Energy Security Initiative Loan Guarantee Agreement’, 12 November 2019, www.state.gov/caribbean-energy-security-initiative-loan-guarantee-agreement/. 32 Masdar, ‘UAE-Caribbean Renewable Energy Fund’, https://masdar.ae/-/media/corporate/downloads/ media/masdar-clean-energy-factsheet.pdf (accessed 22 September 2019). 33 US Energy Information Administration, ‘How much carbon dioxide is produced when different fuels are burned?’ www.eia.gov/tools/faqs/faq.php?id=73&t=11(accessed 11 August 2019); 34 Rigoberto Ariel Yépez-García and Fernando Anaya Amenábar, Unveiling the Natural Gas Opportunity in the Caribbean, Washington, DC: IDB, April 2019, pp. 36–37. 35 Ibid., pp. 23, 37, 64. 36 Ibid., 69, 74. 37 This is because such an approach would provide for the largest LNG volumes contracted, which would better enable the Caribbean to secure a contract on terms where a lower purchase price for natural gas could be secured for all off-takers. See ibid., pp. 80, 90–91 38 Ibid., p. 53. The Dominican Republic’s current electricity consumption more than three times that of Jamaica; furthermore, Jamaica’s electricity consumption is more than 1.5 times that of Suriname, the closest country in terms of electricity consumption among those surveyed in the IDB studies.

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David Goldwyn and Cory Gill 39 Deloitte Financial Advisory Services, Market Overview and Opportunities, Technical Assistance for Car­ ibbean Energy Security Initiative Guarantee Program, July 2019, pp. 8–9. 40 See the AES Corporation, FORM 10-K (for fiscal year ended 31 December 2018), Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, 27 February 2019, p. 29, www.aes.com/investors/sec-documents/sec-filings-details/default.aspx?FilingId=13256200. See also New Fortress Energy, Amended Registration Statement for Face-Amount Certificate Companies, as filed with the Securities and Exchange Commission on 25 January 2019, https://ir.newfortressenergy.com/sec­ filings/sec-filing/s-1a/0001140361-19-001592, p. 5; Inter-American Development Bank, Deployment of Cleaner Fuels and Renewable Energy in Barbados, Project Profile BA-L1012, 2016, p. 3. 41 AES Dominicana, About Us, http://aesmcac.com/aesdominicana/?page_id=24&lang=en (accessed 1 September 2019); Aes Lng, About Us, http://aeslng.com/. 42 The Henry Hub price index is the pricing point for natural gas futures contracts traded on the New York Mercantile Exchange. 43 Ieda Gomes and Martin Lambert, ‘The potential market for LNG in the Caribbean and Central America,’ Oxford: The Oxford Institute for Energy Studies, November 2017, p. 6. 44 Deloitte Financial Advisory Services, Market Overview and Opportunities: The Natural Gas Sector in the Caribbean, p. 11. 45 AES LNG, ‘About Us’. 46 Compelo Energy, ‘Pueblo Viejo Dominicana to convert Quisqueya I power plant to natural gas’, 15 May 2018, www.compelo.com/energy/news/pueblo-viejo-dominicana-to-convert-quisqueya-i-power­ plant-to-natural-gas/; ‘AES inks supply deal in Dominican Republic, eyes growth in Panama’, LNG World News, 6 November 2018, www.lngworldnews.com/aes-inks-supply-deal-in-dominican-republi c-eyes-growth-in-panama/. 47 Gomes and Lambert, ‘The potential market for LNG in the Caribbean and Central America’, p. 12. 48 ibid., pp. 12–13. 49 ‘JPS full switchover from HFO to LNG to go beyond 2020’, Jamaica Gleaner, 6 February 2019, http:// jamaica-gleaner.com/article/business/20190206/jps-full-switchover-hfo-lng-go-beyond-2020; ‘New 194 MW natural gas power plant up and running’, Jamaica Observer, 25 December 2019, www.jamaica observer.com/article/20191225/ARTICLE/191229859/1606. 50 Ibid. 51 JPS has indicated that its supply contracts with NFE are indexed to Henry Hub plus an agreed margin, while NFE has characterized its contracts generally as long-term, take or pay agreements. See New Fortress Energy, Amended Registration Statement for Face-Amount Certificate Companies, Amendment No. 3 to Form S-1 Registration Statement under the Securities Act of 1933, as filed with the Securities and Exchange Commission on 25 January 2019, p. 60, https://ir.newfortressenergy.com/sec-filings/sec­ filing/s-1a/0001140361-19-001592. 52 Steven Jackson, ‘LNG to supply 80% of power by 2023’, Jamaica Gleaner, 12 April 2019, http://jama ica-gleaner.com/article/lead-stories/20190412/editors-forum-lng-supply-80-power-2023. 53 Inter-American Development Bank, ‘Barbados to improve energy security and diversify the energy mix with a US$34 million IDB loan’, 8 December 2016, www.iadb.org/en/news/barbados-imp rove-energy-security-and-diversify-energy-mix-us34-million-idb-loan (accessed 1 September 2019). The IDB has long been engaged in Barbados, helping the country to develop its Sustainable Energy Framework intended to diversify the country’s electricity matrix with greater shares of natural gas and renewable energy and commissioning a study which found that replacing heavy fuel oil with natural gas for power generation could lead to savings between 15%–30% even in a low oil price environ­ ment. See Inter-American Development Bank, Deployment of Cleaner Fuels and Renewable Energy in Barbados, Project Profile (BA-L1012), 7 December 2016, pp. 1–2, https://ewsdata.rightsindevelopm ent.org/projects/IADB-BA-L1012/pdf/. 54 Government of Barbados, ‘National Energy Policy for Barbados 2019–2030’, www.energy.gov.bb/ web/component/docman/doc_download/88-national-energy-policy-2019-2030. 55 Deloitte Financial Advisory Services, Market Overview and Opportunities: The Renewable Energy, Energy Storage, and Energy Efficiency Sectors in the Caribbean, p. 8. 56 Gischler et al., Unlocking Geothermal Power, p. 77. 57 Deloitte Financial Advisory Services, Market Overview and Opportunities: pp. 8–9. 58 Ibid., p. 6. 59 Ochs et al., p. 57. 60 Gischler, et al., p. 75.

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61 Ibid., p. 78. 62 The World Bank, Dominica: Geothermal Risk Mitigation Project, Report No. PAD2365, 12 February 2019, pp. 1–2, http://documents.worldbank.org/curated/en/870501553220067293/pdf/PAD-Approval­ P162149-revised-02272019-636888024595035457.pdf (accessed 8 September 2019). 63 Gischler et al., p. 55. 64 Ibid., pp. 104–105; World Bank, Dominica, p. 4. 65 Ibid., pp. 3–4. 66 Ibid., p. 4. 67 Ibid., pp. 7–8 68 Inter-American Development Bank, ‘IDB and CDB to expand the Sustainable Energy Facility (SEF) for the Eastern Caribbean’, 17 December 2018, www.iadb.org/en/news/idb-and-cdb-expand-sustaina ble-energy-facility-sef-eastern-caribbean (accessed 3 July 2019). 69 SEF instruments include the Contingent Recovery Grant, which is initially provided as a grant to finance drilling activities and converts to a loan only if geothermal resources are proven in adequate quantities to allow for the construction of a geothermal plant. This is intended to help to reduce the aforementioned high risks associated with geothermal exploration and make such projects more attractive to private investors. For a broader overview, see Inter-American Development Bank, Proposal for a loan, a nonreimbursable investment financing, and a nonreimbursable technical cooperation for the Sustainable Energy Facility for the Eastern Caribbean Expanded, Washington, DC: IDB, 27 November 2018, www.gtai. de/:PRO201902285008. 70 The Green Climate Fund has committed to fund US $16 million in exploratory drilling costs and an additional $4 million for capacity building regarding geothermal analysis, environmental and social safeguards. See Inter-American Development Bank, ‘IDB and CDB to expand the Sustainable Energy Facility (SEF) for the Eastern Caribbean’. 71 ‘St. Vincent’s geothermal development approach’, iWitness News (St Vincent and the Grenadines), 10 May 2015, www.iwnsvg.com/2015/05/10/st-vincents-geothermal-development-approach/; ‘Saint Vincent and the Grenadines $27 million geothermal energy project launched’, Caribbean News Now, 20 May 2019, www.caribbeannewsnow.com/2019/05/20/st-vincent-and-the-grenadines-27-million­ geothermal-energy-project-launched/. 72 American Council on Renewable Energy, ‘The Role of Renewable Energy in National Security’, Issue Brief, October 2018, pp. 1–9, https://acore.org/wp-content/uploads/2018/10/ACORE_ Issue-Brief_-The-Role-of-Renewable-Energy-in-National-Security.pdf. 73 Ibid.; see also US Energy Information Administration, ‘Hurricane Harvey caused electric system outages and affected wind generation in Texas’, Today in Energy, 13 September 2017, www.eia.gov/ todayinenergy/detail.php?id=32892 (accessed 23 September 2019). 74 ‘Weathering the storm: Powerful lessons from the Caribbean’, Relief Web, 25 September 2018, https:// reliefweb.int/report/haiti/weathering-storm-powerful-lessons-caribbean. 75 American Council on Renewable Energy, ‘The Role of Renewable Energy in National Security’, p. 5. 76 Deloitte Financial Advisory Services, Market Overview and Opportunities, pp. 3–4. 77 Economic Commission for Latin America and the Caribbean, Foreign Direct Investment in Latin America and the Caribbean Moves Away from Natural Resources, Keynotes for Development, No. 3 April 2018, www.cepal.org/en/publications/43423-eclac-keynotes-development-3, p. 4. 78 Overseas Private Investment Corporation, ‘IFC, OPIC, Canada provide $62.7 million for Jamaica’s largest private sector wind farm’, 26 January 2015, www.opic.gov/press-releases/2015/ifc-opic-canada­ provide-627-million-jamaicas-largest-private-sector-wind-farm (accessed 25 September 2019). 79 Overseas Private Investment Corporation, ‘2016 OPIC impact awards recognize seven leaders in international development’, 7 July 2016, www.opic.gov/press-releases/2016/2016-opic-impact-awards­ recognize-seven-leaders-international-development (accessed 25 September 2019). 80 ‘The Bahamas just installed a new solar park’, Caribbean Journal, 19 March 2019, www.caribjournal. com/2019/03/19/the-bahamas-just-installed-a-new-solar-park/ (accessed 26 September 2019). 81 Chester Robards, ‘The Bahamas’ first utility-scale photovoltaic plant officially opens’, Nassau Guardian, 19 March 2019, https://thenassauguardian.com/2019/03/19/the-bahamas-first-utility-scale-photovoltaic­ plant-officially-opens/ (accessed 26 September 2019). 82 Deloitte Financial Advisory Services, Market Overview and Opportunities, p. 6. 83 Ibid., p. 8. 84 Deloitte Financial Advisory Services, Market Overview and Opportunities: The Natural Gas Sector in the Caribbean, p. 8.

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David Goldwyn and Cory Gill 85 Ibid., pp. 10–11. 86 Ibid., p. 8; Gischler et al. p. 55. 87 Arnold McIntyre, Ahmen El-Ashram, Marcio Ronci, Julien Reynaud, Natasha Che, Ke Wang, Sebastian Acevedo, Mark Lutz, Francis Strodel, Anayo Osueke and Hanlei Yun, Caribbean Energy: Macro-Related Challenges, International Monetary Fund Working Paper WP/16/53, March 2016, p. 19. 88 In 2015 AES began efforts to reconfigure the Andres terminal to allow for LNG reloads onto vessels as a means to transform the facility into a trans-shipment and bunkering hub; the first reload operation took place in February 2017. The company envisions utilizing both this terminal and its Costa Norte LNG terminal in Panama, which began operations in 2018, to implement a ‘hub and spoke’ business model to allow for the re-export of LNG to smaller markets via ISO containers, smaller LNG vessels, bunkering and reload operations. 89 David E. Lewis, ‘Caribbean economies face turbulent seas’, Geopolitical Intelligence Services, 12 September 2019.

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5 The Caribbean holds its own in global tourism competition DeLisle Worrell

Introduction The Caribbean is, in the minds of most North Americans and many travellers elsewhere, the epitome of the tropical resort destination. That is unsurprising given the region’s climate, nat­ ural endowments and convenient location. The Caribbean boasts the world’s second largest barrier reef, on the east coast of Central America, some of the world’s best beaches, sailing, fishing and surfing conditions, and areas of outstanding natural beauty. In addition, there is a wealth of heritage and sporting attractions which bring visitors to the region’s shores. The islands are within easy reach of North America and Western Europe, and the region’s history has endowed it with transport and communications links with these areas that are of long standing. This has made the cost of travel to the Caribbean more affordable than to newer and more distant resort destinations. There is also a great variety of experiences on offer within the Caribbean. The majority of visi­ tors may spend much of their time on the beach or by the swimming pool, but there are many cultural, sporting and educational activities on offer. These include the wide range of water and land sports found in resort destinations worldwide, but they also include experiences peculiar to the Caribbean. There are storied historical sites such as the Mayan pyramids, the old colonial port cities of Cartagena, Havana and San Juan, as well as less well-known treasures such as St Nicholas Abbey located in St Peter, Barbados, and the eighteenth-century rum distilleries of Guyana, which are still in use. There are unique sporting and cultural activities, including diving sites in the Caymans and Bonaire, and the street festival culture which has blossomed from the Trinidad Carnival. The Car­ ibbean exposes visitors to a blend of the cultures of many peoples: the indigenous peoples of this region (Maya, Taino, Kalina, Garifuna), Europeans, Africans, (east) Indians, southern Chinese and Javanese. The admixture has created a recognizable Caribbean culture which contains many lan­ guages and unique dialects, and which varies greatly from Suriname in the east, to Belize and Cancún (Mexico) in the west. Among the less well-known Caribbean attractions are the rainforests of Guyana and Suriname, the flora of Dominica and the fauna of Belize. The present chapter covers the member countries of the Caribbean Tourism Organization (CTO), which includes the full range of Caribbean visitor experiences. Its members include the larger islands (Cuba, Hispaniola) as well as tiny islands such as Montserrat, with only 6,000

59

DeLisle Worrell

inhabitants, and it includes all the language and ethnic groups previously mentioned. Unfortu­ nately, it excludes some of the northern littoral of South America, and the eastern littoral of Central America, and the associated islands. These are all integral to the rich and diverse culture that is recognizably Caribbean, but because they are not CTO members, comparable up-to-date information on them is lacking.

The Caribbean tourism landscape Although every one of the Caribbean tourist destinations is unique in its own way, it is helpful to think of them in groups according to their size, measured by share of the Caribbean tourism market, and the amount typically spent by visitors to each country. The largest players – the Dominican Republic, Cuba, Cancún, Jamaica, Puerto Rico, the Bahamas and Aruba – accounted for 66% of Caribbean arrivals and for 73% of rooms in 2018. They all feature very large hotels, and though they do offer unique experiences for those with an interest in heritage, culture, ecology and sports, their bread and butter offerings are not much different from what is available in resort destinations worldwide, and this forms the bulk of their business. There are a number of smaller countries that may be classed as value-added destinations, where the average spending per tourist exceeds US $1,500. This group comprises the US Virgin Islands (which recorded the highest total expenditure per person, at $2,750), Sint Maarten, Saint Lucia, Antigua and Barbuda, Anguilla, Bermuda, the Turks and Caicos Islands, Barbados, the Bahamas, the Cayman Islands, Dominica, Aruba, Bonaire and Saint Kitts (Christopher) and Nevis ($1,560 per person), in descending order of expenditure. The only destination in the large category to exceed this level of expenditure was Cancún ($1,550). (See Figure 5.1 and Table 5.1.) Among the remaining CTO members there is a group we may call the boutique countries. Their visitor appeal derives from features that are unique, rather than the white sandy beaches and water sports that are typical of most Caribbean resort destinations. Dominica has beaches, but the sand is black, which makes them unsuitable for sunbathing and they are impossible to walk upon barefoot in bright sunshine. However, the island is a small ecological paradise with an active Taino-influenced culture, which attracts hikers, nature lovers and adventure seekers. St Vincent and the Grenadines and the Virgin Islands offer some of the world’s best yachting, with dozens of small islands within a few hours’ easy sailing of each other. The Trinidad Car­ nival has spawned a unique type of street festival, a moving masquerade party that wanders through the streets of the capital, Port-of-Spain. With costumes and music composed especially for the occasion, and with food and drink provided along the way, the Trinidad Carnival is like no other, and neighbours from the Caribbean, Trinidadians, Tobagonians and other Caribbean people from the diaspora, and aficionados from all around the world visit to participate. Belize offers something for everyone, with marine activities centred in its islands and the barrier reef which sits off the east coast, as well as Mayan heritage sites, treks into the rainforest, exotic fauna and a unique Afro-Taino culture, the Garifuna, in the south of the country. Guyana and Sur­ iname are neighbours on the northern littoral of South America, with rainforests, vast savannah grasslands, and flora and fauna that are the basis for a nascent eco-tourism industry. Guadeloupe and Martinique (and French Guiana, or Guyane) are integral parts of France, and the population are all French citizens. They are a special case, because travel from France (and other Schengen Area countries) does not involve crossing the national border. As a result, the factors that affect arrivals to other Caribbean destinations have much less impact on these two islands. (Guyane is not a member of the CTO, so we have no information on that country.) The remaining countries are Haiti and Montserrat. Haiti has tremendous tourism potential, with typical tropical resort features as well as a rich culture and outstanding heritage sites. However, 60

The Caribbean in the global tourism competition

Figure 5.1 Percentage share of arrivals (2014–18) Source: CTO (2019).

Table 5.1 Average expenditure per visitor (2014–18), US $000

US Virgin Islands St Maarten St Lucia Antigua and Barbuda Anguilla Bermuda Turks and Caicos Islands Barbados Bahamas Cayman Islands

2.75 2.54 2.37 2.23 1.96 1.79 1.73 1.70 1.69 1.67

Dominica

1.65

Aruba Bonaire St Kitts and Nevis Cancún Cozumel Puerto Rico Guadeloupe Curaçao Trinidad and Tobago St Vincent and the Grenadines Jamaica

1.62 1.60 1.56 1.55 1.55 1.48 1.38 1.37 1.30 1.30

Grenada British Virgin Islands Dominican Republic Haiti Belize Martinique Montserrat Cuba Guyana Suriname

1.25 1.22 1.15 1.08 1.04 1.02 1.00 0.71 0.38 0.19

1.30

Source: CTO (2019).

61

DeLisle Worrell

poverty and social, political and economic instability continue to stifle that potential. Monserrat is a tiny island in the Eastern Caribbean which lost two-thirds of its usable land area in a volcanic eruption in 1995. It attracts a small number of tourists interested in viewing what remains. Visitors to the Caribbean typically spend between five and 10 days in the destination of their choice (Table 5.2). Countries which depend mainly on the US market record lower average lengths of stay, because US visitors tend to spend one week or less on holiday in the Caribbean. The typical Canadian and European tourist spends between eight and 10 days. The outliers are the countries whose attractions are atypical: Guyana reports average length of stay as high as 23 days, and St Vincent and the Grenadines, with a largely yachting clientele, also records relatively long average lengths of stay (Figure 5.2). There has been major expansion in Caribbean tourist accommodation over the past four decades, mostly by new entrants (Table 5.3). None of the three largest players today (the Dominican Republic, Cuba and Cancún) was a significant Caribbean destination in 1980. Table 5.2 Average length of stay by destination (days), 2014–18

Guyana Montserrat St Vincent and the Grenadines Trinidad and Tobago St Kitts and Nevis Barbados Bonaire British Virgin Islands

23 14 14 14 13 11 11 11

Martinique Anguilla Grenada Curaçao Dominica Dominican Republic Jamaica St Lucia

Antigua and Barbuda

10

Aruba

7

Cuba

10

Bahamas

7

Source: CTO (2019).

Figure 5.2 Length of stay by source market Source: CTO (2019). 62

10 9 9 8 8 8 8 8

Belize Bermuda Cayman Islands US Virgin Islands Cancún Guadeloupe Puerto Rico

6 6 6 5 3 3 3

Table 5.3 Available capacity (number of rooms)

Rooms

1980

2018

Rooms

Dominican Republic

3,800

78,599

Cayman Islands

Cuba

7,526

60,744

St Lucia

Cancún

n.a.

35,024

Jamaica

10,092

Bahamas Puerto Rico

Rooms

1980

2018

6196

Haiti

2,943

1,758

1,245

5078

St Kitts and Nevis

584

1,754

Cozumel

n.a.

4663

651

1,710

32,797

Guadeloupe

3,037

4460

British Virgin Islands Suriname

553

1,276

11,429

17,028

Antigua

1,350

3773

Bonaire

307

1,246

9,224

15,099

Guyana

3623

Anguilla

150

547

Aruba

2,235

11,929

St Maarten

Martinique

2,235

8,785

Curaçao

1,668

7,970

Belize

1,016

7,912

Turks and Caicos Islands St Vincent and the Grenadines US Virgin Islands

Trinidad and Tobago

2,141

7,731

Bermuda

Barbados

6,680

6,657

Grenada

Source: CTO (2019).

1980 118

538 1,670

2018

3532

Dominica

157

525

240

2632

Montserrat

131

156

500

2609

Saba

50

85

4,834

2483

St Eustatius

90

62

4,710

2405

570

2242

63

DeLisle Worrell

A fourth country, Aruba, also emerged as a major Caribbean destination during this period. Following the closure of the oil refinery that was the island’s main source of income and employment up until the mid-1980s, the government embarked on a tourism promotion strategy which successfully transitioned the economy to this new foundation for future eco­ nomic growth. Tiny Aruba is now the sixth largest Caribbean destination, in terms of hotel rooms; the five that rank higher are all several times larger in land area. Of the Caribbean tourism destinations that were already major players in 1980, Jamaica is the only one whose expansion has kept pace with the top three. Accommodation expanded threefold, lifting Jamaica to fourth position in terms of hotel rooms available. Puerto Rico also recorded a significant, but more modest, increase in rooms, by about one-third. Belize and the member countries of the Organisation of Eastern Caribbean States (OECS) were among the smaller destinations which entered the Caribbean tourism market in a substantial way in the 1990s. Belize capitalized on the potential of its barrier reef, the world’s second largest, and its Mayan cultural heritage, to build tourism into a new pillar of the economy, along with agriculture. As the banana economy of the OECS region fell into decline in the 1980s, the region was able to take advantage of its natural endowments to build a tourism industry that highlights heritage, adventure, ecology, culture and sailing. Significant accommodation expansion also occurred in Tobago, the Bahamas, Curaçao and the French départements. The exceptions to this growth story were Barbados, the US Virgin Islands, Bermuda and Haiti. Barbados recorded about the same amount of accommodation in 2018 as in 1980. Room counts fell in the other three countries. Financial services displaced tourism in Bermuda, and political and social turmoil caused the collapse of tourism in Haiti. The countries that might attract investors’ attention, all things being equal, are Aruba, the British Virgin Islands, Curaçao, the Dominican Republic and Cancún. They all had average occupancy levels in excess of 75% in 2018. Caribbean tourism for most destinations peaks in the northern hemisphere’s winter, when holidaymakers from those temperate regions seek respite from their colder climates. There is a secondary peak of activity in mid-summer, when families vacation together. In between those peaks are periods when there is lower occupancy. A hotel which is at full capacity at peak periods will therefore fall below 100% when occupancy is averaged for the full year. Hotels in the five destinations listed above were almost certainly at full capacity during peak seasons, a fact that would have attracted the attention of potential investors seeking opportunities for new hotel investment. As might have been expected, there were remarkable increases in accommodation in Curaçao, where the room inventory grew by one-third from 2014–18, and in Aruba, with a 26% expansion. From a very much larger base, accommodation in the Dominican Republic grew by 14%, and in Cancún by 9%. However, accommodation in the British Virgin Islands fell by almost one-quarter. At the other end of the spectrum, with occupancy rates at less than 50% in 2018, were Belize, Anguilla and the US Virgin Islands. There was a modest increase, of 8%, in rooms available in Belize in 2014–18, which probably reflects the great diversity of Belize’s tourism offerings. Within the mix there were probably segments that offered profitable investment opportunities in that country. There was no change in the volume of accommodation in Anguilla, and, as was the case in the British Virgin Islands, there was a big reduction in accommodation recorded in the US Virgin Islands (Table 5.4).

The growth of Caribbean tourism The emergence of tourism as a major economic activity in the Caribbean may be dated to the widespread adoption of jet airliners in the 1960s, which made short Caribbean resort vacations 64

The Caribbean in the global tourism competition Table 5.4 Occupancy rates, percentage of available rooms

Aruba British Virgin Islands Curaçao Dominican Republic Cancún Puerto Rico Bonaire St Lucia Jamaica

85 79 78 78 77 72 67 67 65

St Maarten Bermuda Barbados Antigua and Barbuda Cozumel Martinique Trinidad and Tobago Bahamas Guadeloupe

65 64 63 61 60 60 60 58 58

Cuba Cayman Islands Grenada Turks and Caicos Islands Dominica US Virgin Islands Anguilla Belize

57 56 55 54 51 43 42 38

Source: CTO (2019).

affordable to the middle classes of North America and Europe. Tourism in the region has a history going back to the eighteenth century; the first President of the USA visited Barbados as a 19-year-old, and visitors to the island may visit George Washington House, where he stayed with his older brother, Lawrence. However, until the arrival of jet transport, tourism was the privilege of the wealthy, those with the time and wherewithal to make an extended stay in the region. Their average expenditure while on holiday would have been high, but their numbers so small that tourism was not a significant economic sector in most of the Caribbean. Cuba, and to a much lesser extent the Bahamas, were the exceptions, because they are so close to the US mainland. Pre-Revolutionary Cuba complemented its sugar and tobacco economy with a thriving tourist industry, centred on Havana. The Cuban Revolution provided the Bahamas with a major tourism boost, as the majority of activity was diverted there, once the economic blockade of Cuba came into effect in the late 1950s. Since 1970 the Caribbean has kept pace with the remarkable growth of international tour­ ism. Arrivals in the Caribbean in 2018 were 7.5 times the number in 1970, compared to the global market, which grew eightfold over that period. That is a creditable performance, given how many competing resort destinations have mushroomed during that period. The Caribbean outpaced the global market from the mid-1980s to the start of the new millennium, but the region suffered badly at the time of the 2007/08 Great Recession, and recovery came only in 2012 (Figure 5.3). The region’s success is a result of a variety of country-specific strategies initiated almost entirely by the private sector. The outstanding exceptions, where deliberate government policy made all the difference, are Cancún and Aruba. In Aruba, the failure of the oil refinery that had been the mainstay of the economy until the early 1980s left the government the urgent task of promoting an alternative with the capacity to swiftly become the bedrock of continuing economic prosperity. Tourism was the obvious choice, and official policy initia­ tives were successful in attracting large-scale hotel investments, thanks to which arrivals more than doubled within five years of the start of the initiative. By 2018 Aruba had become the seventh largest Caribbean destination in terms of the number of arrivals (and the sixth largest by accommodation). The development of Cancún was the result of a Mexican government initiative to diversify the economy by developing the tourist potential of the Caribbean coast. In the early 1990s the Bank of Mexico, the central bank, provided finance for massive investment in roads, an inter­ national airport and other infrastructure, attracting investment to make Cancún the Caribbean’s third largest destination, after the Dominican Republic and Cuba. 65

DeLisle Worrell

Figure 5.3 Global and Caribbean arrivals, millions Source: CTO (2019).

The Caribbean experienced two periods of very rapid growth during which the region increased its share of international tourism: 1985–2000 and 2010–16. The driving force in both cases was the US market, which accounts for almost 50% of tourists to the Caribbean. In the early 1990s European visitor arrivals experienced a surge which augmented the overall rate of growth of Caribbean tourism, boosting it to an average of 7.3% per year between 1985 and 2000. However, the number of arrivals from European countries stagnated after 2000, and the even more rapid growth in Caribbean arrivals between 2010 and 2016, at 8.2% per annum, was entirely reflective of the US market. The number of European arrivals, comprising up to 25% of the total in 2000, had fallen back to 20% by 2018. The other significant markets in 2018 were Canada with 11% of all arrivals, and intra-Caribbean travel at 6% (Figure 5.4).

Competitiveness The World Economic Forum’s Travel and Tourism Competitiveness Report 2019 argues that world tourism is at a tipping point between its potential for development of host countries and ‘overtourism’, which creates congestion and destruction of the physical, economic and sociocultural environment. The report noted that tourism competitiveness continues to improve worldwide thanks to the intensification of air transport links, digital connectivity and international open­ ness, notwithstanding the global context of growing trade tensions and nationalism. Travel is mostly less expensive and safer. Moreover, governments view tourism more favourably than in earlier years, and this is reflected in increases in government funding and more effective tourism marketing. However, demand threatens to overwhelm infrastructure, overcrowding threatens cultural and natural assets, and there is a continued increase in deforestation, air pollution and species endangerment. Europe and Eurasia are judged to be the most competitive regions, followed by Asia-Pacific, the Americas, the Middle East and North Africa, and sub-Saharan Africa. Countries are evaluated according to criteria that are grouped under four headings: the enabling environment; government tourism policy; infrastructure; and natural and cultural 66

The Caribbean in the global tourism competition

Figure 5.4 Caribbean arrivals by source market, millions Source: CTO (2019).

resources. The enabling environment includes the business climate, safety and security, health and hygiene, the labour market and information and communications technology readiness. Government policy includes prioritization of tourism, openness, price competitiveness and environmental sustainability. Only five Caribbean destinations are included in the Travel and Tourism Competitiveness Report: Barbados (in 2017; not included in 2019), Cancún (Mexico), the Dominican Republic, Jamaica, and Trinidad and Tobago. Mexico scores well above the global average for all countries inclu­ ded in the tourism index, with a score of 4.7, compared with Spain, which tops the rankings with a score of 5.4; Barbados, the Dominican Republic and Jamaica are in the vicinity of the global average, with a score of 3.9; while Trinidad and Tobago is somewhat below the average, with a score of 3.6. The Caribbean lost market share during the period from 2004 to 2010 when the volume of arrivals to the region was virtually stagnant. It is testimony to the very rapid resurgence of worldwide tourism over the past decade that the Caribbean was unable to recapture the lost market share, despite the record increase in arrivals to this region between 2010 and 2016. In 2018 the Caribbean’s share of world tourism was 2.1%, down from a peak of over 3% in the 1990s (Figure 5.5). The decline in the Caribbean’s market share cannot be blamed on price inflation in the region. The prices of tourism and other consumer services in the Caribbean have risen modestly and at a steady pace, compared to US prices, in the period since 1990. There was no relative price inflation during the periods when the number of arrivals to the Caribbean levelled off, i.e. in 2004–10 and 2016–18. This result is consistent with the only previous study of Caribbean tourism that uses market share as the measure of competitiveness. Worrell and Craigwell (2008) reached the conclusion that 67

DeLisle Worrell

Figure 5.5 Caribbean market share (%), arrivals (millions), price competitiveness index (PCI) Source: CTO (2019); ECLAC (2019); author’s calculations.

for the Caribbean as a whole, price competitiveness may not be the optimum strategy for increasing the share of major markets, even though there may be exceptions in individual countries. … These findings lend support to the notion that non‑price factors and market segmentation are the keys to competitiveness, and that overall price and income effects, to the extent that they matter, may be of secondary importance for many, if not most countries. A focus on enhancing product quality, increased productivity, more skilful marketing, along with the criteria discussed in the Travel and Tourism Competitiveness Report, might offer a better explanation of success in maintaining market share and guidance for future competitiveness. Casual empiricism suggests that destinations which have focused on providing exceptional visi­ tor experiences, whether by way of accommodation, amenities, food, culture, heritage, sports, health, adventure and environmentally sensitive offerings, have held on to or improved their market share. We have attempted to confirm this intuition by comparing changes in countries’ share of the Caribbean market (dMktShare), with changes in their prices for tourism and other services, relative to the Caribbean average (dPCI). The price competitiveness index used, PCI, was devised by myself and colleagues in Worrell et al. (2013); the prices used are the country deflators for hotels, restaurants and retail services in the Statistical Yearbook of the Economic Commission for Latin America and the Caribbean (ECLAC). We plot comparisons for two

68

The Caribbean in the global tourism competition

periods, 1985–2000, when arrivals to the Caribbean were increasing rapidly, and 2016–18, when the number of arrivals to the region rose by less than 0.5% each year. In Figure 5.6, the countries to be envied are those in the top right-hand quadrant, where the country has gained market share in spite of the fact that prices have increased relative to their “Competitors”. We take this as evidence of product quality improvement, an umbrella term we will use to cover all the factors mentioned in the previous paragraph as strategies to sustain market share. We have made 21 observations, nine from the period of high growth (1985–2000) and 12 from the recent period when the number of arrivals stagnated (2016–18). During the high growth period five countries showed quality improvement: the Dominican Republic, St Lucia, Jamaica, Trinidad and Tobago, and Belize. The remaining four countries from that period (Antigua and Barbuda, Barbados, Cancún and the Bahamas) also recorded relative price increases, compared with the Caribbean average, but they all lost market share, suggesting that they failed to achieve quality improvements consistent with the increase in their prices, relative to the average for the region. During the 2016–18 period only two countries showed evidence of presumed quality improvement: St Vincent and the Grenadines and St Lucia. In this period Trinidad and Tobago lost market share, with the implication that tourist service providers in that country need to reassess the value they offer at the current price point. A majority of countries, eight in all, appear to have adjusted their prices downward in line with the quality of product on offer, judging from the fact that they were able to increase their market share. Those countries were Guyana, Belize, Grenada, Suriname, Jamaica, the Bahamas, Antigua and Barbuda, and St Kitts and Nevis. Dominica was the only country to lose market share, even though prices in services in that country rose more slowly than the Caribbean average (Figure 5.7).

Figure 5.6 Changes in market share versus changes in price Source: CTO (2019); ECLAC (2019); author’s calculations. 69

DeLisle Worrell

Figure 5.7 Average expenditure per person, US $000, length of stay, days Source: CTO (2019).

One strategy to increase expenditure per person is to target markets where tourists tend to take longer vacations. The countries which appear to have had some success with this approach are Antigua and Barbuda, Barbados, Bonaire, St Kitts and Nevis, and Trinidad and Tobago. They all have visitors who typically spend longer on holiday than the Caribbean average, and average expenditure per visitor is also higher than the Caribbean average. However, there is a larger number of countries which attract higher than average expendi­ ture per visitor, even though the average visitor spends a short time on holiday, relative to the Caribbean average: the US Virgin Islands, St Lucia, Anguilla, Bermuda, the Bahamas, the Cayman Islands, Aruba, Dominica, Cancún, Puerto Rico, Guadeloupe, Curaçao and Jamaica. The remaining countries recorded lower than average visitor expenditure; they are split between those where tourists stay for a relatively short time (Belize, the Dominican Republic, Grenada), and those where visitors spend relatively little, though their holidays are longer than the Caribbean average (Guyana, Montserrat, the British Virgin Islands, Cuba and Martinique). The former might try to attract tourists who are in the habit of taking longer holidays, while the latter group might try to enhance the quality and range of tourism services on offer.

Market diversification All else being equal, countries that source tourists from several different countries in substantial proportions assure themselves of a greater degree of resilience in case of weaknesses in the economic circumstances of any one source country. Mitigating against this in the Caribbean is the fact of geographical proximity to the very large US market. The closer a country is to the 70

The Caribbean in the global tourism competition

USA, the more likely it is to derive most of its visitors from that market; in five countries in our sample (the Bahamas, Bermuda, the Cayman Islands, Puerto Rico, and Turks and Caicos Islands) the USA accounts for over 75% of all arrivals (see Appendix 1.) All except Bermuda are within an hour’s flight of the US mainland, and Puerto Ricans are US citizens. The USA is large enough that these countries can pursue a diversification strategy based on targeting the more prosperous cities or regions, but we do not have the data to assess to what extent that has been the policy in any country. Another four countries (Aruba, Belize, Jamaica, and St Kitts and Nevis) while some­ what less dependent, derive over half of their arrivals from the USA. Apart from Aruba, these are all within short flying distance of the US mainland, and it is possible to travel to Belize by road, via Mexico. Aruba’s heavy dependence on the USA is probably explained by the country’s late entry into the tourism market, and the fact that the switch to tourism was as a result of deliberate government policy. US companies are the dominant players in the hotel industry in the Caribbean, although there has been growing interest by European companies in recent years, and they would have been the first to be attracted to Aruba. The remaining seven countries (Barbados, Cuba, Curaçao, the Dominican Republic, St Lucia, St Maarten, and Trinidad and Tobago) source at least 15% of their arrivals from three or more countries, affording them a degree of insurance against recession in a single source market. The USA is the largest source for the last four on the list, but thanks to travel and communications links that go back centuries, Europe is the largest source market for Barbados and Curaçao. The ongoing US restrictions on travel to Cuba limited US arrivals to only 14% of the Cuba total in 2018, with Canada and Europe each accounting for about one-quarter of the number of arrivals.

The economic importance of tourism The best available indicator of the importance of tourism in Caribbean economies is the pro­ portion of foreign exchange inflows that derives from the industry. Small open economies like those of the Caribbean are fuelled by foreign exchange. Because of their limited size and population, they have the capacity to produce only a very limited range of goods and services at internationally competitive prices. Their economies function by selling these competitive pro­ ducts internationally and using the earnings thereof to purchase from world markets the wide range of products and services which define a modern economy. The contribution that tourism makes to the supply of foreign earnings therefore determines its importance in the growth and prosperity of the economy (see Worrell 2012). St Kitts and Nevis, Grenada, Antigua and Barbuda, and St Lucia are the Caribbean countries most highly dependent on tourism, and indeed their tourism receipts accounted for over 70% of all foreign currency inflows in 2018. The Bahamas, Jamaica and Cuba derive two-thirds of their foreign currency inflows from the industry; for Barbados, Belize, and St Vincent and the Gre­ nadines tourism supplies over half of their foreign currency. The industry is also a major source of foreign currency for Dominica, Panama and the Dominican Republic, all of which receive over 30% of inflows from tourism (Table 5.5). Trinidad is mainly an oil exporter; its tourism is related to the annual carnival. Tobago, the tourist island, is much smaller, and that is reflected in the fact that tourist receipts account for about 10% of foreign currency inflows for the country. Tourist activity is a relatively small part of the economies of Guyana and Suriname, neighbours on the South American mainland, whose main exports are agricultural products and minerals. 71

DeLisle Worrell Table 5.5 Contribution of export services to foreign currency inflows, percentage

St Kitts and Nevis

88

St Vincent and the Grenadines (2016)

49

Grenada

83

Dominica

41

Antigua and Barbuda

76

Panama

41

St Lucia

73

Dominican Republic

30

Bahamas

69

Haiti

11

Jamaica

69

Trinidad and Tobago (2016)

10

Cuba (2007)

68

Suriname

6

Barbados

53

Mexico

5

Belize

49

Guyana

2

Source: ECLAC (2019).

An evaluation An overall assessment was made of all member countries of the CTO, based on visitors’ average daily expenditure, their success in making ‘quality’ improvements, the resilience of tourism with respect to economic fluctuations in source markets, competitiveness as measured by the Travel and Tourism Competitiveness Report of the World Economic Forum, whether hotel capacity is fully utilized, and the growth of accommodation and arrivals during the period 2014–18 (see Appendix 2). Average daily expenditure ranges from over US $200 to a low of less than $50. Countries’ success in improving the quality of tourism services, strengthening brand recognition, improving productivity and adding value to the product is measured by comparing changes in shares of the Caribbean tourism market with changes in prices relative to the Caribbean average. Resilience is assessed on the basis on diversity of source markets, with the caveat that this is an imperfect measure, because diversity is possible within a large market like the USA. For those countries included in the Travel and Tourism Competitiveness Report, we take account of their ranking. We make the plausible assumption that anything over 75% for the full year indicates that hotels are at full capacity during the peak season(s). Overall, arrivals to the Caribbean increased by a remarkable 13.5% during the period 2014–18, with two countries, Cuba and Belize, recording increases in excess of 50%. The Dominican Republic and Cancún were among the more successful performers. The Dominican Republic garners the largest share of tourist arrivals to the Caribbean (22%), and the numbers are still growing, by 28% during the same period. Hotels have been operating at close to full capacity (78% in 2018), and the country attracts tourists from a relatively wide range of countries, even though the USA accounts for the largest share (34%). The Domin­ ican Republic has continued to increase its share of the Caribbean market even as the price of its services has outpaced the Caribbean average. However, average daily expenditure of visitors to the country is disappointingly low, at US $128. Tourism is of major importance in the Dominican Republic, contributing 30% of the country’s foreign currency inflows in 2018. Cancún, with 11% of all arrivals in the Caribbean, has the third largest share of visitors, after the Dominican Republic and Cuba. Average daily expenditure is quite high, at US $172 (compared with $305 for the US Virgin Islands, the highest in the Caribbean). Mexico scores well above average in the Travel and Tourism Competitiveness Report, and hotels in Cancún 72

The Caribbean in the global tourism competition

operate close to full capacity during the high season (77% annually). Hotel capacity expanded by 9% in 2014–18, and arrivals were up by 12%. Smaller countries with a relatively strong showing include St Lucia, Antigua and Barbuda, and Aruba, with average daily expenditures of US $264, $247 and $180, respectively. St Lucia managed to improve its market share and increase the price of services, both in the rapid growth period of 1985–2000, and in more recent years when the market slowed. The country has relatively diversified source markets, although the USA is the largest, with 44% of arrivals. Capacity utilization is 67%, but investors continue to show interest, and capacity increased by 4.4% in 2014–18. Arrivals were up by 17% in that period. St Lucia has an economy based primarily on tourism which accounted for 88% of foreign currency inflows. Antigua and Barbuda was able to improve its market share despite relatively faster price increases in the 1985–2000 period, but price increases have been associated with loss of market share more recently. Capacity utilization is 61%, and hotel capacity fell by 19% in 2014–18. However, arrivals were up by a modest 8% in that period. Antigua and Barbuda is also a tourist economy, with 76% of foreign earnings coming from the sector. Aruba depends on the US market for 69% of arrivals. The country recorded the highest capacity utilization in the region in 2018 (88%), and room capacity increased by 26% in 2014–18. However, during this period the number of arrivals rose by less than 1%. There is a second group comprising a dozen moderately successful performers, all of whom recorded average daily tourist spending of US $150–$200 in 2014–18. The group includes the tourism-dependent countries of St Kitts and Nevis, the Bahamas, Grenada and Jamaica, all of which derived two-thirds or more of foreign currency inflows from the tourism sector. The USA accounted for 71% of visitors to St Kitts and Nevis; arrivals increased by 12% in the 2014–18, even though there was no increase in the number of hotel rooms available. The islands increased their market share during the 1985–2000 period, when the price of services rose more slowly than the Caribbean average. Some 80% of visitors to the Bahamas are from the USA. Capacity utilization is low, at 58%, but the islands continue to attract hotel investment, and capacity rose by 11% in 2014–18, with a 14% increase in arrivals during the same period. As with St Kitts and Nevis, gains in market share in the late 1980s and the 1990s were associated with slower price rises for services, com­ pared with the Caribbean average. The story is similar for Grenada: utilization is low at 55%, but room capacity increased by 14% and arrivals by 21% in 2014–18. Jamaica offers yet another example of low capacity utilization (65%), in a country where room capacity increased by 19% and arrivals by 22% in 2014–18. Jamaica sources two-thirds of its visitors from the USA. In the 15 years of rapid expansion of Caribbean tourism, Jamaica was able to gain market share even though the price of services rose more quickly than the Car­ ibbean average. However, more recently, Jamaica’s capture of increased market share was accompanied by service price increases that were more modest than for the Caribbean as a whole. Other moderately successful member countries of the CTO (Curaçao, St Vincent and the Grenadines, Barbados, Belize, Bermuda, the Cayman Islands, Dominica and Guadeloupe) are less dependent on tourism as a source of foreign currency; tourism contributes between onethird and one-half of foreign currency inflows. Curaçao has a larger number of source markets that most of the Caribbean, with Europe, the largest, accounting for 52% of total arrivals in 2018. In that year, the hotels on the island operated at an average of 78% of capacity, among the highest in the region. The number of rooms available increased by one-third in 2014–18. However, arrivals for 2018 were 5% lower than in 2014. 73

DeLisle Worrell

Visitors to Barbados come mainly from Europe (38%), with substantial contributions also from Canada, the USA and neighbouring Caribbean countries. Barbados’s score in the Travel and Tourism Competitiveness Report is just about average for all the countries included in the report. Capacity utilization in 2018 was only 63%, and only 7% more rooms were added in 2014–18, but arrivals were up by 31% in that period. Belize receives two-thirds of its visitors from the USA. Apparently, it has been successful in matching price to product in the tourism sector; during the 15 years of high growth Belize gained market share, even though the price of its services rose faster than the Caribbean average. In recent years Belize has made even bigger market share gains, but these were associated with service prices that rose more slowly than for the Caribbean as a whole. Room capacity utiliza­ tion was only 38% in 2018, and there was an increase of only 7% in accommodation, but arrivals were up by 52% in 2014–18. The USA is the source of 76% of visitors to Bermuda. Hotel capacity on the island is not heavily utilized (64%), and the number of rooms stagnated in 2014–18. However, visitor arrivals rose by one-quarter during that period. Tourism, which was once a major activity, has declined to minor significance, relative to international financial services. The Cayman Islands has a very similar profile, with tourism declining in importance relative to international financial services; in the period 83% of arrivals came from the USA with 56% capacity utilization. However, there has been an increase of 18% in the number of hotel rooms, to accompany a 21% increase in arrivals in 2014–18. Tourism provides 49% of foreign exchange in St Vincent and the Grenadines. Between 1985 and 2000 this was one of the countries to gain market share even though the price of services there rose more quickly than the Caribbean average. Between 2014 and 2018 capacity was up by 22% and arrivals were 16% higher. The capacity utilization in Guadeloupe was 58%, and there was no change in the number of rooms available, but arrivals increased by one-third in 2014–18. Dominica, which derived 41% of its foreign earnings from tourism, was hit by a devastating hurricane in 2016, which destroyed 54% of capacity, causing a 23% reduction in visitor arrivals in 2018, compared with 2014. International banking and finance were the major activities other than tourism which con­ tributed significantly to foreign currency inflows in Curaçao, Barbados, Bermuda and the Cayman Islands. Barbados also exports some manufactured goods. In Belize, Dominica, and St Vincent and the Grenadines agricultural produce is also a significant export. There are a number of countries where performance does not match up to those described so far. Cuba has a 16% share of Caribbean arrivals, the second largest, but average daily expendi­ ture is only US $78, among the lowest in the region. Tourism provides 68% of Cuba’s foreign currency. Capacity utilization is only 57%, but the number of rooms available increased by 9%, while arrivals rose by 56% in the 2014–18 period. Puerto Rico is also a major Caribbean tourist destination, with 9% of arrivals in 2018. A devastating hurricane in 2017 sharply reduced the available accommodation on the island, and arrivals in 2018 decreased by 24% compared with 2014. The smaller tourist-dependent destinations that recorded comparatively low average daily expenditure were the British Virgin Islands, which also lost capacity because of the hurricane, and Martinique, which recorded increases of 13% and 10% in the number of rooms and arrivals, respectively, in 2014–18. In the remaining countries the contribution of tourism to foreign currency inflows is 10% or less. Average daily expenditure in Trinidad and Tobago is low at US $148, and the country score is below the world average in the Travel and Tourism Competitiveness Report. Capacity

74

The Caribbean in the global tourism competition

utilization is 60% and there has been no change in the room inventory recently. Arrivals in 2018 were 9% lower than in 2014. Suriname derives only 6% of foreign inflows from tour­ ism; for neighbouring Guyana the contribution is only 2%. Average daily expenditure per visitor is $42 and $21 for Guyana and Suriname, respectively, the lowest for any member of the CTO.

Conclusion The growth of the tourist industry in the Caribbean during the period 2014–18 is a rich and varied success story. This chapter uses CTO statistics to measure the extent of that success, to examine some of the reasons that explain it, and to look at the variations of experience among the countries of the region. For the most part it has been a story of private enterprise, with the providers of tourism services pricing their services in line with the quality of service on offer, and, for a majority of countries, adjusting prices in a successful strategy of protecting or increasing their market share. The best performing countries recorded high average daily expenditure per visitor, full capacity, a growing inventory of accommodation, and strong growth in arrivals. Among the other countries there is every combination of high/low average daily expenditure, good and bad value propositions, diversification of source markets, full to low capacity utilization, and large, modest, or little or no increase in accommodation. The results ranged from modest to exceptional growth in visitor arrivals, sustaining the Caribbean’s share of world tourism above 2% of the global total. The fact that a growth rate of arrivals that averaged 8.2% per year from 2010–16 actually failed to breach the 2.5% market share mark is no reflection on the Caribbean. Rather, it reflects the unprecedented expansion in world tourism during this period. Countries for which tourism is the main source of foreign exchange had creditable per­ formances, for the most part. That is also the case for the larger tourist destinations such as the Dominican Republic and Cancún, although the size and endowments of their econo­ mies are such that tourism is not the only major source of foreign currency. In only two countries, Aruba and Mexico, have we identified direct government investment, promotion, finance and other support as a determining factor in the emergence to prominence of the tourism industry, and in both cases government direct action was less evident once the tourism industry became well established. The flexible responses of the Caribbean tourist industry to the markets it serves, the quality and appeal of the products they sell, and the history of adapting to changing opportunities, all augur well for the future of Caribbean tourism. The challenges the Caribbean faces going forward are made more uncertain by the march of communications technology. We do not have sufficient data to analyse the impact of peer-to-peer online marketing services such as Airbnb and Tripadvisor. Further­ more, the limitations of our data mean that we have only been partly successful in revealing the drivers behind the successful tourism strategies, and there remain many curiosities relating to the available data that we are unable to explain. This chapter has no greater ambition than to add meaningfully to an appreciation of the richly diverse landscape of Caribbean tourism.

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Appendix 1 Source countries of visitors to Caribbean countries

Figure 5.8a More than 75% from the USA Source: here

Figure 5.9a Between 50% and 75% from the USA Source: here 76

The Caribbean in the global tourism competition

Figure 5.10a Countries with at least three source markets providing 15% or more Source: here

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Appendix 2 Evaluation matrix

Figure 5.11a Evaluation matrix Source: Authors calculations

References Caribbean Tourism Organization (CTO) (2019) Annual Statistical Report 2018, Barbados: CTO. Available atwww.onecaribbean.org/. Economic Commission for Latin America and the Caribbean (ECLAC) (2019) Statistical Yearbook 2018, Santiago: ECLAC Available at www.cepal.org/en/publications/sy. World Economic Forum (2019) The Travel and Tourism Competitiveness Report 2019. Geneva: World Economic Forum. Available at www.weforum.org/reports/the-travel-tourism-competitiveness-report-2019. Worrell, DeLisle (2012) ‘Policies for Stabilisation and Growth in Small Very Open Economies’, Occasional Paper no. 85, Washington, DC: Group of 30. Available at www.group30.org. Worrell, DeLisle and Craigwell, Roland (2008) ‘The competitiveness of selected tourism markets’, Social and Economic Studies, 57(2): June. Worrell, DeLisle, Greenidge, Kevin and Lowe, Shane (2013) ‘Competitiveness in the Caribbean and Central America’, International Research Journal of Economics and Finance, 109: 61–87. Available at http:// ssrn.com/abstract=2287328.

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Part II

Obstacles to sustained progress

6 CARICOM and that vexing issue of size and viability Patsy Lewis

Introduction Caribbean Community (CARICOM) countries show large variations in size of population, geography and economy. As Table 6.1 shows, even though all of these countries – with the exception of Haiti, which has a population of 11 million – are small, there are still significant variations in size of population and land mass. Jamaica, for instance, has the largest population, of 2.9 million to Montserrat’s 4,932, while Guyana with a population of fewer than one million has the largest land mass of 216,970 sq km, while that of Montserrat is a mere 103 sq km.1 Table 6.2 also shows wide variations in per capita gross domestic product (GDP), ranging from US $32,217.9 in the Bahamas to $868.3 in Haiti (World Bank n.d.-a). CARICOM embodies the Caribbean Community and CARICOM Single Market and Economy (CSME) in a single treaty, the Revised Treaty of Chaguaramas (RTC). CARICOM describes its work as resting on four pillars: ‘economic integration, foreign policy coordination, human and social development, and security’ (CARICOM n.d.-b). Its main goals, as set out in the RTC (Article 6), are to deepen the economic integration of its members; increase the international competitiveness of regional firms; expand trade and economic relations with third countries and increase their ‘effectiveness and leverage’ in dealing with these parties; promote economic development and convergence and improve ‘standards of living and work’; and coordinate foreign and economic policy. It also includes enhancing functional cooperation, especially in health, education, transport and communications, and improving efficiency in the operation of common services and activities (CARICOM Secretariat 2001). CARICOM’s smallest members also maintain their own sub-integration grouping, the Organisation of Eastern Caribbean States (OECS). The group, which has its own economic union, has seven full members – Antigua and Barbuda, Dominica, Grenada, Saint Kitts (Christopher) and Nevis, Saint Lucia, Saint Vincent and the Grenadines, and Montserrat – and three associate members – Anguilla, the British Virgin Islands and the French department, Martinique. Guadeloupe’s request for associate membership was under consideration at the time of writing and Sint Maarten, a Dutch territory, has been granted Observer Status. This chapter identifies the concerns that have led these countries and territories to invest in a regional integration scheme, the challenges they face in maintaining the arrangement and the

81

Patsy Lewis Table 6.1 CARICOM population and area (2018)

Country

Population† (year)

Area* (sq km)

Antigua and Barbuda Bahamas Barbados Belize Dominica Grenada Guyana Haiti Jamaica Montserrat‡ Saint Kitts and Nevis Saint Lucia Saint Vincent and the Grenadines Suriname Trinidad and Tobago

96,290 385,640 286,640 383,070 71,630 111,450 779,000 11,123,180 2,934,860 4,650 52,440 181,890 100,210 575,990 1,389,860

442 13,939 431 22,966 750 345 216,970 27,750 10,991 103 269 616 389 163,820 5,128

Source: *CARICOM Secretariat (n.d.-c). ‡

Montserrat Statistics Department (2019).

Table 6.2 HDI ranking of CARICOM countries and GDP per capita

Country

GDP per capita, 2018 (current US $)

Antigua and Barbuda Bahamas Barbados Belize Dominica Grenada Guyana Haiti Jamaica St Kitts and Nevis St Lucia St Vincent and the Grenadines Suriname Trinidad and Tobago

16,727.0 32,217.9 17,949.3 4,884.7 7,691.3 10,640.5 4,979.0 868.3 5,354.2 19,275.4 10,566.0 7,361.4 6,234.0 17,129.9

HDI ranking, 2018 74 60 56 103 98 78 123 169 96 73 89 94 98 63

Change in HDI ranking, 2013–18 –3 –4 –9 –2 –8 0 –1 –1 0 –2 +4 +4 –3 –3

Source: World Bank data on GDP per capita, https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?locations=ZJ-CL; UNDP (2019) UNDP reports, Human Development Index trends, 1990–2018.

value that it continues to hold. Specifically, it explores the drivers of regional integration, the tensions that have emerged, and their efforts to address these. It argues that, despite a general anxiety around economic size, there are clear differences that set these countries apart and form 82

CARICOM and that vexing issue of size and viability

the basis for some of the challenges they face, which influence, in part, the pace and direction of the movement. These include size of economies and capabilities, and structure of economies, with two distinct types of economies in evidence, based on goods and services, although these are not mutually exclusive.2 These differences play out in the slow implementation of the CSME; skewed benefits from intra-regional trade; differential enthusiasm for trade liberalization, most evident in their negotiations with Europe around the CARIFORUM-EC Economic Partnership Agreement (EPA); and the persistence of the OECS as a subregional grouping with distinct interests and concerns.

Size and conceptualization of Caribbean integration CARICOM has its origins in concerns around size and viability. The West Indies Federation (WIF) (1958–62) was created as the mechanism to allow British territories, considered too small to be viable as independent units, to proceed to independence. When CARICOM emerged in 1973, from the fledgling Caribbean Free Trade Area (CARIFTA) established in 1965 from the ashes of the failed WIF, only four of its members (Barbados, Jamaica, Guyana, Trinidad and Tobago) were independent countries. All, apart from Jamaica, had populations under 1.5 million. Between 1974 and 1983 seven of these territories proceeded to independence, representing some of the world’s smallest states both in terms of population and physical size. Their populations range from 172,000 in St Lucia to 54,000 in St Kitts and Nevis (see Table 6.1). Concerns relating to the small size of these territories are expressed primarily about their economic viability, as well as their political relevance and effective sovereignty, and remain the driving force behind the integration movement. The economy has been central to the conceptualization and practice of Caribbean integra­ tion. The WIF’s formation, as an alternative to independence for individual territories, was driven by the small size of individual territories and concerns that they could not become viable economies, maintain effective government and fulfil their obligations to the international community. While Jamaica and Trinidad’s rush to independence, following the collapse of the WIF, put paid to concerns about political viability, the lure of economic cooperation and ‘integration’ would suggest that insecurity around economic viability lingered. Thus, economic considerations were central to the form that cooperation took, in particular the drive for enlarged markets, ultimately leading to the emergence of CARIFTA, then CARICOM. Cen­ tral concerns of regional integration were the creation of a regional market for goods and the pooling of resources in key areas of ‘functional’ integration to reduce costs and increase effi­ ciency, even as CARICOM embraced other apparently non-economic areas of cooperation, namely in foreign relations and security. These concerns with size and viability were also central to prescriptions before and after independence on how better to organize Caribbean economies. Arthur Lewis (1950), one of the region’s (and the world’s) foremost development economists, located his prescriptions for the British Caribbean territories’ development within a regional framework. During the preindependence phase, when it was still possible to treat these territories as operating as a unified entity, he viewed individual territories’ resources – oil from Trinidad, bauxite from Jamaica and Guyana, and agriculture from the Eastern Caribbean – as being available for the creation of a viable Caribbean economy. William Demas, whose seminal volume, The Economics of Develop­ ments in Small Countries with Special Reference to the Caribbean (1965), foregrounded size and the constraints it posed for developing ‘self-sustaining growth’, which W. W. Rostow (1960) had identified as an important step that developing countries needed to go through to achieve ‘development’. Although other noted Caribbean economists, working together as the New 83

Patsy Lewis

World Group (NWG) – Lloyd Best, Norman Girvan, George Beckford, Alister McIntyre, Havelock Brewster, among others,3 rejected size as an object to development, even they believed that a regional scheme was key to Caribbean development. The NWG, influenced by dependency theory, argued that underdevelopment was a product of disconnected internal structures of production, and the terms of their engagement with the global economy as pro­ ducers of raw materials within protected markets (both inherited from colonialism), rather than their small size. Their interest in the regional space went beyond concerns with establishing a regional market to increase the competitiveness of firms, to an interest in integrating production structures and rationalizing production within and among member states. Havelock Brewster and Clive Tho­ mas’s book, The Dynamics of West Indian Economic Integration (1967), was the most detailed expression of this approach. Ultimately, Demas’s perception of integration exerted the greatest influence on the new structure, the main priority of which was to expand trade and increase the competitiveness of individual firms by freeing constraints that would allow them to operate freely within the region.4 This approach to centring economic concerns, especially trade, has continued to inform different phases of regional integration, most recently expressed in the RTC and the CSME. Despite differences in emphasis, these perspectives on Caribbean under­ development reflect the challenges facing CARICOM countries, both in terms of size and the constraints that it imposes, the structure of their economies, closely, though not exclusively related to size, and the terms of their engagement with the global political economy. The functional elements of Caribbean integration, which began with the management of regional assets such as a common currency, a modest shipping fleet of three ships – a gift from Canada – the University of the West Indies, among others, also developed to address the challenges that individual territories and countries faced in providing these on an indi­ vidual basis. These common services have grown to include an ever-expanding array of fields, with associated organizations. They now cover health, secondary and tertiary educa­ tion and vocational training, disaster mitigation and response, and reflect, together, a desire to provide services which require greater resources than are available to the individual nations, as well as to reduce costs. Thus, questions of efficiency and costs have become central to the regional project, overtaking Arthur Lewis’s (1965) emphasis on the political limitations of small states. This concern with size sets CARICOM apart from other integration schemes, particularly with those formed in Latin America.5 CARICOM shared with Latin American schemes the general concern with enlarging markets by reducing barriers to intra-regional trade, allowing possibilities for the development of industry. But it also sought to address the potential differ­ ential impact of such schemes on members with different factor endowments and significant differences in size, by officially classifying countries as more developed (MDC) and less devel­ oped (LDC), largely in accordance with size. In the earlier phases of the integration process, it sought to secure a share of the regional market for the agricultural produce of the LDCs and allowed them to maintain protections against competing industries in MDCs, even where the latter had been established first. The LDCs were also given access to development loans from the Caribbean Development Bank (CDB) on more favourable terms and, more recently, under the Caribbean Development Fund, established to compensate for the negative fallout from the implementation of the CSME. The nexus between size and development, especially in the small island states of the Car­ ibbean and the Pacific, were amplified by the efforts of the Commonwealth Secretariat and the World Bank (2000) to define and expound on these under the framework of ‘vulnerability’ and the more recent literature to which this gave rise (Briguglio 1995; Briguglio and Kisanga 2004; 84

CARICOM and that vexing issue of size and viability

Cooper and Shaw 2009). These expanded earlier concerns with the islands’ economic viability and limited scope for competitiveness and their greater exposure to trade volatility, to include new concerns with their vulnerability to hurricanes/cyclones and other natural hazards. This shift was reflected in a growing literature around vulnerability based on attempts to give the concept substance with the creation of measurements and the ranking of countries based on a vulnerability index (UNEP 1998). The region’s concerns with size were also acknowledged in the World Trade Organization’s (WTO) Doha Round, especially in respect to trade-related measures. A later turn in the literature to consider the policy framework within which ‘vul­ nerability’ can be understood, brought the conversation back to concerns with the political implications of size. This concern, expressed in terms of ‘resilience’, goes beyond the outsized role of government in small societies and the influence of personality on the state, that con­ cerned Lewis (1965), to align more closely with neoliberal concerns with ‘good governance’ and the entrenchment of the market, the retreat of the state, financial liberalization, and the disciplining of labour, among others (Briguglio et al. 2008). While anxieties around size are central to the raison d’être of the integration movement, and continue to be expressed in the MDC/LDC divide, there are other differences such as structure of economy that present challenges to CARICOM’s cohesion and have come to dominate conversations about its relevance. This section of the chapter explores the different tensions that exist among member states and how these are manifested in the integration movement. These include the persistence of the OECS; differential benefits from the CSME; and trading arrangements that are external to the CSME. The MDC/LDC divide, which has persisted, suggests that although size is a constant con­ straint6 which all states (except for Haiti, which has its own peculiar historical and structural constraints) have to navigate, these concerns are experienced differently. The OECS’s formation and the continued evolution of its integration process nearly 50 years after CARICOM’s for­ mation would suggest the persistence of some of these concerns. The OECS provides a tighter and more ambitious scheme than CARICOM, with some of the main elements of the CSME, but with tighter completion frameworks. It inherited from the WIF a common currency, the Eastern Caribbean dollar (EC $)7 and a currency authority upgraded in the post-independence period to the Eastern Caribbean Central Bank (ECCB), which controls monetary policy. They share a supreme court, also inherited from the WIF. Some important innovations are the move to give binding effects to the decisions of OECS heads of government in certain specified areas and the removal of all restrictions to travel, live and work within the OECS. The OECS also maintains its own ‘Permanent Delegation’ in Geneva, Switzerland, as well as its own trade negotiation and advisory body, the Trade Policy Unit, even as it is part of the umbrella CARICOM Office of Trade Negotiations (OTN). It also has its own common procurement arrangements for drugs and health-related products. Economic union initiatives such as unim­ peded movement, are expected to be significantly eroded once the CSME is fully implemented and the OECS would have to extend these to all CARICOM countries. Nevertheless, such initiatives were expected to give OECS firms a head start in their drive to be competitive vis-à­ vis- their larger CARICOM counterparts. Arguably, given the slow implementation of the CSME, some of its ambitions may not come into effect at all.

Challenges in meeting goals of economic integration The structure of the regional economies has emerged as a major challenge within CARICOM. Because CARICOM’s economic model privileges open markets, with resources remaining under the control of individual states, this has given rise to differential benefits accruing from 85

Patsy Lewis

the regional market. CARICOM countries are loosely classified into those with service or goods-based economies, although most of them are largely undiversified. The OECS countries, Barbados and the Bahamas, rely on services, especially tourism, and in the case of some OECS countries, Citizenship by Investment Programmes (CBI). The goods-based exporting economies are Belize, Guyana, Haiti, Jamaica, Suriname, and Trinidad and Tobago (CDB 2019). The OECS economies are primarily service-based, in particular tourism and offshore finance, although Dominica, Grenada, St Lucia, and St Vincent have significant agriculture sectors. The manufacturing sector in all these countries is small and underdeveloped. The small OECS countries are highly dependent on imports of food, fuels and goods and, as with most CAR­ ICOM countries, they are highly indebted. Although debt per capita ratios across CARICOM countries average 73.4%, this ranges from a high of 157.7% in Barbados to as low as 47% in Guyana. CARICOM countries also experience high levels of unemployment – the highest in the OECS countries – ranging from 25% in St Vincent and the Grenadines to 5% in Trinidad and Tobago – as well as poverty (CDB, 2018: 17). They are also particularly vulnerable to hurricanes and climate change (CDB 2019). Despite this, because of relatively high levels of per capita GDP, they are classified as either high, upper-middle or middle-income countries (ECLAC 2018: 23). The exception is Haiti, which is classified as a low-income country (ibid.). They are also classified as being in the high to medium human development group on the United Nations Development Programme (UNDP) Human Development Index (HDI). This has effectively graduated them from accessing concessionary financing from the international community, despite their chronic current account deficits, large trade imbalances, and the high cost of borrowing and the relatively high cost of infrastructural projects, which arise from their small size. These challenges are compounded by declining official development assistance and foreign direct investment (FDI), and also by increasing costs of post-disaster, in particular posthurricane reconstruction, the intensity of which has been exacerbated by climate change. FDI inflows into the region fell from 7.4% in 2016 to 5.5% in 2018, with the largest FDI going to tourism and CBI programmes. Among the goods economies, Guyana was the exception, experiencing the sharpest increase in FDI from 1.7% in 2016 to 6% in 2017 (ECLAC 2019: 25–26). There is greater diversity within the economies of the larger countries. Suriname, Guyana, Jamaica, and Trinidad and Tobago all have strong mineral sectors. Bauxite, gold and oil account for 30% of Suriname’s GDP and for 90% (ECLAC 2019) of its total exports. One-third of Guyana’s GDP in 2016 came from agriculture, forestry, fisheries and mining, in particular bauxite. Gold accounted for 48% of its exports in that year. With the recent discovery of oil, Guyana, with one of the lowest GDP per capita incomes, is positioned to become one of the world’s largest oil producers by 2025, with a GDP growth projected to exceed 85% in 2020 (IMF 2019). Trinidad, with an economy based on oil and natural gas resources, and whose petroleum industry contributed 40% of GDP between 2006 and 2014, boasted one of the highest levels of GDP per capita in Latin America and the Caribbean, at US $17,129.9. Since 2015 petroleum’s share has declined to 22% as a result of falling international oil prices (World Bank 2019). Nevertheless, Trinidad has the most significant manufacturing sector, based on the advantages of the petroleum industry, and dominates intra-CARICOM trade. The Bahamas and Haiti are at two ends of the Caribbean extreme, with the service-based Bahamas economy boasting the region’s highest GDP per capita and Haiti, with its fraught history of political instability and external manipulation, its lowest. Neither country participates in the CSME. The Bahamas has always resisted incorporation into the economic elements of CARICOM, while Haiti’s political challenges, compounded by the 2010 earthquake, have earned it a moratorium on implementing the CSME, although it was expected to do so in 2020 (CARICOM 86

CARICOM and that vexing issue of size and viability

Secretariat 2018a). During the period 2016–19 the service-based economies experienced the fastest growth, averaging 1.7% in 2017, while the economies that performed poorly during this period were the oil and commodity producers, thus reflecting falling prices for oil and other commodities from 2014 (World Bank 2019). Both types of economies are susceptible to vola­ tility in global markets and, in the case of tourism, to singular events occurring either in the domestic or external realm. They are also vulnerable to natural disasters, in particular hurricanes, which exact a high toll. ECLAC (2018: 27) calculated that the seven major disasters that occurred between 2000 and 2015 left damages ranging from 33% to 200% of the GDP of the affected country. The 2017 hurricanes took an even heavier toll, with Dominica and the British Virgin Islands sustaining losses amounting to 225% and more than 300% of their GDP, respectively (CDB 2018: 15). The financial crisis of 2008 and the global recession that ensued (2008–10), had a negative effect on all the economies of the CARICOM member states, aggravating challenges and undermining enthusiasm for implementing the CSME. Since 2010 economic growth for the region has averaged an anaemic 0.8%, lagging far behind the 4.7% average for other small states (ECLAC 2018: 23). It has also affected the quality of life, reflected in all but four CARICOM countries experiencing a fall in their ranking on the HDI between 2013 and 2018. As Table 6.2 shows, Barbados and Dominica experienced the largest drop, falling by 9 and 8 places, respectively, on the Index. The recession compounded structural problems with competitiveness, evident in low eco­ nomic growth and chronic trade imbalances in both goods and services, resulting in persistent fiscal imbalances and even higher debt. Despite significant progress in reducing excessively high debt, the average debt-to-GDP ratio remained above 60%, the generally accepted threshold at which debt is characterized as sustainable (ECLAC 2018: 26). Between 1999 and 2016 CAR­ ICOM experienced annual deficits in its trade in goods with its trading partners. ECLAC (ibid.: 25), citing data from the World Bank and the UN Conference on Trade and Development, observed that CARICOM has been steadily losing market share in global trade both in both goods and services. Its market share in goods fell by one-third between 1990 and 2016, down from 0.14% to 0.092%, while its share of services fell from 0.5% in 1990 to 0.4% in 2012.8 The CARICOM market has also seen a significant shrinkage of the percentage of intra-regional trade versus trade with countries outside of CARICOM. Intra-regional imports declined by over US $1 billion between 2011 and 2016 (down from $3.4 billion to $1.5 billion), or from 13.8% to 10.7%. During the same period intra-regional exports halved (down from $3 billion to $1.5 billion), or from 13.9% to 12.5% (CARICOM Secretariat 2018b: 1). Despite the region’s weak performance in all its major markets, imbalance in intraCARICOM trade has led to some frustration. Shares of intra-regional trade largely mirror pat­ terns in CARICOM’s external trade, with the dominance of the MDCs and the primacy of Trinidad and Tobago. The MDCs consistently account for over 90% of exports, averaging 96.4% during the period 2011–16 (CARICOM Secretariat 2018c: 1). Trinidad alone accounted for 68.3% of exports, followed by Suriname (10.8%), Jamaica (7.9%) and Guyana (7%).9 The LDCs accounted for 3.6% of exports, of which 1.9% was attributed to Belize (ibid.: 2). This pattern was no different for intra-regional trade, which was dominated by the MDCs, accounting for 92.9% of exports, compared to 7.1% for the LDCs (CARICOM Secretariat 2018b: 2). Intra-regional trade showed gross imbalances, primarily in favour of Trinidad, which devel­ oped a manufacturing sector based on its petroleum industry and which benefited from cheaper oil. Trinidad accounted for the lion’s share of intra-regional exports, averaging 67.9% between 2011 and 2016, but a mere 5.8% of imports (ibid.: 3). The skewed character of intra-regional trade is evident when we consider Jamaica and the OECS, whose imports from the remainder 87

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of the region during the period accounted for 26.6% and 18.2%, while exporting a mere 3% and 5.7%, respectively (ibid.). The slow pace of implementation, a perennial challenge for CARICOM, worsened during and in the aftermath of the recession, from which many countries are still struggling to emerge. Two areas of conflict were the differential benefits from trade, a not altogether new problem but one felt keenly by Jamaica in the wake of the recession, and the perception that some countries were deliberately hindering elements of the free movement regime. Dissatisfaction with the application of the regime that allowed for unimpeded travel of CARICOM citizens came from Jamaica and Guyana and was directed at Trinidad and Barbados which, at various times, were accused of bias against Jamaican and Guyanese citizens, in contravention of their rights under the CSME to an automatic six-month stay. Jamaica’s dissatisfaction with the treatment of one of its citizens, Shanique Myrie, by a Barbadian immigration officer, led to the country successfully presenting a case against Barbados before the Caribbean Court of Justice, which reinforced the right to unimpeded travel (CCJ 2013). The recession also affected infor­ mal immigration operating outside of the CSME which, while tolerated and even welcomed in the service-based economies of Antigua and the Bahamas, in particular, became a cause for concern when unemployment among nationals began to rise. The Jamaican private sector became particularly concerned about its declining share of intraregional trade, prompting calls from the private sector (and leading figures of the ruling Jamaica Labour Party) for the country to pull out of CARICOM if its concerns with trade and immi­ gration were not met. In response to these concerns, the government established the Commission on the Review of Jamaica’s Relations within the CARICOM and CARIFORUM Frameworks (Government of Jamaica 2017), to investigate, among other issues, the extent to which Jamaica benefited from the CSME. The Commission, after bemoaning the poor state of implementation and Trinidad’s dominance of the market, which it attributed, in part,10 to the Trinidadian private sector benefiting from subsidized oil, set out a five-year timetable within which the outstanding elements of the CSME should be completed. It recommended that, if this deadline was not met, Jamaica should withdraw from the CSME, while remaining party to CARICOM’s functional arrangements. While accepting the majority of its recommendations, the government pulled back from the proposal to ‘exit’ the CSME if it was not completed in five years.

Strengths and limitations of regional integration Outside of the inevitable concern about trade, CARICOM plays a significant role in coordi­ nating efforts and pooling resources across a range of sectors, including health, education, agri­ culture, meteorology, climate change and food safety. The ‘functional’ realm of CARICOM’s activities is one of the most dynamic aspects of its work, carried out by institutions that fall under CARICOM’s direct control and associated institutions with their own independent governing structures. Their activities range from providing practical services such as formulating a system of regional secondary exams under the Caribbean Examinations Council, coordinating responses to the HIV/AID pandemic, and supporting the establishment of the Caribbean Risk Insurance Facility, to drafting model laws and regulations across a wide range of issues. Not only does the latter seek to introduce conformity in legislation across the region, but it provides an important function for states with a limited legal capacity. CARICOM’s role has also expanded to include the provision of a broad regulatory framework for the management of fisheries and the Caribbean Sea. Despite not being overtly ‘economic’, CARICOM’s functional activities provide an impor­ tant economic function in reducing the administrative costs that each country would have to 88

CARICOM and that vexing issue of size and viability

bear in order to provide these services. Moreover, many of the region’s micro-states would find it challenging to provide some of them. Examples of such services include aviation safety and security, competition policy and the monitoring of standards and quality. CARICOM’s insti­ tutions and associate institutions also play an important role in providing a coordinated response to important issues such as climate change, disaster management and security. Furthermore, CARICOM’s role in lobbying for financial support from various donors, in particular the European Union (EU), has been crucial in keeping many of its institutions alive. One of CARICOM’s four pillars is cooperation in foreign affairs. This is a key cornerstone in CARICOM’s ability to unify and amplify the voice of individual states through common regional positions, and has led to the view that globally these small states are ‘punching above their weight’. This has taken the following broad forms: adopting common positions on issues of importance; protecting the territorial integrity of member states; coordinating foreign policy responses; and leading trade negotiations and overseeing external trading agreements. CARICOM’s adoption of common positions on maintaining the territorial integrity of its member states include its support in 2004 of President Aristide and rejection of US intervention in Haiti; its support for Belize and Guyana in resisting territorial claims by Guatemala and Venezuela, respectively; its condemnation of the United Kingdom’s dismissal of the govern­ ment and suspension of the constitution of the Turks and Caicos Islands and imposition of direct rule; and its successful resistance of the USA’s attempts to prevent Grenada from accessing funds made available by the International Monetary Fund (IMF) and World Bank during the Grenada revolution (1979–83). Despite these successes, CARICOM has often found it difficult to maintain a common stance. One of its major failures was in securing a common regional position following the collapse of the Grenada revolution when Prime Minister Maurice Bishop and others were killed, which opened the door to US military intervention. Other notable failures include an inability to arrive at a common position on the Community’s relationship with Venezuela that include the PetroCaribe arrangement,11 membership of the Bolivarian Alliance for the Peoples of our America (known as ALBA) and on the political crisis which continues to threaten the Maduro regime.12 The Community has also broken ranks in adopting common positions at the UN in respect of US policies, especially when political pressure is applied. The Trump Administration’s approach to the region has increased these challenges. In 2020 CARICOM’s current chair, Mia Mottley, prime minister of Barbados, criticized the USA for trying to divide the region (Jamaica Gleaner 2020; Donati 2020), by undermining its support for a peaceful approach to the solution of Venezuela’s political crisis. She was referring to a meeting with US Secretary of State, Mike Pompeo, with a select group of Caribbean leaders to discuss the Venezuelan situation, among other issues. President Trump held a similar meeting with a select group in March 2019, in an effort to secure their support for its more interven­ tionist position on Venezuela. CARICOM has also not yet arrived at a coordinated position on its diplomatic relationship with the People’s Republic of China and Taiwan. Five of the 14 countries that have diplomatic ties with Taiwan are members of CARICOM – Belize, Haiti, St Kitts and Nevis, St Lucia, and St Vincent and the Grenadines (O’Connor 2020). CARICOM’s cooperation in foreign affairs is often difficult to disentangle from the eco­ nomic realm. The increasing centrality of trade in foreign affairs with the rise of the WTO and its implications for the restructuring of their extant trade agreements, which has elevated trade in the foreign policy of Caribbean states, is also felt at the regional level. CARICOM has played a role in a plethora of trade agreements in the 1990s and 2000s13 emerging from its decision to widen its relations with Latin America, and has taken a more central role in the negotiations of trade relations with its major trading partners. The Caribbean Regional Negotiating Machinery (RNM, later renamed the OTN) was CARICOM’s boldest attempt at a coordinated regional 89

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approach, providing advice to countries on WTO negotiations but more directly negotiating with the EU on behalf of CARICOM and the Dominican Republic. It was a response to the weak capacity of the ministries of foreign affairs of most of the smaller Caribbean countries and the requirement for common positions in negotiating a successor reciprocal trade agreement with the EU to replace the trade-related elements of the Cotonou Partnership Agreement. One could argue, however, that the RNM’s formation and leading role in these negotiations were as much driven by the EU’s interest in a common regional approach, in preference to negotiating with 15 separate countries, which would deliver a single market. The case would be strength­ ened by the inclusion of the Dominican Republic, part of the CARIFORUM group (CARICOM and the Dominican Republic), the EU’s preferred mechanism for coordinating its relations with CARICOM and the Dominican Republic, and the EU’s bankrolling of the RNM during these negotiations. Despite the RNM’s ultimate success in concluding negotia­ tions with the EU on a new agreement, the group had to paper over cracks arising from the differences in economies, especially their ability to effectively make use of expansive access to the EU market. While the Dominican Republic, Trinidad and Tobago, and Jamaica were sanguine about the prospect of accessing the EU market, Guyana and the OECS were more reserved, with Guyana resisting reciprocity as part of the agreement, among others and seeking a reopening of negotiations (Antigua Sun 2008); and the OECS launching its own Trade Policy Unit to help its members in negotiations and in the formulation of trade policy. The experience of negotiating the CARIFORUM-EC EPA showed that a common voice on trade could not easily overcome the differential interests and capabilities in accessing markets, given the different structural impediments that existed, arising from structure of economy and intense challenges of size. Nevertheless, CARICOM continued to use the OTN as its main instrument in its negotiations with Canada on a successor agreement to the CARIBCAN. The search for alternative economic activities has led countries to embrace sectors and activities that enhance their vulnerabilities. These include the development of offshore sectors and the launch of CBI programmes. The offshore sector is dominant in the British Overseas Territories (British Virgin Islands, Cayman Islands and Montserrat) and in Antigua and Barbuda, and St Kitts and Nevis. These countries have been subject to increasing regulation and sanctions from regulatory bodies in the USA and Europe, on the grounds that they provide a haven for money laundering and terrorist financing. Five OECS countries (Antigua, Dominica, Grenada, St Kitts and Nevis, and St Lucia) have also launched CBI programmes as a means of raising money for large infrastructural projects and repaying debt. These have become not insignificant contributors to the economy. An IMF preliminary report on the Eastern Caribbean Currency Union (ECCU)14 attributed the region’s growth of 3.75% in 2018 to tourism and CBI inflows, noting that the latter were important in supporting Dominica’s recovery from the 2017 hurri­ cane (IMF 2020). CBI programmes, nevertheless, have exposed these countries to sanctions and the threat of sanctions from their major ‘development’ partners. In addition to due diligence concerns about their ability to properly vet applicants, the visa-free access that citizenship pro­ vides to the CARICOM region, the UK, Canada15 and Schengen Area countries, is also con­ sidered problematic. In response, OECS countries have agreed to explore uniform legislation, oversight mechanisms and the periodic review of these programmes (Dominica News Online 2019) to counteract some of the criticisms they have faced and to discourage what has been described as a ‘race to the bottom’ as countries have lowered the investments required under these programmes as interest in them, along with revenues, have declined (Jessop 2017). CARICOM also plays a crucial role in supporting the economic well-being of its members to what can be considered existential threats. CARICOM is at the forefront in defending the region’s interests on a number of closely inter-related matters: the blacklisting of the offshore 90

CARICOM and that vexing issue of size and viability

financial sector which threatens the survival of countries and territories that depend on this sector; the practice of de-risking that has affected access to correspondence banking arrange­ ments (World Bank 2015); and challenges in accessing concessionary financing from the inter­ national community. The offshore financial centres (OFCs) are located in the Bahamas and Barbados, the OECS and Caribbean territories – Aruba and the Cayman Islands (ECLAC 2018: 32). The sector is subject to regulation from different bodies including the Organisation for Economic Co-operation and Development (OECD) and the Financial Action Task Force (FATF), the USA’s Foreign Account Tax Compliance Act (FACTA), and the UK’s Crown Dependencies and Overseas Territories International Tax Compliance Regulations (ibid.). This sector has been subject to what some see as arbitrary rule setting and differential treatment, with sanctions more likely for small states even when they are compliant. ECLAC notes that given their perceived lack of influence, small states and territories are treated more harshly; so that although they are less likely to contravene anti-money laundering rules, they are more likely to be subject to sanctions than are states such as Switzerland and large institutions such as Deutsche Bank that have infringed on these rules (ECLAC 2018, 32). Although OFCs do not operate in all the CARICOM countries, the fallout from the treat­ ment of the sector has increased the threat of large banks reducing or pulling out altogether from providing correspondence banking arrangements, a problem that affects the region. Fear of incurring hefty fines and sanctions under anti-money laundering and counter-terrorism finan­ cing regulations has led to banks reducing their risk by terminating corresponding banking relationships, among other services. The loss of corresponding banking relationships has huge implications for a country’s ability to do business with the international community, affecting its ability to trade, engage in foreign transactions such as remittances, and make and receive pay­ ments. It also affects the private sector and foreign investors (ECLAC 2018: 30). ECLAC puts the complete loss of such services in stark terms: ‘no medicine, reduced food, no capital goods and limited inputs for local manufacturing’. In other words, this would mean the collapse of economies. Jamaica, the Bahamas, Barbados, the Cayman Islands, the Turks and Caicos Islands, Belize, and the OECS have all suffered to some extent from the withdrawal of various types of services (ibid.). These more recent threats to the Caribbean economies have compounded existing challenges in accessing concessionary funds, because of their high per capita GDP, thus further increasing their vulnerability. CARICOM is playing a leading role in combatting these challenges. Its responses have inclu­ ded issuing declarations that oppose the arbitrary setting of rules and the inclusion of states that are compliant with international legislation on the US list of ‘Major Money Laundering Jurisdiction’ that has laid them open to the de-risking strategies of global banks (CARICOM Secretariat 2019). More recently, CARICOM has been lobbying Finland, the new chair of the EU’s financial tax governance council to halt the blacklisting of Caribbean countries and to support their push for concessionary financing, given the effects of climate change on disasters (ibid.).

How successful is CARICOM in overcoming challenges of size? CARICOM’s agenda across its wide arena of operation is driven, as suggested throughout this chapter, by concerns about the size of its members and their limited capabilities.16 An important consideration continues to be the high cost and limited technical capacity to provide important services on an individual basis, and challenges in producing competitive goods and services. Given CARICOM’s role in reducing those costs and making such services possible, its impor­ tance to their economic well-being extends far beyond potential gains from trade. Not only do the services it provides across its wide functional agenda represent real economic savings from 91

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the pooling of resources, but CARICOM also has a more important role in advocating on issues that affect their economic survival. Nevertheless, CARICOM’s heavy and continued dependence on financial resources from donors, particularly the EU, in funding its functional organizations, including CARICOM itself, speaks to the limitations of the regional project to stand on its own feet. This control over resources gives external actors significant sway over the direction of Caribbean integration, an example of which is the allocation of significant sums under European Development Fund regional programming to the strengthening of region integration, which prioritizes the EU’s agenda for a consolidated market. The Caribbean’s continued reliance on protected markets, which defines its relationship with its major trading partners such as the USA (Caribbean Basin Initiative), Canada (Caribbean Canada Trade Agreement) and the EU (EPA), reflects the challenges its small states have in achieving competitiveness. As industrialized countries insist on greater liberalization and reci­ procity within trade arrangements, CARICOM countries have been pushed into seeking out new (and renewing older) relationships. Some of these, such as CARICOM’s cooperation agreement with Cuba, and various FTAs and partial scope agreements with countries in Latin America, have been spearheaded by CARICOM. Others have exposed deep divisions within the group, arising from their differing economic constraints. For example, the refusal of Barba­ dos and Trinidad and Tobago to join PetroCaribe (Venezuela’s arrangement for selling oil to countries in the Caribbean and Latin America at low interest rates) reflected its access to oil and natural gas, which the remaining CARICOM countries, with high oil costs, could not ignore. The decision of six OECS17 countries to join the Venezuelan initiative, the Bolivarian Alliance for the Peoples of Our America – Peoples’ Trade Treaty (ALBA-TCP) also underscored their need for resources and the attractiveness of such arrangements to provide assistance along more mutually supportive lines.18 Prior to the collapse of oil prices and the economic and political crisis that has engulfed Venezuela, the latter, with Cuba, was a significant source of capital and resources for large infrastructural projects to which these countries have limited access. Cuba and Venezuela made significant contributions to the cost of constructing a new international airport for St Vincent and the Grenadines19 and to the refurbishment of Dominica’s airport (Dominica Vibes News 2014). The continued need of individual countries for resources and capital investment has provided inroads for China, whose influence can be seen in large and expensive infrastructural projects, particularly in highways and ports. CARICOM, relying on the resources of its members, cannot provide the large injections of capital they require. However, the failing of the regional project is that governments have not taken the opportunity that CARICOM provides to craft a common approach to regulate Chinese investment. Nor should a common approach be applic­ able only to China. Regional policymaking lags far behind the economic and political shifts that have allowed China to become one of the largest economic actors in the region. It has also not kept up with the hunt for and the exploitation of new sources of oil by the main players in the industry and interest in deep-sea mining, and the need for regulation in these areas. Furthermore, it has also not provided a framework to control cruise shipping; in defining the types of tourism that would be most beneficial to the region, reducing its environmental impact, and increasing the sector’s returns to the region; nor to control exclusionary practices in the industry that alienate local populations. Of course, CARICOM cannot play this role if its members prefer to exercise exclusive national control over these matters.

Conclusion In reflecting on CARICOM’s role in mitigating challenges of size, one can say with some conviction that its members would be much worse off if it did not exist. This is especially 92

CARICOM and that vexing issue of size and viability

critical in terms of the less tangible ways in which it helps to shore up their fragile sover­ eignty by giving voice to issues that affect them and, more generally, in increasing their visibility in the region and international community. Many of the challenges CARICOM faces in helping to transform regional economies are structural and beyond its control, and cannot be addressed by trade. Nor have its members accorded CARICOM this more expansive role in their economic affairs. Furthermore, the global turn since the 1980s towards trade liberalization and the intensification of globalization, especially in production processes, have reduced prospects for production integration, which could, potentially, have addressed deeper problems of how and what the region produces, rather than what it trades. There is little evidence, despite the CSME making a nod in this direction (RTC, Article 52), that there is any appetite for this among CARICOM states. Despite these constraints, CARICOM provides a potentially powerful vehicle for its members to exercise greater control over their economies by pursuing greater collaboration in setting policy. Already, there has been, as described, movement in this direction in agriculture, fisheries and man­ agement of the sea, and an interest in addressing intra-regional air and maritime travel. Nevertheless, there are crucial areas for common action which have been ignored. These include stronger regulation of tourism to reduce beach degradation and pollution and increase financial returns to the region, while creating more spaces for the engagement of ordinary citizens. Even more ripe for regulation are the new economic activities that have been (and will continue to be) opened up in the energy sector, and in deep-sea mining. CARICOM also has an important role to play in developing regional regulation on marine resources, particular marine organisms, the exploitation of which is expected to fuel a multi­ billion biotechnology industry based on the development of ‘new food, biochemical, bio­ medicals, pharmaceuticals, cosmetics, fertilizers and pest control products’ (ECLAC 2018: 45). Such regulation should cover both the ownership of these resources to ensure more national control and greater economic returns, as well as their management to reduce the effects of pollution and climate change, and to create spin-off industries in the region. A corollary to oil exploitation is investment in renewable energy to reduce the region’s dependence on fossil fuel. CARICOM has moved in this direction with the establishment in 2015 of the Caribbean Center for Renewable Energy and Energy Efficiency but there is no clear connection between this organization and initiatives in oil and seabed explorations. A more fundamental question that the region must face is whether to allow these harmful economic practices at all. Belize has already pointed to an alternative radical approach, which is to leave its oil resources in the ground and to focus on renewable energy. This presents the region with a dilemma. On the one hand, better management and control over new resources could address chronic unemployment20 and poverty21 and put CARICOM and the region on a more financially sustainable path. On the other hand, exploiting these resources, even within regulatory guidelines, is likely to exacerbate climate challenges to which these small island states are inherently vulnerable. What countries cannot continue to do, however, is to engage in the same patterns of resource ownership and exploitation that have been important elements in their current parlous state, as their resources are exploited for the benefits of others.

Notes 1 ECLAC (2018: 38) notes that the Caribbean region, when sea is included, covers 2.75 million sq km. 2 This broad categorization refers to the relative importance of each sector, as the balance of each may shift in individual countries. For example, the service sector dominates most OECS countries, although agriculture remains important to some such as Dominica and Grenada. 93

Patsy Lewis 3 The seminal work of these authors is published in Norman Girvan and Owen Jefferson (eds) (1971) Readings in the Political Economy of the Caribbean, Kingston: New World Group. Kari Levitt, although not from the Caribbean, is very much part of this group. 4 The broader influence behind the form that CARIFTA and CARICOM took was customs union theory, as developed by Jacob Viner (1950), although with important modifications to minimize effects of polarization (see Myrdal 1957 ; Eckenstein 1969: 41–55; Kitamura 1996: 42–63), reflected in the less developed/more developed categorization of countries. 5 Note that size did come to play a role in the Latin American Free Trade Association. Concerns among the smaller countries that the larger countries – Argentina, Brazil and Mexico – benefited more greatly from the arrangement, influenced the formation of the Andean Community. 6 See the Commonwealth Secretariat and World Bank (2000) report for a discussion of these. 7 The Eastern Caribbean dollar is pegged to the US dollar at a conversion rate of US $1.00 = EC $2.70. 8 CARICOM’s collection of data on services traded lags behind its collection of data on goods. The latest available data on trade in services from the CARICOM Secretariat is for 2012. 9 Guyana overtook Suriname in 2016, increasing its share to 11.8% to Suriname’s 10% and to Jamaica’s 9.7% (CARICOM Secretariat, 2018c: 13). 10 The report did note Jamaica’s declining competitiveness in its other markets but was still concerned about Trinidad’s perceived advantages. 11 Trinidad and Barbados did not sign the agreement. 12 CARICOM countries have been divided on Organization of American States resolutions sanctioning the Maduro government but have managed to maintain a common position on non-intervention, despite US attempts to win support for a more interventionist approach. 13 These include agreements with Venezuela (1992), Columbia (1994), the Dominican Republic (1998), Cuba (2000) and Costa Rica (2003). These agreements provide for non-reciprocity from the LDCs. 14 The ECCU refers to all the countries that use the Eastern Caribbean dollar as their currency. They include the OECS states and Anguilla. The ECCU is administered by the ECCB. 15 Canada has expressed its dissatisfaction with these schemes in Grenada, St Kitts and Nevis, and Antigua by imposing visa requirements on holders of these countries’ passports. Some European countries offer similar schemes, arising from concerns about the need for a coordinated approach to such schemes, given that they entitle passport holders to rights within the EU. See Transparency International and Global Witness (2018) which was critical of programmes in both the Caribbean and the EU. 16 Although Haiti, with its significantly larger population (over 10 million), does not fit the World Bank and Commonwealth Secretariat’s cut-off of 1.5 million people, nevertheless it faces significant develop­ ment challenges, aggravated by natural hazards – hurricanes and earthquakes – and political instability. 17 Dominica is the only OECS country that is not a member. 18 For a discussion of CARICOM and ALBA see Antonio Romero Gomez (2018) ‘Opportunities for CARICOM in ALBA, PetroCaribe’, in Patsy Lewis, Terri-Ann Gilbert-Roberts and Jessica Byron, Pan-Caribbean Integration: Beyond CARICOM. London and New York: Routledge, pp. 171–183. 19 These included access to loans under PetroCaribe as well as the significant underwriting of the cost of Cuban specialist by both governments. See Jamaica Gleaner (2011). 20 ILO (2017: 35, Table 6) rates for the larger CARICOM states in 2017 showed high rates of 12.15% in Barbados and 10.4% in Jamaica, with the lowest, 4.5%, in Trinidad and Tobago. The figures for the OECS countries are likely to be much higher. 21 Poverty figures for most countries of the region, based on CDB surveys, are dated. Nevertheless, these figures suggest high levels of poverty ranging from a high of 41.3% of persons for Belize (2009) to 9.2% for the Bahamas (2001). Poverty tends to be higher among women. See ECLAC (2018: 50, Table 5) and CDB (2016). The region is also susceptible to high levels of inequality with the Bahamas being the most unequal, having a Gini coefficient measure of .57 (ibid.: 25).

Bibliography Antigua Sun (2008) ‘CARICOM nations divided on EPA issues’, Antigua Sun, 3 July. Available at www. bilaterals.org/?caricom-nations-divided-on-epa&lang=es (accessed 20 January 2020). Brewster, Havelock and Thomas, Clive (1967) The Dynamics of West Indian Economic Integration, Jamaica: Institute of Social and Economic Research, University of the West Indies. Best, Lloyd (1971) ‘Size and Survival’, in Norman Girvan and Owen Jefferson (eds), Readings in the Political Economy of the Caribbean, Kingston: New World Group. 94

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Briguglio, Lino (1995) ‘Small island developing states and their economic vulnerabilities’, World Develop­ ment, 23(9): 1615–32. Briguglio, Lino and Kisanga, Eliawony J. (2004) Economic Vulnerability and Resilience of Small States, London: Commonwealth Secretariat; Tal-Qroqq: University of Malta, pp. 315–26. Briguglio, Lino, Cordina, Gordon, Farrugia, Nadia and Vella, Stephanie (2008) ‘Economic vulnerability and resilience concepts and measurements’, Research Paper, UNU-WIDER, No.55. Available at www. tandfonline.com/doi/abs/10.1080/13600810903089893. Caribbean Court of Justice (CCJ) (2013) Shanique Myrie v. The State of Barbados, CCJ Application No. OA 002 of 2012, Port of Spain: CCJ. Available at www.caribbeancourtofjustice.org/wp-content/uploads/ 2013/10/2013-CCJ-3-OJ.pdf (accessed 26 May 2020). Caribbean Development Bank (CDB) (2016) The Changing Nature of Poverty and Inequality in the Caribbean: New Issues, New Solutions, Bridgetown: CDB. Available at www.caribank.org/publications-and­ resources/resource-library/thematic-papers/changing-nature-poverty-and-inequality-caribbean-new­ issues-new-solutions (accessed 12 December 2018). Caribbean Development Bank (CDB) (2018) 2017 Annual Report, Bridgetown: CDB. Available at www. caribank.org/publications-and-resources/resource-library/annual-reports/2017-annual-report (accessed 30 August 2018). Caribbean Development Bank (CDB) (2019) Fact Sheet: 2018 Caribbean Economic Review and 2019 Outlook, Bridgetown: CDB. Available at www.caribank.org/sites/default/files/publication-resources/Fact%20Sheet_ Caribbean%20Economic%20Review%20and%202019%20Outlook.pdf (accessed 20 January 2020). CARICOM Secretariat (n.d.-a) Members, Georgetown: CARICOM Secretariat. Available at https:// caricom.org/about-caricom/members (accessed 20 January 2020). CARICOM Secretariat (n.d.-b) Who We Are, Georgetown: CARICOM Secretariat. Available at https:// caricom.org/about-caricom/who-we-are (accessed 20 January 2020). CARICOM Secretariat (n.d.-c) ‘Member States and Associate Members’, Georgetown: CARICOM Secretariat. Available at https://caricom.org/member-states-and-associate-members/ website (accessed 22 January 2020). CARICOM Secretariat (n.d.-d) CARICOM’s Trade: A Quick Reference to Some Summary Data 2001–2006. Chapter 1: CARICOM’s Total Trade with Principal Trading Partners and the Rest of the World, Georgetown: CARICOM Secretariat. Available at http://statistics.caricom.org/Files/Publications/Quick_Ref2008/ CARICOMs%20Total%20Trade.pdf (accessed 16 January 2020). CARICOM Secretariat (2001) Revised Treaty of Chaguaramas Establishing the Caribbean Community Including the CARICOM Single Market and Economy, Georgetown: CARICOM Secretariat. Available at https:// caricom.org/documents/4906-revised_treaty-text.pdf (accessed 20 January 2020). CARICOM Secretariat (2005) CARICOM Our Caribbean Community: An Introduction, Kingston: Ian Randle Publishers. CARICOM Secretariat (2018a) St. Ann’s Declaration on CSME, Georgetown: CARICOM Secretariat. Available at https://today.caricom.org/2018/12/04/st-anns-declaration-on-csme/ (accessed 17 November 2019). CARICOM Secretariat (2018b) Snapshot of CARICOM’s Trade Series 1: CARICOM’s Intra-Regional Trade: 2011–2016, Georgetown: CARICOM Secretariat. Available at http://statistics.caricom.org/ (accessed 10 January 2020). CARICOM Secretariat (2018c) Snapshot of CARICOM’s Trade Series 2: CARICOM’s Total Trade Summary by Trading Partners: 2011–2016. Regional Statistics Programme, Georgetown: CARICOM Secretariat. Available at http://statistics.caricom.org/ (accessed 10 January 2020). CARICOM Secretariat (2019) CARICOM’s Advocacy for Resilience Financing Intensifies: Optimism in Fin­ land’s Support, Georgetown: CARICOM Secretariat. Available at https://caricom.org/media-center/ communications/press-releases/caricoms-advocacy-for-resilience-financing-intensifies-optimism-in-finlands­ support (accessed 17 January 2020). CARICOM Secretariat (2020) ‘CARICOM Chair Addresses 73rd World Health Assembly’, 19 May, Georgetown: CARICOM Secretariat. Available at https://caricom.org/caricom-chair-addresses-73rd­ world-health-assembly/ (accessed 3 June 2020). Commonwealth Secretariat and World Bank (2000) ‘Small states: meeting challenges in the global econ­ omy’, Report of the Commonwealth Secretariat/World Bank Joint Task Force on Small States, London: Commonwealth Secretariat and Washington, DC: World Bank. Cooper, Andrew F., and Shaw, Timothy M. (2009) The Diplomacies of Small States: Between Vulnerability and Resilience, International Political Economy Series, Basingstoke: Palgrave Macmillan, pp. vii–18.

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Patsy Lewis Demas, William (1965) The Economics of Developments in Small Countries with Special reference to the Caribbean, Montreal, QC: McGill University Press. Dominica News Online (2019) ‘Plan to enact uniform regulations for Citizenship by Investment Programs in OECS’, Dominica News Online, 21 June. Available at https://dominicanewsonline.com/news/homepa ge/news/plans-to-enact-uniform-legislation-for-citizenship-by-investment-programme-in-oecs/ (acces­ sed 21 January 2020). Dominica Vibes News (2014) ‘Gov’t defends decision to upgrade airport ’, Dominica Vibes News, 29 October. Available at www.dominicavibes.dm/news-147307/ (accessed 21 January 2020). Donati, Jessica (2020) ‘Pompeo’s Jamaica visit divides Caribbean over Venezuela: Meeting in Kingston reveals fissures over neutrality and regional alliance’, Wall Street Journal, 22 January. Available at www. wsj.com/articles/pompeos-jamaica-visit-divides-caribbean-over-venezuela-11579737670 (accessed 25 January 2020). Eckenstein, C. (1969) ‘Regional Integration among Unequally Developed Countries’, in Roy Preiswerk (ed.) Regionalism and the Commonwealth Caribbean: Special Lecture Series No. 2, St. Augustine: Institute of International Relations, pp. 51–55. Economic Commission for Latin America and the Caribbean (ECLAC) (2018) The Caribbean Outlook, 2018, ILC/SES.37/14/Rev.1, Santiago: ECLAC. Available at https://repositorio.cepal.org/bitstream/ handle/11362/43581/4/S1800607_en.pdf (accessed 20 January 2020). Economic Commission for Latin America and the Caribbean (ECLAC) (2019) Economic Survey of the Caribbean 2018, Studies and Perspectives Series: ECLAC Subregional Headquarters for the Caribbean, No. 77 (LC/TS.2019/9; LC/CAR/TS.2018/5), Santiago: ECLAC. Economic Commission for Latin America and the Caribbean (2020a) ‘Measuring the impact of covid-19 with a view to reactivation’, Covid-19 Special Report No. 2, Santiago: ECLAC. Available at www.cepal. org/en/publications/45477-measuring-impact-covid-19-view-reactivation (accessed 29 May 2020). Economic Commission for Latin America and the Caribbean (2020b) ‘The social challenge in times of Covid-19’, Covid-19 Special Report No. 3, 12 May, Santiago: ECLAC. Available at https:// repositorio.cepal.org/bitstream/handle/11362/45544/1/S2000324_en.pdf (accessed 12 June 2020). Economic Commission for Latin America and the Caribbean (2020c) ‘Alicia Bárcena calls for rethinking the model and consolidating the economic, social and environmental dimensions of sustainable devel­ opment so as to leave no one behind’, Press Release, 18 May, Santiago: ECLAC. Available at www. cepal.org/en/pressreleases/alicia-barcena-calls-rethinking-model-and-consolidating-economic-social-and (accessed 29 May 2020). Economic Commission for Latin America and the Caribbean (2020d) ‘The Covid-19 pandemic is exacerbating the care crisis in Latin America and the Caribbean’, April, Santiago: ECLAC. Available at https://repositorio.cepal.org/bitstream/handle/11362/45352/4/S2000260_en.pdf (accessed 12 June 2020). European Commission (2012) How the EU Is Putting the EPA into Practice, Brussels: European Commission. Available at www.eesc.europa.eu/resources/docs/factsheet-how-the-eu-is-putting-the-epa-into-practice. pdf (accessed 20 January 2020). Girvan, Norman and Jefferson, Owen (eds) (1971) Readings in the Political Economy of the Caribbean, Kingston: New World Group. Government of Jamaica (2017) Commission on the Review Jamaica’s Relations within the CARICOM and CARIFORUM Frameworks, Kingston: CARICOM/CARIFORUM Review Commission Secretariat, Ministry of Foreign Affairs and Foreign Trade. International Labour Organization (ILO) (2017) 2017 Labour Overview: Latin America and the Caribbean, Lima: ILO. Available at www.ilo.org/wcmsp5/groups/public/—americas/—ro-lima/documents/ publication/wcms_618120.pdf (accessed 24 January 2020). International Monetary Fund (IMF) (2019) Guyana at a Glance, Washington, DC: IMF. Available at www. imf.org/en/Countries/GUY#ataglance (accessed 24 January 2020). International Monetary Fund (IMF) (2020) Mission Concluding Statement Eastern Caribbean Currency Union: IMF Staff Concluding Statement of the 2019 Discussion on Common Policies of Member Countries, 7 January,Washing­ ton, DC: IMF. Available at www.imf.org/en/News/Articles/2020/01/07/mcs010720eastern-caribbean­ currency-union-2019-discussion-on-common-policies-of-member-countries (accessed 21 January 2020). Jamaica Gleaner (2011) ‘St. Vincent: Prime Minister Praises Cuba-Venezuela Over International Airport Project’, Jamaica Gleaner, 12 August. Available at http://jamaica-gleaner.com/power/30979 (accessed 21 January 2020). Jamaica Gleaner (2020) ‘Mottley warns of attempts to divide the Caribbean’, Jamaica Gleaner, 10 January. Available at http://jamaica-gleaner.com/article/caribbean/20200119/mottley-warns-attempts-divide­ caribbean (accessed20 January 2020).

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Jessop, David (2017) Caribbean ‘Citizenship by Investment’ Is Becoming a Dangerous Race to the Bottom, October. Available at https://blogs.lse.ac.uk/latamcaribbean/2017/10/26/caribbean-citizenship-by-investment­ is-becoming-a-dangerous-race-to-the-bottom/ (accessed 21 January 2020). Kitamura, Hiroshi (1966) ‘Economic Theory and the Economic Integration of Underdeveloped Regions’, in Miguel Wionczek (ed.), Latin American Economic Integration: Experience and Prospects, New York: Praeger, pp. 42–63. Lewis, William Arthur (1950) ‘The industrialization of the British West Indies’, Caribbean Economic Review, 2(1): 1–51. Lewis, William Arthur (1965) The Agony of the Eight, Bridgetown: Advocate Commercial Printery. Lorde, T. and Alleyne, A. (2016) ‘Estimating the trade and revenue impacts of the European UnionCARIFORUM Economic Partnership Agreement: A case study of Barbados’, Cave Hill Department of Economics, Working Paper Series, June, pp. 16–11. McIntyre, Alister (1966) ‘Some Issues of Trade Policy in the West Indies’, New World Quarterly 2(2). McLean, Sheldon, Humphrey, Errol and Khadan, Jeetendra (2014) ‘Trade and development nexus: Reflections on the performance of trade in goods under the CARIFORUM-European Union Part­ nership Agreement: A CARIFORUM perspective’, LC/CAR/L.448, Port-of-Spain: ECLAC Regional Sub-Headquarters for the Caribbean. Montserrat Statistics Department (2019) Intercensal Population Count and Labour Force Survey 2018: Key Findings Report, St John’s: Montserrat Statistics Department. Available at https://statistics.gov.ms/ wp-content/uploads/2019/08/FINAL-REPORT-KEY-FINDINGS-CENSUS-LABOUR-FORCE­ SURVEY-2018-.pdf (accessed 22 January 2020). Myrdal, Gunnar (1957) Economic Theory and Underdeveloped Regions, London: Gerald Duckworth. O’Connor, Tom (2020) ‘Which countries still recognize Taiwan? Two more nations switch to China in less than a week’, Newsweek, 20 January. Available at www.newsweek.com/who-recognizes-taiwan­ two-change-china-1460559 (accessed 20 January 2020). Rostow, Walt Whitman (1960) The Stages of Economic Growth: A Non-Communist Manifesto, Cambridge: Cambridge University Press. Stoneman, Richard, Pollard, Duke and Innis, Hugo (2012) Turning Around CARICOM: Proposals to Restructure the Secretariat, Consultancy to Conduct an Organisational Restructuring of the Caribbean Community (CARICOM) Secretariat. Report prepared and submitted by Landell Mills. Available at https://caricom.org/documents/9400-restructuring_the_secretariat_-_landell_mills_final_report.pdf (accessed 18 January 2020). Transparency International and Global Witness (2018) European Getaway: Inside the Murky World of Golden Visas, 17 October. Available at www.transparency.org/whatwedo/publication/golden_visas (accessed 22 January 2020). United Nations Development Programme (UNDP) (2019) ‘Human Development Index Trends, 1990–2018’, Human Development Report, 2019, New York: UNDP. Available at http://hdr.undp.org/ en/content/table-2-human-development-index-trends-1990%E2%80%932018 (accessed 16 January 2020). United Nations Environment Programme (UNEP) (1998) Development of a Vulnerability Index for Small Island Developing States, Report of the Secretary General, Nairobi: UNEP. Available at www.unep.ch/ islands/dd98-vul.htm. Viner, Jacob (1950) The Customs Union Issue, New York: Carnegie Endowment for International Peace. World Bank (n.d.-a) GDP per capita (current US$): Latin America & Caribbean, Chile, Washington, DC: World Bank. Available at https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?locations=ZJ-CL (accessed 20 January 2020). World Bank (n.d.-b) ‘Population, total – Latin America & Caribbean World’, Washington, DC: World Bank. Available at https://data.worldbank.org/indicator/SP.POP.TOTL?locations=ZJ-1W (accessed 22 January 2020). World Bank (2015) Withdrawal from Correspondence Banking: Where, Why, and What to Do About It, Washington, DC: World Bank. Available at http://documents.worldbank.org/curated/en/113021467990964789/pdf/ 101098-revised-PUBLIC-CBR-Report-November-2015.pdf (accessed 20 February 2019). World Bank (2019) World Bank in the Caribbean, Washington, DC: World Bank. Available at www. worldbank.org/en/country/caribbean/overview (accessed 24 January 2020).

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7 Debt and fiscal constraints Lester Henry

Introduction The issue of public debt has been a persistent problem for most of the small states of the Car­ ibbean over the past 40 years. Despite their size, some have ranked among the highest in the world in terms of per capita debt. Most countries in the region have been struggling to cope with fairly high levels of both internal and external debt. This is significant because ‘many Caribbean economies face high and rising debt to GDP [gross domestic product] ratios that jeopardize prospects for medium-term debt sustainability and growth’.1 This has not always been the case, however. Some started off relatively debt-free during the 1980s but by the 1990s almost all of them were in trouble. Thus, while Guyana and Jamaica have been highly indebted since the 1980s, Barbados and several of the small islands that make up the Organisation of Eastern Caribbean States (OECS) had exhibited stronger fiscal discipline. More recently, how­ ever, there has been serious concern about the sustainability of such debt.2 One of the main factors driving the accumulation of debt in the region has been fiscal constraints. But that is not the only issue: international events and natural disasters have also played an important part in driving these small states into burdensome debts. Regardless of the causes, the fact is that the region faces a serious challenge in dealing with this issue of increasing total debt.

The evolution of highly indebted Caribbean economies From the late 1970s several small Caribbean states began to experience a rapid build-up of national debt. The initial impetus for this, in most cases, was a result of the oil price shock earlier in the decade (1974). With the exception of Trinidad and Tobago, most of the islands were totally dependent on imported oil and related products. The advent of the second oil shock (1979–80) only exacerbated the macroeconomic situation in the region: ‘in nearly every country the public finances weakened as fiscal deficits widened and public debt increased’.3 Combined with sluggish growth in the international economy and depressed commodity prices, it was not surprising that several Caribbean Community (CARICOM) members began to engage with the International Monetary Fund (IMF). By the early 1980s Jamaica, Guyana and Dominica were receiving assistance under the IMF’s Extended Fund Facility. In 1982 Barbados, Guyana and Jamaica obtained short-term relief 98

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under its Compensatory Financing Facility. Barbados also negotiated a standby agreement at the same time. Jamaica, however, had already experienced several consecutive years of poor eco­ nomic performance; in fact, 1982 was so bad that in early 1983 an IMF waiver had to be granted. The country’s stock of external debt was already consistently over US $1 billion. The negative global economic environment also saw a rise in the external debt of the smaller states of the OECS. Between 1980 and 1983 almost all of them showed increases in their external debt stock. Even Trinidad and Tobago, despite its oil revenue, started to show signs of an emerging debt problem. In the latter half the 1980s, as regional and international economic conditions continued to worsen, the external debt situation deteriorated drastically. During this period, without excep­ tion, all the small states of the Caribbean saw further significant increases in their debt stocks. For example, by 1990 Jamaica’s external debt had ballooned to over US $4 billion.4 By this time, several countries had witnessed large increases in their domestic debt. Consequently, by 1990 the total debt-to-GDP ratio for Guyana and Jamaica had reached 459% and 131%, respectively. Most of the other countries still had debt ratios of under 60%.5 During the 1990s, with some exceptions, there was a continuing overall trend towards increasing debts burdens. The shift away from external debt towards domestic financing started to take hold during this period, particularly in the case of the Bahamas, Barbados, Jamaica and Saint Kitts (Christopher) and Nevis. Each of them ‘made explicit attempts to finance their debt from internal sources’,6 such that domestic debt accounted for more than 50% of the total debt. There are several reasons for this shift. First, some countries were unable to access international capital markets, i.e. float bonds. This applied to most of the OECS member states. Second, others wanted to avoid conditionality obligations that came with borrowing from the multilateral insti­ tutions, e.g. Trinidad and Tobago. Third, it alleviated the problem of potential valuation changes due to exchange rate depreciation in those countries with floating rates, e.g. Jamaica. The 1990s also saw a reduction in the overall debt of the region, but this was mainly due to one country, Guyana. In 1996 the country was granted substantial debt relief of US $520 mil­ lion by both the ‘Paris Club’ and Trinidad and Tobago, with which it had a significant debt. Furthermore, the Paris Club granted the country ‘Naples Terms’, which provided for the can­ cellation of 67% of the net present value of its eligible bilateral debt.7 In the case of Trinidad and Tobago, oil prices had recovered, giving a boost to fiscal revenues, and allowing it to repay a portion of its external and internal debt by the end of the decade. There was also a steady decline in Jamaica’s debt-to-GDP ratio, mainly due to the country’s adherence to the structural adjustment programmes recommended by the IMF. Between 2000 and 2010 the average public debt as a percentage of the GDP of the Car­ ibbean states increased again. By the end of 2010 ‘six of the 10 most highly indebted countries were from the Caribbean, and four countries – St. Kitts and Nevis, Jamaica, Barbados and Grenada – ranked among the top five’.8 The trend towards increasing domestic internal debt also continued. During the decade several states exceeded the 50% of internal public debt-toGDP ratio. St Kitts and Nevis, in particular, accumulated a ratio of 116%. The debt burden appeared even more dramatic when total debt was compared to total government revenue. In 2006 the ratio for St Kitts and Nevis, Antigua and Jamaica stood at 466%, 444% and 433%, respectively.9 Furthermore, interest payments as a share of public revenue were also alarmingly high. The advent of the global financial crisis in 2007–08 contributed to the further accumu­ lation of debt in the region, such that ‘the ratio of public debt to GDP increased by about 15 percentage points between 2008 and 2010’.10 During the 2000s several countries benefited from a variety of debt relief efforts. Guyana qualified for additional assistance under the Heavily Indebted Poor Countries (HIPC) and the 99

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Multilateral Debt Relief (MDRI) initiatives. The United Kingdom granted Jamaica some relief under its Commonwealth Debt initiative. Meanwhile, Italy wrote off debts incurred by Antigua and Barbuda, and Saint Vincent and the Grenadines in 2007.11 The net result of these relief efforts was to moderate the extremely high debt-to-GDP ratios across the region; however, they were insufficient to have a major impact on the overall situation. From 2010 to the present day economic conditions globally and in the region have con­ tinued to be challenging. Many states have not yet recovered from the fallout of the financial crisis. For example, commodity prices have not returned to the high levels experienced prior to the crisis. The same is true for the tourism-dependent states which rely on visitor arrivals. Therefore, it is not surprising that the debt situation has remained critical or, indeed, has wor­ sened in several countries. In others, the debt has been mitigated somewhat by home-grown austerity measures and agreements with multilateral institutions. Therefore, the period between 2010 to 2015 saw the regional average debt-to-GDP ratio increase from about 68% to 74%.12 By 2018, however, even though these ratios remained high by international standards, several countries were reporting meaningful decreases in their total debt.

The nature and structural characteristics of Caribbean debt As has been noted by a number of multilateral institutions, such as the IMF and the InterAmerican Development Bank (IDB), as well as regional scholars, the problem of persistent indebtedness in the Caribbean is caused by an array of issues, many of which these countries have no control over. It is generally agreed that the causes are as follows: (1) fiscal imbalances, often due to infrastructural reconstruction following a natural disaster; (2) unfavourable debt dynamics in which the obligation to service the existing debt requires additional borrowing, casting a spotlight on the structure of debt portfolios across currencies, tenors and types of lenders; and (3) public and contingent liabilities, particularly those from outside of central

Figure 7.1 CARICOM: total public debt-to-GDP (%) 2000, 2020, 2018 Source: World Bank (2019) International Debt Statistics, http://datatopics.worldbank.org/debt/ids/. 100

Debt and fiscal constraints

government, the sources of which are weak, contingent-risk management enterprise holdings, inadequate financial sector regulation and weaknesses in public sector management.13 The Caribbean is one of the most vulnerable areas of the world, having been struck by 187 disasters over the past 60 years. Jamaica and Haiti, in particular, have suffered heavy and fre­ quent economic losses due to hurricanes. Nor have the smaller states of the Eastern Caribbean been spared. Indeed, across the Caribbean, fiscal deficits have often been related to infra­ structure reconstruction activities following natural disasters. For example, in 2004 Hurricane Ivan caused damage to Grenada estimated in excess of 200% of the country’s GDP.14 In 2007 both Dominica and Saint Lucia were affected by a 7.3 magnitude earthquake causing significant damage to all forms of infrastructure. And more recently, Hurricane Maria almost completely devastated the island of Dominica in 2017. Damage was estimated to be as much as 226% of GDP.15 It was calculated that it would take Dominica at least five years to recover to prehurricane levels. At the same time, the British Virgin Islands were also severely affected with damage estimated at 330% of GDP.16 Caribbean debt has also been compounded by unfortunate developments which have resul­ ted in many countries taking on new debt to pay off older debt. Very often the level of debt and the interest payments due become overwhelming to the extent that restructuring appears to be the only viable solution. For example, Jamaica undertook comprehensive restructuring of its domestic debt in January 2010. The country’s domestic debt service had reached to 99% of government revenues, of which 60% was consumed by interest payments.17 The Jamaica Debt Exchange was deemed to be a tremendous success. It attracted widespread participation by creditors and resulted in a significant decline in interest payments in the ensuing period. How­ ever, the underlying economic conditions worsened, and interest payment ratios increased once again. Therefore, another further restructuring had to be done three years later. The case of Grenada was also instructive. In 2005 the country invited external and domestic commercial creditors to participate in a debt exchange, swapping US $190 million of external debt (including one global bond of $100 million) and $86 million of domestic debt for new bonds. The Grenada government offered two new 20-year bonds aimed at reducing interest payments on all of this debt. Initially, once again it was a success in that the ‘lower interest rates and longer maturities created a 45% reduction in NPV [net present value] terms’.18 However, just as in the case of Jamaica, a few years later Grenada found itself seeking another round of restructuring. In both cases it proved impossible to trim the principal amount of debt. Other countries such as Belize, Antigua and Barbuda, Dominica, Guyana and Haiti have all gone through similar restructuring experiences. With the few exceptions, the ‘no trim’ approach was taken, especially when dealing with private external and domestic creditors. This added to the likelihood that the debt burden would remain high. Outright debt relief is often only associated with the Paris Club, multilateral institutions and some bilateral arrangements. For example, the IMF, the World Bank, and the IDB cancelled all of Haiti’s outstanding debt following the earthquake of January 2010. For most of the Caribbean countries, however, this generosity has become less applicable as so much of their recent borrowing has been from the domestic private sector. The issue of persistent debt accumulation stemming from contingent liabilities and debt incurred by state enterprises due to weak regulation and management is also critical. In Trinidad and Tobago, where there is a large amount of state-owned enterprises, this problem can have a significant impact on the overall debt and credit rating of the country. The recent closure of the state-owned oil company formerly known as Petrotrin was a case in point. The company was losing billions of dollars annually due to inefficiencies and over-staffing. Payment on a maturing US $850 million bond was due in 2019 and the government was already struggling to meet it 101

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other recurrent obligations. Therefore, in late 2018 the decision was taken to close down the company and restructure its assets. One of the main justifications for this action was to avoid the adverse impact that a default by the company would have had on the country’s credit rating and hence its ability to raise funds on the international market. According to the Minister of Finance, both Moody’s and S&P Global Ratings had warned that the company’s position was taking the overall Trinidad and Tobago outlook from ‘stable’ to ‘speculative’.19 This is just one case of the larger regional problem of institutional weaknesses relating to limited capacity for effectively managing public expenditure and matching this with revenues. In addition, the systems for revenue and expenditure forecasting and debt management remain weak and ineffective in a number of countries. This is particularly evident in relation to con­ taining contingent liabilities.20 Nevertheless, the Caribbean Development Bank (CDB) claimed that when the decomposed contributions to debt are averaged over seven countries, the results are striking. It suggests that primary deficits made no overall contribution to the growth of debt in the Caribbean during the period under study.

Fiscal and macroeconomic implications of debt A number of studies have attempted to assess the implications of the sustained fiscal deficits and high indebtedness of the Caribbean countries. Most of the findings are quite negative regarding the economic, social and long-term consequences. For example, some observers have argued that accumulation of debt has had the overriding effect of changing the focus of economic policy and of institutions in a fundamental way. It has led to a situation whereby debt man­ agement becomes the main objective of economic policy and all other objectives have been rendered captive to this.21 The cases of Jamaica, St Kitts and Nevis, and more recently Barbados would appear to provide support for this prospective. In the particular case of Jamaica, the country’s economic policy has for years been centred on various IMF-related recommendations to deal with the country’s persistent debt. In spite of all this, its debt-to-GDP ratio has been above 100% for almost three decades. Persistent budget deficits and large debts can also have the effect of crowding out domestic investment. As many Caribbean countries started to switch to domestic sources of debt this problem became more acute. In these small economies, once the government becomes the major debtor to the domestic private financial system, the dynamics of national debt change. The small size of the market makes it easy for the effects to be felt in the private sector. For example, in Barbados, the build-up of debt, and the increasing costs of servicing it, have tended to crowd out the fiscal space and have had adverse implications for private investment and consumption decisions owing to the country’s high level of risk.22 A more extreme case is that of St Kitts and Nevis, where in 2011 commercial banks had over 40% of their loan portfolios tied up with the public sector and held huge amounts of government debt. This was in a context where the lack of access to finance in the OECS was reported by firms as a major constraint for business operations. There is also the problem of liquidity risk in case of government default on domestic debt. It is not only possible for high levels of public debt to precipitate macroeconomic and financial instability, it can also limit governments’ ability to adequately respond to such instances of instability. For example, the 2009 collapse of the CL Financial Group and the British-American Insurance Company (BAICO) presented serious challenges to the governments of Trinidad and Tobago and the other OECS member states. It came at a time when Trinidad and Tobago had the fiscal space to absorb such a major shock to its financial system. However, that was not the case among the other OECS countries. The bailout was estimated to cost between 102

Debt and fiscal constraints

TT $20–$26 billion (about US $3–$4 billion). This was a substantial addition to the national debt and threatened to severely damage the country’s credit rating.23 The OECS countries were hit particularly hard by the collapse, as this region had the highest amount of assets in relation to GDP tied up in the companies. These countries had very little fiscal space to deal with the crisis, and therefore sought help from the Trinidad and Tobago government which later contributed US $50 million towards a resolution.24 Indeed, for most of the Caribbean, particularly the small states of the OECS, in recent years the Fiscal Flexibility Index (FFI), a measure of how much discretionary spending is available to a government, continues to be eroded. For the region as a whole, the FFI declined from roughly 35% to 30% between 2013 and 2017.25 Jamaica, for example, had an FFI of 5.5% in 2014 but this improved to 8.7% in 2017. Barbados also improved from 15.2% to 18.8% by 2017. How­ ever, these increases were achieved, as in several other islands, by cuts in spending on wages and salaries and on transfers and subsidies. In Trinidad and Tobago, the index declined from 27% to 18% percent, but in this case, the government did not make such cuts, preferring to borrow in order to maintain employment levels and the social safety net. Debt overhang may also depress investment and growth, which in turn makes paying off the debt even more difficult. Studies of the specific impact of debt on GDP growth in the Car­ ibbean have confirmed this negative hypothesis. For example, in 2009, Boamah and Moore found that persistent debt-to-GDP ratios above 63% tend to have a negative influence on growth.26 Similarly, Greenidge et al. showed in 2012 that, at levels below 30%, increases in the debt-to-GDP ratio are associated with faster economic growth but this diminishes rapidly as the ratio rises beyond 30%; furthermore, beyond 55% of GDP the debt becomes a drag on the economy.27 The CDB also noted that high levels of debt tend to be deleterious to targeted developmental outcomes.28 More recently, in 2018 McLean and Charles produced empirical results which once again suggested that public debt has a negative impact on real economic growth. Specifically, they found a marginal effect of –0.029, suggesting that a 1% increase in the debt-to-GDP ratio causes a 0.029% decline in real GDP growth for the countries in the Caribbean panel.29 High debt overhang can also lead to currency substitution and capital flight. There was ample evidence of this in many severely indebted countries during the 1980s debt crisis, as, due to the fear of appropriation of their funds for debt servicing, private investors preferred to send their money out of the country. In the Caribbean, Guyana and Jamaica were particularly affected by this as domestic residents stockpiled assets abroad while the country’s public debt spiralled out of control.

Prospects for debt reduction and fiscal sustainability According to Eichengreen,30 generally countries have pursued two broad approaches to debt reduction. First, the orthodox approach relies on growth, primary surpluses and the privatization of government assets. This in turn facilitates the preservation of long debt duration and non­ resident holdings. Second, the heterodox approach includes restructuring debt contracts, gen­ erating high inflation, taxing wealth and repressing private finance. The Caribbean has mainly adhered to orthodox methods in seeking to resolve is its debt problems. There was always the expectation that strong economic growth and the generation of fiscal surpluses would have a positive impact on national debt. There were some efforts at using the privatization of gov­ ernment assets in the 1990s but this has not been a major issue in recent years, perhaps with the exception of St Kitts and Nevis. The only aspect of the heterodox approach that has been widely utilized is that of debt restructuring. 103

Lester Henry Table 7.1 Caribbean fiscal flexibility indices, 2013–17

Country

2013

2014

2015

2016

2017

Anguilla

26.5

25.1

26.3

26.2

32.4

Antigua and Barbuda

25.6

23.3

20

29.2

21.3

Bahamas

37.3

33.3

33.8

25.2

34

Barbados

15.2

17

19.4

19.8

18.8

Belize

40.8

42.7

46.7

36.2

31.9

Dominica

52.3

48.9

41

50.8

56.2

Grenada

37.3

41.6

43.4

34.7

30.4

Guyana

50.9

49.3

41.4

43.1

45

Jamaica

10.8

5.5

7.1

8.3

8.7

55

44.7

46.6

46.8

40.9

St Kitts and Nevis

42.8

38.5

41.4

31.6

36.3

St Lucia

39.5

35

35

29.2

24.2

St Vincent and the Grenadines

33.9

30.6

27.8

26.3

26

Suriname

33.3

36.4

36.7

31.1

32.1

Trinidad and Tobago

27.2

26.2

26.2

22.1

18.8

Caribbean

35.2

33.2

32.9

30.7

30.5

Goods producers

38

38.7

37.8

33.1

31.9

Service producers

34.2

31.2

31.1

29.8

29.9

Montserrat

Source: ECLAC (2018).

Therefore, restructuring and reigniting economic growth have been the at heart of efforts to reduce debt and achieve some measure of fiscal sustainability. Jamaica, Grenada and St Kitts and Nevis provide examples of the recent trends in the region. All three countries engaged in debt consolidation by issuing new debt to pay off old debt at lower interest rates or longer loan terms. This bought some relief as it improved debt servicing payments on several occasions. However, rather than being a one-off event restructuring had to be repeated as the underlying economic conditions often deteriorated. In the case of Jamaica, even after the imposition of severe austerity measures, such as freezing wages and cutting spending, the first debt restruc­ turing of 2010 left the country with the highest debt interest burden in the world; interest payments alone amounted to 11% of GDP.31 Several other countries such as Antigua and Barbuda, Belize and Grenada restructured their debt a second time, only to find themselves still heavily indebted. This was perhaps why the IMF described the successes of these programmes as be ‘partial and inadequate’. The multilateral agency which has become more active in the Caribbean in recent years, outside of Jamaica, suggested some reasons for their failure.32 First, there was a lack of credibility in the reform programme in some instances. Second, governments must take own­ ership of the programmes. They asserted, for example, that Antigua and Barbuda and St Kitts and Nevis remained committed to fiscal adjustments, even in the face of severe contractions. However, Jamaica’s policy slippages that were due to exogenous shocks reversed some of its initial gains in debt sustainability. Third, they emphasized the important role played by 104

Debt and fiscal constraints

multilateral institutions in providing support, especially to protect the countries’ private financial sectors. Fourth, there were communication errors in terms of explaining the programmes to bondholders and other creditors. Other reasons included the presence of contagion effects, especially in the Eastern Caribbean Central Bank (ECCB) area, and the fact that the pro­ grammes turned out to be costly in cases where the reduction in debt ended up being too small. Apart from restructuring, some Caribbean countries have also tried innovative ways to reduce their debt burdens. St Kitts and Nevis repaid US $46.1 million to the IMF utilizing proceeds from its controversial Citizenship by Investment programme. They also engaged in ‘debt-for­ land’ swaps which resulted in a reduction of $203.1 million (7.51%) of the original debt stock.33 Of course, in many other Caribbean countries such swaps would be very difficult to implement as citizens tend to be very wary of the limited availability of land space on their islands. Another emerging option to deal with the persistent high indebtedness among some Car­ ibbean countries, is to adopt binding fiscal rules. Jamaica and Grenada adopted fiscal rules in 2014 and 2016, respectively. OECS countries have implied fiscal rules, as recommended by the ECCB, but they are not legally binding. In adopting binding fiscal rules, which came into force after trying just about everything else, the Jamaican Minister of Justice said that ‘Jamaicans are tired of the inadequate social services and low levels of public investment which have resulted from the burdens of carrying our enormous debt’.34 In Grenada, a fiscal rules management committee (FROC) was set up.35 The FROC is the most important institutional pillar under­ pinning Grenada’s rules-based fiscal framework. It was set up as an independent oversight body whose main goal is to monitor compliance with the fiscal rules and targets established under the Fiscal Responsibility Act. In both cases, prudent fiscal management will require strict adherence to targets and involves continuous monitoring of fiscal events and timely reporting of fiscal decisions and outcomes. As draconian as it may seem, Wright et al. 36 argued that Caribbean countries seem incapable of adequately confronting their fiscal and debt challenges without an institutionalized and legitimate discretionary-constraining mechanism, such as fiscal rules. One of the main problems driving deficits in the region is the procyclical nature of government spending. They called for a switch to more ‘evidence-based solutions to promote a new structural-fiscal culture in the Caribbean, in which fiscal discipline in entrenched, fiscal procyclicality is curbed if not totally replaced by countercyclical policies, and transparency and credibility of budgets are fundamentally improved’.37

Summary and the way forward Several Caribbean countries have taken steps to address their long-standing problems of persis­ tent budget deficits and high levels of debt. There have been some signs of success as central government debt decreased by almost 2 percentage points, to 72.4% of GDP in 2018, com­ pared with 2017. There was an overall trend towards lower public debt, with only two out of the 13 reporting countries seeing an increase in debt levels in 2018. Grenada, Jamaica and Saint Kitts and Nevis have all significantly reduced their debt ratios during the period 2010–18, by 39.7%, 28.4% and 68.2% of GDP, respectively. In particular, for Jamaica, public debt fell below 100% of GDP in 2018/19 and is expected to decline below 60% by 2025/26, in line with the provisions of the Fiscal Responsibility Law.38 However, in the same year, Barbados suspended payments on its external public debt interest and arrears while it negotiated restructuring agreements with its external creditors. The country then agreed to receive IMF support as well as instigating an austerity programme. Since then there have been some improvements in controlling its serious debt problem. 105

Lester Henry

In spite of all of this recent progress, the Caribbean still records one of the highest debt-toGDP ratios in the world. The region has never fully recovered from the global financial crisis of 2008–09. Even though regional economic growth had been sluggish for more than two dec­ ades, the crisis, via its impact on commodity prices and visitor arrivals, clearly exacerbated the problem. Add to this the frequent and devastating natural disasters that affect the region, these combined factors make the Caribbean one of the most vulnerable areas in the world. Further­ more, weak regulatory institutions and a lack of fiscal responsibility further compound the problem. Together these factors have resulted in the region being regarded as a ‘high debt, low growth’ area for almost three decades. It is difficult, therefore, to expect any rapid deviation from this in the next decade ahead.

Notes 1 International Monetary Fund (IMF) (2013) ‘Caribbean Small States: Challenges of High Debt and Low Growth’, Washington, DC: IMF, www.imf.org/external/np/pp/eng/2013/022013b.pdf. 2 Caribbean Development Bank (CDB) (2013) Public Sector Debt in the Caribbean: An Agenda for Change, Bridgetown: CDB. 3 Economic Commission for Latin America and the Caribbean (ECLAC) (1983) ‘Economic Activity 1982 in Caribbean Countries’, Port of Spain: ECLAC, p. 7. 4 ECLAC (1990) Latin America and the Caribbean: Options to Reduce the Debt Burden, Santiago: ECLAC, p. 21. 5 Esteban Perez Caldentey (2007) ‘Debt accumulation in the Caribbean: Origins, consequences and strategies’, Studies and Perspectives Series, Port of Spain: ECLAC, p. 12. 6 Ibid. 7 ECLAC (1997) ‘Summary of Caribbean Economic Performance 1996’, 18 June, Port of Spain: ECLAC, p. 29. 8 CDB, Public Sector Debt in the Caribbean. 9 ECLAC (2008) ‘Public debt sustainability in the Caribbean’, September, Port of Spain: ECLAC, p. 9. 10 IMF, ‘Caribbean Small States’, p. 16. 11 IMF (2012) ‘The Challenges of Fiscal Consolidation and Debt Reduction in the Caribbean’, WP/12/ 276, November Washington, DC: IMF, p. 41. 12 See A. Wright, Kari Grenade and Ankie Scott-Joseph (2017) ‘Fiscal Rules: Towards a New Paradigm for Fiscal Sustainability in Small States’, Inter-American Development Bank, Working Paper series no. idb-wp-780, February, Washington, DC: IDB, p. 5. 13 CDB. 14 Ibid. p. 33. 15 S. Muñoz and I. Ötker (2018) ‘Building Resilience to Natural Disasters in Caribbean-Requires Greater Preparedness’, Washington, DC: IMF, www.imf.org/en/News/Articles/2018/12/07/ NA120718-Building-Resilience-to-Natural-Disasters-in-Caribbean-Requires-Greater-Preparedness (accessed 25 November 2019). 16 Ibid. 17 CDB, p. 128. 18 Ibid., p. 127. 19 Newsday, 19 April 2019, https://newsday.co.tt/2019/04/19/petrotrin-sale-by-years-end. 20 Wright et al., ‘Fiscal Rules’. 21 Perez Caldentey, ‘Debt accumulation in the Caribbean’. 22 IDB (2017) Caribbean Region Quarterly Bulletin 6(3), 15. 23 Most of the money was later recovered by sales of the group’s assets. 24 Munro Hunter (2013) ‘The Insurance Sector and the Collapse of CL Financial’, in Alfred Schipke, Aliona Cebotari and Nita Thacker (eds) The Eastern Caribbean Economic and Currency Union, Washington, DC: IMF. 25 ECLAC (2018) ‘Economic Survey of the Caribbean 2018’, Port of Spain: ECLAC. 26 Daniel Boamah and Winston Moore (2009) ‘External debt and growth in the Caribbean’, Money Affairs, 22(2), 139–57. 27 Kevin Greenidge, Lisa Drakes, and Roland Craigwell (2012) ‘The external public debt in the Caribbean Community’, Journal of Policy Modeling, 32(2010), 418–31. 106

Debt and fiscal constraints

28 CDB, p. 25. 29 Sheldon McClean and Don Charles (2018) ‘A Perusal of Caribbean Public Debt and Its Impact on Economic Growth’, Studies and Perspective Series, Port of Spain: ECLAC Subregional Headquarters for the Caribbean. 30 Barry Eichengreen, Asmaa El-Ganainy, Rui Esteves and Kris James Mitchener (2018) ‘Public Debt through the Ages’, Working Paper No. 19/6, Washington, DC: IMF, https://ssrn.com/abstract= 3333751. 31 J. Johnston (2013) ‘The Multilateral Debt Trap in Jamaica’, Washington, DC: Center for Economic and Policy Research. 32 IMF, p. 18. 33 ECLAC, ‘Economic Survey of the Caribbean 2018’. 34 https://jis.gov.jm/senate-passes-fiscal-rule-legislation/. 35 http://gov.gd/egov/news/2017/aug17/23_08_17/item_2/fiscal-responsibility-oversight-comittee.html. 36 Wright et al., p. 22. 37 Ibid. 38 www.worldbank.org/en/country/jamaica/overview.

107

8 Crime, violence and drugs in the Caribbean Sherill V. C. Morris-Francis

Introduction Violence plays a prominent role in the history of the Caribbean, dating back to before the 1800s when violence was entrenched in the culture of the early inhabitants – the Maya, Inca and Aztec peoples. Violence was used to conquer foreign empires and to secure power. Other early inhabitants, the Carib, Arawak and Mapuche peoples, were also considered warlike.1 The exploration of the Caribbean in the fifteenth and sixteenth centuries by the Spanish and Eur­ opean powers resulted in its colonization. This process involved the considerable exploitation of labour and resources and resulted in fundamental changes to the social and political structures in the Caribbean. As Thomas2 argued, colonialism could be described as a modality of violence, as evidenced by the use of violence during slavery to control the labour force and violence used by the slaves themselves (that same labour force) as a means to gain their freedom. During the mid-seventeenth to the eighteenth centuries colonialism was linked to mercantilism, a time when the Caribbean traded in gold, silver, sugar and coffee using slave labour. Over time, industrial capitalism replaced mercantilism. Leading up to emancipation and in response to the dehumanizing conditions in which they lived, the slaves responded by revolting against their oppressors. The violence depicted during this period included riots, industrial violence, vigi­ lantism and lynching. This all culminated in the successful slave rebellion in the 1790s, leading to the independence movement that resulted in Haiti’s independence in 18043 and ultimately the abolishment of slavery. Life in the postcolonial Caribbean was impacted by the history of violence and oppression experienced in the colonial period. As Neumayer4 argued, the culture of violence that exists in the Caribbean may be the direct result of violent colonization, and violence during slavery, which led to the breakdown of society’s institutions of social control. Colonialization also resulted in a societal divide between the ‘haves’ and the ‘have-nots’, and thus a subculture of violence was created to challenge this inequality.5 However, guns replaced the cudgels and whips used to perpetrate violence during the colonial era. Achieving independence did not work to the advantage of many Caribbean countries, as some continue to face many challenges in their political, economic and social sectors. As described in a United Nations (UN) publication,6 these challenges include high levels of

108

Crime, violence and drugs in the Caribbean

income inequality and inequality of opportunity, including gender inequality, high rates of unemployment and rural and urban poverty, and communities with histories of social exclusion. The economic situations were directly related to the decline in foreign investments in key sectors such as agriculture, which resulted in high unemployment and social discontent. Crime and violence are also linked to the influence exerted by developed nations. As pur­ ported by Thomas,7 the media and popular culture in the USA have greatly influenced many social ills such as the consumerism and commodity fetishism of Caribbean youths. In addition, the portrayals of drug use and guns in American films have become models for heroic mascu­ linity and gun violence among Caribbean youths. Participation in the illegal drug trade8 is also seen as a response to the inequality that has prevented marginalized groups from accessing opportunities, thus becoming both a source of sustenance for the criminal networks and a source of income for professional criminals. Where the drug trade has flourished, crime and other criminal activities have ensued.

Setting the stage: theoretical explanations of crime and violence in the Caribbean Violence is a complex global phenomenon and many experts have suggested different typologies as explanations. For example, the public health approach which divides violence into three cate­ gories: self-directed; interpersonal violence; and collective violence.9 This approach is concerned with how the individual’s biological make-up is impacted by their environment, thus implying a relationship between one’s experience of violence and ultimately the tendency to use violence oneself. Moser and Shrader10 also proposed three categories of violence that best depict the various manifestations of crime and violence in the Caribbean – political, economic and social. Sociologists view criminal behaviour as a direct result of the breakdown of norms and values in a society, and the transmission of these norms and values across generations. This perspective focuses on the dynamics of conflict development and its escalation into violence. The crimin­ ological perspective incorporates multiple biological, social and personal factors to explain the onset and continuation of a criminal career. This perspective is therefore concerned that crime is a function of individual traits and free will, and their psychological and biological make-up interacting with the structure, processes and conflicts in society. Economists argue from the vantage point of the cost and benefits of participating in criminal activities, thus favouring the rational choice perspective. Criminals, therefore, assess the potential rewards against the risks and will choose criminal activities if the perceived returns are greater than the risks.11 Fajnzylber and colleagues12 view income inequality, rather than the actual income of an individual, as the key motivating factor for committing a crime. They proposed a positive relationship between inequality and the rate of homicide and robbery, that is, the greater the inequality, the higher the intentional homicide and robbery rates. They conclude that it is the unequal distribution of income in a country that fuels high crime rates. In so far as it concerns the relationship between countries’ unemployment rates and crime, research consistently shows that during periods of high unemployment, crime and violence will increase. The political science perspective offers a structural explanation of crime and violence, with a focus on the societal, political and/or economic forces within society. Relevant to this per­ spective is the levels of poverty, corruption, impunity, racism, social exclusion and the perceived lack of justice. Violence results when individuals are denied legitimate means to achieve their goals. Low social capital, disorder and urban decay are other factors that have an impact on the level of crime and violence.13 Any of the above perspectives can be applied in assessing crime and violence in the Caribbean. 109

Sherill V. C. Morris-Francis

Crime and violence: patterns and trends Many Caribbean countries have developing economies with a large social divide between the ‘haves’ and the ‘have-nots’, thus income inequalities are more pronounced, making the parti­ cipation in crime and violence more likely. The region boasted relatively stable homicide rates between the 1950s and the 1970s. Starting in the late 1970s to early 1980s the levels of crime and violence in some Caribbean countries started to increase, a trend that continued into the first decades of the twenty-first century. This violence took many forms, the most visible of which were homicides, robberies, kidnapping, muggings, simple and aggravated assaults, drug violence, drug use and abuse, domestic violence, sexual violence, gang violence, and violence against children and the elderly. The World Health Organization14 described the crime and violence situation in Latin America and the Caribbean (LAC) as having reached epidemic pro­ portions based on a homicide rate of 24 per 100,000 in 2015; the high levels of unsolved murders (over 90%); the use of firearms in the majority of homicides, an increase in violent robbery; the high incarceration rates; and overcrowded prisons. It is noted that the average homicide rate for the Caribbean declined in 2017 to 15.1 per 100,000 population (which is more than two times the global rate of 6.1 per 100,000), behind Central America and South America with 25.9 and 24.2 per 100,000 population, respectively.15 It is worth noting that while the LAC is home to only 9% of the world’s population, it is said to account for approximately one-third of the world’s crime. In 2017, of the estimated 464,000 deaths by intentional homicide worldwide, 37% occurred in the Americas (this region includes the Caribbean). This has been the trend for the past three decades. Globally, over 80% of homicide victims are males (9.1 per 100,000 males versus 2.0 per 100,000 females), and the highest homicide rate for males is found in the Americas with a rate of 31.2 per 100,000, fol­ lowed by Africa at 21.5 per 100,000. Young Caribbean men are especially at risk, with a homicide rate for the 18–19-year-old age-group estimated at 46 per 100,000 (15–29-year-old males account for 51% of all male homicide victims, but for only 25% of the total male popu­ lation). This high homicide rate for males suggests that a large share of homicides is related to organized crimes or gang activities, which are largely male-dominated, so both victims and perpetrators are males. Meanwhile, a great disparity exists in respect of the female homicide rate, since male homicide rates are 8 to 11 times higher than the female rate. In the Americas, 39% of all female homicide victims are aged between 15 and 29, whereas only 24% of the female population are in that age group.16 Figure 8.1 compares homicide rates in the Caribbean with the rest of the world from 1990 to 2017, and reveals that the Caribbean continues to have very high rates. Much of the crime and violence in the Caribbean can be attributed to organized drug traf­ ficking and gang-related activities. Evidence of gangs in the Caribbean can be traced back to the 1970s in Trinidad and Tobago, Jamaica and the Bahamas. However, since 2000 gangs have been very visible in many Caribbean countries and have been linked to organized crime and the drug trade. Since the mid-1980s the following countries, Guyana, the Bahamas, Saint Kitts and Nevis, and Jamaica, have experienced high increases in the rate of homicide, while others, such as Barbados and Saint Lucia, experienced periods of high crime. To put this in context, a reported rate of 20 per 100,000 persons killed is considered high for Latin America but significantly high for the Caribbean region, which usually has an average of about 10 per 100,000 for the region.17 Countries such as Jamaica and Trinidad and Tobago experienced homicide rates that were significantly higher than the regional average for more than a decade (see Table 8.1). With these few exceptions, prior to the 1990s Caribbean countries had low violent crime rates.18 However, crime varies both in complexity and structure across the region,

110

Crime, violence and drugs in the Caribbean

Figure 8.1 Comparison of homicide rates in the Caribbean and the rest of the world, 1990–2017 Source: Extracted from the United Nations Office on Drugs and Crime (UNODC), Homicide Data Set, 2019, available at https://dataunodc.un.org/GSH_app.

and recently gang violence and crime have increased significantly. Evidence suggests that many communities have become war zones due to gang proliferation and gangs seeking new revenue opportunities such as firearm trafficking, organized crime, kidnapping and human trafficking.19 In Jamaica, 79% of all murders committed during 2013 were attributed to the 238 gangs operating in the country. In Trinidad and Tobago, the 102 gangs operating in 2012 were linked to illegal activities including firearms-related offences, drug trafficking, property offences and sexual offences. In the Bahamas, 18 different gangs were unofficially identified and were linked to many illegal activities.20 Table 8.1 shows homicide rates in Caribbean countries from 2008 to 2017 and confirms that Jamaica has consistently had the highest rates in the region. During the period Jamaica ranked sixth in the world for high murder rates, and has struggled with violence that has wreaked havoc on its economy and overall development. Jamaica is followed by Saint Kitts and Nevis, Trinidad and Tobago, the Bahamas and the Dominican Republic in terms of homicide rates. Haiti has one of the lowest homicide rates in the region, despite its experience of natural dis­ asters, political volatility and instability. In 2015 the Caribbean Community (CARICOM) provided crime statistics for its members and associate members21 and revealed that for crimes against persons Antigua and Barbuda experienced a 14.9% increase from 2005 to 2006 (430 in 2005 and 494 in 2006), compared with a 9.3% decrease in crimes against property (down from 3,042 in 2005 to 2,758 in 2006). From 2012 to 2013 the country saw a 13.6% increase in incidences of breaking, entering and larceny, up from 742 to 843. While Jamaica, Barbados, and Trinidad and Tobago (larger countries) receive significantly more attention with respect to their crime situation, smaller countries such as Saint Kitts and Nevis report similar problems. About 60% of that country’s crime is attributed to shooting, kidnapping, burglary, larceny and robbery.22 It should be noted 111

112 Table 8.1 Homicide rates per 100,000 inhabitants of Caribbean countries, 2008–17

Country

2008

2009

2010

Anguilla Antigua and Barbuda Aruba Bahamas Barbados Cuba

7.5 17.3 4.9 20.9 8.9 4.6

7.4 17.1 3.9 24.5 6.3 5

0 6.3 3.9 26.1 11.1 4.5

2 34.6 9.6 4.7

9.8

18.3

21.0

8.4

Dominican Republic

24.8

24.3

25.0

25.1

22.3

19.2

17.4

Grenada Haiti Jamaica Martinique

15.4 5.1 58.0 4.3

6.7 6.1 60.0 2.8

9.6 6.8 51.4

3.8 9.0 40.0

13.3 10.0 38.7

5.7 10.0 42.1

7.5 9.3 35.1

Montserrat

20.4

Puerto Rico St Kitts and Nevis

21.8 45.7

24.2 53.1

27.4 40.8

31.4 65.4

27.2 34.2

24.5

St Lucia St Vincent and the Grenadines Trinidad and Tobago Turks and Caicos Islands

23.0 14.7

22.8 21.1

25.5 22.9

26.5 19.2

22.3 25.6

41.6 6.8

38.4 6.6

35.6

26.4

28.3

Dominica

2011

2012

2013

2014

2015

2016

2017

0

35.4 10.3 3.9 29.8 7.8 5.5

7 – 5.8 31.5 8.5 5.9

27.7 – 1.9 32.4 8.8 5.2

– – – 37.7 10.9 5.4

– – – 28.4 7.7 5

– – – 30.9 10.5

12.4

12.3

21.8

25.7

15.2

11.3

5.6 10.0 42.1

10.2 9.5 47.0

11.1 – 57.0

19.2

16.7

19.2

18.5

18.8

19.3

15.8

16.9 36.5

29.6 –

30.2 12.1

29.9 5.9

30.9

–

19.9

Source: Prepared by the author using data from UNODC, Homicide Data Set, 2019, available at https://dataunodc.un.org/GSH_app.

–

–

Crime, violence and drugs in the Caribbean

that due to size and resources, not all countries report data consistently and/or provide crime data on trends in crime and violence. In the Caribbean, as in the rest of the world, firearms are the ‘tools’ of choice in the com­ mission of serious crimes. This trend began in Jamaica in the 1970s, and Trinidad and Tobago experienced an increase in 2000. In 2013 firearms were used in most murders, assaults and armed robberies, especially in Jamaica (73.4%), Trinidad and Tobago (72.6%) and the Bahamas (82.4%). Globally, during the period 2007–11 46.3% of all homicides were committed with a firearm. The Caribbean had the second highest overall rate (65%) of homicides being committed with a firearm.23 The Caribbean has some of the highest prison population rates in the world and the condi­ tions in many of these prisons are harsh due to inadequate facilities and extreme overcrowding. Table 8.2 shows the prison population in the Caribbean from 2003 to 2017. Countries such as Saint Kitts and Nevis, the US Virgin Islands and Cuba, consistently show rates of over 500 prisoners per 100,000 people. Haiti has a very high prison population, with over 80% of its inmates being in pre-trial detention. For this reason, Haiti’s prisons have the highest over­ crowding rates in the world with prisons at over 450% capacity.24 Other countries across the region also experience overcrowding issues including the Dominican Republic, Trinidad and Tobago, and the Bahamas.

Drug trafficking A review of illegal drug trafficking in the Caribbean is necessary given recent evidence sug­ gesting that it is on the rise. It can be argued that high unemployment and limited employment opportunities in the Caribbean have pushed many people, especially young males, to view criminal and drug-related activities as viable alternatives.26 Drug trafficking has presented a major problem for the Caribbean since the 1970s. The Caribbean countries are appealing to drug traffickers because of their natural landscapes, mountainous interiors, geographical locations and uncontrolled coastlines – all of which are ideal for the growth and transportation of nar­ cotics. Drug traffickers in South America used this to their advantage and established the Car­ ibbean basin as a route between the supply markets in South America and the demand markets in the USA and Europe. Traffickers target vulnerable islands such as Haiti, because of its severely under-patrolled maritime borders. Cuba and the Bahamas are also seen as ideal venues for drug trafficking organizations because the Cuban keys provide the necessary cover for illegal maritime activities and Puerto Rico is perceived as a major commercial gateway in terms of air and freight traffic to the USA. Drug trafficking is a multibillion-dollar business and as a result it strengthened the alliance between crime groups in the Caribbean and their South and Central American counterparts. At least 20% of the illicit drugs destined for the USA passed through the Caribbean. In 2016 17 Caribbean and Latin American nations were named by the USA as being major illicit drug producing and/or drug transit countries.27 It is noteworthy that Jamaica was viewed as the largest Caribbean supplier of marijuana to the USA and is a major transit point for cocaine trafficked from South America to North America. It is estimated that in 2015 between 90–100 metric tons of illicit drugs were trafficked through the region. This has undoubtedly aggravated the crime problem in the region. Table 8.3 describes the activities in these countries. Illegal drug manufacturing and trafficking bring attendant criminal activities such as murder, kidnapping, drug wars, gang-related activities, organized crime, trafficking in illegal guns, money laundering, cybercrimes, corruption, and economic and political instability. This resulted in the development and proliferation of criminal groups and activities which exacerbated the 113

114

Table 8.2 Caribbean prison population 2003–17 (count/rate per 100,000 population)25 Country

2003

2004

Anguilla

41/332.3

Antigua and Barbuda Aruba

191/ 216.4

Bahamas

282/ 877.1

Barbados

992/ 364.4

The British Virgin Islands Cayman Islands Cuba

2005

194/ 217.4 231/ 230.9 2897/ 879.9 997/ 363.9 105/ 453.2

188/ 397.5 55000/ 489.1

Curaçao Dominica Dominican Republic Grenada Guadeloupe Haiti Jamaica Martinique

243/ 346.7 16789/ 187.2

695/ 160.1 3519/ 39.2 4744/ 174.9 643/ 163.0

rto Rico St Kitts and Nevis

290/ 412.1 13008/ 142.9 182/ 177.3

1941/ 21.3

14380/ 380.8 195/ 412.2

282/ 399.3 12657/ 137.0 237/ 230.2 743/ 169.0 3670/ 39.6 4825/ 175.8 631/ 158.9 14263/ 378.8

2006

2007

2008

2009

2010

2011

2012

45/348.8

44/329.3

58/421.2

76/537.9

193/ 213.7

229/ 247.6

295/ 311.6

361/ 373.0

241/ 719.4

210/ 419.7 60000/ 531.2 578/ 438.2 301/ 425.1 13752/ 146.7 334/ 232.5

4663/ 49.6 4913/ 178.0

13788/ 367.2 237/ 481.6

227/ 273.7 1325/ 387.1 1010/ 365.7

254/ 358.0

367/ 354.3 790/ 177.6 6370/ 66.7 4709/ 169.7 763/ 191.9

232/ 466.0

1321/ 378.9 1046/ 377.2 117/ 457.0 203/ 383.6

235/ 330.6 16718/ 173.5 386/ 371.4

1250/ 352.3 898/ 322.5

409/ 392.2

8204/ 84.5

12130/ 324.7 271/ 538.4

1278/ 354.2 910/ 325.5 117/ 429…8 212/ 381.9

541/ 366.5 295/ 412.9 20743/ 209.6 438/ 418.4

246/ 241.1 1360/ 371.0 1060/ 377.8

21875/ 218.2 457/ 434.9 784/ 173.7

5331/ 53.3 5163/ 184.1 920/ 232.2 11258/ 302.1 254/ 499.2

10894/ 293.1 282/ 548.2

4457/ 157.5 885/ 225.1 11470/ 309.4 346/ 665.3

1433/ 385.2 1045/ 371.1 138/ 484.1 185/ 321.6 57337/ 503.7 440/ 287.6 275/ 381.7 21044/ 236.8 489/ 463.6

8722/ 84.8 4364/ 153.6

12244/ 331.1 366/ 695.9

2013

371/ 379.3 240/ 232.6

908/ 321.4

2014

2015

2016

2017

60/415.0

46/311.9

55/366.7

331/ 334.8 170/ 163.8 1396/ 365.3 864/ 304.9 134/ 452.9 186/ 314.3

371/ 367.5

305/ 299.0

1746/ 446.7 954/ 335.7

189/ 315.5

348/ 222.3 266/ 367.4 24744/ 240.7 480/ 453.2 871/ 193.0 9936/ 95.2 4112/ 144.2 918/ 236.0 12246/ 332.0 330/ 620.7

25203/ 242.2 513/ 482.3

10461/ 98.9 4034/ 140.9

12246/ 332.7 334/ 621.5

219/ 299.3 24602/ 233.7 502/ 469.9 907/ 201.4 11046/ 103.1 3854/ 134.2 940/ 243.6 11364/ 309.3

874/ 305.6

218/ 358.8

377/ 236.9 211/ 286.9 16750/ 157.4 457/ 425.8

3799/ 131.9

10727/ 292.4 220/ 401.5

253/ 408.1

26286/ 244.1

956/ 212.4 8882/ 80.9 3857/ 133.5 870/ 226.0 10039/ 274.1 220/ 400.0

Country St Lucia St Vincent and the Grenadines Sint Maarten (Dutch part) Trinidad and Tobago US Virgin Islands

2003

2004

460/ 285.8 1404/ 1293.3

3924/ 304.1 576/ 532.9

2005 503/ 307.2 364/ 334.7

3771/ 290.8

2006

2007

1085/ 996.3

1071/ 982.1 94/289.8

3700/ 283.9 586/ 545.3

3599/ 274.9

2008 518/ 306.1 1176/ 1077.3

3863/ 293.7 612/ 573.0

2009

1075/ 984.0

3719/ 281.4

2010 526/ 304.8 1039/ 950.5

3691/ 277.9 577/ 543.6

2011

1268/ 1159.7

4287/ 321.2

2012 568/ 324.9 460/ 420.8 180/ 512.3 3710/ 276.5 577/ 546.6

2013

3615/ 268.1 577/ 547.9

2014 634/ 359.4 412/ 376.7 161/ 427.1 3379/ 249.5

2015

2016 559/ 314.0 460/ 419.2

7447/ 547.5

Source: Compiled by the author using data from UNODC, Prison Population: Global Homicide Study 2019, https://dataunodc.un.org/crime/total-prison-population.

2017 527/ 294.4 469/ 426.4 120/ 300.0 3999/ 292.1

115

116

Table 8.3 Major illicit drug producing and/or drug transit countries

Transit country

Destination country

Means of transit

Type of substance

The Bahamas

The USA, other international markets The USA

Commercial and private planes Maritime and air

Illicit drugs Illicit drugs

Not stated

Cocaine

Colombia

Latin America, West Africa, Europe The USA

Costa Rica

Various

Maritime

Dominican Republic Ecuador

North America and Europe

Maritime routes

The USA, Europe

Maritime routes, land

El Salvador

The USA

Maritime, land (buses and tractor-trailers)

Guatemala

Various markets

Maritime and land

Haiti

The USA and other markets

Maritime

Narcotics, migrants and other illicit goods Cocaine, marijuana

Honduras

The USA

Maritime, air,

Cocaine, chemicals precursors

Jamaica

Maritime, air freight, human couriers, private aircraft

Largest supplier of marijuana; cocaine

Mexico

The USA, Canada, the United Kingdom and other Caribbean Islands The USA

Various

Nicaragua

The USA

Cocaine and heroin, marijuana, methamphetamine cocaine

Belize Bolivia

Cocaine, heroin, marijuana

Other

In 2014 90% of cocaine seized in the USA was from Colombia

Illicit drugs Accounts for 6% of cocaine in these markets Illicit narcotics, chemical precursors, cocaine and heroin

Domestic consumption is rising within the country In 2015 90% of cocaine was trafficked to the USA through the Mexico/Central America corridor

In 2015 90% of cocaine was trafficked to the USA through the Mexico/Central America corridor Drugs exchanged for illegally trafficked firearms

In 2015 90% of cocaine was trafficked to the USA through the Mexico/Central America corridor

Transit country

Destination country

Means of transit

Type of substance

Other

Panama

The USA

Seaports, air, and land (Pan American Highway)

Illicit drugs

Peru

South American countries, Europe, the USA, East Asia, Mexico, Africa Caribbean region, Central America, the USA, Western Africa and Europe

Private and commercial aircraft, land, maritime

Cocaine, precursor chemicals

In 2015 90% of cocaine Was trafficked to the USA through the Mexico/Central America corridor Top producer of cocaine

Venezuela

Cocaine, marijuana, precursor chemicals

Source: Compiled by the author using information from News Americas, www.newsamericasnow.com/17-caribbean-latin-american-nations-named-as-major-drug-producing-or-tra nsit-countries/.

117

Sherill V. C. Morris-Francis

levels of crime in the Caribbean. Much of the violence and crime may explicitly be linked to the safeguarding of the drug trafficking-related routes in the region. This has been identified in the CARICOM Crime and Security Strategy as an immediate and significant threat.28 A recent phenomenon known as the ‘balloon effect’, whereby an increased focus and pres­ sure on certain drug routes have led to a bulge in alternative routes, has resulted in a resurgence in illegal drug trafficking via the Caribbean region.29 For example, Venezuela used to be the route for cocaine being trafficked from South America to Honduras, but following the coun­ try’s implementation of stricter anti-drug rules, the frequency of drug transshipments to Central America has been significantly reduced. Drug traffickers have therefore been forced to seek alternative routes and new markets in the Caribbean; thus, countries have seen increased activities in this regard. Connected to the drug and crime problems in the Caribbean is the notion that criminal deportees from the USA, Canada and the UK continue their gang, drug and organized crime activities in their home countries. It is believed that they maintain contact with their criminal peers, and as a result it is easy for them to continue a life of crime upon their return home. However, evidence in this regard is mixed. Some studies30 show that most deportees do not participate in criminal activities upon their return. Those who do engage in crime do so as a result of the limited options available to facilitate their reintegration.31 For example, a Jamaican constabulary force study found that of 1,000 individuals deported between 2005 and 2012 only 40 (or 4%) reoffended, while another study reported that criminal deportees were likely to have been the perpetrators of 5% of all murders and rapes in Jamaica.32 Barnes et al. interviewed police officers in Jamaica who confirmed a connection between certain deportees and the increased numbers of gangs, incidents of gang violence, extortion, and drug and gang-related murders in certain areas in Jamaica. Deportees’ continued participation in gang involvement was further confirmed.33 A study on deportees in Barbados34 concluded that they were not directly responsible for the increase in crimes in that country, while in Trinidad and Tobago, and Belize, Griffin could not find a statistically significant relationship between deportees and crime. In a study on deportation and homicide rates in 38 countries (including 17 LAC countries), Blake35 used data spanning a 35-year period (1970–2004) from the UN World Crime Surveys and Deportable Alien Control System. He found a positive and statistically significant relation­ ship between increased criminal deportation and an increase in homicide rates in the receiving countries, and that the magnitude of this relationship was stable across the different models. He concluded that for every 1% increase in the number of deported criminals per capita, there is an associated increase of 4% to 8% in the homicide rate of the receiving country. Blake also examined the effects of crime on economic growth and development in the receiving LAC countries. Again, his research showed that the rates of homicide in LAC countries not only undermine growth but also threaten human welfare and impede social development. While the number of criminals and non-criminals returned to some countries is low, reof­ fending in their home countries could have devastating effects, particularly so in the smaller Caribbean countries, as it does not take many offenders to have a potentially large impact. Jamaica has retained the leading spot in terms of the number of deportees from the USA rela­ tive to its population, and Jamaicans remain the most deported Caribbean group from Canada and the UK.36

Cost and consequences of violence This section reviews the cost and consequences of crime and violence in the Caribbean. This area is well documented and has been shown to have a negative impact on a country’s 118

Crime, violence and drugs in the Caribbean

development, particularly in the political, economic and social arenas. Violence erodes physical, human and social capital, which is especially detrimental to the poor. According to the Asset Vulnerability Framework,37 violence erodes the following assets: (a) labour (b) human capital; (c) social capital; (d) household relations; and (e) productivity. This impact is manifested in citizens’ lack of confidence in their country’s potential for development; large industry and service companies refusing to invest, or moving their monies out of the country; resources being diverted from essential services, such as education and health, to fight crime; and educated and skilled persons immigrating to other countries. Crime and violence drive away investment, both foreign and local, increase the cost of doing business due to the need for additional security measures, prevent business expansion and productivity improvement, all of which eventually slows economic growth.38 Crime and violence also result in other losses, such as theft, looting, arson, fraud and extortion, as well as non-material losses including diminished employee morale and safety, and decreased productivity. Another area affected by crime and violence is one of the major income-earning industries for the Caribbean – the tourism industry. This industry relies heavily on both domestic and foreign investments and is highly sensitive to the crime situation, whether real or perceived. For many Caribbean countries, tourism is the largest source of foreign exchange. Tourism receipts represent more than 30% of Caribbean countries’ total exports in comparison to the global average which is just over 5%.39 The tourism industry provides employment opportunities for individuals at all educational levels and relies on many tourism-related industries in the country. It is therefore recognized that the level of crime and violence will limit and disrupt the development of this industry.40 In terms of ‘brain drain’, the Caribbean has a migration rate of over 40% for highly educated individuals. Five Caribbean countries (Guyana with 70%; Trinidad and Tobago over 60%; Jamaica 50%; Haiti approximately 50% and Cuba over 30%) were listed among the top 10 countries in 2015 to 2016 for the highest percentage of tertiary-educated individuals who migrated to developed countries, with the USA the main destination country.41

Estimates of the cost of crime, violence and drugs When assessing the effect of crime and violence on development, scholars analyse the direct and indirect costs levelled on a country’s economy. It is an established fact that a country will have expenditures even in the absence of violence, but that in adverse situations it will divert resources from other important areas to address the crime and violence situation. A four-level typology labelled ‘Socioeconomic Costs of Violence’42 sought to assess the cost of social and domestic violence, and distinguished between (a) direct monetary costs; (b) non-monetary costs, including pain and suffering; (c) economic multiplier effects, changes at the macroeconomic level within the labour market, and intergenerational effects; and (d) social multiplier effects, including the impact on quality of life, interpersonal relations, the erosion of human and social capital, and decreased participation in the democratic process. The direct cost of crime and violence in the LAC has been estimated using the accounting method, also known as the method of losses and expenditure.43 Using this method, Jaitman and Torre assessed the cost of crime and violence in 17 Latin and American countries, including four Caribbean countries – the Bahamas, Barbados, Jamaica, and Trinidad and Tobago. The following crimes were included in the analysis: murder, rape, robbery and assault. The costs were classified into three categories: (1) social costs, i.e. the cost of victimization based on the quality of life in the aftermath of homicides and other violent crimes, and income loss due to imprisonment; (2) costs to the private sector in terms of expenditure on security services for 119

Sherill V. C. Morris-Francis

firms and households; and (3) costs incurred by governments in terms of expenditure on administering the judiciary system, police services and prisons. In 2014 the LAC incurred US $16.5 billion in victimization costs, of which $10.6 billion was attributed to homicides. Over 90% of homicide victims in the 17 LAC countries were males, 46% of whom were between 15 and 30 years of age. They had been killed during their most productive years making their deaths very costly for society in terms of lost human capital. In 2014 the estimated social cost of crime to the Caribbean was reported to be between 0.4% and 0.5% of the LAC gross domestic product (GDP). Specifically, the cost of homicide for the Bahamas was recorded at 0.48% of GDP, reported as the third highest among the Caribbean countries. Barbados had the least value of incomes foregone from homicides, recorded at 0.06% of GDP. Barbados and Trinidad and Tobago had the lowest cost of victimization (assaults, rapes and robberies), recorded at 0.02% of GDP. Loss of income due to incarceration was estimated at $8.4 billion for the LAC in 2014, while among the Caribbean countries, the Bahamas lost 0.36% of its GDP and Jamaica had the smallest loss at 0.09% of GDP. In the area of private expenditure on security, two different estimates were assessed: (a) the ‘lower bound’ costs, that is, estimates only for the economic sectors, and (b) ‘upper bound’ costs, that is, expenditures from the entire private sector economy. Costs in this area for the Caribbean showed the Bahamas with a high private expenditure of between 1.0% and 1.9% of GDP, and Barbados with the lowest private sector cost. Overall, for private security in the Caribbean, the estimated lower bound cost was above 0.6% of GDP and the upper bound estimate was well above 1.0% of GDP. A portion of government expenditure on the overall administration of justice, police services and prisons was attributed to the cost of crime. For the administration of justice, the cost was calculated based on the number of criminal cases filed. For police expenditure, a lower-bound estimate was calculated based on the percentage of arrests for violent crimes (homicides, sexual violence, robberies and assaults) compared to arrests for all crimes, while the upper bound esti­ mate was calculated based on the total expenditure for police services. The total cost of prison administration was included in the calculation. Estimates in this area then revealed that in 2014 crime-related costs in the LAC were between US $44 billion and $70 billion, with the highest costs occurring in the Caribbean. Leading the pack was Jamaica, with government expenditure of between 1.42% and 2.44% of GDP on crime-related matters. Barbados recorded expenditure of between 1.36% and 2.0% of GDP, followed by the Bahamas with expenditure of between 1.15% and 1.94% of GDP. The LAC recorded average expenditure of 0.17% of GDP for administering the justice system, while the Caribbean countries (the Bahamas, Barbados and Jamaica) spent approximately 0.06% of their GDP in this area. Public expenditure on security in the LAC represented one-third of the amount spent on education and health. In 2014 the Caribbean recorded the second highest overall expenditure on crime, second to Central America. For the LAC, the lower-bound estimate was US $114.5 billion, and the upper-bound estimate was $170.4 billion lost to crime for the 17 countries studied. This represented an average of 3.0% of their GDP, with a lower bound average of 2.41% and an upper bound average of 3.55% of GDP on the overall cost of crime. For the Caribbean coun­ tries, the upper bound average of crime-related costs for the Bahamas and Jamaica showed high governmental costs of 4.79% and 3.99% of GDP, respectively, followed by Trinidad and Tobago at 3.52% and Barbados with the lowest cost at 2.68% of GDP. With regard to the social cost of crime in the LAC, homicide was identified as the main con­ tributor to the cost of crime from 2010 to 2014. This cost was calculated as income not earned due to the death of the individual. During this period the LAC spent between US $9.8 billion and $11.4 billion per annum in this area, with the 17 countries spending an average of 0.40% of GDP in 120

Crime, violence and drugs in the Caribbean

2010 and 0.32% in 2014. For the Caribbean countries, 2013 showed the highest average expendi­ ture of 0.36% of GDP. The country with the highest average expenditure for the period was the Bahamas at 0.53% of GDP, followed by Jamaica at 0.44% of GDP. With regard to public spending on the administration of prisons, the data show that this expen­ diture increased by almost 100%, up from US $4,318 million (0.19% of GDP) to $7,832 million (0.23% of GDP) from 2010 to 2014. A similar picture is painted for the Caribbean with Barbados having the highest average expenditure on prison administration at 0.47% of GDP, followed by Jamaica with 0.34%, and Trinidad and Tobago with 0.33%. The Bahamas recorded the lowest expenditure at 0.30% of GDP. This level of spending, as Jaitman and Torre argued, could be attributed to fixed costs associated with running the prison systems in these countries.44 Among the 17 LAC countries, the estimated cost of income lost due to prison inmates not contributing to the economy in 2010 was US $5.8 billion, or 0.18% of GDP. This figure increased to over $8.4 billion, or 0.20% of GDP, in 2014. Among the Caribbean countries, loss in this area showed the Bahamas to have the highest loss at 0.35% of GDP, followed by Bar­ bados at 0.24%, Trinidad and Tobago at 0.14%, and Jamaica at 0.10% of GDP. Jamaica was identified as one of the three countries in the LAC with a relatively low loss of 0.10% of GDP or less; Trinidad and Tobago was classified as having medium-sized losses (0.10% to 0.20% of GDP) and the Bahamas and Barbados were in the high loss group (0.20% or greater). During the period 2010–14 the overall average cost of incarceration for the LAC was estimated at US $13,800 million, or 0.39% of GDP. For the four Caribbean countries, the cost of prison administration was higher than the loss incurred due to incarceration. In terms of the overall cost of incarceration, this was highest in Barbados, at 0.71% of GDP, followed by the Bahamas at 0.65%, Trinidad and Tobago at 0.47%, and Jamaica at 0.44% of GDP. It is noteworthy that Barbados, Jamaica, and Trinidad and Tobago spent more on prison administration (0.47%, 0.34%, and 0.33% of GDP, respectively) than what they lost from non-productive inmates (0.24%, 0.10%, and 0.14% of GDP, respectively). The Bahamas’ loss due to incarceration was higher (0.35% of GDP) than its expenditure (0.30% of GDP) on prison administration.45 How does the crime and violence situation impact the business environment in the Car­ ibbean? Evidence shows that the costs incurred for crime and security far exceeds any other costs of doing business in the Caribbean. Data show that in 2010 25% of businesses in the LAC experienced the highest levels of firm victimization, and that 62% of these firms paid for security. In 2014 over 80% of businesses in the Caribbean identified crime as an obstacle to doing business, and in the fiscal year 2013/14 over 20% of Caribbean businesses reported losses due to theft, robbery, vandalism or arson, compared to the world average of 19.4%.46

Challenges and solutions The following are identified in the literature as some of the challenges faced by Caribbean countries in combating crime and violence. The Caribbean criminal justice systems have been described as inefficient and lack the necessary resources to effectively address crime and vio­ lence. This is related to the system being underfunded, having outdated and inefficient proce­ dures, and giving unequal treatment, benefits and protection to citizens. Tied to this challenge is the poor relationship between citizens and law enforcement and the lack of confidence in their performance and in the justice system. Many crimes go unreported, and of the crimes reported, especially homicides, many remain unsolved. Evidence also suggests that Caribbean citizens are generally reluctant to assist law enforcement due to criminal reprisal, police abuse of power and disregard for the rights of citizens. It has also been noted that witnesses are often threatened and even killed, which further undermines trust in the criminal justice systems.47 There is also 121

Sherill V. C. Morris-Francis

concern about the level of corruption that exists among law enforcement agents and other public officials, making the fight against crime and violence even more challenging. There is also a crisis within the correctional systems, evident in long case processing times and backlogs contributing to overcrowding in the prison systems. Meanwhile, violent crimes such as homi­ cide are being fuelled by insecurity among the citizenry. This has not only affected economic development but has also heightened fear and reduced confidence in governments. Another challenge that must be overcome is criminals’ use of technology to avoid detection by law enforcement agents and to protect their illicit enterprises. Over the years, many Caribbean countries have initiated programmes or legislation aimed at addressing the problems of crime and violence. These initiatives target both crime prevention and crime suppression. Most Caribbean countries have joined major treaties and conventions addressing specific types of crime such as organized crime, drug crime and the use of firearms. CARICOM has also implemented the Crime and Security Strategy aimed at harmonizing and standardizing criminal legislation in the region. Countries are committed to instituting stronger sentencing laws, thereby increasing penalties for criminal activity, including mandatory senten­ cing for certain crimes. Countries, including the Bahamas, Barbados, and Trinidad and Tobago, have all instituted police and criminal justice legislation addressing many aspects of their criminal justice systems. Countries have also taken major steps to address organized crime, gang, drug and firearms issues by creating new legislation or amendments to address them. They have also ratified sev­ eral international agreements in this regard, including the Arms Trade Treaty, the 2000 United States Convention against Transnational Organized Crime, and the 1988 United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances. Many coun­ tries are also part of the Caribbean Financial Task Force, the CARICOM Regional Coordi­ nating Mechanism for drug control, the Caribbean Regional Maritime Counter-drug Agreement, the Caribbean Task Force on Crime and Security, and the Partnership for Prosperity and Security. Countries have also taken steps in response to the issue of gangs, by introducing legislation specifically to define, criminalize, suppress and prevent this activity. In response to the prevalence of gun use, the Caribbean countries have implemented legislation that bespeaks, inter alia, specific firearms offences, conditions and penalties for firearms ownership, and the import and export of these weapons.48 In partnership with several US agencies, the Caribbean Basin Security Initiative is a shared security partnership that started in 2010. This initiative supports efforts to reduce illicit traffick­ ing, promote crime prevention, and increase citizen security. Caribbean members include Antigua and Barbuda, the Bahamas, Barbados, Dominica, the Dominican Republic, Grenada, Guyana, Jamaica, St Lucia, St Kitts and Nevis, St Vincent and the Grenadines, Suriname, and Trinidad and Tobago. These agreements and partnerships continue to facilitate the region’s quest to monitor and fight crime and illegal drug activities in each country.

Conclusion This chapter provided an overview of crime and violence in the Caribbean and although only a few selected countries were highlighted it is evident that crime and violence are serious obsta­ cles to development. Many Caribbean countries have undertaken legislative initiatives aimed at addressing the issue. Caribbean countries generally face similar challenges regarding crime and violence, with the major impediments being the lack of trust in the criminal justice systems, underreporting of crime, poor data collection and inadequate resources (limited budget alloca­ tion and infrastructure) to effectively and efficiently address the problem. The repercussions of 122

Crime, violence and drugs in the Caribbean

this problem are many and varied and include citizens’ insecurity, reduced competitiveness, a poor investment climate contributing to the loss of educated and skilled workers who emigrate to more developed countries, leaving those who are most vulnerable to criminal activities behind, thus affecting the region’s overall development. Experts, both locally and internationally, have offered myriad explanations for some of the region’s challenges, blaming the economic stagnation, emigration, drug trafficking and gang activities. However, these issues rarely occur in isolation. Crime and violence are often a response to certain factors in the environment, such as poverty and limited opportunities, which are all endemic in the Caribbean.

Notes 1 Peter Imbusch, Michel Misse and Fernando Carrion (2011) ‘Violence Research in Latin America and the Caribbean: A Literature Review’, International Journal of Conflict and Violence, 5(1), 87–154. 2 Deborah A. Thomas (2013) ‘The Problem with Violence: Exceptionality and Sovereignty in the New World’, Journal of Transnational American Studies 5(1), http://escholarship.org/uc/item/5z13v661Jamaica. 3 Ibid. When Haiti became independent it was the first republic founded by people primarily of African descent. 4 Eric Neumayer (2003) ‘Good Policy Can Lower Violent Crime: Evidence from a Cross National Panel of Homicide Rates, 1980–97’, Journal of Peace Research 40(6), 619–40, www.jstor.org/stable/3648380. 5 Frederick W. Hickling (2009) ‘The High Cost of Poverty: Mental Health Perspectives from the Caribbean Diaspora’, International Psychiatry 6(2), 29–30. 6 United Nations Development Programme (UNDP) (2012) ‘Human Development and the Shift to Better Citizen Security’, Caribbean Human Development Report 2012, New York: UNDP, p. 15. 7 Thomas, ‘The Problem with Violence’. 8 Biko Agozino, B. Bowling, E. Ward and G. St Bernard (2009) ‘Guns, Crime and Social Order in the West Indies’, Criminology & Criminal Justice 9(3): 287–305. Anthony Harriott (2002) ‘Crime Trends in the Caribbean and Responses’, Report submitted to UNODC, Vienna: UNODC. Thomas, ‘The Problem with Violence’. 9 World Health Organization (2002) World Report on Violence and Health, Geneva: World Health Orga­ nization, www.who.int/violence_injury_prevention/violence/world_report/en/full_en.pdf?ua=1. 10 Caroline Moser and Elizabeth Shrader (1999) ‘A Conceptual Framework for Violence Reduction’, LCR Sustainable Development Working Paper, No. 2, Washington, DC: World Bank, p. 4. 11 See, for a further discussion, my recent publication S. Morris-Francis, C. Gibson and L. Grant (2018) Crime and Violence in the Caribbean: Lessons from Jamaica, Lanham, MD: Lexington Books. 12 Pablo Fajnzylber, Daniel Lederman and Norman Loayza (2002a) ‘What Causes Violent Crime?’, Eur­ opean Economic Review 46: 1323–57; Pablo Fajnzylber, Daniel Lederman and Norman Loayza (2002b) ‘Inequality and Violent Crime’, Journal of Law and Economics, XLV(April), 1–40. 13 Moser and van Bronkhorst, ‘Youth Violence in Latin America and the Caribbean’, p. 16; A. Heine­ mann and D. Verner (2006) Crime and Violence in Development: A Literature Review of Latin America and the Caribbean, Washington, DC: World Bank. 14 See Laura Jaitman and Ivan Torre (2017) ‘Estimation of the Direct Costs of Crime and Violence’, in Laura Jaitman (ed.) The Costs of Crime and Violence: New Evidence and Insights in Latin America and the Caribbean, Institutional Capacity of State Division. III. Series, IDB-MG-510, Washington, DC: InterAmerican Development Bank, pp. 19–44. 15 See UNODC (2019) Global Study on Homicide: Homicide Trends, Patterns and Criminal Justice Response, Vienna: UNODC, www.unodc.org/documents/data-and-analysis/gsh/Booklet2.pdf. 16 Ibid. 17 See Harriott, ‘Crime Trends in the Caribbean and Responses’. 18 UNDP, Caribbean Human Development Report. 19 Colin Frederick (2010) ‘The Caribbean Is the Fragile Border of Drug Trafficking’, Washington, DC: Council on Hemispheric Affairs, www.sirronaldsanders.com/Docs/The%20Caribbean%20is%20the% 20Fragile%20Third%20Border%20of%20Drug%20Trafficking.pdf. 20 Luisa Godinez Puig, Heather Sutton and Luciana Alvarez (2017) ‘Gangs and Victimization’, in Inder Ruprah and Heather Sutton (eds), Restoring Paradise in the Caribbean: Combatting Violence with Numbers, Washington, DC: Inter-American Development Bank.

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Sherill V. C. Morris-Francis 21 CARICOM Secretariat (2015) ‘Crime Statistics’, CARICOM Member States, Associate Members: 2000 – latest available year, Georgetown: CARICOM Secretariat, www.caricomstats.org/Files/Publications/ Crime_Tables_CARICOMMSandAM.pdf. 22 See Frederick, ‘The Caribbean Is the Fragile Border of Drug Trafficking’. 23 Luisa Godinez Puig, Heather Sutton and Luciana Alvarez (2017) ‘The Tools of Violence’, in Inder Ruprah and Heather Sutton (eds), Restoring Paradise in the Caribbean: Combatting Violence with Numbers, Washington, DC: Inter-American Development Bank; see also Geneva Declaration Secretariat (2015) Global Burden of Armed Violence 2015: Every Body Counts, Cambridge: Cambridge University Press, www.genevadeclaration.org/measurability/global-burden-of-armed-violence/global-burden-of-armed­ violence-2015.html. 24 See the article by Tristan Clavel (2017) ‘Haiti’s Hellish Prisons Symbolize a Broken Justice System’, 21 February, www.insightcrime.org/news/brief/haiti-hellish-prisons-symbolize-broken-justice-system/. 25 Data shown in this table refer to the total prison population. As per the UN-CTS definition, a prison population is composed of Persons Held in Prisons, Penal Institutions or Correctional Institutions. It refers to persons held on a specified day and it should exclude non-criminal prisoners held for administrative purposes, for example, persons held pending investigation into their immigration status or foreign citizens without a legal right to stay. 26 Robert L. Ayres (1998) ‘Crime and Violence as Development Issues in Latin America and the Car­ ibbean’, Washington, DC: World Bank Publications. 27 ‘17 Caribbean, Latin American Nations Named as Major Drug Producing or Transit Countries, News Americas, 2 March 2016, www.newsamericasnow.com/17-caribbean-latin-american-nations-named-as­ major-drug-producing-or-transit-countries/. 28 UNODC (2014) ‘UNODC Chief Launches New Caribbean Regional Program’, www.unodc.org/ ropan/en/IndexArticles/Caribbean/launch-of-unodc-regional-programme-in-support-of-caricom-crime­ and-security-strategy.html; see also IMPACS (2013) ‘CARICOM Crime and Security Strategy 2013: Securing the Region’, Port-of-Spain: IMPACS, https://2009-2017.state.gov/documents/organiza tion/210844.pdf; UNODC (2013)UNODC Regional Programme 2014-2016 in Support of the CARICOM Crime and Security Strategy, Vienna: UNODC, www.unodc.org/documents/ropan/ UNODC_Regional_Programme_Caribbean/UNODC_Regional_Programme_for_the_Caribbean_ 2014-2016_in_support_of_the_CARICOM_Crime_and_Security_Strategy_2013.pdf. 29 The Economist (2014) ‘Drugs Trafficking in the Caribbean: An Old Route Regains Popularity with Drugs Gangs’, www.economist.com/news/americas/21602680-old-route-regains-popularity-drugs­ gangs-full-circle. 30 See T. Golash-Boza (2015) Deported: Immigrant Policing, Disposable Labour and Global Capitalism, New York: New York University Press; Bernard Headley, Michael D. Gordon and Andrew MacIntosh (2005) Deported, vol 1, Kingston: Stephensons Litho Press; World Bank (2010) World Development Indicators 2010, Washington, DC: World Bank. 31 See Burt Geoff Burt, Mark Sedra, Bernard Headley, Camille Hernandez-Ramdwar, Randy Seepersad and Scot Wortley (2016) ‘Deportation, Circular Migration and Organized Crime Jamaican Case Study’, Research Report: 2016-R007, Ottawa: Public Safety, www.publicsafety.gc.ca/cnt/rsrcs/ pblctns/2016-r007/2016-r007-en.pdf; Morris-Francis et al., Crime and Violence in the Caribbean. 32 See E. Thomas-Hope (2014) Reintegration and Rehabilitation of Forced Returnees to Jamaica, Kingston: IOM 33 See Annmarie Barnes, Barry Chevannes and Andrea McCalla (2006) A Study on Criminal Deportation, Kingston: Ministry of National Security; Carl Williams and Mitchel P. Roth (2011) ‘The Importation and Re-exportation of Organized Crime: Explaining the Rise and Fall of the Jamaican Posses in the United States’, Trends in Organized Crime, 14: 298–313. 34 See C. E. Griffin (2000) ‘Deportees and Crime in Barbados’, Caribbean Dialogue, 6, 79–91; C. E. Griffin (2002) ‘Criminal Deportation: The Unintended Impact of U.S. Anti-Crime and AntiTerrorism Policy Along Its Third Border’, Caribbean Studies, 30(2), 39–76. 35 Garfield O. Blake (2014) ‘America’s Deadly Export: Evidence from Cross-Country Panel Data of Deportation and Homicide Rates’, International Review of Law and Economics, 37(4), 156–68; Garfield O. Blake (2015) ‘Using Increases in Criminal Deportees from the US to Estimate the Effect of Crime on Economic Growth and Development in Latin America and the Caribbean’, Laws, 4, 691–708, doi:10.3390/laws4040691. 36 See Morris-Francis et al., Crime and Violence in the Caribbean. See also UNODC and World Bank (2007) Crime, Violence, and Development: Trends, Costs, and Policy Options in the Caribbean, Washington, DC: UNODC and World Bank, www.unodc.org/pdf/research/Cr_and_Vio_Car_E.pdf.

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37 Caroline Moser (1996) Confronting Crisis: A Comparative Study of Household Responses to Poverty and Vulnerability in Four Poor Urban Communities, Environmentally Sustainable Studies and Monograph Series 8, Washington, DC: World Bank. 38 See UNODC and World Bank, Crime, Violence, and Development. 39 UNEP, UN DESA and FAO (2012) SIDS-Focused Green Economy: An Analysis of Challenges and Opportunities, www.unep.org/greeneconomy and www.unep.org/regionalseas. 40 See Morris-Francis et al. 41 OECD (2019) Migration Data Brief No. 4, June, www.oecd.org/els/mig/Migration-data-brief-4-EN.pdf. 42 See Andrew Morrison, Mayra Buvinic and Michael Shifter (2003) ‘The Violent Americas: Risk Fac­ tors, Consequences, and Policy Implications of Social and Domestic Violence’, in Hugo Frühling and Joseph S. Tulchin with Heather Golding (eds), Crime and Violence in Latin America, Washington, DC: Woodrow Wilson Center Press, Chapter 5. 43 Jaitman and Torre, ‘Estimation of the Direct Costs of Crime and Violence’. See also Inder Ruprah and Heather Sutton (eds) (2017) Restoring Paradise in the Caribbean: Combatting Violence with Numbers, Washington, DC: Inter-American Development Bank. 44 Ibid. 45 The foregoing is my summary of Jaitman and Torre, ‘Estimation of the Direct Costs of Crime and Violence’, and Ruprah and Sutton, Restoring Paradise in the Caribbean; Luisa Godinez Puig, Heather Sutton and Luciana Alvarez (2017) ‘Crime and the Private Sector’, in Inder Ruprah and Heather Sutton (eds), Restoring Paradise in the Caribbean: Combatting Violence with Numbers, Washington, DC: Inter-American Development Bank. See also Morris-Francis et al. 46 See World Bank Enterprise Survey Data 2010 and 2016 for selected country profiles. Enterprise Sur­ veys are available for over 144 countries. These can be found at World Bank, Enterprise Surveys: What Businesses Experience, www.enterprisesurveys.org/en/enterprisesurveys. See also Godinez Puig et al., ‘Crime and the Private Sector’. 47 US Department of State (2013) ‘CARICOM Crime and Security Strategy: Securing the Region’, www.state.gov/documents/organization/210844.pdf. 48 For an in-depth discussion of the foregoing information see Ruprah and Sutton, Restoring Paradise in the Caribbean.

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9 It’s complicated The Caribbean’s relationship to white-collar crime Kristina Hinds

The Caribbean1 can be conceived as both a zone of pleasure and a zone of (borderline) illegality. One trope associated with the region presents it as a site of sun, sand, sea (and sex), where the people are friendly and jovial. This trope presents the region as an ideal site for the tourist industry. Another trope presents the Caribbean as a site of piracy, corruption, illicit trafficking and evasion. These activities are not all illegal, but some may push the boundaries of the international norms of acceptable conduct. This latter trope can be linked to portrayals of governance in the region; the location of the region as a transshipment point for trafficking in drugs, small arms and people; to the existence of international business sectors (offshore finance/businesses); and to the maintenance of citizenship investor programmes. Neither of these portrayals is fully true nor fully untrue. Alto­ gether, the Caribbean is a part of the world, like any other, in which people seek ways to survive and thrive. However, in the Caribbean people seek these things amid all the vulnerabilities that arise from the smallness of its nation states and in the shadow of an exploitative past of colonization, enslavement and indentureship while at the same time being disadvantageously placed in the system of global capitalism. So, as the social media relationship status puts it: ‘it’s complicated’. If we return to the binary tropes of pleasure and illegality, the elements of these that exist in the region can be viewed as contradictory or as two sides of the same coin. Each of these is intertwined with the search for development options for small formerly colonized places and the people who inhabit them. To discuss white-collar crime in the region, I will focus on the trope that portrays the region as a zone of illegality. In this connection, the Caribbean is a target of external surveillance and regulation as a site of evasion of the norms and rules of the ‘developed’ world. The international business/financial services sectors of the region are mon­ itored as being tax havens or possible tax havens. Citizenship by Investment Programmes (CIPs) are monitored as selling passports to dubious ‘business’ persons. The region is also monitored as a possible site for money laundering, for facilitating the financing of criminal and terrorist activities and as a location from which other scams can be launched. As Marshall puts it, the framings of these activities have ‘produced a discourse of sleaze with attendant implications for the region’s reputation’.2 As such, Caribbean states and jurisdictions3 have attempted to comply with external regulations. Caribbean states and territories, then, are used by states outside of the region to deal with their crime and security issues extraterritorially. 126

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Yet, the Caribbean also has its own internal crime and security issues. Of these, the more conventional crimes such as property crimes and violent crimes that tend to evoke fear are generally prioritized. These internal concerns are also linked to the need to provide safety in a region which seeks to attract tourists as its bread and butter income generator. All the same, white-collar crimes including fraud and corruption are critically important in the region, even if under-policed when compared to more conventional crimes. These white-collar crimes come with costs that may not be as visible as the costs of more conventional crimes, but they do cause significant harm. In this chapter, I will focus primarily on the ‘external’ elements of white-collar crime deemed to be facilitated in the region, even while noting that the region faces significant difficulties with its own (internal) white-collar crimes. However, before proceeding to do any of this, it is cri­ tical that I discuss what the term ‘white-collar crime’ means, the various ways in which the term has been used and how this term can be applied to discuss occurrences thereof in the Caribbean. Analyses of white-collar crime mostly fit within the overlapping disciplines of sociology and criminology. Law has also been an important vantage point for appraising white-collar crime. All the same, analyses and discussions about white-collar crime stretch beyond these areas into accountancy, business, political science and international relations among others. This chapter is located in the field of political science/international political economy, and therefore does not attempt to present a sociological/criminological treatment of white-collar crime. Instead, it discusses the ways in which white-collar crime has been addressed (or not addressed) by Car­ ibbean states in the context of internal politics and the location of the region in the global political economy. However, in addressing white-collar crime, a survey of existing literature on the topic which is mostly located within sociology, criminology and law seems unavoidable in order to grasp the meaning of this less than straightforward concept.

What is white-collar crime? Commentaries on white-collar crime present a variety of offences as constituting this category of crime. These include fraud, embezzlement, bribery, extortion, insider trading, tax evasion, money laundering, false statements, perjury, obstruction of justice and political corruption.4 The USA’s Federal Bureau of Investigations (FBI) neatly notes that ‘the term white-collar crime is now synonymous with the full range of frauds committed by business and government professionals’.5 Much of the literature that addresses white-collar crime notes that the originator of the term was Edwin Sutherland who first used it 1939 to express that the working-class or immigrant communities were not the sole perpetrators of crime in the USA. He sought to dispel the myth that poverty causes crime by highlighting the fact that elite and wealthy individuals also per­ petrate criminal acts.6 Although not unknown, this intervention was and continues to be noteworthy since most views about crime continue to be linked to visceral fears of the poor and minorities. Sutherland also noted the tendency towards lenient punishment for white-collar crimes and the limited stigmatization that accompanied the commission of these when com­ pared to other infractions.7 Sutherland’s insights about class and punishment are particularly relevant in the Caribbean where, although some studies note the existence of and the implications of white-collar crime for the region, most studies focus primarily on ‘conventional’ crimes that tend to have a lower class bias.8 The United Nations Development Programme’s 2012 Human Development Report for the region states that much of the crime in the region is connected to inequality and to people facing limited options.9 Policing, enforcement and reporting statistics on crime in the region 127

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also follow suit, partly due to the complexities in understanding and addressing many whitecollar offences.10 Although there is no denying the seriousness of violent crimes or other more conventional crimes, it is important to note that much of the criminality that is penalized may be a result of inherent class biases. This is a critical point for the Caribbean, a region steeped in a history of racialized, class- and skin colour-based inequalities. Despite emerging from the context of American experience of the 1930s and 1940s, Sutherland’s work makes the striking point that the ways in which notions of crime have been constructed and the ways in which crimes have been policed, adjudicated and punished focus on certain types of crime and criminality in which lower-class groups tend to be over-repre­ sented.11 In post-colonial societies, such as those in the Caribbean, this is a crucial point to reflect on. Much of what has been criminalized in these societies has emerged from systems seeking to control the enslaved and formerly enslaved masses, the non-white, the poor and the otherwise ‘undesirable’. Put differently, there is a politics of criminalization in which the lower class and non-white people have been systematically (over-)criminalized in the Caribbean. Let me offer a historical example here. In 1661 the Barbados Slave Code was developed to control rebellious enslaved persons by sanctioning the most inhumane of restrictions and punishments. This was further tightened in 1676, 1682 and 1688 to make penalties and restrictions even more harsh and included a ban on the beating of drums and the playing of instruments. This legal template was adopted and adapted in Jamaica, South Carolina and across the British colonies. It was upheld during the nineteenth century.12 Meanwhile, the most criminal acts of the slave trade, chattel slavery and all the accompanying brutalities were still legal in the nineteenth century. Even at the point of the abolition of slavery, chattel slavery was not treated as a crime. Instead, slave ‘owners’ were compensated for their loss of property.13 Crimes that obviously generated victims were not constructed as such in light of economic imperatives and on the grounds of race and class which the political structures of the time upheld. While this history does not connect directly to white-collar crime today, it does illustrate how in-built class biases and social, economic and political structures that support these can disguise some crimes and shield some criminals while criminalizing and harshly punishing others. Present-day discussions about the decriminalization and legalization of cannabis and related to the lucrative commercialization of the plant for recreational and medicinal purposes also reflect this racialized class bias. While businesses now stand to benefit from this commer­ cialization, there is little provision for the previously criminalized and incarcerated growers and consumers of the plant, many of whom have been poor, young and often non-white men.14 To return more squarely to the focus of this chapter, the point I wish to make here is that class biases in constructions of criminality allow white-collar offences to be de-emphasized. This is a significant insight in general and for the Caribbean in particular. Let us now return more directly to definitional discussions of the term white-collar crime. Since the genesis of the term, there has been much discussion and disagreement about its use and meaning. What is more, the term has evolved to address technological advances (cyber­ crimes) and changes in business and social structures. By the 1980s terms such as ‘elite deviance’, ‘official deviance’ and ‘corporate deviance’ began to be used as alternatives within sociology and criminology, in order to move away from the overly broad nature of the term white-collar crime. In light of the inchoate nature of the term ‘deviance’, more specialized terms such as ‘corporate crime’, ‘business crime’ and ‘government crime’ became important as analytical categories.15 By the 1980s the relationship between business and government in the USA had changed from enmity to government facilitation of business. This shift which Bensman marks as in train from the 1960s with the end of the New Deal in America, can be seen as part of a 128

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neoliberal shift within the world economic paradigm. Bensman goes on to note that this refashioned relationship ushered in the need to modify Sutherland’s approach to white-collar crime to more fully include criminality within government agencies, law enforcement, the judiciary and political parties.16 Simpson and Weisburd, in their telling of the story of the term white-collar crime within the evolution of sociology, criminology and criminal justice research also note the importance of the Watergate scandal in the USA in shaping this turn towards a focus on political and other state-based activities as within the scope of this category of crime.17 The class-based emphasis of early conceptions that follow Sutherland’s formulation have also come into question. Coleman asserts the following of white-collar crime: ‘All white-collar crimes are, by definition, violations of the law committed in the course of a legitimate occupation or financial pursuit by persons who hold respected positions in their communities’.18 This definition builds on Sutherland’s view of this type of crime as ‘a crime committed by a person of respectability and high social status in the course of his occupation’.19 Although status and occupational location are central to these formulations, white-collar crime can go beyond elite or trusted groups, a point that Sutherland himself made in noting that employees who steal from their employers (embezzlement) are also committing white-collar crime and in so doing turn the power relationship implied in the concept on its head.20 Furthermore, Greene notes that from a legal perspective, class cannot be taken into consideration when assessing criminal liability. The act at hand and its classification as a crime must instead be focal. Moreover, varied acts of fraud, perjury, obstruction of justice and intellectual property violations can be com­ mitted by persons from any class, as indeed is the case for all crimes.21 These are valid inter­ ventions, but they also partially miss what I take to be the innovation of the concept of whitecollar crime as a concept, which is to problematize our understandings and treatments of crime. The real thrust of the concept is to capture as criminal the calculated acts perpetrated by individuals or by organizations that violate trust, cause financial loss and hardship, or steal and deceive for their own enrichment. Even if the perpetrators are of respected status or are powerful, and even if their actions occur through means that may be easily concealed, these actions are harmful and are (or should be) criminal. The development of the concept of whitecollar crime introduces the politics of crime in which relationships of power within societies can shield some while over-criminalizing and harshly penalizing others. In order to truly understand crime then, white-collar elements should be addressed not only for the losses and difficulties that they cause individuals and groups, but for the damage that they may cause to societies in gen­ eral.22 To paraphrase Harriot’s assertion in regards to the Caribbean, when such corruption is endemic across the public sector, political and business elites, it undermines the moral authority of institutions and leadership and thus justifies further criminality across society writ large.23

Systemic forces, white-collar crime and the Caribbean Now, if we take the view that white-collar crime is a problem because it can cause pervasive rot, then one might understand how – if the Caribbean is viewed as a zone of illegality that courts or at least is unable to adequately address such crime – it might be constructed as an area for surveillance, regulation and management by external entities. White-collar crimes that are facilitated in areas such as these undermine the management of criminal activities in the inter­ national system. One can also understand why addressing white-collar crime that is internal to the region might be important. White-collar crime can undermine efforts to scaffold well-being and development in the region. However, the power dynamics that relate to white-collar crime, especially the more elite of these, can also pose problems for addressing such crimes whether in the areas of internal or external concern. What is more, just as Sutherland pointed 129

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out how class biases over-emphasize lower-class crime, within the global political economy power differentials allow ‘peripheral’ zones in the world to be over-emphasized for their roles in facilitating criminality. These zones are ‘discursively constructed and “othered” as centres of intrigue’.24 Meanwhile, there are more significant forces at play. The treatments of white-collar crime that I have presented so far, though, miss something crucial and that is the systemic factor, or the factor that makes this type of crime possible. Here I am referring to a global capitalist system that encourages the continued pursuit and growth of profits by businesses, both within sovereign spaces and across borders. This is a system that provides the groundwork for the wealth-power connection that makes these sorts of offences possible and that also conceals them. This global system revolves around continual wealth accumulation and thereby presents opportunities for those seeking to gain wealth for themselves and for their organizations to engage in trust breaking and cheating behaviours. Although global interconnectivity within a system dominated by capitalist corporate enterprises cannot be viewed as the cause of white-collar crime, it may be seen as facilitating or providing an expanded range of opportunities for such crime. Indeed, the gamut of socialist thought has been based on problematizing the thieving (or exploitative) nature of capitalism. The interlinked nature of the global political economy which allows for ever increasing flows of goods, services and capital across borders, often facilitated by rapidly evolving information and communications technologies, also makes the management and policing of white-collar crime difficult for developing countries.25 One can make similar claims about global interconnectivity complicating the monitoring and policing of other forms of crime, such as orga­ nized crime and terrorist-related activities, which may also seep into white-collar crime at some junctures.26 Yet, it is the powerful or developed states within the global political economy which both benefit from this system of global capital and seek to manage the difficulties such as criminality and evasion that the same system throws up. Caribbean states and territories are especially open to the above-mentioned global flows and tend to court foreign capital as part of their quest for economic viability. While courting foreign capital, Caribbean jurisdictions also tend to be very vulnerable in the face of the threat of losing foreign investment due to their small size. Consequently, Caribbean states, like other develop­ ing countries, may be less than enthusiastic about the prospect of losing investment that digging too deeply into some areas of white-collar crime might trigger. What is more, as capacityconstrained locations they tend to face difficulties in adequately regulating and policing whitecollar crime.27 The cross-border nature of investment into the Caribbean may mean that businesses and money can cross borders in order to break laws, or at least push the limits of what may be permissible in other sovereign spaces. It is here that so-called offshore entities in the Caribbean have become the focus of intergovernmental bodies, such as the European Union (EU) and the Organisation for Economic Co-operation and Development (OECD), and of some countries such as the USA and Canada. The Caribbean has also been a target for the EU, the OECD, the USA and Canada in light of their concerns over banking and other regulations in the region that may make the region a prime location for money laundering. Furthermore, some Car­ ibbean states that seek to attract investment via CIPs, are viewed with caution for the possibility that such programmes attract ‘dodgy’ investors and ‘dirty’ money in exchange for passports. As a region then, the Caribbean is targeted as a locale that may facilitate white-collar crime (e.g. tax evasion), organized crime/terrorism and the area in which they can overlap (e.g. money laundering). The offshore industry is claimed to have begun in the Caribbean in 1936 in the Bahamas when British and Canadian companies established themselves there to shelter the investments of 130

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some of their more affluent clients.28 Vlcek’s discussion of the literature about ‘offshore’ indi­ cates a few noteworthy influences on its development in general and in the Caribbean. Vlcek notes Ronen Palan’s insight that offshoring became a possibility as part of the development of sovereignty during the nineteenth century. Notably, British court cases found that companies that were resident in the United Kingdom were subject to its taxes but those that were simply registered but not resident in this sovereign space were not subject to British taxation. This development created the space for the growth of the Eurodollar market in the City of London in 1957 so that financial institutions could accept US dollar deposits, loan these funds and then record them as having originated in another jurisdiction (offshore). Consequently, depositors of US funds avoided both British taxation and taxation in the USA, until brought ‘onshore’.29 He also notes Bill Maurer’s argument that developments in telecommunications technologies in the 1960s further facilitated cross-border financial transactions and that the establishment of tele­ communications links between Britain, France and their Caribbean colonies created prime conditions for developing Caribbean offshore sectors.30 Additionally, Vlcek makes a compelling case for viewing capital as nomadic, moving in search of profitable pastures. He combines this view with insights about both the unjust nature of capitalism and the clever, self-seeking behaviours of some of the participants in capitalism who seek out loopholes.31 These insights allow us to see that powerful countries’ role in the evolution of sovereignty comingles with the expansion of capitalism and facilitates the development of opportunities that allow white-collar crime to be facilitated across borders via offshoring. The Caribbean has simply become a location in which states and territories use their sovereignty or their offshore character (in the case of non-sovereign jurisdictions) to participate in these economic options for their internal economic viability. As such, a variety of businesses including multinational cor­ porations, financial institutions and gaming/betting companies have sought to make use of the tax evasion or avoidance that changing their identity offshore allows. As the earlier discussion about white collar-crime indicated, tax evasion is a white-collar crime. What is more, other types of criminal activity (white collar and otherwise) including money laundering can be facilitated by offshoring. As a consequence, the trope of the Caribbean as a zone of illegality in need of regulation and policing raises its head. Yet, the illegality that it facilitates in the whitecollar domain is illegality that poses problems for jurisdictions outside of the Caribbean, rather than for the Caribbean itself. Whose taxes are being evaded? Those of states outside of the Caribbean. The Caribbean thereby becomes a zone for managing the criminal concerns of more powerful states. Pressure is placed on Caribbean states to address these ‘outsider’ problems. Powerful states convert their problems into problems for the region. Let us consider two very prominent examples of white-collar crime committed by outsiders and facilitated in the Car­ ibbean – the Enron and Allen Stanford scandals.

White-collar crime in the region: a few examples In 2001 Enron, an energy trading company and reportedly the fifth largest company in America at the time, came under scrutiny over false reporting of its profits, insider trading by key figures in the company, encouraging employees to take up investments that corporate leaders knew were failing, and a range of other fraudulent activities. The collapse of this company resulted in a large number of job losses and financial hardship for former employees and investors. It led to a successful civil suit by former employees and to the criminal conviction of key corporate players involved in the fraud. Along the way, one committed suicide (J. Clifford Baxter), another died of a heart attack after being criminally convicted (Kenneth Lay) and another served 12 years in prison (Jeffrey Skilling, who was released in 2019).32 All these occurrences 131

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took place within the sovereign space of the USA. However, Enron maintained a significant network of offshore operations that helped to conceal much of this fraud including 900 sub­ sidiaries registered in the Cayman Islands.33 In this case, the harm caused was primarily enacted in the USA. However, in important ways other damage, although not criminal, also resulted from this scandal including the reputational harm done to Caribbean states and jurisdictions beyond the Cayman Islands. The collapse of Enron further fed into the trope of the region as a zone of illegality, even though the fraud was of the making of an American company and its executives. The Enron scandal took place at a time when the region was already beginning to be monitored as a tax haven. From the late 1990s the G7’s Financial Action Task Force (FATF) began to make recom­ mendations for improving transparency in such locales and in 2000 it began to designate countries as ‘cooperative’ or ‘uncooperative’ in regulating their offshore sectors and in exchan­ ging information about their clients.34 Instead of addressing the whole range of evasive activities that many places in the world facilitate, and that are encouraged by the constant search for wealth creation and wealth hoarding that capitalism perpetuates through neoliberal globaliza­ tion, specific peripheral zones of the world such as the Caribbean have been singled out as areas for over-policing. Akin to Sutherland’s insights about the class biases in thinking about crime, there seems to be a bias in focusing on these exotic non-white locales in the policing of global criminality. The Allen Stanford Ponzi scheme that resulted in him being convicted in 2012 to serve 110 years in prison in the USA (convicted on 13 of 14 counts), is also a noteworthy case.35 The USA’s Securities and Exchange Commission (SEC) filed a complaint against Robert Allen Stanford and other associates in February 2009 after discovering that they had been running a Ponzi scheme for at least 10 years. Stanford controlled the Stanford Financial Group which included the Guardian Investment Bank established in Montserrat in 1985 and which moved to Antigua and Barbuda in 1990 (it was renamed the Stanford International Bank Ltd). The Stanford International Bank received funds in the form of certificates of deposit that were sold by the Stanford Group Company (a subsidiary of the Stanford Financial Group). Despite mar­ keting these certificates of deposit as lucrative low-risk investments, these funds were not invested as marketed and instead funded loans to Stanford himself and purchases of personal real estate, among other fraudulent uses. The bank’s financial statements were purposely falsified to portray the bank as operating as it should and yielding returns on investments. Meanwhile, Leroy King, then Chief Executive Officer of the Financial Services Regulatory Commission in Antigua and Barbuda, allegedly facilitated these fraudulent activities by providing deceptive audits, alerting Stanford to enquiries by the SEC and obstructing their investigations into Stan­ ford’s operations in exchange for bribes.36 This sham operation reportedly amounted to US $7–$8 billion in investments received under false pretences from some 18,000 Americans or, according to the Latin American arm of the Stanford Victims Coalition, more than 27,000 people from 113 countries. At the time of writing, investors had yet to be repaid for their losses.37 As was the case with Enron’s demise, the crimes were committed (mostly) against Americans but were facilitated by Stanford’s ability to locate his bank first in Montserrat and then in Antigua and Barbuda. In this case, Stanford was also allegedly assisted in his criminal activities by an official in the regulatory body of Antigua and Barbuda (Leroy King), who in 2019 was extradited to the USA to face trial.38 Unlike the Enron case, this high-profile case of whitecollar crime also substantially affected the Caribbean state in which Stanford’s operations were located. Stanford took up citizenship in Antigua and Barbuda, received a knighthood from the island’s government (this was revoked in 2010), invested heavily in the country and became its 132

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largest single private employer. Additionally, Stanford began to invest in regional cricket by building a cricket ground and setting up a professional cricket competition.39 The fall-out from Stanford’s demise significantly affected Antigua and Barbuda in the form of thousands of job losses, and a contraction of 9.6% in the country’s GDP, meaning that the government was forced to seek loan assistance from the International Monetary Fund (IMF). Furthermore, the country faced legal action and other pressure from investors for its role in facilitating the Ponzi scheme.40 Again, this incident seemed to reinforce the need for regulation, surveillance and the insis­ tence on transparency in the Caribbean by powerful states and intergovernmental organizations. The Stanford case reinforced the trope of peripheral places being hotspots for illegality and thus justifies the emphasis on enforcing regulation through the exertion of power. Indeed, investors have not only sought legal redress against state entities in Antigua and Barbuda but have also mobilized to try (unsuccessfully) to prevent the IMF from extending loans to the government of Antigua and Barbuda. Antigua and Barbuda has been assigned culpability for allowing inno­ cent investors to be robbed. However, the Caribbean can also be viewed as merely a site that facilitates the defrauding of American citizens. For instance, one BBC report noted that Stan­ ford was a known contributor to political campaigns in the USA, contributing in excess of US $1 million personally and over $2 million through his companies to around 100 American politicians, including having donated to the presidential campaigns of President Barrack Obama and his opponent John McCain’.41 What is more, politicians from both sides of the USA’s political spectrum have been less than willing to repay funds received from Stanford and his companies in order to assist in compensating the victims. Furthermore, money stolen via this Ponzi scheme has been traced to banks in the developed world, including some in Canada and Switzerland.42 The web of intrigue surrounding this slate of white-collar crime was not simply a case of a Texan man going to the Caribbean, becoming a citizen of Antigua and Barbuda and defrauding Americans from his Caribbean hideout, before being found out by the US federal authorities who duly brought him to justice. This case further revealed small states’ potential vulnerability to large-scale cases of whitecollar crime when courting investment. Although Caribbean states seek investment to address their economic precarity, this can transform into a double-edged sword that ultimately rein­ forces this precarity. Not only are losses inflicted in terms of important investment, jobs and GDP, reputational losses are inflicted too. These have ripple effects with countries in the region having to be constantly on the alert for blacklists, adjusting to regulations and requirements in an effort to stay off of such lists.43 Saunders notes, for example, that Caribbean countries have generally sought to comply with the USA’s Foreign Account Tax Compliance Act and the OECD’s Common Reporting Standards as well as implementing anti-money laundering stra­ tegies, mutual legal assistance treaties and agreements to exchange tax information.44 Further­ more, while Caribbean jurisdictions have sought tirelessly to comply with regulations, such as those laid out by the US government, while developed countries’ jurisdictions have not. One author has remarked on the strict transparency and reporting standards to which Caribbean jurisdictions seek to comply, while entities in the US, notably in the District of Columbia, do not. Furthermore, the OECD’s FATF has noted that the USA has been ‘non-compliant’ as regards corporate transparency. All the same, it is Caribbean jurisdictions that face continued losses in response to the strictures of anti-tax haven regulations that originate outside of the region.45 Recent losses of correspondent banking relationships between banks located in the Caribbean and those in global commercial centres illustrate some of these losses. Banks in developed countries seeking to ‘de-risk’ in light of the alleged special openness to white-collar and 133

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organized crime in Caribbean banking systems have begun to pull relationships that facilitate transfers of money between banks located in the Caribbean and elsewhere.46 This imperils international business/financial services sectors in the region and also hampers other commercial and personal cross-border monetary exchanges (such as the flow of remittances).47 In order not to face significant ill-effects, Caribbean jurisdictions are compelled to work towards addressing the white-collar crime problems of outsiders that might be facilitated within the region. That Allen Stanford sought new citizenship both for his business through offshoring and for himself is also a critical point upon which to concentrate with respect to the relationship between the Caribbean and white-collar crime. CIPs have been pursued in the region in the search for investment and have also been the target of external surveillance for reasons similar to offshoring. Essentially, CIPs and offshore businesses are both citizenship transactions that lay themselves open to similar criminality concerns. In 2018 the OECD listed Antigua and Barbuda, the Bahamas, Barba­ dos, Dominica, Grenada, Montserrat, Saint Kitts (Christopher) and Nevis, and Saint Lucia as having high-risk CIPs that could be used to evade taxation.48 What is interesting about the OECD’s listing of Caribbean locations with worrisome CIPs is that Barbados and the Bahamas are generally not viewed as operating such programmes. Meanwhile, EU member states operate such programmes but are absent from this listing (Malta and Cyprus are the exceptions).49 Hinds and Lorde in their discussion of the five Caribbean states that host CIPs50 highlight some instances of wrong-doing that these programmes have unwittingly allowed. They note reports of people from various nationalities including from Canada, the Russian Federation, the Ukraine, the People’s Republic of China and Iran being either wanted or convicted for whitecollar and financial crimes such as stock manipulation, embezzlement, bribery and money laundering while holding passports from St Kitts and Nevis. They also remark on the case of an Indian businessperson named Mehul Choksi who held citizenship and residence in Antigua and Barbuda and who was accused of defrauding the Punjab National Bank in 2018.51 Consequently, we can see how CIPs further reinforce the portrayal of the Caribbean as a zone that facilitates illegality by helping to conceal white-collar and organized crime and crim­ inals. As has been the case with the offshore sector, this criminality is the concern of sovereign states outside of the Caribbean that seek to find ways to manage the evasion that results from the ignoring of border processes. As has also been the case with offshoring, Caribbean states have tried to find ways to continue these initiatives that bring much needed money to their shores while simultaneously managing external efforts at regulation and surveillance. As such, the states in the region that offer CIPs have sought to tighten security screenings by working through the International Criminal Police Organization (INTERPOL) and the Caribbean Community’s Implementation Agency for Crime and Security.52 Hinds and Lorde also examine the ways in which the narrative about CIPs in the Caribbean is skewed since, as Saunders also notes, such programmes also exist in the EU, the USA and Canada. What is more, scandal and criminality have also followed such CIPs within the developed world.53 Yet, it is the developing countries that mostly find themselves the subject of surveillance and monitoring. Caribbean states and territories thus end up imposing regulations within their own sovereign or quasi-sovereign spaces in order to please outsiders. Despite efforts in the region to address white-collar (and organized) crimes committed by outsiders, the Caribbean countries have struggled to address their own internal high-level white-collar crime. Corruption is a regional problem that is cited, often anecdotally, but is dif­ ficult to account for or measure due to political cultures of opacity. Furthermore, the close links between businesspeople in the region and the connections between prominent businesses/ businesspersons and political parties (which are often obscured) make it very difficult to decipher corruption or to weed out other types of high-level white-collar crime.54 134

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The case of the collapse of the Colonial Life Insurance Company (CLICO) in January 2009, the largest insurance company in the region, is illustrative of the links between corporate actors and state officials; the problems of corporate governance; and the difficulties with having these activities addressed as criminal. CL Financial (CLF), the parent company of CLICO and the British American Insurance Company (BAICO), operated in 32 countries and included entities in the USA, Canada, the UK and Switzerland via joint ventures. The collapse of this regional insurance company robbed numerous people living in the Caribbean of their pensions, life insurance and other investments. The collapse was linked to questionable practices within the company that caused cash flow issues. Specifically, the company accepted large amounts of short-term deposits, paid high interest rates on these and then used these deposits to fund longterm investments.55 Soverall notes that ‘soft touch’ regulatory approaches were partly at fault in allowing these high-risk strategies. He further contends that the repercussions of the CLICO collapse were more severe than the collapse of the Stanford Financial Group due to CLICO’s size and regional reach.56 The government of the Republic of Trinidad and Tobago used tax­ payers’ money to bail out CLICO, while the governments of the Bahamas, Barbados, St Lucia, and St Kitts and Nevis shielded the company by placing its operations in each of their countries under judicial management.57 Soverall and Persaud present the case of CLICO as a failure of regulation compounded by the improperly close relationships between corporate executives and public officials/politicians in the region.58 Meanwhile, Alleyne et al., writing from the perspective of the accountancy profession, have argued that the CLICO and Stanford debacles illustrate the need to offer pro­ tection to ‘whistle-blowers’ in order to address such corporate misdeeds before they reach crisis stages that inflict heavy costs on taxpayers, investors and individual Caribbean countries.59 From both perspectives, the cultures in corporate and political governance in the region create opportunities for white-collar crime. In Barbados, criminal charges were laid against two prominent CLICO executives. These charges, however, have not been acted on to date. In Trinidad and Tobago, the Colman Commission of Enquiry recommended that the CLICO case be examined by the Director of Public Prosecutions with an eye to the state considering laying criminal charges against key operatives of the company.60 As of 2019 criminal proceedings were still not fully underway but were expected to go forward.61 Taxpayers in the region have borne the cost of reim­ bursing investors (usually not fully). That government officials, politicians and key operatives of CLICO were complicit in this debacle, gives reason for pause in the Caribbean. Ten years later, the alleged perpetrators and their suspected accomplices still operate freely in the region. Although CLICO is but one example of (yet unproven) high-level white-collar crime in the region, it is a very significant owing to the effect that it has had across several Caribbean states. That it has not been dealt with as a crime is less than surprising to many Caribbean inhabitants. As June Fowler, the spokesperson for the Barbados Investors and Policyholders’ Alliance stated in response to the news that the assets of Leroy Parris, the former chairman of CLICO Barba­ dos,62 were to be unfrozen: Nothing will be done. There will be a lot of talk; there will be a lot of fuss being made, but in the final analysis, nothing really will be done to help the regional gov­ ernments to recover what they had to put up to make the policyholders whole. Nobody will touch it because there are too many incestuous relationships between that organisation and the governments in the region … And I think that is a sad thing for us in the region.63 135

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White-collar crime that has cost taxpayers and insurance policyholders and that has caused sig­ nificant harm across the region has been less than adequately addressed. Meanwhile, Caribbean states participate in bolstering the compliance measures recommended to them by external entities, in order to help these outsiders to address their white-collar crime issues. Indeed, the Caribbean is in the curious position of appearing to be better at addressing external white-collar crimes than internal ones.

Conclusion: it’s complicated In this section, I return to my original premise that the relationship between the Caribbean and white-collar crime is ‘complicated’. Much of the treatment of things that can be considered white-collar crime of concern to outsiders is wrapped up in external concerns about organized crime and terrorist financing. Deciphering white-collar from other types of crimes is itself complex. Furthermore, the regulatory hoops through which Caribbean jurisdictions try to jump in attempts to save their reputations, pose difficulties for a region seeking to attract investment. Some investment seeks loopholes in regulations and in the state system. However, operating within the zone of loopholes can cause other forms of investment to shy away from the region. Commercial bank ‘de-risking’, with all manner of other consequences, is one such example. Caribbean states and territories are often caught between ‘a rock and a hard place’. On the one hand, they seek to attract investment by being permissive, but on the other hand they have to address external regulatory concerns that they are too permissive. As a result, the region’s approach to white-collar crime is largely driven by external concerns that are entangled with fears of organised crime and terrorism. Meanwhile, the approach to crime within the region is heavily focused on more conventional crimes; on personal safety; and on so-called citizen security. Such an emphasis is clearly critical in the region because people’s safety is imperative. Yet, the focus on white-collar criminality at high levels, including state/political operatives and business elites, is less than well addressed. While seeking to be attuned to external requirements to limit white-collar crime, Caribbean countries have struggled to address such endemic problems from within. Indeed, it is even difficult to capture the extent to which such criminality exists beyond anecdotal evidence and gossip in the region. Thus, the image of the region as an exotic location in which illegality flourishes is sustained. Although regional officials try to negate this image by addressing external regulatory require­ ments, they are clearly unable and unwilling to fully commit to doing so. On the one hand, there continue to be loopholes and a market for exploiting these loopholes which is encouraged by the systemic nature of wealth-seeking in the global political economy. On the other hand, Caribbean jurisdictions are both unable and reluctant to address their internal white-collar infractions in meaningful ways. In the main, the focus is on addressing the external dictates that focus on getting peripheral countries to respond to the concerns of powerful states, but addressing these concerns really is complicated for small countries seeking to manage both the global and the local. Within the global portraiture then, competing and complimentary images of pleasure and criminality in the Caribbean continue to be painted. The region remains a zone of piracy in its many modern-day guises. It continues to be constructed as a zone of illegality conducted against a backdrop of beautiful scenery. The Caribbean is this and it also is not this. The pleasureillegality construction obscures the competing forces, both global and internal, that have com­ plicated Caribbean survival; that have influenced decision-makers’ choices about how (and whether) to act in the face of crime; and that make it truly complicated to understand the region’s relationship to white-collar crime. 136

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Notes 1 The Caribbean region includes small island sovereign states and non-independent island territories spread across the Caribbean Sea. My use of the term ‘Caribbean’ includes states situated in South America, specifically Guyana, Belize and Suriname, for their historical and cultural treatment as such. These states and territories are characterized by having differing creole languages, although they are commonly categorized as English, French, Spanish and Dutch-speaking in line with patterns of colo­ nization. See K. Hinds (2019) Civil Society Organisations, Governance and the Caribbean Community, Cham: Palgrave Macmillan). In this chapter, I focus primarily on Caribbean states that were formerly British colonies along with those that remain British territories. 2 Don D. Marshall (2007) ‘The New International Financial Architecture and Caribbean OFCs: Con­ fronting Financial Stability Discourse’, Third World Quarterly, 28(5), 917–38, www.jstor.org/stable/ 20454972. 3 I use both states and jurisdictions to indicate that not all Caribbean countries are sovereign states. Some are territories (of the USA, the United Kingdom, France or the Netherlands), some are independent sovereign states, but all are jurisdictions. 4 FBI (2019) ‘What We Investigate: White-Collar Crime’, www.fbi.gov/investigate/white-collar-crime (accessed 20 December 2019); Stuart P. Green (2004) ‘The Concept of White Collar Crime in Law and Legal Theory’, Buffalo Criminal Law Review 8(1), 1–34, ww.jstor.org/stable/10.1525/nclr.2004.8.1. 1; A. Harriott (2002) Crime Trends in the Caribbean and Responses, report submitted to the United Nations Office on Drugs and Crime November 12, 2002, New York: United Nations Office on Drugs and Crime; P. J. Henning (2008) ‘The DNA of White-Collar Crime’, New Criminal Law Review: An International and Interdisciplinary Journal 11(2), 323–54, www.jstor.org/stable/10.1525/nclr. 2008.11.2.323; E. H. Sutherland (1940) ‘White-Collar Criminality’, American Sociological Review 5(1): 1–12,www.jstor.org/stable/2083937; J. T. Wells (1993) ‘Accountancy and White-Collar Crime’, Annals of the American Academy of Political and Social Science 525, 83–94, available at www.jstor.org/ stable/1046839. 5 FBI, ‘What We Investigate’. 6 Green, ‘The Concept of White Collar Crime in Law and Legal Theory’, p. 3; Sutherland, ‘WhiteCollar Criminality’; J. Bensman (1988) ‘White Collar Crime: Re-Examination of a Concept’, Interna­ tional Journal of Politics, Culture, and Society 2(1), 4–14, www.jstor.org/stable/20006883; J. W. Coleman (1987) ‘Toward an Integrated Theory of White-Collar Crime’, American Journal of Sociology 93(2), 406–39, www.jstor.org/stable/2779590; D. Kerrigan and N. Sookoo (2013) ‘White Collar Crime in Trinidad’, in R. Seepersad and A. Bissessar (eds), Gangs in the Caribbean, Newcastle upon Tyne: Cambridge Scholars Publishing, pp. 151–74; S. Simpson and D. Weisburd (2009) ‘Introduction’, in S. Simpson and D. Weisburd (eds), The Criminology of White-Collar Crime, New York: Springer, pp. 3–14. 7 E. H. Sutherland (1945) ‘Is “White Collar Crime” Crime?’ American Sociological Review 10(2): 132–39, www.jstor.org/stable/2085628. 8 Harriott, Crime Trends in the Caribbean and Responses; C. Bailey (2016) ‘Crime and Violence in Barba­ dos’, in H. Sutton (ed.) IDB Series on Crime and Violence in the Caribbean, IDB Technical Note: 1059, Washington, DC: Inter-American Development Bank; United Nations Development Programme (UNDP) (2012) Caribbean Human Development Report 2012: Human Development and Shift to Better Citizen Security, New York: UNDP, www.undp.org/content/dam/undp/library/corporate/HDR/ Latin%20America%20and%20Caribbean%20HDR/C_bean_HDR_Jan25_2012_3MB.pdf. 9 UNDP, Caribbean Human Development Report 2012, pp. 1–2. 10 Kerrigan and Sookoo, ‘White Collar Crime in Trinidad’, p. 155; Harriott, pp. 7, 12. 11 Sutherland, ‘White-Collar Criminality’; Sutherland, ‘Is “White Collar Crime” Crime?’ 12 H. Beckles (2013) Britain’s Black Debt, Kingston: University of the West Indies Press. pp. 60–63. E. B. Rugemer (2013) ‘The Development of Mastery and Race in the Comprehensive Slave Codes of the Greater Caribbean during the Seventeenth Century’, William and Mary Quarterly 70(3), 429–58, www.jstor.org/stable/10.5309/willmaryquar.70.3.0429. 13 Beckles, Britain’s Black Debt, pp. 143–59. 14 B. Y. Thompson (2017) ‘Good Moral Characters: How Drug Felons Are Impacted under State Marijuana Legalization Laws’, Contemporary Justice Review 20(2), 211–26, doi:10.1080/10282580.2017.1307109; J. Valleriani, J. Lavalley and R. McNeil (2018) ‘A Missed Opportunity? Cannabis Legalization and Reparations in Canada’, Canadian Journal of Public Health 109, 745–47. 15 Coleman, ‘Toward an Integrated Theory of White-Collar Crime’, p. 407.

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Kristina Hinds 16 Bensman, ‘White Collar Crime’, p. 11. 17 Simpson and Weisburd, The Criminology of White-Collar Crime, p. 5. This point notwithstanding, Sutherland’s broad treatment also included ‘white-collar criminality in politics’; see Sutherland, ‘White-Collar Criminality’, p. 4. 18 Coleman, p. 407. 19 Sutherland cited in Coleman, p. 407; Kerrigan and Sookoo, p. 151. 20 Sutherland, ‘White-Collar Criminality’, p. 9. 21 R. J. Chibe (2006) ‘Foreword: A Golden Age of White-Collar Criminal Prosecution’, Journal of Criminal Law and Criminology, 96(2), 389–95, www.jstor.org/stable/40042770; Green, pp. 9–11. 22 Bensman; Coleman; Sutherland, ‘White-Collar Criminality’. 23 Harriott, p. 11. 24 Marshall, ‘The New International Financial Architecture and Caribbean OFCs, pp. 918–19. 25 P. Grabosky (2009) ‘Globalization and White-Collar Crime’, in S. S. Simpson and D. Weisburd (eds), The Criminology of White-Collar Crime, New York: Springer, pp. 129–52. 26 Harriott, p. 7; Kerrigan and Sookoo, pp. 152–53. 27 Grabosky, ‘Globalization and White-Collar Crime’, p. 131. 28 E. C. Suss, O. Williams and C. Mendis (2002) Caribbean Offshore Financial Centers: Past, Present, and Possibilities for The Future, Washington, DC: IMF. 29 W. Vlcek (2009) ‘Behind an Offshore Mask: Sovereignty Games in the Global Political Economy’, Third World Quarterly, 30(8), 1465–81, www.jstor.org/stable/40388330. 30 Ibid., p. 1468. 31 Ibid. 32 CNN (2019) ‘Enron Fast Facts’, 25 April, https://edition.cnn.com/2013/07/02/us/enron-fast-facts/ index.html. 33 Vlcek, ‘Behind an Offshore Mask’, p. 1471; D. C. Johnston (2002) ‘Enron’s Collapse: The Havens’, New York Times, 17 January, www.nytimes.com/2002/01/17/business/enron-s-collapse-the-havens­ enron-avoided-income-taxes-in-4-of-5-years.html?auth=login-google&login=google. 34 Marshall, p. 920 35 S. Cohn (2019) Victims of that Other Ponzi Scheme – Allen Stanford’s – Say They Have Been ShortChanged, 20 February, CNBC.com, www.cnbc.com/2019/02/20/allen-stanfords-ponzi-scheme-victims­ say-they-have-been-short-changed.html; J. Stempel (2019) ‘U.S. Court Voids $65 Million Settlement Tied to Allen Stanford Ponzi Scheme’, Reuters, 17 June, www.reuters.com/article/us-stanford-fraud/u-s­ court-voids-65-million-settlement-tied-to-allen-stanford-ponzi-scheme-idUSKCN1TI2SB. 36 The Economist (2012) ‘Allen Stanford: Arise and Fall’, The Economist, 10 March, www.economist. com/finance-and-economics/2012/03/10/arise-and-fall; US Department of Justice (2019) ‘Last Defendant in Stanford Investment Fraud Scheme Extradited to U.S’, 12 November, www.justice.gov/ opa/pr/last-defendant-stanford-investment-fraud-scheme-extradited-us; A. W.-Y. Walsh and A. D. Spalding (2012) ‘Recognizing and Responding to Red Flags: The Stanford Ponzi Scheme’, Journal of Legal Issues and Cases in Business, 1, 1–13. 37 Cohn, ‘Victims of that Other Ponzi Scheme’; Stempel, ‘U.S. Court Voids $65 Million Settlement Tied to Allen Stanford Ponzi Scheme’; Trinidad and Tobago Guardian (2010) ‘Stanford Investors Lash Out at IMF’, Trinidad and Tobago Guardian, 4 May, www.guardian.co.tt/article-6.2.333825.3b607a4a65. 38 US Department of Justice, ‘Last Defendant in Stanford Investment Fraud Scheme Extradited to U.S’; Caribbean Broadcasting Corporation (2019) ‘Former Regulator to Face Fraud Charges in US after Losing Extradition Fight, CBC, 6 November, www.cbc.bb/2019/11/06/former-regulator-to-face­ fraud-charges-in-us-after-losing-extradition-fight/. 39 BBC (2012) ‘Profile: Allen Stanford’, BBC, 14 June, www.bbc.com/news/world-us-canada­ 17279419; T. Leonard (2009) ‘How Sir Allen Stanford Bowled Antigua Over’, The Telegraph, 20 Feb­ ruary, www.telegraph.co.uk/finance/financetopics/sir-allen-stanford/4736739/How-Sir-Allen-Stanford­ bowled-Antigua-over.html. 40 P. Ashin (2012) ‘Dirty Money, Real Pain’, Finance & Development’, 49(2), www.imf.org/external/ pubs/ft/fandd/2012/06/ashin.htm; The Antigua Observer (2013) ‘Stanford Investors Sue Antigua, ECCB for US $90M, Antigua Observer, 20 February, www.antiguaobserver.com/stanford-investors­ sue-antigua-eccb-for-us-90m/; Trinidad and Tobago Guardian, ‘Stanford Investors Lash Out at IMF’. Trinidad and Tobago Guardian (2012) ‘Antigua Sans Allen Stanford’, Trinidad and Tobago Guardian. 13 March, guardian.co.tt/article-6.2.418014.c54e9e486f. 41 BBC, ‘Profile: Allen Stanford’.

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42 S. Cohn (2014) ‘Where Is the Stanford Ponzi Loot?’, CNBC, 6 March, www.cnbc.com/2014/03/06/ where-is-the-stanford-ponzi-loot-this-is-the-man-who-knows.html; M. Waas, M. (2012) ‘Insight: Obama, Politicians Decline to Return Stanford Money’, Reuters, 14 February, www.reuters.com/article/us­ stanford-campaign/insight-obama-politicians-decline-to-return-stanford-money-idUSTRE81C22H20120214. 43 Marshall, p. 933. 44 R. Saunders (2018) ‘Commentary: The Coming OECD Blacklist’, 19 October, https://pressroom. oecs.org/commentary-the-coming-oecd-blacklist. 45 B. Zagaris (2015) ‘Raising Revenue on the Backs of Caribbean Jurisdictions’, Tax Notes International, 607–08. 46 Ibid.; Marshall, p. 934; T. Alleyne, J. Bouhga-Hagbe, T. Dowling, D. Kovtun, A. Myrvoda, J. Okwuokei and J. Turunen (2017) Loss of Correspondent Banking Relationships in the Caribbean: Trends, Impact, and Policy Options, Washington, DC: IMF. 47 Alleyne et al., Loss of Correspondent Banking Relationships in the Caribbean. 48 Saunders, ‘Commentary: The Coming OECD Blacklist’. 49 Ibid. 50 The five states are Antigua and Barbuda, Dominica, Grenada, St Kitts and Nevis, and St Lucia. 51 K. Hinds and T. Lorde, T. (2018) ‘Caribbean Citizenship by Investment Programmes: Modern Pirates of the Caribbean?’ in J. West (ed.), South America, Central America and the Caribbean 2019, London: Routledge, pp. 38–44. 52 Ibid., pp. 41–42 53 Ibid.; K. Hinds and T. Lorde (2017) ‘Economic Citizenship in the Caribbean: A Critical Analysis’, in J. West (ed.), South America, Central America and the Caribbean, London: Routledge. 54 Kerrigan and Sookoo; C. Barrow-Giles (2017) The National Integrity System and Governance in the Commonwealth Caribbean, Oistins: Carib Research and Publications. 55 W. Soverall (2012) ‘CLICO’s Collapse: Poor Corporate Governance’, American International Journal of Contemporary Research, 2(2), 166–78, p. 171. 56 Ibid., p. 172 57 Ibid., p. 173; W. Soverall and W. Persaud (2013) ‘A Study of Corporate Failure and the Political Economy of Financial Regulation in Trinidad and Tobago and the Caribbean’, International Journal of Humanities and Social Sciences, 3(16), 17–28. 58 Soverall, ‘CLICO’s Collapse’; Soverall and Persaud, ‘A Study of Corporate Failure and the Political Economy of Financial Regulation in Trinidad and Tobago and the Caribbean’. 59 P. Alleyne, W. Charles-Soverall, T. Broome and A. Pierce (2017) ‘Perceptions, Predictors and Con­ sequences of Whistleblowing among Accounting Employees in Barbados’, Meditari Accountancy Research, 25(2): 241–67; P. Alleyne, D. Weekes-Marshall and R. Arthur (2013) ‘Exploring Factors Influencing Whistle-blowing Intentions among Accountants in Barbados’, Journal of Eastern Caribbean Studies. 60 T. H. Colman (2014) The Commission of Enquiry into the Failure of CL Financial Ltd, CLICO (Trinidad) Ltd, CLICO Investment Bank Ltd, British American Insurance Company (Trinidad) Ltd, Caribbean Money Market Brokers Ltd. & The Hindu Credit Union Co-Operative Credit Union, Port-of-Spain: Government of the Republic of Trinidad and Tobago. 61 Trinidad Express (2019) ‘Still Waiting for CLICO Case, Trinidad Express, 10 March, https://trinidad express.com/opinion/editorials/still-waiting-for-clico-case/article_4f2ab156-4391-11e9-b57c-a79bdc676cc7. html (accessed 20 December 2019). 62 Parris has been charged criminally along with another former CLICO executive Terrence Thornhill. A temporary stay in criminal charges was granted for Terrence Thornhill in 2012 and for Leroy Parris in 2015. See Barbados Today (2015) ‘Waiting Game’, Barbados Today, 9 April, https://barbadostoday.bb/ 2015/04/09/waiting-game/. 63 H.-L. Evanson (2018) ‘Sad “No One Paid” for Clico Collapse, Nation News, Barbados, 17 March, www.nationnews.com/nationnews/news/139426/sad-paid-clico-collapse.

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10 Caribbean natural disasters and country/regional responses Robert E. Looney

Introduction In addition to their enchanting beauty, the Caribbean countries share one thing in common – a frequent exposure to violent and costly natural disasters.1 Irma and Maria,2 the two Category 5 hurricanes that hit the Caribbean in September 2017, and Dorian, another Category 5 hur­ ricane that struck the Bahamas in late August 2019, are the most recent storms to have inflicted widespread destruction of property, massive disruption of economic activity and considerable loss of life. The cost of Irma has been roughly set at US $100 billion, while Maria’s damage to Puerto Rico alone may amount to as much as $90 billion.3,4 More recently, in 2019 Hurricane Dorian is estimated to have caused $3.5 billion in damage to the Bahamas.5 Since 1990 the Caribbean region has experienced more than 385 weather-related disasters. Annual losses due to ever more catastrophic climate events in the Caribbean average $3 billion.6 While earthquakes, such as the catastrophic one that hit Haiti in 2010,7 and volcanoes are also a constant danger, hurricanes are likely to remain the single most significant threat to Caribbean economies over the long term and they will be the focus of this chapter. Climate change makes natural catastrophes worse, in both intensity and frequency.8 Climate experts warn that one of the key effects of climate change, warmer waters in the Atlantic Ocean, is likely to result in an increase in both the frequency and power of hurricanes.9 Given the sub­ stantial damage associated with these storms and the limited domestic capacity of governments in the region to cope with their effects, hurricanes will pose a persistent impediment to the region’s growth and development. Due to climate change, the region is also facing a series of threats in the form of rising sea levels, which, in turn, are eroding coastlines and inundating cities and tourist resorts. Climate change is also reducing agricultural production with increasingly prolonged droughts and unseasonal rain. With warming oceans, coral bleaching and ocean acidification will impose staggering costs on local fishing industries. In short, climate change represents an existential threat to the viability of the region’s economies and to individual livelihoods. Unfortunately, the small disaster-prone economies in the Caribbean are, for the most part, not in a position to affect outcomes. They produce minimal amounts of greenhouse gasses relative to the larger developed and developing economies, so cannot control the process of

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global warming through standard mitigation measures such as adopting cleaner energy. Nor do they currently have the financial means to undertake significant abatement measures required to insulate themselves from the effects of increasingly violent storms and rising sea levels. Several Caribbean countries rank among the most highly indebted in the world. International Mone­ tary Fund (IMF) data show that in 2019 the average Caribbean debt was 70.5% of gross domestic product (GDP), up from 59.6% in 2000.10 According to the United Nations (UN) Economic Commission for Latin America and the Caribbean, without meaningful intervention, the countries of the Caribbean cannot grow their way out of the current debt crisis.11 Moreover, the island economies face challenges from iso­ lation, small local markets, high transport costs and expensive energy. The promised agricultural revolution never quite arrived, with fragile crops like coffee and bananas being extremely vul­ nerable to storms and changing weather conditions. Many consider the situation hopeless and foresee a series of impending disasters leading to a future of declining economic fortunes and mass migration out of the region.12 The case studies below suggest that this pattern of events is already happening in several countries. However, a final section suggests that solutions are available, but that they will require concerted efforts and regional cooperation to a degree not seen so far.

Recent hurricanes Owing to their increased intensity, hurricanes are having an impact on a greater number of countries at any given time. In 2017 Hurricane Irma caused extensive damage in Anguilla, Antigua and Barbuda, the Bahamas, the British Virgin Islands, Cuba, the Dominican Republic, Haiti, Puerto Rico, Saint-Martin, Sint Maarten, Saint Barthelemy, Saint Kitts (Christopher) and Nevis, the Turks and Caicos Islands, and the US Virgin Islands. Hurricane Maria wrought destruction on the Bahamas, Dominica, the Dominican Republic, Guadeloupe, Haiti, Marti­ nique, Puerto Rico, the Turks and Caicos Islands, and the US Virgin Islands. In 2019 large regions of the Bahamas were devastated by Hurricane Dorian. The immediate loss of infra­ structure disrupted economic activity and social interaction in these countries. They all faced significant financial constraints that impeded their recovery and reconstruction. While the region also encounters natural disasters in the form of earthquakes (Haiti in 2010) and volcanoes (off and on in Montserrat since 1995), weather-related disasters are most likely to pose the greatest future threat to the region. The smaller island nations and territories are the most vulnerable in this regard. The focus on climate-related natural disasters reflects the findings of a leading global insurance reinsurer, Munich Re, which recently noted: We have been collecting data on natural disaster loss events since the 1970s. Analyzing this data, we see that the vast majority – roughly 80 to 90 percent – of natural disaster events worldwide stem from weather-related catastrophes as opposed to geophysical events like earthquakes, seaquakes, or volcanic eruptions.13

Anguilla Anguilla relies heavily on tourism and offshore financial services to support its economy(72.1% of GDP in 2018), with tourism accounting for 57% of GDP in 2016.14 Anguilla was on track for a record year for tourism when Hurricane Irma damaged up to 90% of the island’s gov­ ernment buildings and its electricity infrastructure.15 However, by December 2018 nearly all of the island’s power had been restored. At that time, many of the country’s smaller tourist facil­ ities had reopened or anticipated opening for the holiday season. However, Anguilla’s leading 141

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resorts did not open until well into 2018 amid widespread fears that the tourism sector might take years to recover completely.16 As Anguilla is a British Overseas Territory, it has had access to support from the United Kingdom to fund its recovery and rebuilding efforts – an advantage not shared by some of its neighbouring islands.17 However, initial assistance efforts from the UK were met with criticism from some Anguillans, with the response from the British Foreign and Commonwealth Office alleged to be slower than that from the governments of France and the Netherlands, which control half of neighbouring St-Martin/St Maarten. Assistance was delayed not by a lack of goodwill but because UK law prevented a disburse­ ment being made from its £13 billion aid budget since Anguilla, along with the British Virgin Islands, was too wealthy to qualify for aid. Instead, assistance came from general Treasury funds and not the Department for International Aid budget. Initially, in September 2017 British Prime Minister Theresa May announced that the total aid package for British Overseas Terri­ tories affected by the 2017 Atlantic hurricane season would amount to £57 million.18 By December this had been increased to £70 million, with Anguilla receiving £60 million, and the British Virgin Islands and the Turks and Caicos Islands receiving the remainder. On 20 July 2018 the UK Minister of Overseas Territories approved the release to Anguilla of the remaining £50 million of a £60 million reconstruction grant. This helped to ensure fiscal sustainability, despite reconstruction-related expenditure increases. The release came after the UK approved Anguilla’s medium-term economic and fiscal plan, which outlined fiscal measures to ensure sustainable public finances during 2021. However, the country’s current account deficit, which stood at 22.2% of GDP in 2017, before increasing to 27.0% in 2018, might be difficult to finance.19 However, owing to the destruction caused by Hurricane Irma and the subsequent loss of tourism, the economy experienced a recession in 2017 and 2018 as the tourism industry lost 37.0% of its value in real terms from 2016 to 2018. GDP growth contracted by 7.7% in 2017, and consumer spending dropped by 11.7%, with capital formation declining by 19.8%.20 Gov­ ernment consumption also contracted sharply, by 11.6%. However, GDP recovered in 2018, expanding by 1.9% as hotels returned to operation. As of April 2018, the Four Seasons, Zemi Beach House, and Reef by Cuisinart had reopened and were fully operational for the 2018/19 winter high season. Tourism also benefited from the reopening of the Anguilla-St Maarten ferry terminal in July 2018 as St Maarten’s airport provides a key access point for visitors to Anguilla. As for the future, since the 2015 general election, the centrist Anguilla United Front (AUF) has held six out of seven seats in the House of Assembly.21 This dominant position helped to ensure ease of policy formation, at least up until the general election in September 2020. Under the stewardship of Chief Minister and Minister of Finance Victor Banks, the AUF continued to pursue broadly pro-business policies, including the use of additional public spending and private concessions to boost infrastructure development. The government has pledged to prioritize education reform, investment-led economic development and reconstruction efforts. In achieving its education goals under the FutureVision 2020 plan,22 the government expects to benefit from a €11.6 million grant from the European Union (EU). The focus will be on reviewing, upgrading and renewing the curricu­ lum, which should support a more productive workforce further down the road. On the eco­ nomic development side, the government will attempt to incentivize additional investment into the hotel and service industry, and accelerate the creation of a new economic zone for infor­ mation technology businesses. Reconstruction requirements remain vast and primarily supported by external funds. The planning and construction of a new air traffic control tower for the international airport will be 142

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a primary focus along with repairs to schools, clinics and hurricane-response infrastructure.23 However, construction growth will slow as recovery efforts wane. While it is expected that construction activity will remain relatively elevated in the near term, supported by continued private and public sector reconstruction efforts, this tailwind is likely to fade. As a result, the declining investment will see growth decelerate in the years ahead.

Antigua and Barbuda Hurricane Irma severely damaged property and infrastructure on Antigua and Barbuda. The storm passed directly over Barbuda, the smaller island of the nation, causing an estimated US $300 million in damage – roughly one-third of GDP – and leaving the island effectively unin­ habitable.24 The storm damaged or destroyed 95% of all properties on Barbuda, prompting a mandatory evacuation of the island’s entire population of 1,700 inhabitants.25 The larger island of Antigua suffered relatively little damage and in 2019 was continuing to accommodate most of the displaced persons from Barbuda. The majority of the nation’s vital tourism industry – which indirectly contributes 60.4% of GDP and directly supports 6,000 jobs – remained largely intact. The primary airport and the cruise terminal in St John’s remained open. As a result of the limited damage to Antigua, the country’s GDP was not seriously affected, declining from a rate of growth of 5.5% in 2016 to 3.1% in 2017, before expanding to 7.4% in 2018.26 Recovery and reconstruction efforts on Barbuda are likely to take several years to complete, given the extent of the devastation and the country’s limited access to funds. The government of Antigua and Barbuda has insufficient fiscal capacity, as a debt burden that stood at 89.5% of GDP in 2018 will constrain the country’s ability to take on additional debt.27 The country’s current account deficit increased from 2.4% of GDP in 2016 to 8.8% in 2017, before declining slightly to 7.0% in 2018. How long the figures can remain in this range is problematic, given the country’s debt situation. Due to its collapsing economy, Venezuela may not be able to assist Antigua and Barbuda (and potentially others) to the extent that it has in the past.28 However, donations from inter­ national organizations and other nations have begun to trickle in. Notable assistance has come from the ALBA Bank29 (US $2 million) and $29 million from the Caribbean Development Bank (CDB).30 In early 2018 the UN Development Programme (UNDP) launched a relief project,31 aimed at installing more resilient roofs on damaged houses in Barbuda. However, progress is slow and painful, given that most residents have left the island. With a limited amount of funds reaching Barbuda, a controversy has developed that may hinder recovery. Since the end of slavery in the 1830s, land on Barbuda has been communal.32 Collective land ownership prevented Barbuda from developing tourism. However, rebuilding efforts will cost more than US $200 million. Prime Minister Gaston Browne has decreed an end to the island’s communal land practice on the contention that the tradition is a significant impediment to the foreign investment needed for the island’s recovery.33 Browne’s decree has spawned a backlash from the island’s residents who insist that the tradition should remain in place even if it has negative consequences for the recovery process. Browne’s Antigua and Barbuda Labour Party swept to a resounding victory in the island’s 21 March 2018 general election.34 He interpreted this as a mandate to move forward with proinvestment policies, including land privatization in Barbuda. Privatization is likely to weigh on social stability. Critics claim that the government will use the measures to move forward quickly with foreign-owned development schemes, while not adhering to environmental or other local concerns. 143

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The tourism sector will be the critical driver of growth, as new and renovated resorts boost capacity.35 In 2019 the Royalton Antigua opened, thus further increasing capacity. Other resorts in the pipeline include a new hotel by the Yida International Group and the US $250 million Paradise Found resort on Barbuda.36 However, fiscal constraints will present headwinds to growth, as the government continues to pay down debt over the coming years.

The British Virgin Islands The British Virgin Islands face a similar scenario to neighbouring Anguilla. The territory’s islands were devastated by Hurricane Irma and damaged, albeit to a lesser extent, by Hurricane Maria. All told, the hurricanes caused up to nearly US $3.6 billion in damage to the island’s buildings, homes, boats and yachts.37 Furthermore, almost 20% of the population was displaced. As a British Overseas Territory, the British Virgin Islands received support from the UK government. Like many smaller nations in the Caribbean, the British Virgin Islands rely on the provision of offshore financial services and tourism to support their economy. The offering of offshore registration to firms seeking to incorporate on the islands began in the 1980s, and incorporation fees have since come to provide over half of the government’s annual revenues.38 As of the second quarter in 2017, there were 395,684 companies active in the British Virgin Islands.39 With electricity and communications lines knocked out by the hurricane, there was a period of rebuilding before the islands’ financial services sector was functioning at full capacity. Similarly, the territory’s principal port, at Tortola, was closed for several weeks. The Norwegian Cruise Line cancelled all stops at the island for the remainder of the year. However, given that external economic and financial market factors mainly drive financial services as opposed to domestic events, hurricanes have had little impact on the territory’s growth in comparison to events such as the financial crisis of 2007–08. A buoyant financial sector has thus limited the downturn in the territory’s growth resulting from a decrease in tourism. While many of the financial offices suffered extensive damage in 2017, the attractive­ ness of the British Virgin Islands, where corporations effectively pay no taxes on their revenues, ensured that the industry rebounded and continues to house foreign professionals. However, the threat of punitive action by the EU for tax avoidance carries downsides risk. Greater scrutiny from the EU regarding the territory’s status as a tax-friendly market could undermine the viability of the British Virgin Islands financial services sector. In March 2018 the British Virgin Islands were added to the Financial Action Task Force (FATF)’s intermediary ‘grey list’ of jurisdictions that do not adhere to EU anti-tax avoidance standards but have committed to work with the EU to reform their practices.40 As of October 2019 the British Virgin Islands remained on the ‘grey list’.41 Should the FATF ever determine that the British Virgin Islands are non-compliant with these strictures, it could add them to its ‘blacklist’ of tax havens, impose tighter controls on financial transactions with the EU bloc or indirectly elevate the reputational risk associated with operating in the British Virgin Islands, thus along with climate change severely jeopardizing future economic growth.

The Turks and Caicos Islands Tourism and related activities account for approximately 35% of the Turks and Caicos Islands’ GDP.42 The sector’s rapid growth in recent years has been supported by the development of new hotels and resorts, particularly in the high-value luxury segment. While the country suf­ fered extensive damage from Hurricanes Irma and Maria, no deaths occurred.43 However, with communications with many of the country’s islands severed and the country’s air and seaports 144

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closed for several weeks, there was an immediate drop-off in economic activity. The British Foreign Office advised against travel to the Turks and Caicos Islands as of 3 October 2017, citing damaged infrastructure and limited access to essential supplies. Nonetheless, the country’s tourism hub, Providenciales, was less affected than the rest of the island chain, and by mid-October 2017 commercial air travel had resumed, government offices reopened, and Carnival Cruises restarted port calls to Grand Turk in early November. As a British Overseas Territory, the Turks and Caicos Islands has benefited from UK support for its rebuilding efforts. Estimates suggest that Turks and Caicos Islands suffered US $500 million in damages and losses as a result of Hurricanes Irma and Maria, equivalent to more than 60.0% of GDP.44 While significant, the damage was less severe than elsewhere in the Caribbean. Most buildings suffered little to no structural damage, large and medium-sized businesses were covered by insurance, and all of them planned to rebuild and restart operations. Additionally, the UK government committed significant funds to underwriting rebuilding efforts. By the end of 2017, most of the country’s tourism infrastructure and major resorts had opened, and flights and port calls from cruise ships had resumed. The hurricanes had an initial short-term adverse effect on the Turks and Caicos Islands’ growth. However, given the pattern of storm damage, the willingness of the major resorts to begin immediate repairs and expansion, together with the availability of funds for rebuilding, recovery is proving to be fast. World Bank data show that growth dropped to 4.3% in 2017, down slightly from 4.4% in 2016, but increased to 5.3% in 2018.45 Tourism will continue to underpin growth. The sector will benefit from increased access and visibility. In November 2017 Southwest Airlines introduced a daily service to Providenciales from Florida,46 thus expanding access to the islands from the USA for stay-over visitors, who have historically accounted for one-third of total arrivals but who account for the vast majority of tourism’s contribution to the islands’ economy. The government has also committed significant funds to bolster the country’s tourism marketing board. A strong hotel and resort development pipeline, particularly in the high-value luxury seg­ ment, suggests that the sector will continue to draw investment. One of the prominent hotel chains, Ritz-Carlton, is developing a large US $224 million hotel in Grace Bay, which secured a conditional building permit in March 2018.47 Additionally, projects that stalled during the 2008–09 financial crisis have begun to secure new investment. In May 2018 Chinese developers acquired the $160.0 million incomplete Royal Reef resort project.48 In June the new developers secured the Toscana Resort, a large, incomplete project in Grace Bay.

Dominica After avoiding the worst of Hurricane Irma, the island of Dominica was devastated following a direct hit from Hurricane Maria.49 Nearly all the buildings on the island suffered some degree of damage, and as many as 27 people perished. Initial assessments raised the fear that due to severe damage to its tourism infrastructure, including Dominica’s main port at Roseau, the tourist sector would be affected for some time as many travellers opted for other destinations. Tourism and related sectors accounted for 33.4% of GDP in 2017 and supported 31.6% of total employment.50 Furthermore, Hurricane Maria inflicted substantial damage on the island’s agricultural sector,51 which accounted for an average of approximately 13.0% of GDP during the period 2014–18. With tourism and agriculture in sharp decline and domestic consumption falling steeply with mounting unemployment, the island’s manufacturing sector is unlikely to see an 145

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increase in activity anytime soon. More than 80% of the sector was damaged or destroyed. GDP growth contracted by 6.8% in 2017, while the agricultural sector contracted by 19.1% in that year, and by 27.4% in 2018.52 Many dire forecasts appeared in the wake of the storm. Fortunately, these have turned out to be overly pessimistic. Dominica began its recovery process by first clearing the damage inflicted by Maria just enough for the island to be deemed safe again, and then began to welcome tourists back to the country. Initially, the government’s repair efforts were small-scale with teams working to clear roads, dispose of debris and restore water and electricity. As of April 2018 the government had spent nearly US $19 million to remove debris and rebuild roads.53 Despite the problems in agriculture, GDP growth returned in 2018, with the economy expanding by 2.3%.54 Prior to the passage of the Hurricane Maria, the island had expected to receive 219 cruise calls. After the storm, that number fell to 34. Cruise ships returned to the country in January 2019, when 16 additional visits were added, including the return of Carnival Cruise Line’s Fascination. 55 However, following the onset of the COVID-19 crisis in March 2020 all sailings were suspended. The key to the government’s efforts in drawing the cruise lines back was the restoration of accessibility to the island’s main attractions. By April 2018 19 of the island’s 23 attractions were back in operation.56 To assist recovery, the World Bank and the EU authorized US $65 million and €24 million, respectively, for humanitarian assistance, replacing assets lost in the agricultural sector, rebuilding houses and strengthening resiliency on the island.57,58 Insurance payments have also supported the reconstruction of tourism facilities and residences with tourism recovering faster than expected .59 However, given the degree of damage inflicted by the recent storm, it is likely to take several years to rebuild back to pre-storm levels. In the meantime, destroyed infrastructure, particularly in the tourism sector, will act as a drag on economic activity over the longer term. Nevertheless, growth should continue with the IMF forecasting GDP growth of 9.4% in 2019 before levelling off at 4.9% in 2020.60 Dominica faces a more challenging economic recovery than many of the neighbouring economies in the Eastern Caribbean. It is more heavily reliant on the agricultural sector and is a less popular tourist destination. Furthermore, as an independent country, it has more limited access to reconstruction funding compared to the British, French and Dutch overseas territories in the Caribbean. Moreover, the government of Dominica faces constraints in its ability to borrow and finance reconstruction and investment. In 2015 Dominica entered into an IMF agreement to reduce the debt-to-GDP ratio to 60% by 2030.61 However, the government reversed course because of the storm. The debt-to-GDP ratio subsequently rose to 76.8% in 2019, up from 75.3% in 2015. Dominica’s fiscal balance has been supported somewhat by its successful Citizenship by Investment (CBI) programme,62 which produced a large surplus of 14.8% of GDP in 2016. Nevertheless, Dominica’s CBI programme will only provide limited fiscal support over the coming years, with the government severely limited in its spending capacity once multi­ lateral support begins to recede. IMF data show that in 2017 the government ran a slight surplus of 0.6% of GDP before deficits returned, reaching 12.9% of GDP in 2018 and 7.9% in 2019.63 The current account deficit at 12.7% of GDP in 2017 and 43.4% in 2018 is unsustainable. Dominica’s short- and long-term growth outlook also faces headwinds from substantial constraints on private and public credit. The domestic financial sector has sustained heavy losses as two major natural disasters in three years curtailed economic growth and many borrowers’ ability to repay debts. Hurricane Maria exacerbated the increase of non-performing loans in 146

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Dominica’s financial system.64 Non-performing loans reached 17.4% in 2017, up from 14.5% in 2016. However, these decreased to 17.0% in 2018. Still, domestic banks’ capacity to issue new debt remains constrained. This weakness in Dominica’s financial sector will weigh on the private sector’s ability to recover. With grants for recovery declining, private consumption and investment have also contracted back towards pre-hurricane levels. The economy will have to become more self-reliant if growth is to stabilize in the 3%–5% range. During the 1980s and 1990s growth averaged 4.0%, but from 2000–18 it dropped to 1.1%. While revenue from the Citizenship by Investment scheme may help, new sources of funding will be needed to raise the capital for the modernization of Dominica’s infrastructure

St Maarten All told, Hurricane Irma caused at least US $1.8 billion (180% of GDP) in damage and losses with much of the disaster affecting St Maarten’s tourism sector. The island is not only hugely reliant on visitor arrivals to drive growth, with tourism and related sectors accounting for around 80% of GDP in 2017, but the infrastructure for that sector was also one of the hardest hit by the hurricane. In that year GDP contracted by 8.7%. By early 2018 the tourist sector was still severely crippled.65 The mega-resorts, the country’s largest employers, remained closed. Compounding the problems of the tourist industry were the constraints posed by the severe damage to the Princess Juliana International Airport and the port at Philipsburg.66 Indeed, Royal Caribbean had cancelled all visits to the island through the end of October, and the smaller Windstar Cruises had removed St Maarten from its schedule until at least early 2018. By mid-March 2018 the roads were clear of wreckage, but most tourist facil­ ities were still recovering from the disaster. In many cases, the major seaside resorts did not reopen until the summer or autumn of that year. St Maarten now has access to the Caribbean Catastrophe Risk Insurance Facility and support from the IMF, along with Dutch aid.67 However, Dutch funds come with conditions. Prime Minister William Marlin was ousted in November 2017 by a vote of no confidence after refusing the terms of a €550 million aid package from the Netherlands.68 The conditions for hurricane aid included the creation of an integrity committee to oversee the disbursement of aid funds and temporary Dutch control of the country’s border. The country’s new government that was elected in February 2018 supported the Dutch aid package, whose funds have helped to speed up St Maarten’s recovery. By 2019 growth was underway driven by the tourist industry, with approximately onethird of citizens working in hotels and hospitality. Almost all the hotels in St Maarten had reopened. In that year the number of stay-over arrivals surged, increasing by 114.5% during August and exceeding 2018’s annual total .69 That said, stay-over arrivals are still well below pre-hurricane levels, which suggests that the tourism industry has additional room to rebound. However, growth is expected to slow in the long term with the completion of reconstruction projects. In the near term, the reconstruction of the Princess Juliana International Airport will strengthen St Maarten’s transport links to North America, offering upside potential to its tour­ ism industry. In September 2019 the World Bank approved a US $72.0 million project to advance the reconstruction of St Maarten’s international airport and improve its resiliency for future extreme weather events.70 The project, which was financed mainly by the Dutch government and the European Investment Bank, aims to boost the airport’s capacity to exceed 2.5 million passengers per year. 147

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Puerto Rico After Puerto Rico took an indirect hit from Hurricane Irma, Hurricane Maria passed directly over the island as a Category 4 storm.71 Damage was estimated at US $90 billion.72 Puerto Rico’s electrical grid, vulnerable due to years of mismanagement and underinvestment, was extensively damaged by the storms. Hurricane Maria caused the deaths of 2,975 people.73 The loss of power to residents averaged 84 days.74 Approximately 12% of the Commonwealth’s residents left the island, with over half choosing not to return.75 In 2018 the rate of poverty was about 43.1%, compared to 13.1% for mainland USA.76 The storms also hit Puerto Rico’s tourism infrastructure, particularly resorts near San Juan, a popular destination. While the industry has been a rare bright spot amid the territory’s pro­ longed recession,77 extensive damage significantly curtailed business during the peak winter tourism season. Similarly, damage to the Commonwealth’s agricultural sector was widespread, with estimates of crop destruction as high as 80%.78 With the US Congress indicating that it intended to provide Puerto Rico with the funds it needed to rebuild, and with US President Donald Trump declaring the island a disaster zone, aid fell under the authority of the US Federal Emergency Management Agency (FEMA).79 However, since Puerto Rico is not a US state, and does not have a voting representative in Congress, it generally receives less attention than US states. Lack of representation creates the risk that later waves of funding, which require Congressional approval, will be inadequate or not passed promptly.80 Additionally, these waves may become increasingly politicized as time passes, particularly following the tense Congressional negotiations surrounding Puerto Rico’s finances. It was anticipated that rebuilding funds authorized by the US federal government would produce an increase in economic activity during 2018, while consumer spending would be supported by insurance and FEMA payments to replace lost or destroyed property.81 However, homeowners in Puerto Rico generally have less insurance coverage than those in mainland USA, and FEMA withheld funds from homeowners lacking proof of home ownership.82 GDP growth contracted by 2.7% in 2017 and declined further, by 4.9%, in 2018. Household con­ sumption, on the other hand, contracted by a mere 0.4% in 2017 before increasing by 1.1% in 2018. Even before the passage of Hurricane Maria, Puerto Rico was in a dire financial situation. The Commonwealth was confronted by more than US $120 billion in debt and unfunded pension liabilities, which led the US Congress to appoint a fiscal control board to manage the territory’s finances. In mid-2018 the Federal Oversight and Management Board (FOMB),83 mandated by Congress to oversee the Commonwealth’s budget, estimated that aid would total roughly $62.0 billion in over the next few years, with $50.0 billion coming from the federal government and the rest from private insurance payouts. The FOMB estimated that only 12.5% of relief funds would have a direct impact on the local economy because most would go on imports. However, it was clear that the funds would provide just a short-term boost to the economy,84 which would quickly fade if structural reform efforts proved insufficient to reverse Puerto Rico’s long-term economic decline. The bulk of the relief spending was to take place in 2018 and 2019, before fading in 2020. Critics of US assistance for Puerto Rico claim that the island did not receive anywhere near the funds and attention given to comparable disasters on the mainland.85 While the assistance may give some relief, and probably a short-term economic stimulus in some sectors, the island’s structural impediments will remain a tight constraint on growth. Problems such as inadequate infrastructure, education and health care systems, alongside the likely regressive effects of the

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2017 US tax reform, pose longer-term challenges for Puerto Rico.86 A reasonably optimistic forecast is that 2015 living standards may be restored by 2035. The big uncertainty is US funding.87 An optimistic view contends that federal aid will gra­ dually make its way to the island in the coming years, despite frequent delays amid partisan fighting in the USA. In September 2019 the FOMB issued a warning. The Board noted that there was a risk that aid from FEMA and Housing and Urban Development could come in at as much as $30.0 billion below the $69.0 billion it estimated in its May 2019 fiscal plan.88,89 This risk is due to perceptions among the US federal government that Puerto Rico is corrupt, and not to be trusted with additional funds.

The US Virgin Islands The losses suffered from the destruction wrought by Hurricanes Irma and Maria caused the US Virgin Islands’ economy to contract in 2017 by 1.7% after expanding by 1.09% in 2016.90 Estimates of damage indicate that as many as 80% of the territory’s structures suffered some level of damage.91 Many of these facilities were critical for the territory’s tourism industry. The ser­ vice sector typically accounts for two-thirds of economic output in the US Virgin Islands, with more than one-third of output coming from industries directly related to tourism. Damage to the island’s tourism infrastructure and a reduced tax base are exacerbating the territory’s ongoing fiscal crisis. The US Virgin Islands’ economy was already vulnerable, with real GDP contracting by an estimated average of 4.0% per year since 2009 because of weak tourism from the USA as well as the closure of the Hovensa oil refinery in 2012 (when GDP contracted by 15.0%).92 Moreover, the labour force is in decline as the territory has seen significant outmigration in recent years. After peaking at 53,974 in 2008, the labour force declined to 50,859 in 2019.93 Outmigration will no doubt pick up given a fall in living standards and limited economic prospects. On the other hand, the US Virgin Islands should see growth over the next few years stem­ ming from the territory’s rebuilding efforts, including a restart of Hovensa.94 Insurance pay­ ments and funding from FEMA are expected to power a sharp upturn in construction. However, the construction boom is a one-off stimulus rather than a foundation for a sustained recovery. While the costs of rebuilding will be covered in large part by assistance from FEMA, the US Virgin Islands government is highly likely to default on repayments given its substantial debt burden, limited liquidity and narrow revenue base. The territory’s debt stands at US $2.1 bil­ lion, or $19,000 per capita, higher than that of Puerto Rico. The US Virgin Islands credit rating is now sub-investment (‘junk’) grade according to all three major credit rating agencies, and the territory will reportedly no longer be covered by S&P or Fitch after it stopped providing data, thereby severely limiting its access to capital markets.95 Concerns about a possible municipal debt crisis rose when Moody’s cut the Virgin Islands Water and Power Authority’s bond rating to eight notches below investment grade.96 Com­ bined with a poorly funded pension system and a substantial budget deficit, the government finances of the US Virgin Islands are severely stressed, threatening the economy’s medium to long-term prospects and its ability to recover from any future natural disasters.

The Bahamas The Bahamas’ economy is mainly dependent on the tourism, real estate and financial sec­ tors.97,98 Although not included as a separate item in the country’s national income accounts, 149

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the IMF estimates that tourism receipts account for around 27% of the Bahamas’ GDP.99 In 2018 real estate and construction activities contributed 25% of GDP, followed by finance at 9%. Following the devastation of large parts of the Bahamas by Hurricane Dorian in early Sep­ tember 2019, the country now faces the prospect of a long period of expensive reconstruction work and fiscal stress on government budgets that were already in a weak state.100 As noted earlier, the Inter-American Development Bank (IDB) estimates the damage wrought by Hur­ ricane Dorian at US $3.4 billion.101 The economic fall-out from Hurricane Dorian is expected to push the Bahamas into its sixth annual contraction in output since 2008. Several distinct trends characterize the Bahamas’ fiscal accounts.102 Government revenue and expenditure have increased their share of GDP since the 1990s. In the 1990s revenue averaged 10.7% of GDP, rising to 11.7% in the 2000s and to 14.7% from 2010–18. Expen­ diture, on the other hand, increased more rapidly from 12.1% of GDP in the 1990s to 13.3% in the 2000s and to 18.7% from 2010–18. As a result, government deficits expanded from 1.4% of GDP in the 1990s to 1.6% in the 2000s and to 4.0% from 2010–18. Increasing def­ icits resulted in rising debt levels with the average government debt to GDP 19.1% of GDP in the 1990s rising to 22.5% in the 2000s and up to 46.2% from 2010–18. In 2018 government debt reached 63.3% of GDP. The deterioration in the country’s fiscal accounts stemmed from a series of causes. As with many developing countries, government expenditure rose over time due to an overexpansion of personnel. Moreover, many of the country’s state-owned enterprises remained inefficient, hampered by deficits that had to be covered by government subsidies. In addition, posthurricane rebuilding and clean-up activities following the passage of several hurricanes previously had an impact on revenue collections and spending levels. The May 2018 budget proposed by the new Free National Movement government showed a significant policy shift towards tightening fiscal discipline.103 It introduced fiscal responsibility legislation (approved in September) to limit the fiscal deficit to 1.8% of GDP for 2018/19, to 1.0% for 2019/20, and to 0.5% for 2020/21, with expenditure growth after that not projected to exceed long-term growth in nominal GDP. An independent Fiscal Responsibility Council was to supervise these limits.104 These fiscal projections were disrupted entirely by Hurricane Dorian. Added to the recon­ struction costs associated with Dorian, the increasing effects of climate change will impose enormous costs on the Bahamas stretching out into the future. The government’s immediate priority is to ensure recovery from the production and infrastructure losses; in 2019 it announced a value-added tax exemption105 for hurricane-affected islands and also planned to set up a trust fund106 to aid rebuilding. As a result, the government is highly likely to face increasing fiscal deficits with hurricane-related lost revenues and increased reconstruction expenditures. Given existing debt levels, financing these added expenses represents a crucial challenge for the country. As for the future, the IMF gives the Bahamas a 20% chance of being hit by a hurricane in any given year.107 With 80% of its land lying within 3 ft of sea level and reason to believe that even more areas may be affected,108 the country faces the threat of losing a considerable amount of land and tourism resources as the effects of climate change become more pronounced. The IDB notes that ‘achieving disaster and climate change resilience will require rethinking development strategies, the location of settlements, redesigning infrastructure, securing better data and infor­ mation management, and strengthening environmental protection as a first protection barrier against natural hazards’.109 The government will be under increased pressure to undertake these actions while at the same time ensuring that adequate resources are available for improvements in the education, health and general well-being of the population. 150

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Assessment Several patterns emerge from the country case studies. Most prominent is the financial limita­ tions these small island nations have in responding to natural disasters. Domestic resources are often severely limited due to prolonged periods of fiscal deficits and accumulated external debt burdens. International aid, while useful, often comes after a considerable delay and is mainly focused on short-term issues such as humanitarian needs and repair rather than on longer-term investments that increase resiliency to subsequent disasters. In recent years, with the passage of increasingly costly hurricanes, aid fatigue seems to be setting in. Given that there is likely to be an increase in the number of natural disasters in other parts of the world, competition for aid assistance will be intense. For example, there were 407 natural disasters worldwide in 2018, including 116 flooding events and 112 severe weather events. Insured losses from natural catastrophes in 2018 totalled US $98 billion as of September 2019, down from $147 billion in 2017. However, it was still the fourth costliest year on record in constant dollars.110 A vicious circle is developing in the Caribbean, whereby inadequate funds for reconstruction lessen resiliency to climate change. The result is incomplete recoveries, which in turn perpe­ tuate and, in some cases, expand large pockets of poverty and thus increased numbers of citizens who are highly vulnerable to the next round of natural disasters. If the circle continues, look for an accelerated depopulation of the region with mounting numbers of climate refugees. Financing these added expenses is a crucial challenge for many Caribbean countries. In the past, Official Development Assistance has helped, but because of their high per capita income levels, many do not qualify for further help.111 Also, with US assistance under the Trump Administration problematic at best, and European countries mired in a pattern of slow growth and with massive climate-related allocations needed elsewhere around the world, funds are in short supply.112 In particular, as part of the November 2016 Paris Climate Agreement, the developed countries agreed to provide developing countries US $100 billion per year through 2020 in assisting their transition to lower greenhouse gas emission economies with significant climate change abatement capabilities. Unfortunately, every indication suggests that aid pledges will come up significantly short.113 Other sources of funding for the Caribbean tend to come in at a high cost. One recent study found that companies are likely to be charged up to 10% more for loans if they are located in countries perceived as more exposed to climate-related risks.114 While the financial resources to combat the mounting tool of disasters are likely to remain stretched, increased country self-help measures have expanded regional cooperation, and innovative insurance schemes may enable reasonably swift recoveries from natural disasters while significantly reducing many of the adverse effects associated with climate change. First, a reorientation of development strategies will be required if the region is to remain viable. The focus of these programmes should shift towards the construction of sturdier buildings, pov­ erty reduction, targeted educational programmes and diversification away from an over-reliance on climate-sensitive tourism. Caribbean countries, to remain viable, must look beyond short-term disaster responses and commit themselves to a focus on building self-protective resilience throughout the region. Returns on adaptation investments can be extremely high. The Global Commission on Adaptation estimated that adaptation projects often had benefit-cost ratios ranging from 2:1 to 10:1.115 IMF research on the Caribbean found that investing in structural resilience would increase potential economic output by 3%–11%.116 However, adaptation, as the World Bank documents, will entail higher costs if conformity to higher standards occurs.117

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Second, cooperative agreements will be critical. In attempting to respond to the dangers of climate change, it has become increasingly apparent that rather than national efforts, many adaptive measures are much more effective at the regional level. As noted above, the Caribbean Catastrophe Risk Insurance (CCRIF), located in the Cayman Islands, enables member countries to reduce risks associated with climate disasters. Risk reduction occurs because it is unlikely that all of the region’s countries will experience a significant disaster in the same year. Given the limited penetration of conventional insurance throughout the region, along with limited avail­ ability of donor assistance, the CCRIF fills a funding vacuum through providing immediate assistance. Following the September 2017 hurricanes (Irma and Maria), the CCRIF distributed US $29.6 million within two weeks to six affected countries. Between 2007 and 2017 the CCRIF distributed over $119 million to affected countries.118 Insurance, such as that through the CCRIF, also complements the first point above. It provides an incentive for countries to shift resources towards climate-resistant structures, thus reducing their premiums. Another area of regional cooperation involves migration. The Caribbean faces increasing numbers of climate migrants – individuals displaced by increasingly intense storms or agricultural disasters brought on by droughts or flooding. Of the 10 countries worldwide that experience the highest average annual internal displacement per capita, six are in the Caribbean.119 Unfortunately, climate migrants have no formal rights in the USA or other countries outside the region.120 Given the current US political environment, there is little chance the USA will pass legislation creating a new category of refugees.121 In an attempt to fill this vacuum, the Caribbean has moved ahead by creating a series of Free Movement Agreements (FMAs),122 facilitating the liberalization of migration restrictions between countries. FMAs within Caribbean Community (CARICOM) and OCES countries now grant significant privileges in the form of indefinite stays and even permanent resettlement to those displaced by catastrophic hurricanes. It is not surprising that agriculture is on the top of the regional climate change agenda, given its importance to the Caribbean and its demonstrated vulnerability to climate-induced impacts. Regional efforts take place through the Regional Food and Nutrition Security Policy (RFNSP).123 The RFNSP is a work in progress that will eventually enable CARICOM member states to benefit from economies of scale and economic externalities that are unavailable to them in isolation, and at a lower cost than they could achieve acting on their own. Some of the measures proposed under the policy include the creation of a regional infor­ mation system that can provide early warning for socio-economic and environmental shocks. Also of importance is the setting up of agricultural insurance schemes to safeguard against natural disasters, as well as the creation of emergency reserve stocks of food. Third, new sources of revenue will be required to support national abatement efforts. These will also require close regional cooperation. Take the all-important tourism industry. Many of the Caribbean countries rely on fiscal incentive schemes for promoting foreign direct invest­ ment (FDI). Given the need for increasing their tax base, countries are increasingly willing to grant tax exemptions for the remodelling of older tourist facilities or the construction of new ones. A reduction in the tax burden relative to that in other countries to attract FDI is a phe­ nomenon that has intensified in the Caribbean over the past few decades. This practice is occurring despite little in the way of tangible evidence that fiscal benefits are not necessarily the most effective means of promoting FDI in the tourism sector. Regional public sector cooperation should also be encouraged to avoid damaging fiscal competition among countries.124 Another source of revenue, not available to an individual country, would be a joint agree­ ment to charge the cruise line visitors to the Caribbean a levy entirely devoted to making the 152

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islands more resilient to disasters. For example, a US $50 levy on 10 million passengers could raise $500 million. One could even market on-island tours to show cruise liner visitors the value of their contribution in supporting recovery. Following a visit to the Bahaman islands of Abaco and Grand Bahama in the wake of Hur­ ricane Dorian, the Prime Minister of St Lucia, lleun Chastanet, noted: ‘Our extinction is imminent. The climate crisis has taken away from us the ability to control our destiny’.125 The situation will only get worse. Perhaps if the region’s countries mostly opt to pursue their own national interests, Chastanet’s prophesy will be borne out. However, by collaborating against the threat of climate change, the region’s economies have a chance of surviving and perhaps even prospering in the years ahead.

Notes 1 This chapter is an updated and expanded version of an earlier essay. See Robert Looney (2018) ‘Hurricanes Irma and Maria: Impacts and Responses’, South America, Central America and the Car­ ibbean, London: Routledge and EuropaWorld Plus (europaworld.com). 2 Following the Federal Dollar, Washington, US Government Accountability Office, 23 September 2019, https://blog.gao.gov/2019/09/23/the-state-of-recovery-two-years-after-hurricanes-irma-and­ maria/. 3 ‘Hurricane Irma Damage Could Cost $100 Billion’, The Trumpet, 13 September 2017, www.the trumpet.com/16283-hurricane-irma-damage-could-cost-100-billion. 4 Arelis Hernandez and Laura McGinley, ‘Harvard Study Estimates Thousands Died in Puerto Rico Because of Hurricane Maria’, Washington Post, 29 May 2018, www.washingtonpost.com/national/ harvard-study-estimates-thousands-died-in-puerto-rico-due-to-hurricane-maria/2018/05/29/1a82503a­ 6070-11e8-a4a4-c070ef53f315_story.html. 5 ‘Damages and Other Impacts on Bahamas by Hurricane Dorian Estimated at 43.4 Billion’, 15 November 2019, www.iadb.org/en/damages-and-other-impacts-bahamas-hurricane-dorian­ estimated-34-billion-report. 6 Economic Commission for Latin America (2019) ‘Alicia Bárcena Reviewed with Caribbean Authorities Progress on the Debt for Climate Adaptation Swap Initiative, Including the Creation of a Reserve Fund’, 23 September, New York: ECLAC, www.cepal.org/en/news/alicia-barcena-reviewed­ caribbean-authorities-progress-debt-climate-adaptation-swap-initiative. 7 Reginald DeRoches, Mary Comerio, Marc Eberhard, Walter Mooney and Glenn J. Rix, ‘Overview of the 2020 Haiti Earthquake’, Earthquake Spectra, 27 October 2011, S1–S21, https://escweb.wr.usgs. gov/share/mooney/142.pdf. 8 For a comprehensive discussion of the causes and consequences of climate change see Chapter 3 in this volume. 9 ‘Hurricanes and Climate Change’, Center for Climate and Energy Solutions (n.d.), www.c2es.org/ content/hurricanes-and-climate-change/. 10 International Monetary Fund (2019) World Economic Outlook Database, October, Washington, DC: IMF, www.imf.org/external/pubs/ft/weo/2019/02/weodata/index.aspx. 11 Economic Commission for Latin America (2019) ‘Alicia Bárcena Reviewed with Caribbean Authorities Progress on the Debt for Climate Adaptation Swap Initiative’. 12 Marshall Shepherd, ‘Are Hurricanes Creating Climate Refugees in the Caribbean?’ Forbes, 21 Sep­ tember 2017, www.forbes.com/sites/marshallshepherd/2017/09/21/are-hurricanes-creating-climate­ refugees-in-the-caribbean/#3a9910eb5e97. 13 Benjamin Bathke, ‘Q&A: How Climate Risk Insurance Can Work for Developing Countries’, Devex, 13 November 2017, www.devex.com/news/q-a-how-climate-risk-insurance-can-work­ for-developing-countries-91526. 14 ‘Anguilla: Economic Indicators’, Moody’s Analytics, December 2019, www.economy.com/anguilla/ indicators. 15 David Hughes, ‘Trail of Destruction’, The Sun, 23 February 2018, www.thesun.co.uk/news/ 4360755/hurricane-irma-anguilla-florida-tropical/. 16 Jennifer Kester, ‘Anguilla Makes a Big Comeback’, Forbes, 5 February 2019, www.forbes.com/sites/ forbestravelguide/2019/02/05/anguilla-makes-a-big-comeback/#63c80cf167f4. 153

Robert E. Looney 17 Nigel Tisdall, ‘The Rebirth of Anguilla: How British Money Is Helping This Idyllic Island to Recover’, The Telegraph, 23 May 2019, www.telegraph.co.uk/travel/destinations/caribbean/anguilla/ articles/anguilla-recovered-from-hurricane-irma/. 18 ‘Middle Income Bots Hit by Natural Disasters Could Have Access to OECD Aid’, MercoPress, 1 November 2018,https://en.mercopress.com/2018/11/01/middle-income-bots-hit-by-natural-disasters­ could-have-access-to-oecd-aid 19 ‘Country Economic Forecast: Anguilla’, Oxford, Oxford Economics, 25 November 2019. 20 Ibid. 21 ‘Anguilla United Front Launches Slate of Candidates: Appeals for a Clean Campaign in 2020’, The Anguillian, 25 November 2019, https://theanguillian.com/2019/11/anguilla-united-front-launches­ slate-of-candidates-appeals-for-a-clean-campaign-in-2020/. 22 ‘Anguilla Vision 2020’ (n.d.), www.facebook.com/pages/category/Community/Anguilla-Vision­ 2020-327041437932326/. 23 ‘Air Traffic Control Tower’, The Anguillian, 27 November 2017, https://theanguillian.com/2017/ 11/air-traffic-control-tower/. 24 Tara John, ‘“Hurricane Irma’s Damage Could Cost Us $300 Million, Antigua and Barbuda”, PM Says’, Time, 12 September 2017, https://time.com/uda;https://time.com/4937000/hurricanes­ antigua-and-barbuda-gaston-browne/. 25 Blair Shiff and Aaron Katersky, ‘Hurricane Irma Hit Barbuda Like a “Bomb” Prime Minister Says’, abc News, 7 September 2017, https://abcnews.go.com/International/hurricane-irma-hit-barbuda­ bomb-prime-minister/story?id=49665358. 26 IMF, World Economic Outlook Database. 27 Ibid. 28 Robert Looney, Interview: ‘Enticed by U.S. “Carrots” Some Caribbean Countries Break With Venezuela’s Maduro’, World Politics Review, 26 March 2019. 29 ‘ALBA Bank to Donate $2 Million to Barbuda for Reconstruction’, telesur, 27 September 2017, www.telesurenglish.net/news/ALBA-Bank-to-Donate-2-Million-to-Barbuda-for-Reconstruc tion-20170917-0016.html. 30 ‘CDB Approves USD29 Million to Rehabilitate Infrastructure Damaged by Hurricane Irma in Antigua and Barbuda’, CDB, 14 December 2017, www.caribank.org/newsroom/news-and-events/ cdb-approves-usd29-million-rehabilitate-infrastructure-damaged-hurricane-irma-antigua-and-barbuda. 31 ‘UNDP Mobilized US$25 Million, Restored Buildings and Boosted Preparedness in HurricaneAffected Caribbean’, UNDP, 17 September 2018, https://www.Undp.Org/Content/Undp/En/ Home/News-centre/news/2018/UNDP_mobilized_US25_million_restored_buildings_and_boosted_ preparedness_in_hurricane-affected_Caribbean.html. 32 Gregory Scruggs, ‘Barbuda’s Communal Land Ownership’ Pulitzer Center (n.d.), https://pulitzercen ter.org/projects/barbudas-communal-land-ownership. 33 Adela Suliman, ‘Communal Land Ownership in Barbuda a Myth, Says Prime Minister’ Reuters, 23 April 2018, www.reuters.com/article/us-britain-barbuda-land/communal-land-ownership-in­ barbuda-a-myth-says-prime-minister-idUSKBN1HU2D5. 34 ‘Antigua and Barbuda General Election Results: 21 March, 2018’, Antigua and Barbuda Election Center, 21 March 2018, www.caribbeanelections.com/ag/elections/ag_results_2018.asp. 35 ‘Travelers Are Flocking to Antigua and Barbuda Right Now’, Caribbean Journal, 15 September 2019, www.caribjournal.com/2019/09/15/antigua-barbuda-tourism-travelers/. 36 Alexander Britell, ‘Robert De Niro Hotel Project “Still Going Ahead” in Barbuda’, Caribbean Jour­ nal, 31 January 2018, www.caribjournal.com/2018/01/31/robert-de-niro-hotel-project-still-going­ ahead-barbuda/. 37 Luis Ferre-Sadurni, ‘It’s “One Tough Year” After Hurricanes Tore Through the British Virgin Islands’, New York Times, 24 September 2018, www.nytimes.com/2018/09/24/world/americas/ caribbean-hurricane-irma-recovery-tortola.html. 38 ‘Setting Up Your Company in the BVI: What You Need to Know’, GuideMeSingapore (n.d.), www. guidemesingapore.com/business-guides/incorporation/misc-topics/what-to-note-when-setting-up-in-bvi. 39 ‘Statistical Bulletin’, British Virgin Islands Financial Services Commission, vol. 47, June 2017, www. bvifsc.vg/sites/default/files/documents/Statistical%20Bulletins/2017_statistical_bulletin_qtr_2.pdf. 40 Christopher Copper, ‘BVI Sets Out Measures to Counter EU Tax ‘Greylist’ Concerns’, International Investment Net, 23 March 2018, www.internationalinvestment.net/internationalinvestment/news/ 3500709/bvi-sets-measures-counter-eu-tax-greylist-concerns.

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41 ‘UAE Removed from EU Substance Blacklist and Latest Changes to the EU List of ‘Non-Coop­ erative’ Taxation Jurisdictions’, Vistra.com, 18 October 2019, www.vistra.com/insights/uae-removed­ eu-substance-blacklist-and-latest-changes-eu-list-non-cooperative-taxation. 42 John Gatewood and Catherine M. Cameron, ‘Belonger Perceptions of Tourism and its Impacts in the Turks and Caicos Islands’, Lehigh University, August 2009, www.lehigh.edu/~jbg1/Perceptions­ of-Tourism.pdf. 43 ‘Hurricane Irma Pummels Turks and Caicos Islands’ BBC News, 8 September 2017, www.bbc.com/ news/world-latin-america-41194959. 44 Sophie Hares, ‘Hurricanes Threaten Caribbean Countries Still Recovering from 2017 Storms: Offi­ cials’, Relief Web, 31 May 2018, https://reliefweb.int/report/world/hurricanes-threaten-caribbean­ countries-still-recovering-2017-storms-officials. 45 World Bank (2019) ‘World Development Indicators’, October, Washington, DC: World Bank, https:// databank.worldbank.org/reports.aspx?source=World-Development-Indicators. 46 ‘Southwest Airlines Launches Service to Turks and Caicos Islands’, Southwest.com, 5 November 2017, http://investors.southwest.com/news-and-events/news-releases/2017/11-05-2017-175953896. 47 ‘High Time for High Rises in Turks and Caicos?’, Uncommoncaribbean.com (n.d.), www.uncommonca ribbean.com/turks-and-caicos/high-rises-in-turks-and-caicos/. 48 Delana Isles, ‘Chinese Developer Acquires Royal Reef Resort’, Turks and Caicos Weekly News, 7 May 2018, https://tcweeklynews.com/chinese-developer-acquires-stalled-royal-reef-resort-p8674-107. htm. 49 Matt Gross, ‘After Maria’s Devastation, Can Dominica be a Destination Again? New York Times, 19 March 2018, www.nytimes.com/2018/03/19/travel/dominica-hurricane-maria-recovery.html. 50 ‘Dominica: Contribution of Travel and Tourism to GDP as a Share of GDP’, Knoema World Data Atlas (n.d.), https://knoema.com/atlas/Dominica/topics/Tourism/Travel-and-Tourism-Total­ Contribution-to-GDP/Contribution-of-travel-and-tourism-to-GDP-percent-of-GDP. 51 World Bank, World Development Indicators. 52 Ibid. 53 Chabeli Herrera, ‘Two Monster Hurricanes Battered These Caribbean Islands. Now They’re Back in Business’, Miami Herald, 16 April 2018, www.miamiherald.com/news/business/article208802464.html. 54 World Bank, World Development Indicators. 55 John Stansfield, ‘Carnival Cruise Lines Back to Dominica’, cruisemapper.com, 17 July 2018, www. cruisemapper.com/news/4328-carnival-cruise-lines-back-to-dominica. 56 Oda O’Carroll and Polly Thomas, ‘Caribbean Travel Update: Which Islands Are Ready for Tourists Post-Hurricanes’, lonelyplanet.com, 31 May 2018, www.lonelyplanet.com/articles/caribbean-travel­ hurricane-update. 57 ‘World Bank Provides $65 Million for Dominica’s Post-Maria Reconstruction’, World Bank, 13 April 2018, www.worldbank.org/en/news/press-release/2018/04/13/world-bank-provides­ us65-million-for-dominicas-post-maria-reconstruction. 58 ‘EU Releasing EC$24m to Dominica for Post Hurricane Maria Reconstruction Efforts’, OECS, 23 November 2018, https://pressroom.oecs.org/eu-releasing-ec24m-to-dominicas-for-post-hurricane­ maria-reconstruction-efforts#. 59 ‘Dominica to Get US $19m Insurance Pay-Out Because of Hurricane Maria’, Daily Herald, 25 Sep­ tember 2017, https://pressroom.oecs.org/eu-releasing-ec24m-to-dominicas-for-post-hurricane-maria­ reconstruction-efforts#. 60 IMF, World Economic Outlook Database. 61 IMF (2018) Dominica: 2018 Article IV Consultation-Press Release and Staff Report, 5 September, Washington, DC: IMF, www.imf.org/en/Publications/CR/Issues/2018/09/05/Dominica-2018­ Article-IV-Consultation-Press-Release-and-Staff-Report-46204. 62 ‘Citizenship by Investment Dominica’, Dominica Citizenship by Investment (n.d.), www.dominica citizenshipbyinvestment.com/. 63 IMF, World Economic Outlook Database. 64 World Bank, World Development Indicators. 65 Mark Orwoll, ‘Post-Hurricane Irma St. Maarten/St. Martin Tourism Update’, Travel Age West, 11 February 2019, www.travelagewest.com/Travel/Caribbean/Post-Hurricane-Irma-St-Maarten/ St-Martin-Tourism-Update. 66 Shivani Vora, ‘St. Martin Starts a Comeback’, New York Times, 2 February 2018, www.nytimes. com/2018/02/02/travel/st-martin-caribbean-hurricane-recovery.html.

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Robert E. Looney 67 ‘About Us’: Caribbean Catastrophe Risk Insurance Facility, CCRIF (n.d.), www.ccrif.org/content/ about-us. 68 ‘Dutch Saint Martin’s Leader Quits Over Hurricane Irma Aid Controversy’, dw.com, 24 November 2017, www.dw.com/en/dutch-saint-martins-leader-quits-over-hurricane-irma-aid-controversy/a-41525021. 69 Alexander Britell, ‘St Maarten Is a Resurgent Caribbean Hotspot’, Caribbean Journal, 12 August 2019, www.caribjournal.com/2019/08/12/st-maarten-caribbean-hotspot/. 70 ‘World Bank Approves Sint Maarten Airport Terminal Reconstruction Project’, World Bank, 20 September 2019, www.worldbank.org/en/news/press-release/2019/09/20/world-bank-approves­ sint-maarten-airport-terminal-reconstruction-project. 71 A comprehensive discussion of the situation in Puerto Rico is provided in Chapter 16 in this volume. 72 ‘Final Numbers on Maria in Puerto Rico: $90 Billion in Damage, Some Cat 5 Winds’, Dailykos. com, 11 April 2018, www.dailykos.com/stories/2018/4/11/1756129/-Final-numbers-on-Maria­ in-Puerto-Rico-90-billion-in-damage-some-Cat-5-winds. 73 ‘Puerto Rico Increases Hurricane Maria Death Toll to 2,975’, BBC, 29 August 2018, www.bbc. com/news/world-us-canada-45338080. 74 ‘One Year After Hurricane Maria’, Environmental Defense Fund (n.d.), www.edf.org/sites/default/ files/documents/Hurricane%20Maria%20Anniversary%20FactsheetFINAL.pdf. 75 Ibid. 76 Ben Glassman, ‘A Third of Movers from Puerto Rico to the Mainland United States Relocated to Florida in 2018’, census.gov, 26 September 2019, www.census.gov/library/stories/2019/09/puerto­ rico-outmigration-increases-poverty-declines.html. 77 Joseph Stiglitz and Martin Guzman, ‘From Bad to Worse in Puerto Rico’, Project Syndicate, 28 February 2017, www.project-syndicate.org/commentary/puerto-rico-debt-plan-deep-depression-by­ joseph-e–stiglitz-and-martin-guzman-2017-02?barrier=accesspaylog. 78 Michael Sheetz, ‘Hurricane Maria Wiped Away Around 80% Of Puerto Rico’s Agricultural Indus­ try’ cnbc.com, 25 September 2017, www.cnbc.com/2017/09/25/hurricane-maria-wiped-away­ about-80-percent-of-puerto-ricos-farming-industry.html. 79 ‘FEMA Approves More Than $500 Million in Assistance to Puerto Rico’, fema.gov, 23 October 2017, www.fema.gov/news-release/2017/10/23/4339/fema-approves-more-500-million-assistance­ puerto-rico. 80 Patricia Mazzie, ‘Hunger and an ‘Abandoned’ Hospital: Puerto Rico Waits as Washington Bickers’, New York Times, 7 April 2019, www.nytimes.com/2019/04/07/us/puerto-rico-trump-vieques.html. 81 ‘FEMA Approves More than $500 Million in Assistance to Puerto Rico’. 82 Andres Viglucci (n.d.) ‘They Lost Homes in Hurricane Maria, but Didn’t Have Deeds: FEMA Rejected Their Claims’, Miami Herald (special report), www.miamiherald.com/news/nation-world/ national/article217935625.html. 83 FOMB (n.d.) Financial Oversight and Management Board for Puerto Rico, Washington, DC: FOMB, https://oversightboard.pr.gov/. 84 Farzana Gandhi, ‘We Are Failing Puerto Rico: Why Short-Term Disaster Relief Is a Disaster’, Salon. com, 8 April 2018, www.salon.com/2018/04/08/we-are-failing-puerto-rico-why-short-term-disaster­ relief-is-a-disaster/. 85 ‘Pro-Con: Did US Shortchange Puerto Rico on Disaster Aid’, dailyastorian.com, 1 June 2019, www.dailyastorian.com/opinion/columns/pro-con-did-us-shortchange-puerto-rico-on-disaster-aid/ article_f8924614-8301-11e9-bece-27be362fca7b.html. 86 Ike Brannon, ‘Exclude Puerto Rico from Tax Reform’, Forbes, 13 December 2017, www.forbes. com/sites/ikebrannon/2017/12/13/exclude-puerto-rico-from-tax-reform/#1783568370cd. 87 ‘Federal Uncertainty Undermines Local Growth’, elnuevodia.com, 9 December 2019, www. elnuevodia.com/english/english/nota/federaluncertaintyundermineslocalgrowth-2533740/. 88 Michelle Kaske, ‘Puerto Rico Is at Risk of a $30 Billion Cut in U.S. Aid, Board Says’, Bloomberg. com, 18 October 2019, www.bloomberg.com/news/articles/2019-10-18/puerto-rico-at-risk-of­ 30-billion-cut-in-u-s-aid-board-says. 89 FOMB (2019) Restoring Growth and Prosperity: 2019 Fiscal Plan for Puerto Rico, 9 May Washington, DC: FOMB, https://drive.google.com/file/d/13wuVn04–JKMEPKu-u-djZJHqTK-55aV/view. 90 ‘Oxford Forecast for US Virgin Islands’, Oxford Economics, 5 December 2019. 91 Samantha Raphelson, ‘2 Months After Maria and Irma, U.S. Virgin Islands Remain in the Dark’, npr. org, 14 November 2017, www.npr.org/2017/11/14/564138720/2-months-after-maria-and-irma­ u-s-virgin-islands-remain-in-the-dark.

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92 World Bank Development Indicators. 93 Ibid. 94 ‘USVI Legislature Approves Agreement for St. Croix Refinery Restart’, Oil & Gas Journal, 2 August 2018, www.ogj.com/refining-processing/refining/operations/article/17295826/usvi-legislature-approves­ agreement-for-st-croix-refinery-restart. 95 U.S. Territories: Public Debt Outlook: 2019 Update, June, Washington, DC: United States Government Accountability Office, www.gao.gov/assets/710/700079.pdf. 96 Robert Slavin, ‘Virgin Islands Power Authority Downgraded as Moody’s Lists Seven Obstacles’, The Bond Buyer, 24 September 2019, www.bondbuyer.com/news/virgin-islands-power-authority­ downgraded-for-seven-problems?tag=00000160-9e98-d96d-a579-defd0ec70000. 97 The Bahamas case study draws extensively on Chapter 24 in this volume. 98 ‘Bahamas: Economy’, globalsecurity.org (n.d.), www.globalsecurity.org/military/world/caribbean/ bs-economy.htm. 99 Nicole Laframboise, Nkunde Mwase, Joonkyu Park and Yingke Zhou (2014) Revisiting Tourism Flows in the Caribbean: What Is Driving Arrivals, December, Washington, DC: IMF, www.imf.org/ external/pubs/ft/wp/2014/wp14229.pdf. 100 ‘Quick Facts: Hurricane Dorian’s Devastating Effect on the Bahamas’, mercycorps.org, 26 September 2019, www.mercycorps.org/articles/hurricane-dorian-bahamas. 101 ‘Damages and Other Impacts on Bahamas by Hurricane Dorian Estimated at $3.4 Billion: Report’. 102 IMF World Economic Outlook. 103 Commonwealth of the Bahamas (2018) 2018/19 Budget Communication: Implementing the Govern­ ment’s Policy Agenda and Securing Core Fiscal Objectives, 30 May, Nassau: Commonwealth of the Bahamas, www.thebahamasweekly.com/uploads/20/BudgetCommuniucation1819_-_Final.pdf. 104 Government of the Bahamas (2018) Fiscal Responsibility Bill, Nassau: Government of the Bahamas, www.bahamas.gov.bs/wps/wcm/connect/ebf7a997-b11e-416a-b222-f048c48f2f4a/DOC12_56_4409_ 24_18.pdf?MOD=AJPERES. 105 ‘Bahamas Extends Hurricane Dorian Ta Relief Initiative’, The Gleaner, 24 October 2019, http://jamaica­ gleaner.com/article/caribbean/20191024/bahamas-extends-hurricane-dorian-tax-relief-initiative. 106 Rashad Rolle, ‘Trust Fund to Help Families Rebuild,’ The Tribune, 4 November 2019, www. tribune242.com/news/2019/nov/04/trust-fund-help-families-rebuild/. 107 Maximilien Queyranne, Wendell Daal and Katja Funke (2019) Public Private Partnerships in the Car­ ibbean Region: Reaping the Benefits While Managing Fiscal Risks, 8 May, Washington, DC: IMF, www. imf.org/en/Publications/Departmental-Papers-Policy-Papers/Issues/2019/05/08/Public-Private­ Partnerships-in-the-Caribbean-Region-Reaping-the-Benefits-while-Managing-46239. 108 Denise Lu and Christopher Flavelle, ‘Rising Seas Will Erase More Cities by 2050, New Research Shows’, New York Times, 29 October 2019, www.nytimes.com/interactive/2019/10/29/climate/ coastal-cities-underwater.html. 109 ‘Damages and Other Impacts on Bahamas by Hurricane Dorian Estimated at $3.4 Billion’. 110 ‘Spotlight on Catastrophes: Insurance Issues’, Insurance Information Institute, 20 December 2019, www.iii.org/article/spotlight-on-catastrophes-insurance-issues. 111 Compton Bourne, Megan Alexander, Daren Conrad and Julia Jhinkoo (2015) ‘Financing for Development Challenges in Caribbean SIDS: A Case for Review of Eligibility Criteria for Access to Concessional Financing’, June, New York: UNDP, www.undp.org/content/dam/rblac/docs/Research %20and%20Publications/Poverty%20Reduction/UNDP_RBLAC_Financing_for_Development_Report Caribbean.pdf. 112 Caitlin Emma, ‘Trump Administration Mulls $4.3b in Foreign Aid Cuts’, politico.com, 15 August 2019, www.politico.com/story/2019/08/15/trump-administration-43-billion-foreign-aid-cuts-1666066. 113 ‘What Is Climate Finance and Where Will it Come From?’ The Guardian, 4 April 2013, www. theguardian.com/environment/2013/apr/04/climate-change-renewableenergy. 114 Robert Buhr, Ulrich Volz, Charles Donovan, Gerhard Kling, Yuen Lo, Victor Murinde and Natalie Pullin (2018) Climate Change and the Cost of Capital in Developing Countries, London: SOAS. 115 ‘Adapt Now: A Global Call for Leadership on Climate Resistance’, Global Commission on Adap­ tation, 30 September 2019, https://gca.org/global-commission-on-adaptation/report. 116 Bob Simison (2019) ‘Investing in Resilience’, Finance & Development, December, Washington, DC: IMF, www.imf.org/external/pubs/ft/fandd/2019/12/climate-change-and-investing-in-resilience-simison.htm. 117 World Bank (2010) The Economics of Adaptation to Climate Change, Washington, DC: World Bank, https://siteresources.worldbank.org/EXTCC/Resources/EACC_FinalSynthesisReport0803_2010.pdf.

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Robert E. Looney 118 ‘Regional Insurer Disbursed US$119 Million During 10-Year Period’, Jamaica Observer, 15 January 2018, www.jamaicaobserver.com/news/regional-insurer-disbursed-us-119-million-during-10-year­ period_122489?profile=1056. 119 Global Report on Internal Displacement, Internal Displacement Monitoring Centre, 2017, www.internal­ displacement.org/global-report/grid2017/http://www.internal-displacement.org/global-report/grid2017/. 120 Tim McDonnell, ‘The Refugees the World Barely Pays Attention to’, npr.org, 20 June 2018, www. npr.org/sections/goatsandsoda/2018/06/20/621782275/the-refugees-that-the-world-barely-pays­ attention-to. 121 Molly Enking, ‘U.S. Won’t Take Climate Refugees Displaced by Dorian’, grist.org, 13 September 2019, https://grist.org/article/u-s-wont-take-climate-refugees-displaced-by-hurricane-dorian/. 122 Ama Francis (2019) Free Movement Agreements & Climate-Induced Migration: A Caribbean Case Study, New York: Colombia Law School, http://columbiaclimatelaw.com/files/2019/09/FMAs-Climate­ Induced-Migration-AFrancis.pdf. 123 CARICOM Regional Food and Nutrition Security Policy, CARICOM, 5 October 2010, www.fao.org/ fileadmin/templates/righttofood/documents/project_m/caricom/CARICOMRegionalFoodand NutritionSecurityPolicy-5october2010.pdf. 124 Martin Bes et al. (2013) Promoting Growth in the Caribbean: Tax Incentives in Theory and Practice, June, Washington, DC: World Bank, http://documents.worldbank.org/curated/en/198981468011437275/ text/785860WP04-0Pr00Box377349B00PUBLIC0.txt. 125 Sean Buchanan, ‘Extension ‘Imminent’ for Small Islands’, indepthnews.com, 12 September 2019, www.indepthnews.net/index.php/sustainability/climate-action/2967-extinction-imminent-for-small­ islands.

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Part III

External influences

11 Why and how to use fiscal policy to target the exchange rate DeLisle Worrell1

Introduction The motivation for this chapter is the observed discomfort with the conventional approaches to stabilization and growth policies that is manifest in a majority of small open economies. Open economies are faced with a choice of an independent monetary policy with a floating exchange rate and open financial markets or a fixed exchange rate with a financial market which is segre­ gated from the international market by use of exchange controls. Conventional wisdom, informed by the widespread failure of exchange controls in the 1970s and 1980s, advocates choosing exchange rate flexibility. However, in open economies flexible exchange rates have proved to be excessively volatile, depressing investment and growth, and increasing the risk of financial crisis. In recent years there has been growing acknowledgement that predictable exchange rates with low volatility contribute to macroeconomic and financial stability in small open economies; an Inter­ national Monetary Fund (IMF) study tried (unsuccessfully, in my opinion) to accommodate this reality within the conventional policy framework (Ostry et al. 2012). However, actual practice still does not vary appreciably from the standard approach to macroeconomic management, with a preference for flexible exchange rates and inflation targeting using monetary policy. This chapter proposes an approach to macroeconomic policy which equips the authorities in small open financially integrated economies (SOFIEs) to target the exchange rate by influencing the volumes of trade in goods and services to achieve equilibrium at the target rate. The SOFIE is not only small and open and therefore highly import-dependent, with limited scope for import substitution, but also highly integrated with international financial markets, which limits the role of controls on financial inflows and outflows to that of traffic policeman. Officials can put speed bumps in the way of speculative outflows and inflows, but they cannot alter the direction or volume of net flows. The Mundell-Fleming option of a fixed exchange rate pro­ tected by capital controls is not on offer in the financially integrated economy, and the role of monetary policy is limited to buying time for other policies to take effect (Worrell et al. 2017). The conventional view is that, in the absence of capital controls, the authorities cannot use interest rate policy to target an exchange rate through the financial account, and therefore the exchange rate will be determined by demand and supply on the current account. However, in the small open economy the elasticity of current account responses to exchange rate changes is

161

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close to zero. On the supply side, the small economy is an atomistic producer in a global market; it can supply everything it can produce at the ruling world price. To increase earnings, productive capacity must be increased, which is a strategy for the medium to long term. On the demand side, there are few domestic substitutes for the wide range of items in the import basket. Low demand and supply responsiveness to exchange rate changes means that the impact of shocks is magnified, leading to high exchange rate volatility (Blanchard et al. 2010). There are other reasons why small open economies find it necessary to target the exchange rate, linked to the nature of shocks to which the economy may be subject. A large exchange rate appreciation may deal a fatal blow to some export activity, so that export potential is per­ manently impaired even if the rate subsequently depreciates. In addition, there may be impli­ cations for financial stability from excessive volatility of exchange rates, because of the impact on the local currency balance sheets of companies with net foreign liabilities (in the case of exchange rate depreciation) or net foreign assets. Because of the adverse effects of excessive exchange rate depreciation, the SOFIE needs to target the exchange rate, even though it lacks the ability to use monetary policy for that pur­ pose. In this chapter, we propose that fiscal policy should be used instead, in order to contain aggregate demand and imports in the short term, and to provide market incentives to expand tradable production in the long term. To reconcile the day-to-day foreign balances with the results of short-term fiscal adjustment and long-term fiscal policy effects, monetary policy is employed. The central bank maintains a stock of foreign exchange reserves which it uses, in case of an adverse shock, to defend the exchange rate until such time as fiscal contractionary measures take effect. In the event of an adverse domestic shock, the central bank increases the country risk premium over the foreign interest rate in order to attract additional inflows to provide temporary financing until fiscal measures can remove the excess demand. The Mundell-Fleming framework focuses on monetary policy and offers two possibilities: with capital controls in place, monetary policy may be used to target the exchange rate; in the absence of exchange controls, monetary policy targets domestic inflation. In the context of the SOFIE neither option is available: the extent of financial integration makes it impossible to target the exchange rate using monetary policy – the authorities’ intentions will always be fru­ strated by capital flight. And the impact of domestic monetary policy on inflation is minimal compared to the impact of a depreciation of the exchange rate. How then may the SOFIE achieve the objective of an exchange rate with little or no vola­ tility? That is clearly desirable from the point of view of stimulating growth and containing inflation. The answer put forward in this chapter lies with fiscal policy. The authorities may target the exchange rate by adjusting the size of the fiscal deficit and how it is financed, and the choice of an exchange rate target appropriate to the economic circumstances of each SOFIE ensures that domestic inflation does not exceed the world inflation rate, which is the best that may be achieved in the small open economy. The second section of this chapter describes an economic model which incorporates the structural features of the SOFIE, and shows how fiscal policy may be used to target the exchange rate. Our point of departure is a version of the monetary model of adjustment which underpins the methodology used by the IMF in its surveillance and policy operations.

The model Our starting point is the familiar IMF financial programming model, whose analytical under­ pinnings are described in Agenor (2004: 372) from which Figure 11.1 is borrowed. The figure shows the trade-off between foreign reserve accumulation and appreciation of the real exchange 162

Using fiscal policy to target the exchange rate

rate that secures a balance of demand and supply of foreign exchange (BB); and the trade-off that secures a balance of money supply and credit demand (MM). In Agenor’s chart, which represents the standard view, the BB trade-off slopes downwards to the right: as domestic goods become more expensive relative to foreign goods, consumers switch to imports away from domestic substitutes and producers find the local market more lucrative than exporting. The demand for foreign exchange rises, the supply falls, and the appreciation will tend to drive down foreign reserves. The MM balance slopes upward to the right because a loss of foreign reserves implies an equivalent drain on the domestic money supply, and, in the absence of idle cash, a credit crunch that aggravates domestic deflation. The horizontal line B*B* in Figure 11.1 is closer to the reality for SOFIEs. Because of its small size the SOFIE produces very little of what it consumes, so the elasticity of substitution between imports and import substitutes is close to zero. And because the local market is so small, it offers only a trivial addition to the potential demand for the export activities in which the SOFIE’s production is substantial enough to be internationally competitive. Therefore, an appreciation or depreciation of the real exchange rate has no appreciable effect on the demand or supply of foreign exchange. The balance of payment effects as they might appear in the typical SOFIE are more accu­ rately represented by Figure 11.2. Exports are unaffected by devaluation in the current period. Any potential incentive that devaluation may provide, through increased local currency returns to exporters, will only yield results in future years. On the import side, devaluation produces a disproportionately small contraction in imports because there are no domestic substitutes avail­ able, and domestic consumers are forced to cut back on purchases as devaluation shrinks their international purchasing power. The shape of the MM curve is also a matter for debate, and indeed there is a question as to whether there is a stable relationship between money and credit movements in emerging mar­ kets and developing economies where financial markets are very imperfect. In such

Figure 11.1 The standard model and modification 163

DeLisle Worrell

Figure 11.2 The impact of devaluation on the current account

circumstances large pools of idle cash are commonplace, and the supply and demand for credit do not respond to interest rate changes. It is clear from the B*B* schedule of Figure 11.1 that the SOFIE cannot attain external balance through changes in the real exchange rate. What is more, with the indeterminacy of the MM schedule, there is no instrument available to the monetary authority to influence the exchange rate one way or another. Instead, external imbalances must be addressed through measures that affect the quantity of foreign exchange demanded and supplied, rather than its price. The policy framework may be represented as in Figure 11.3. In the short term the supply of foreign exchange is fixed, based on the capacity to export and the private sector’s ability to fully realize that capacity. Private investment, infrastructure development, productivity gains, government incentives and other capacity-enhancing measures will pay dividends, thus increasing the supply of foreign exchange, but only in the longer term.

Figure 11.3 Adjusting the demand to the supply of foreign currency 164

Using fiscal policy to target the exchange rate

The demand for foreign exchange is derived from aggregate expenditure in the economy; as people spend more, additional imports are needed and foreign exchange demand rises. The demand schedule, plotted against expenditure, slopes upward to the right; if aggregate expen­ diture is expected to be at point A in Figure 11.3, the policy that is required to balance the external accounts is a reduction of aggregate expenditure to point B. That reduction suffices to bring the demand for foreign exchange in line with supply. The model that follows allows us to derive the size of fiscal adjustment required to reduce expenditure by the required amount. One issue that surfaces at this point is the impact of fiscal contraction on output. In well-run administrations, authorities may take the opportunity to secure productivity gains in the public service, providing the same services at lower cost. Where this is not possible there will be a decline in output. This is unavoidable because of the inadequacy of the supply of foreign exchange; it can be corrected only in future periods, when additional supplies of foreign exchange become available as a result of capacity-enhancing strategies. A second debate concerns the question of how the burden of adjustment should be shared between government and the private sector. Because independent monetary policy is not available to the SOFIE, the sharing of the burden comes down to the design of the fiscal adjustment strategy. Reducing the fiscal deficit through revenue enhancement puts a greater share of the burden on the private sector, as does a reduction in social benefits. Given the structural constraints of the SOFIE, what we require for the purpose of growth and adjustment are tools which empower the policymaker to respond to an adverse shock through fiscal policy contraction to balance the external account in the short term, accompanied by a medium-term fiscal strategy which contains fiscal expansion to a pace which maintains external balance. Monetary policy is used to support the fiscal adjustment, using a combination of sterilized exchange rate intervention to achieve the target exchange rate, and domestic market intervention to keep domestic interest rates aligned to the long-term trend of the international interest rate. The tools needed include a real time monitor of the country’s external balance, and a model which measures the impact of fiscal policy on the balance of external payments. Any conven­ tional macroeconomic model may be adapted to measure the impact of money creation on the balance of external payments and the level of foreign reserves. We employ the Agenor model which was mentioned earlier. It contains equations for aggregate demand, domestic supply, wage determination, uncovered interest parity and money market equilibrium. All variables are in logs. The supply of money is subject to random shocks, whose impact depends on the nature of the exchange regime: m ¼ δs þ ums

ð1Þ

where m is the supply of money, s is the exchange rate, δ is a parameter which defines the exchange regime and ums is a white noise shock. To modify the model for our purposes we replace the white noise shock with the impact of money created to fund the government deficit: m ¼ δs þ ηb

ð2Þ

where b is the (log of the real) increase in the net domestic assets (NDA) of the central bank. We assume that increase is entirely due to the financing of the government deficit with newly created money; in practice, this is almost always the case in the typical SOFIE. Our interest is in increases in NDA that create pressure on the foreign exchange market. We therefore specify ΔNDA as positive values only: b ¼ logðΔNDA=pÞ for ΔNDA=p > 0; b ¼ 0

ð3Þ

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The money market equilibrium equation in the Agenor model provides a relationship between money supply and output: i ¼ λm þ λp þ γy

ð4Þ

where i is the nominal interest rate, p is the price of output and y is real domestic output. All that remains for our purposes is to add an import equation: n ¼ μy þ ψðs þ p *       −   pÞ

ð5Þ

where n is the amount of real imports and p* is the foreign price of foreign goods. This system may be used to input values of ΔNDA and derive estimates of the impact on imports, establishing a relationship between money-financed fiscal expansion, increases in domestic expenditure and the increased imports that result. Fiscal expansion does not increase the supply of foreign exchange, and therefore the additional imports it induces must be financed through a drawdown of foreign reserves. This is the relationship which is used to determine the amount of adjustment necessary to restore external balance at the target exchange rate. Gov­ ernment borrowing from the central bank must be reduced sufficiently so that the resulting tightening of money and credit reduces real output, which in turn reduces imports and relieves enough pressure on the foreign exchange market to leave the central bank with adequate reserves with which to defend the exchange rate target.

Successful defence of the Barbados dollar peg, using fiscal policy In 2013 Barbadian policymakers successfully defended the country’s exchange rate peg to the US dollar by making use of this framework to guide fiscal policy adjustment, in order to relieve pressure on the foreign exchange market. Prior to the general election in February of that year, which was narrowly won by the Democratic Labour Party, the ruling political party had engaged in excessive public spending with the hope of giving an artificial boost to employment. The adverse consequences on the balance of payments became evident to the Central Bank of Barbados within weeks of the election, through its daily foreign reserve monitor, which is reproduced in Figure 11.4. By the end of April it was apparent that the foreign exchange market was under severe pressure. Comparing the rate of foreign reserve loss with the typical pattern observed in other years (at that time the picture would have shown a comparison with the years 2009–12) it was clear that foreign reserve losses by year­ end would have left the Central Bank short of what was needed to secure the peg, if no action was taken. The Central Bank of Barbados had a minimum reserve target of a sum equivalent to three months of imports, the amount the Bank judged adequate to reassure the foreign exchange market about the soundness of the peg. In order to attenuate the demand for foreign exchange and remain above that minimum, it was calculated that expenditure on imports needed to be reduced by about US $200 million. Using import propensity estimates derived from the Central Bank’s economic policy model, along with tax and fiscal expenditure multipliers, the policymakers calculated the reduction in the fiscal deficit that was needed to cut foreign spending by the required amount. The government introduced a package of tax and expenditure measures which, together with an external loan secured in December 2013, alleviated the pressure on the foreign exchange market. The initial stock of foreign reserves was sufficient to finance the excess foreign spending in the interim, but this led to a loss of Bds $450 million (US $225 million), and reserve levels were only partly restored by foreign borrowing in December (US $150 million). 166

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Figure 11.4 Daily foreign exchange reserves, Central Bank of Barbados

The advantage of the approach proposed in this chapter over conventional strategies is immediately apparent. The shock which caused excess foreign spending and pressure on the foreign exchange market was the pump-priming of the economy in advance of the general election; the use of fiscal adjustment was therefore the correct prescription for restoring balance to the external accounts, because it went directly to the cause of the problem in the first place. As fiscal over-reach is the most common source of pressure on the external accounts of small open economies, an approach which puts the burden of adjustment on tax and fiscal spending is often to be recommended on these grounds. However, the use of fiscal tools is also the SOFIE’s most assured strategy in response to external shocks, such as a loss of external competitiveness or market share. In order to regain competitiveness and restore market share, the country must invest in new technologies, markets, products and services or new systems and organization, all of which take time to mature and germinate results. In the interim, the economy needs to absorb the shock in the near term, while investment to restore and improve foreign exchange earning capacity is maturing. The frequently suggested alternative of allowing the exchange rate to depreciate does not relieve exchange market pressure; on the contrary, it aggravates it by provoking capital flight. More­ over, exchange rate depreciation does not increase the supply of foreign exchange immediately, because, as mentioned earlier, the small country producer is an atomistic supplier in a perfectly competitive market. If production of exports does increase in the longer term in response to a depreciation, it will be at the expense of real wages. This is the exceptional case whereby a devaluation does not trigger a proportionate increase in nominal wages to compensate for the devaluation-induced acceleration of inflation. There is a switch in real income from labour to 167

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capital in the export sector, whereby product prices rise by the amount of devaluation. As a result, there may be an increase in investment in export activities, resulting in new capacity. In the small open economy, an exchange rate depreciation which eventually stimulates exports is not a ‘beggar thy neighbour’ policy; rather, the appropriate description is ‘beggar our workers’.

Barbados failed to implement policies to boost the supply of foreign exchange The adjustment strategy of 2013 was of limited success, because it failed to restore the country to a path of growth and sustainability. While effective measures were taken to depress the demand for foreign exchange, none of the policies that were indicated on the supply side were put into effect. As a result, there was no increase in investment, either in the public or private sectors, and foreign financing continued to decline from levels attained before the global economic recession (See Figure 11.5). The central policy change needed was a significant productivity increase in the public sector, to be achieved through modernization of its organization and processes, a general upgrade in skills and competencies of personnel, and elimination of overmanning. The evidence showed that productivity in the public sector was below the national average and declining; Barbados’s score in the World Bank’s Doing Business Report remained consistently poor; and the country’s ranking in the World Economic Forum’s Global Competitiveness Report was on the decline, mainly because of deteriorating public sector performance. The government’s record of project implementation was poor: over US $100 million in approved funding by the Inter-American Development Bank was withdrawn because projects had not been initiated after years of delays, and much needed infrastructure upgrades never got beyond the planning stages. Government inefficiencies were also among the reasons for the decline in private investment. Legal and regulatory compliance systems are slow, out-of-date and cumbersome, and incentive systems lack transparency. The levels of service provided by the government and most of its agencies are not up to the minimum standard that is acceptable to international investors.

Figure 11.5 Capital inflows, US $ million 168

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The failure of public sector reform is a major reason for the decline of investment, both public and private, that was seen after the 2013 fiscal adjustment. As a result of insufficient public and private investment, there was little improvement in productivity and the competi­ tiveness of the economy, and no significant growth in the economy or the supply of foreign exchange.

Can the flexible exchange rate plus inflation targeting framework be made to work in SOFIEs? It is now widely acknowledged by the IMF and other leading international institutions that some degree of exchange rate management is necessary for small open economies. In a paper published on the IMF website in 2010, then Economic Counsellor Oliver Blanchard and colleagues (Blanchard et al. 2010) advised that Central banks in small open economies should openly recognize that exchange rate stability is part of their objective function. … This does not imply that inflation targetting should be abandoned. Indeed, at least in the short term, imperfect capital mobility endows central banks with a second instrument in the form of reserve accumulation and sterilized inter­ vention. This tool can help control the external target while domestic objectives are left to the policy rate. This advice was elaborated on in an IMF Policy Paper issued two years later (Ostry et al. 2012). For countries with significant currency mismatches, a high pass-through of devaluation to inflation or limited intersectoral factor mobility, the recommendation was for sterilized market intervention to stabilize the exchange rate, combined with inflation targeting through the use of monetary policy. There are intractable problems with the use of either of the recommended instruments. No matter how large the stock of foreign reserves, exchange market intervention will lack credibility if the market believes that fiscal policy is unsustainable; in the absence of adequate fiscal adjustment, uncertainty will trigger capital flight, and the intervention strategy will fail. Monetary policy is of limited use in SOFIEs in the best of circumstances (Worrell 2000) because of financial openness and information asymmetries, and inflation targeting lacks credibility in open economies where inflation is mostly imported, especially via food and fuels. Monetary policy is overwhelmed when the foreign currency market comes under pressure and fiscal policy lacks credibility. There are numerous examples of countries that have attempted to introduce monetary tightening in these circumstances, only to find that exceptionally high interest rates aggravate capital flight and put the exchange rate target beyond reach. The elephant in the room in all balance of payments crises in small open economies is fiscal policy. In every case, whatever the exchange rate regime and whatever the central bank’s stated monetary policy (including countries like Hong Kong and Singapore where no central bank exists), if the financial market believes that fiscal policy is appropriate and sustainable, the authorities can maintain a stable exchange rate and achieve a rate of inflation that does not significantly exceed the global rate. However, where fiscal policy is not credible, and there is no strategy for ensuring sustainability, both inflation and the exchange rate will be out of the authorities’ control, no matter the exchange and monetary regimes. The approach recom­ mended in this chapter provides tools for early detection of exchange market pressure and corrective policies to maintain or restore the credibility of fiscal policy, which is the critical factor for success. 169

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Summary This chapter presents an alternative to the conventional set-up for economic policy which gives SOFIEs the tools they need for effective stabilization of their economies. The approach outlined above has the advantage that the exchange rate anchor is a powerful indicator of economic policy success and a persuasive reason to adopt adjustment policies when needed. A country which is able to set an exchange rate target and achieve it consistently over time gains credibility for its overall economic strategy. On the other hand, the impact of depreciating exchange rates on the purchasing power of incomes is considerable, especially when the exchange market pressure results from concerns about the sustainability of fiscal policy. Large devaluations undermine the savings habit, even in cases where the exchange rate stabilizes at a new lower level, while exchange rate volatility discourages investment, and may cause financial instability. This chapter proposes a strategy to protect foreign exchange reserves and maintain a war chest large enough to defend the target exchange rate. The level of foreign reserves is a highly visible indicator, and one which is available daily. That permits the policymaker to detect external imbalances at an early stage. Fiscal dominance is a fact of life in SOFIEs; my approach acknowledges this and works within the limits it imposes in terms of the tools that will produce results under these circum­ stances. In practice this means a subservient role for monetary policy, in contrast to the infla­ tion-fighting objective of conventional monetary policy. Targeting inflation through the use of domestic policy when inflation is mostly imported simply undermines the credibility of the central bank. The recommended approach is compatible with any type of exchange rate targeting regime, whether peg or managed float, or merely a commitment to prevent excessive volatility of exchange rate fluctuations. However, in practice an exchange rate peg proves to be the most credible regime for many SOFIEs. This approach reflects reality: SOFIEs must get fiscal policy right. If they do, everything else will fall into place; if they don’t, no combination of other policies will serve to stabilize the economy.

Notes 1 My thanks to the participants at the George Washington University Institute for International Eco­ nomic Policy held on 18 April 2017 and to the economists at the Eastern Caribbean Central Bank for their invaluable comments on earlier versions of this chapter. 2 I owe this description to Mar Gudmundsson, Governor of the Central Bank of Iceland.

References Agenor, Pierre-Richard (2004) The Economics of Adjustment and Growth, 2nd edn, Cambridge, MA: Harvard University Press. (The model also appears in Agenor, Pierre-Richard and Montiel, Peter (2008) Devel­ opment Macroeconomics, 3rd edn, Princeton, NJ and Oxford: Princeton University Press.) Blanchard, Olivier, Dell’Ariccia, Giovanni and Mauro, Paolo (2010) ‘Rethinking macroeconomic policy’, IMF Staff Position Note, Washington, DC: IMF, www.imf.org/external/pubs/ft/spn/2010/spn1003.pdf. Ostry, Jonathan, Ghosh, Atish and Chamon, Marcos (2012) ‘Two targets, two instruments: monetary and exchange market policies in emerging market countries’, IMF policy paper, February, Washington, DC: IMF, www.imf.org/external/pubs/ft/sdn/2012/sdn1201.pdf. Worrell, DeLisle (2000) ‘Monetary and fiscal coordination in small open economies’, IMF WP/00/56, March, Washington, DC: IMF. Worrell, DeLisle, Moore, Winston and Beckles, Jamila (2018) ‘A new approach to exchange rate man­ agement in small open financially integrated economies’, in Lino Briguglio (ed.), Handbook of Small States: Economic, Social and Environmental Issues, London and New York: Routledge.

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12 Venezuela The descent into a ‘soft state’ Anthony P. Maingot

Introduction In 1958 the dictatorship of Marco Pérez Jiménez was overthrown by a group of reformist officers and civilian leaders representing three political parties: Rómulo Betancourt’s Acción Democrática (AD – Democratic Action), Rafael Caldera’s Partido Social-Cristiano (Social Christian Party; also referred to as the Comité de Organización Política Electoral Inde­ pendiente – COPEI– Independent Political Electoral Organization Committee) and Jovito Villalba’s Union Repúblicana Democrática (Democratic Republican Union). They co-signed the Pact of Punto Fijo guaranteeing the free play of pluralist electoral politics. Civilian rule came to an end in a piecemeal fashion 37 years later when Lt-Col Hugo Chávez Frías won the 1998 election by a very wide margin. Buoyed by enormous oil profits, Chávez launched what he called the Bolivarian Revolution that opposed ‘bourgeois’ corruption and mismanagement. In 2013, knowing that he was terminally ill, Chávez anointed the labour leader, Nicolás Maduro Moros, as his successor. Since then, the story of Venezuela has been one of economic decline and social disarray. According to Gunther Myrdal’s theory of the ‘soft state’,1 the country has descended into what is best described as all the various types of social indiscipline which manifest themselves by deficiencies in legislation and, in particular law observance and enforcement, a widespread disobedience by public officials and, often, their collusion with powerful persons and groups … whose conduct they should regulate. Within the concept of the soft state belongs also corruption. Given that theoretical focus, any broad-brush description of contemporary Venezuela has to begin by asking: why and how has President Nicolás Maduro survived the following facts and events described in this chapter:



Venezuela’s economy has collapsed. Gross domestic product (GDP) has shrunk by 30%, and inflation is approaching 1,000 percentage points; There has been a massive flight of Venezuelans to Colombia and Ecuador, and of the middle class to Miami, USA;

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Both the USA and the European Union have refused to acknowledge President Maduro, and Mercosur has suspended Venezuela from its membership; Over 60 counties recognize the opposition-controlled Asamblea Nacional (National Assembly) and have declared its leader, Juan Guaidó, as President of the Republic; Meanwhile, four out of five Venezuelans live in poverty and there is widespread hunger. The US government has imposed very stringent sanctions which affect oil sales and other economic transactions. Urban crime is virtually out of control. Massive public protests have led to dozens of deaths and hundreds of political prisoners; and President Maduro’s security cordon is reputed to comprise 400 Cubans and an equal number of Russians.

Are there any points in Venezuela’s political and social history which might provide even a partial answer to this question? The crisis cannot be entirely attributed to the wilful acts of the caudillos Chávez and Maduro and/or the support of Cuba and Russia. After all, this is not the first dictatorship in Venezuela’s history. Authoritarian attitudes do not just spring up from nowhere. ‘A political culture’, says Lucien Pye, ‘is the product of both the collective history of a political system and the life histories of the individuals who currently make up the system; and thus it is rooted equally in public events and private experiences’.2 Sidney Verba leads the his­ torian to his task in the study of political culture by posing the fundamental question: ‘What in the political histories of nations ought one to look at in order to see the impact of historical events on political culture?’3 The questions to be asked of these general areas from the point of view of the formation of political beliefs are: (1) how were these problems solved – incrementally or through salient crises (war, revolutions, etc.)? ‘While incremental problem solving has an important effect on political beliefs, it is salient crises that are most likely to form a peoples’ political memory;’ and (2) were these problems indeed resolved or do they continue to be problems of the system, of the leaders and their most ardent followers? It was Richard Morse who argued that according to the neo-Thomistic, post-medieval Hispano-Catholic view of man and society, ‘the people do not delegate but alienate sovereignty to the prince … they vest power in him without condi­ tion … that he may use it as he deems fitting.’4 There is a ring of truth in Morse’s theory that can be seen in any review of Venezuela’s history.

Relevant historical antecedents Símon Bolívar’s pessimistic ideas about caudillismo and populism were prophetic: Unfortunately, among us, the masses can do nothing, a few strong wills do it all and the multitudes follow their audacity without examining the justice or the crimes of the cau­ dillos; then they abandon him when one even more perfidious surprises him. This is the nature of public opinion and national character of our America.5 Bolívar was not mistaken. Like so many other nations in the southern hemisphere, Venezuela in the nineteenth century was a society at war with itself. As caudillos of the conservative and lib­ eral oligarchies battled each other, European navies blockaded the nation more than once, demanding compensation for damages or the repayment of debts owed to their nationals. Political change was effected through what Rómulo Betancourt called la patada histórica – one caudillo shoulders his way into the Palacio de Miraflores, only to be kicked out by another.6 Young T. R. Ybarra, a caraqueño educated at Harvard, witnessed many of the events of the time 172

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and concluded that ‘They are fighting from time to time…. Nobody knows what it is about, but peace makes them uneasy’.7 Dictator Antonio Guzmán Blanco (1870–88) bestowed on himself the magnificent title of El Ilustre Americano. It did not matter that he had assumed the presidency through dubious means. He was followed by President Raimundo Palacio who signed the first concession for oil exploration. Then came Generals Joaquín Crespo (1892–97), Ignacio Andrade (1897–99) and Cipriano Castro who for 11 years (1897–1908) governed as the typical caudillo from Táchira, a state high up in the Andes. Thus began the era of the Andinos, most of whom hailed from Táchira, the most audacious and inherently cruel of all being Juan Vicente Gómez, who took advantage of Cipriano Castro’s recuperation in Europe from cirrhosis of the liver to record the longest rule in Venezuelan history – 27 years. By the time he died of natural causes in 1935 – surrounded by many of his more than 100 children – Gómez had given shape to the Venezuela we recognize today. First, he created a professional army that defeated the regional caudillos from Caracas, the Llanos and the Andes. Second, this gave him the capacity to nominate regional governors and other officials loyal to him. His negotiation of generous terms with the British, Dutch and American oil companies earned him the royalties needed to pay his military and civilian followers, including his vast extended family. Semi-literate himself, he insisted on pursuing a philosophy of state encoura­ ging others to elaborate a doctrine that was very much in keeping with an opportunistic inter­ pretation of Bolívar’s thought. He had considerable assistance in this from two of the country’s most prominent intellectuals, both of whom proclaimed that Venezuela’s culture was effectively governed by ‘democratic Caesars’. Both Laureano Vallenilla Lanz8 and Pedro Manuel Arcaya9 leaned heavily on the theories of racial and ethnic differences that were very popular among the Positivists at the time. Arcaya argues that ‘the desire of a people to be ruled by a Chief or Conductor whom they loved and respected [is] a desire which I attributed to our ethnic heri­ tage’.10 Compared to this ethnically focused ideology, the ideas which governed the establish­ ment of a civilian democracy grew very slowly and mostly among the urban educated elite. The ‘men on horseback’ from the Andes remained deeply embedded as the reference group.11 Two men who succeeded Juan Vicente Gómez, Eléazar López Contreras and Isaias Medina Angarita, attempted to sustain the post-Gómez status quo but could not deal with two new realities of the country – the rise of a proletariat based on the petroleum industry, and the emergence of a well-organized clandestine political movement. The latter comprised many of the so-called Generation of 28 now led by Rómulo Betancourt.12 It is that ‘generation’ and its political party, Acción Democrática (AD), which joined a large group of junior officers in the coup d’état of 1945. Betancourt governed from 1945 to 1947 when AD elected the prestigious novelist Rómulo Gallegos as president. The short-lived Gallegos presidency fell victim to another patada histórica in 1948, thus proving a principle that was virtually axiomatic by then: ‘change comes mostly with the military, occasionally without the military, but never against the military’. This time it was Andino-born Col Marco Pérez Jiménez, who quickly added a new dimen­ sion to the military’s role in society – the business sector and the ‘transformation of the physical environment’ of the country. This entailed the massive urban renewal of Caracas, connecting super-highways and instigating multiple infrastructure projects all of which predictably provided big pay-offs for military supervisors and allied civilian groups. There is an uncanny similarity between the regime of Pérez Jiménez and that of the later Chávez-Maduro years. In addition to their obsession with ‘Bolivarian’ principles they shared a penchant for rewarding the military with new weapons and luxurious material goods. Pérez Jiménez attempted to legitimize his regime through an election but, upon realizing that the vote was going against him, he stopped 173

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the count and declared himself president. His explanation was that Venezuela deserved the ‘grandeur’ which only a ‘Bolivarian’ military-civilian elite could provide, and announced something grandly called ‘the New National Ideal’: Although it is true that the basic factor of the Republic is the normal evolution of con­ stitutional life – yet what is also certain is that the accomplishments of the national well­ being which will give Venezuela the grandeur she deserves stands higher than this.13 By 1958 a group of officers had decreed that Pérez Jiménez’s time was up and sent him into exile. Many an observer believed that the final ‘sunset of the tyrants’ had arrived.14 In fact, it merely meant that the military withdrew to the cuarteles (military quarters) to enjoy their very much enlarged share of the national budget and the proceeds of their business involvements. It was an arrangement that the civilian governments of Rómulo Betancourt and Carlos Andrés Pérez could afford given the new terms they had negotiated with the oil companies. Clearly, it did nothing to sanitize the nature of Venezuela’s ‘soft state’.15 Instead, it revealed what S. E. Finer calls a state of ‘empirical autocracy and oligarchy’ – a military so entrenched in society that it tends to lose little by substituting indirect for direct rule.16 It can be said that the military prefers to maximize the benefits and minimize any risks by allowing democracy to foster better relations with all sectors at home and abroad such as relations with the USA, which has adopted an anti-dictatorship stance. Interestingly enough, during the 1960s the USA tolerated Venezuela’s increasingly aggressive steps to sieze a larger share of its oil profits. Certainly, Venezuela’s hostility toward Fidel Cas­ tro’s Cuba had something to do with this tolerance, on the principle that ‘the enemy of my enemy is my friend’. Perhaps more important, however, was the growing US dependence on Venezuelan oil. Arthur Schlesinger, Jr. emphasized this point when he explained why President Kennedy was the first US leader to visit Venezuela. ‘Some of us in Washington’, he noted, ‘saw Venezuela as a model for Latin America’s progressive democracy’, adding (in parentheses), ‘remembering always that its oil revenues gave it a margin of wealth the other republics lacked’.17 This was petro-diplomacy at its most utilitarian. It differed from the later ChávezMaduro phase of petro-diplomacy in that at the time neither Betancourt nor the USA articu­ lated their interest in the oil industry by using hostile geopolitical rhetoric. Betancourt had undergone an ideological change of heart; after flirting with an incipient communist movement in his youth, he had opted for, as he put it, the ‘West’ and its democratic system. Following two periods of AD government and one by the conservative Christian Democratic Party (COPEI) under the leadership of Rafael Caldera, Caldera returned to office in 1994 fol­ lowed by Carlos Andrés Pérez of AD in 1999. The latter proved to be watershed years, and coincided with the end of the rule of the party’s signatory to the Treaty of Punto Fijo. To understand the decisions that Caldera in particular made during this pivotal period, one has to understand his unique relationship with those attempting to overthrow democratic govern­ ments. After two attempted coups in 1992, he gave a wide amnesty to the coup leaders, just as he had given amnesty to the Castro-inspired guerrillas in the mountains and to the many radi­ cals who had turned the universities into armed camps. All these amnesties were endorsed by the Roman Catholic Church and much of the business community. It is no surprise, therefore, that he would amnesty Lt-Col Hugo Chávez, who attempted to overthrow Carlos Andrés Pérez in 1992. What was surprising was that as a Life Senator (Senador Vitalicio), Caldera all but endorsed the coup, blaming Carlos Andrés Pérez’s neoliberal-capitalist policies for the ‘hunger’ among the people and the loss of institutional legality within the armed forces. Chávez, enjoying special privileges in jail, congratulated Caldera’s speech from his cell, arguably marking this as the start of 174

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his career as the next ‘saviour hero’ of the country. His rise to power was not immediate but did evolve over a few years into what became known as the Chávez-Maduro era.18

The era of the Bolivarian Revolution Let it be said that there can be little doubt that Chávez’s electoral popularity was authentic. Indeed, in a 2008 Latinobarómetro poll, Venezuelans were second only to Uruguayans in expressing ‘satisfaction with the way democracy works in your country’. More than one-third of Venezuelan respondents stated that inequality had diminished during the early Chávez years, thus providing a possible explanation as to why he was re-elected as president in 2006 and 2012. In the November 2008 municipal and state elections, Chávez’s Partido Socialista Unido de Venezuela (PSUV – United Socialist Party of Venezuela) won 17 out of 22 governorships. By then, however, a real demographic and social division made a dramatic appearance: the opposition coalition triumphed in the five most important states in terms of population, com­ merce and oil, as well as in the all-important mayoralty of Caracas. The country’s three most influential newspapers prematurely proclaimed the results a victory for democracy and the beginning of a new phase in Venezuelan politics.19 It was a victory of sorts, but it was not enough to turn the opposition into a viable alternative to the regime even as opposition to that regime was growing. A subsequent comprehensive poll revealed the contradictions and the complexity of the situation20 – 56% of the population believed that the country was on the wrong path, and only 15% believed that the situation would improve in 2009–10. Only 9% believed that Chávez’s ‘socialism of the twenty-first century’ was a promising option, especially if it led to a Cuba-like situation. By large majorities, poll respondents rejected the nationaliza­ tion of private property and the ongoing centralization of power in the presidency. Only 3% believed that the country’s problems lay with ‘the oligarchy’ or ‘imperialism’, both central themes of the rhetoric spouted by Presidents Chávez and Maduro about pitiyankees (Yankee dwarfs) and escualidos (filthy ones). Despite this, 43% said they would vote for Chávez compared with 39% for any candidate of the opposition at the time. On the other hand, if presented with a ‘new’ opposition candidate, 49% declared that they would vote for him or her, compared with 40% who said they would vote for Chávez. The challenge for the opposition was to find a candidate who could articulate a programme that would appeal to the people, and an arrange­ ment which might suit the various sections of such a highly politicized electorate, and, critically, gain the support of significant sectors of the military. None of this seemed possible in the near term or indeed in longer term despite the deteriorating economic situation. On 1 July 2009 the three major Venezuelan newspapers carried a special insert in the form of a ‘document’ from both the National Academy of Economics and the Academy of Political and Social Sciences.21 The general thrust of the declaration was that the government’s policies were leading the country in the wrong direction. The document cited three basic problems: 1 2 3

the decaying infrastructure of the country, from oil refineries to roads, water and electrical works; the ‘moral decomposition through rampant corruption’ among the upper levels of the regime; and the inefficiency of the ever-increasing centralization of political and economic power.

Perceptions that rampant corruption was on the increase were made at home and abroad. In a stinging speech, the highly respected US district attorney, Robert Morgenthau, alleged that both Chávez and the Iranian President Ahmadinejad had been cooperating with the 175

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militant grouping Hezbollah in collecting money through the drug trade, and that Chávez’s motivation was that he was ‘bent on becoming a regional power’. Perhaps equally devastating was the opinion of The Economist, which claimed that Chávez had used his most recent world tour to cement ‘an anti-American alliance with Iran, Syria, Belarus and Russia’, before con­ cluding that ‘most of the regimes he is cultivating in this enterprise are marked by rigged elections, media censorship, the criminalization of dissent and leaders for life … Is this the future of Venezuela?’ In its 29 July 29–4 August 2017 issue The Economist asked, ‘Venezuela in Chaos, What Should the World Do?’ The weekly newspaper described President Maduro as ‘The clueless caudillo of Caracas’ and predicted that ‘Rather than a second Cuba or a tropical China, Chávista Venezuela, with its corruption, gangs and ineptitude, risks becoming something much worse’ (p. 9). How much worse could it get? The answer was much worse. Business Insider 22 quotes Ricardo Hausman, Venezuelan professor of economics, Harvard University, as saying that the 40% decline in per capita GDP between 2013 and 2017 represented a bigger contraction than that seen in the 1929–33 Great Depression in the USA, in Russia from 1990–94 and in Cuba from 1989–93. Proof that hope springs eternal even in the face of bitter experience is the position of The Economist (February 2019) which maintained for two years that the leader of the opposition, Juan Guaidó was the man who could unite the opposition, ‘but first it must get rid of Mr Maduro’. That patada histórica would not come easily. The Economist concluded that while acute food shortages have dragged much of the popu­ lation in a deepening humanitarian crisis (six out of 10 Venezuelans say they go to bed hungry), a core group of military top brass and higher level officials who remain loyal to Mr. Maduro are able to tap into the remaining resources to survive – or enrich themselves through illicit means.23

The sources of income of the military Miguel Henrique Otero, editor of the only remaining Venezuelan newspaper (now published electronically), El Nacional, speaking from exile, described what he called Maduro’s ‘eight armies’ which combine security and organized crime functions:24 1 2 3 4 5 6

The milicia comprising armed and trained reserves; The Guardia Nacional Bolivariana; 3–5The military: this brings together the army, the navy and the air force – all of which fall under the jurisdiction of Minister of Defense, General Vladimir Padrino López; The Cubans who man the security cordon protecting Maduro; The colectivos – armed gangs who operate on motorcycles; Elements of the Colombian Fuerzas Armadas Revolucionarias de Colombia (FARC –Revolutionary Armed Forces of Colombia) and the Ejército de Liberación Nacional (ELN – National Liberation Army) operating in Venezuelan territory.

He did not mention the Cubans who are known to control key posts in the tele­ communications industry. Although it is difficult to arrive at a precise figure, according to Diosdado Cabello, president of the Asamblea Nacional Constituyente (National Constituent Assembly), in 2019 the total number of armed personnel in Venezuela included 280,000 mili­ tary and two million milicianos. 25 The Belgian think tank, Crisis Group, in a commendable piece of research on the Vene­ zuelan military, discusses the Venezuelan military ‘enigma’.26 It is hard, however, to discern 176

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anything enigmatic about the many economic sectors or activities which sustain the Maduro regime. They are as follows:








14 firms in 20 economic sectors which lie outside any state control or supervision; Of the 576 state-owned firms, including PDVSA, 60 are directed by a general of the National Guard; Ports and airports of special economic military zones; The Orinoco mining arc which is exploited for its gold, diamonds and precious stones; 30% of cabinet members; Of the 20 Chávista governors seven are military men; The Gran Misión Abastecimiento Soberano, a Ministry of Defence programme established in 2016 for the production and countrywide distribution of food, medicines and other staples.27

All this, to be sure, is the tip of the iceberg of what Douglas Farah and Caitlyn Yates term the Bolivarian Joint Criminal Enterprise.28 They identify it as ‘a consortium of criminalized states and non-state actors comprising 181 individuals, 176 companies in 26 countries. Drug trafficking, gold trafficking, oil and gas trafficking, mafias controlling food’. After giving a detailed description of these mafias, Farah and Yates conclude that ‘the Maduro regime has not collapsed and may not for a significant period of time … The network’s ability to adapt and diversify their criminal portfolio means that money continues to flow into the regime’s coffers’. The transnational movement of cocaine from South American producers to consumers in the global north requires a level of coordination that can best be provided by an international net­ work of individuals, who are well connected to corrupt government officials and unscrupulous business interests working together to ensure that the product reaches its destination intact. Equally revealing was the month-long CNN report on how open air and sea ports under military control have created a ‘cocaine superhighway’ to the USA through the Caribbean and Central America. The number of drug-carrying flights departing from the north-western region of Zulia, Venezuela, increased from two per week in 2017 to five per night in 2019.29 This is what sustains some 2,000 generals and thousands of lower ranks loyal to the regime. The New York Times (14 January 2020, p. 8) cites the work of Venezuela’s think tank, Citizens Control, which describes how, unable to pay meaningful salaries to millions of state employees the government has looked the other way as they resort to graft, influence peddling and operate side businesses to make ends meet. They cite the fact that the official salary of a top military general is $13.00 a month, yet they manage to live in relative luxury. In Venezuela, there appears to be no counterpart to the Colombian, or indeed, Mexican criminal cartels. It is widely believed that the Colombian cartels take advantage of Venezuela’s loose assembly of high-ranking retired military men generally identified under the rubric ‘El Cartel del los Soles’ descriptive of the sun-shaped markers of military rank worn by generals. A very accurate description of the Venezuelan situation is given by the Spanish daily newspaper El País: Describing the Venezuelan-based Cartel de Los Soles (Cartel of the Suns) as a drug-traf­ ficking cartel is misleading because it operates differently from traditional Mexican and Colombian cartels in three fundamental ways. First, the Cartel de Los Soles is the only known cartel in the region completely comprising military and government personnel. Second, [it] follows a horizontal structure instead of the traditional hierarchical structure. Third, the Cartel de Los Soles is not responsible for producing drugs, setting prices, or 177

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restricting competition; instead, it is responsible for the transport of shipments though Venezuela to key hubs in Honduras, the Dominican Republic, Suriname and Europe via Africa.30 Even the well-researched reporting of international journalists on the well-known existence of drug planes at Venezuelan Air Force bases has not removed the support of the Venezuelan government for those of its high-ranking officers identified as traffickers.31 On 10 November 2015 two nephews of President Maduro’s wife, Cilia Flores, were arrested in Haiti when they were planning to fly into the USA with a large cargo of drugs. They had flown from the hanger at the airport reserved for the president, held diplomatic passports and were assisted by members of the president’s Honour Guard.32 Additional drugs were found in the multimillion-dollar mansion belonging to the former Venezuelan vice-president Tarek El Aissami. Predictably, many countries and islands in the area continue to be supplied by speedboats and increasingly from the air. In 2015 Costa Rican authorities discovered 33 illegal landing strips along the Pacific coastline and the wreckage of seven suspected drug planes.33 Additionally, the fact that such high levels of corruption exist in present-day Venezuela and Colombia, and that Venezuela refuses to cooperate with US counter-narcotics agencies, makes the Caribbean situation extremely intractable as far as most efforts at regulation are concerned. As the past mayor of Cartagena and president of Colombia’s National Assembly of Industries (ANDI) put it, the main problem is ‘the corruption that eats away (carcome) at everything we do’.34 As dramatic as this sounds, the fact is that the only two aspects of Venezuelan corruption which are new are the role of the drug trade and the full incorporation in the trade of the top echelons of the military and civilian elites. What persisted was what is called ‘the paradox of anticorruption’: corruption so entrenched that the law is enforced only against enemies and dissenters, never against allies.35 In December 1989 the Consorcio de Ediciones Capriles, owned by the Capriles family, published what is considered the most thorough study of corruption in contemporary Venezuela. They conclude that corruption had become an integral part of the country’s political culture, a ‘macroeconomic, political and social variable’. It reflects, they said, the ‘“collective rationality”’ of the whole system … a part of the structure of the national character’. Along with the corrupt act goes impunity.36 In the post-Chávez, Nicolás Maduro regime there is no ideological cover for the rampant corruption sweeping Venezuela, including importantly the drug trade.37 In this regard Vene­ zuela differs fundamentally from that other Latin American country which held on to an ideology of socialism – Cuba. When Cuba, in 1986, was penetrated by Colombian drug dealers (and the CIA), seeking free transit on the way to the USA, the basic principles of Cuban anti­ corruption eventually intervened in dramatic fashion. In June 1989 the accused rogue operation of members of the Ministry of the Interior, plus a ‘hero’ of the military, Gen. Arnaldo Ochoa, were convicted of betraying the revolution through their drug dealing and were executed.38

Conclusion Like so many previous caudillos, Hugo Chávez made a valiant attempt to provide his ‘revolution’ with an overarching ideology. He called it ‘twenty-first century socialism’. This ideology had as its core the idea of creating an alternative (Alianza Bolivariana para los Pueblos de Nuestra América – ALBA) to US imperialism, capitalism (in its neoliberal, free trade and privatization dimensions), and traditional oligarchies (often defined in racial terms). Its basic tenets were for­ mulated by the German-Mexican Marxist Heinz Dieterich, whose book Socialism of the XXI 178

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Century Chávez initially adopted as his ideological guide. After a period of ideological euphoria, Dieterich himself began accusing Chávez of a series of missteps that endangered not only his own revolution but those in Cuba and Bolivia. According to Dieterich, the caudillo-style lea­ dership of Chávez contradicted the fundamental tenet of his model: that socialism has to grow from the bottom up, never from the top down, and never so centralized.39 This is exactly what one found originally in the ‘Bolivarian’ regimes of Chávez and Maduro. The contradictions of Chávez’s ideology, both philosophical and practical, have been duly noted by Venezuelans who know something about socialism and international affairs. The former guerrilla fighter and leader of the then active Movimiento al Socialismo (Movement for Socialism) in Venezuela, Teodoro Petkoff, claimed that few if any of Venezuela’s socialist intellectuals understood, much less supported Chávez, his ideology and his regime’s policies.40 In Venezuela, there exists no real ideology or historically based principles to provide cover for the narco-state. What has existed and continues to exist is a political culture proper, of what Gunnar Myrdal calls ‘a soft state’.41 According to Chávez’s biographer, Bart Jones, Chávez considered the eradication of corruption one of his main tasks – and he failed. It was not just a ‘problem’, it was ‘a culture in a country where many people thought only fools did not grab what they could’. Chávez, says Jones, called it ‘a monster with a thousand heads’.42 In practical everyday terms, this is best expressed by a Venezuelan saying, ‘no me dés, ponme donde hay’ (‘don’t give me, place me where there is’).43 As of January 2020 it is Nicolás Maduro and his military partners who have mastered the intricacies of placing their followers where there is corruption to exploit. This explains why in a poll conducted by Venezuela’s foremost polling agency, Datanalisis, most Venezuelans believe that Maduro will overcome the opposition of the USA and its local allies.44 This appears to be the opinion of Maduro himself. Having survived a major coup attempt on 30 April 2019, and having ‘outfoxed’ Guaidó and the opposition, he was now ready, he told the Washington Post (18 January 2020), for direct talks with the USA. It will be, he said, ‘a bonanza’ for the US oil companies. If the Washington Post’s report is true – that a phone call took place with Rudy Giuliani and the Texan Republican Peter Sessions, seeking a direct line to President Trump – then the Post’s conclusion that Guaidó’s flame is ‘petering out’ and that his US backers are weighing up their options is also true. Given the persistent role of the military and the equally persistent and ingrained corruption in Venezuela’s history, it is virtually certain that any resolution of the Chávista-opposition stand-off will have to include amnesties and special concessions to the military. What will happen with the Chá­ vista criminal drug trade-based mafia, with the corrupt and unsupervised petroleum and arma­ ment deals with Putin’s Russia and the equally corrupt dealings with the Lebanese Hezbollah?45 Where is the Hercules who will clean the stables soiled by centuries of authoritarianism and corruption?

Notes 1 Gunner Myrdal, The Challenge of World Poverty (New York: Vintage Books, 1970), p. 208. 2 Lucien Pye, ‘Political Culture and Political Development’, in Lucien Pye and Sidney Verba (eds), Political Culture and Development, (Princeton, NJ: Princeton University Press, 1965), p. 8. 3 Pye and Verba, Political Culture, pp. 512–60. 4 Richard M. Morse, ‘The Heritage of Latin America’, in Louis Hartz (ed.), The Founding of New Societies (New York: Harcourt, Brace & World, 1964), p. 154. See further on this in Richard M. Morse, ‘Toward a Theory of Spanish American Government’, Journal of the History of Ideas, XV, no. 1 (January 1954), pp. 71–77. 5 See Tomas Rueda Vargas, Escritos, 2 vols (Bogotá: Antares, 1963), vol. 1, p. 237. Scepticism regarding democratic rule was widespread among the precursors. See Anthony P. Maingot, ‘The Caudillo: Representative Leader or Deviant Personality’, in Joseph S. Tulchin (ed.), Problems of Latin American 179

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6 7 8 9 10 11 12 13 14

15

16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35

History (New York: Harper & Row, 1973), pp. 65–108. On the transfer of power from Chávez to Maduro, see Moises Naim and Francisco Toro, ‘Venezuela’s Suicide’, Foreign Affairs, 97(6) (Nov.–Dec. 2018), pp. 126–38. Rómulo Betancourt, Venezuela: Política y Petróleo (Mexico: Fondo Cultural y Económico, 1956), p. 188. T. R. Ybarra, Young Man of Caracas (New York: Ives Washburn, 1941). Laureano Vallenilla Lanz, Cesarísmo democrático (Caracas, 1919; reprinted by Tipografia Garrido in 1961). Pedro Manuel Arcaya, Estudios sobre personajes y hechos de la historia de Venezuela (Caracas, 1911). Quoted in J. Fred Rippy, ‘The Dictators of Venezuela’, in A. Curtis Wilgus, (ed.) South American Dictators (New York: Russell and Russell, 1963). See Samuel E. Finer, The Man on Horseback: The Role of the Military in Politics (New York: Praeger, 1962). See Charles J. Ameringer, The Democratic Left in Exile: The Anti-Dictatorial Struggle in the Caribbean, 1945–1959 (Coral Gables: University of Miami Press, 1974); Robert J. Alexander, The Venezuelan Democratic Revolution (New Brunswick: Rutgers University Press, 1964). Cited in Betancourt, Venezuela: Política y Petróleo, p. 558. One well-informed journalist, Tad Szulc, argued that with the fall of several dictators ‘democracy … is here to stay in Latin America’. See The Twilight of the Tyrants (New York: Henry Holt & Co., 1959) p. 4. See also the optimism in Robert J. Alexander, Rómulo Betancourt and the Transformation of Venezuela (New Brunswick: Transaction Books, 1982). Carlos Andrés Pérez did little to attack corruption. In fact, his corrupt behaviour in his second term led to his indictment by the Congress, forcing his resignation. See Walter Little and Antonio Herrera, ‘Political Corruption in Venezuela’, in Walter Little and Eduardo Posada Carbo (eds), Political C­ orruption in Europe and Latin America (New York: St Martin’s Press, 1996), pp. 267–86. Finer, The Man on Horseback, p. 190. Arthur Schlesinger, Jr., A Thousand Days: John F. Kennedy in the White House (Boston, MA: Houghton Mifflin, 1965), p. 766. Bart Jones, Hugo: The Hugo Chávez Story (London: The Bodley Head, 2008), pp. 158–60. See the editorials in Tal Cual, El Nacional and El Universal, 24 November 2008. ‘Informe Final’, Agencia Venezolana de inteligencia Hinterlances, Democracia Participativa, 27 June 2009. Very similar responses were given to a later poll by Alfredo Keller y Asociados, ‘Las piedras en el camino de la revolución: Lo que piensa la opinión publica’ (Caracas, 22 July 2009). ‘Venezuela ante la crisis: Documento que presentan a la opinión pública nacional la Academia Nacional de Ciencias Económicas y la Academia de Ciencias Políticas y Sociales’ (Caracas, 1 July 2009). www.businessinsider.com/statistics-about-venezuelas-economiccollapse-2017-8; Later, the New York Times (17 May 2019) declared that Venezuela’s fall ‘is the single largest economic collapse outside of war in the last 45 years’. The Economist, Special Report, 2–8 Feb. 2019, pp. 9, 17–20. http://es.insightcrime.org/noticias/noticias-del-día/los-8-ejércitos-crminales-que-sostiene. ¿Qué pasa dentro de la Fuerza Armada de Venezuela? See http://alnavio.com/noticia/17548/actualidad/ que-pasa-dentro-de-la-fuerza-armada-de-venez … www.crisisgroup.org/latin-america-caribbean/andes/venezuela/039-venezuelas-milit … ‘Venezuela’s Military Enigma’, International Crisis Group, 16 September 2019, www.crisisgroup.org/ latin-america-caribbean/andes/venezuela/039-venezuelas-military-enigma. Douglas Farah and Caitlyn Yates, Maduro’s Last Stand: Venezuela’s Survival through the Bolivarian Joint Criminal Enterprise (IBJ Consultants & National Defense University, May 2019). www.cnn.com/2019/04/17americas/venezuela-drug-cocaine-trafficking-intl/index.h … ‘Venezolanos tienen cartel propio’, El País, http://historico.elpais.com.co/paisonline/notas/Julio232007/ narco.html (accessed 28 September 2014). For a well-researched British report, see Jeremy McDermont, ‘Venezuela Is Key Link for the Drug Smugglers’, Daily Telegraph (19 July 2007), p. 5. See www.insightcrime.org/news-briefs/venezuela-military-officials-piloted-drug-plane … See www.ticotimes.net/2016/04/14/costarica-secret-landing-strips … Bruce MacMaster quoted in El Tiempo (9 April 2016), p. 1. Susan Rose-Ackerman and Bonnie J. Palefka, Corruption and Government (Cambridge: Cambridge University Press, 2016), p. 428.

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36 Diccionario de la corrupción en venezuela, vol. 1 1959–1979 (Caracas, 1989), p. 13. 37 According to Transparency International, Venezuela and Haiti rank at the very bottom of their per­ ception of corruption index. 38 William M. LeoGrande and Peter Kornbluh, Back Channel to Cuba (Chapel Hill: University of North Carolina Press, 2014). 39 ‘Entrevista a Heinz Dieterich,’ Diario La Tercera, 29 March 2007; Pedro Páramo, ‘Chávez y el padre del socialismo del siglo XXI’, Contrapunto (January-March 2008), pp. 23–25; See also Miguel Ángel Bastenier, ‘La Biblia de Hugo Chávez’, http://internacional.elpais.com/internacional/2013/04/12/actualidad/ 1365734 … 40 Teodoro Petkoff, ‘Una postura inmoral’, El Tiempo, 23 February 2008, www.eltiempo.com. 41 Myrdal, The Challenge of World Poverty. 42 Jones, Hugo, p. 449. 43 Folk wisdom celebrates ‘el hombre vivo y apuesto,’ and denigrates ‘el pendejo’. See Carlos Balderama, Conocíendo nuestros refranes (2019). 44 Datanalisis, 2 June 2019. On 22 February 2019 Datanalisis predicted that of the various scenarios considered, the status quo, including continuing deteriorating conditions, was the most probable. 45 See two well-informed essays arguing that corruption is too ingrained to be easily eradicated – Alejandro Cardozo Uzcátegui y Victor M. Mijares, ‘Los lazos de corrupción entre Rusia y Venezuela’, Foreign Affairs Latinoamérica, 19(2) (April–June 2019), pp. 64–74; and Colin P. Clarke, ‘Hezbollah is in Venezuela to Stay’, Foreign Policy (9 February 2019).

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13 The external economic relations of the Caribbean A comparison between the USA and the European Union Ginelle Greene-Dewasmes and Tony Heron

Introduction During the twentieth and early part of the twenty-first century the external economic relations of the Caribbean1 have reflected the wider dynamics of global politics, marked by different power structures, prevailing institutions and development norms. In this chapter, we focus on the region’s external relations with its two biggest trading partners, the USA and the European Union (EU), against the backdrop of these wider global dynamics. We chart US- and EUCaribbean relations according to three distinct, though overlapping, phases: (1) the early post­ colonial period, marked by the landmark Lomé Agreement and Caribbean Basin Initiative/ Economic Recovery Act (CBI/CBERA); (2) the post-Cold War period, marked by the creation of the World Trade Organization (WTO) and the shift away from preferential and towards reciprocal trade relations; and (3) the current epoch, marked by the ascendancy of populist nationalism in Europe and North America and the steady erosion of the post-war economic order. In charting US- and EU-Caribbean economic relations across these three phases, we note among other things the significant downgrading of the region’s historically privileged status in US and EU foreign economic policy. We conclude by outlining, albeit briefly, emergent research agendas and substantive policy priorities that are relevant to the Caribbean’s international economic relations in the twenty-first century.

US and EU relations in the twentieth century During the immediate post-colonial period the Caribbean benefited from a relatively privileged status in the international economic order, at least compared to the majority of other developing countries. In the case of the EU, the Caribbean’s privileged position was achieved courtesy of its membership of the African, Caribbean and Pacific (ACP) group of countries, which stood at the apex of the EU’s ‘pyramid’ of trade preferences. In the case of the USA, it came courtesy of the ‘Caribbean Basin’ group of countries, demarcated unilaterally by the Reagan Administration (1981–89) for geopolitical rather than historical or developmental purposes. 182

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The EU-ACP Lomé Convention (1975–2000) The origins of the Lomé Convention can be found in Europe’s post-colonial settlement agreed after the Second World War. Articles 131 and 136 of the Treaty of Rome provided for the African colonies of France and Belgium to be included within the Customs Union; and, fol­ lowing independence, the Yaoundé Convention of 1963 (subsequently renewed in 1969), among other things, extended these trade preferences, supposedly on a reciprocal basis, for 18 African countries. The next significant step came with Britain’s accession to the Common Market in 1973, which increased greatly the number of newly independent (and soon-to-be independent) developing countries with strong colonial ties to Europe. Britain’s accession to the Common Market also coincided with the Organization of Petroleum Exporting Countries (OPEC) ‘oil shock’ of 1973 which, coupled with the related boom in other primary com­ modity prices, instilled a sense of acute nervousness in European capitals where there was con­ cern about the future security of supply for key raw materials, many of which were located in the former colonies. Furthermore, the negotiations leading up to the conclusion of the first Lomé Convention were influenced by the international climate of the mid-1970s, characterized by third world demands for a New International Economic Order (NIEO). Indeed, Lomé I (1975–79) is seen in retrospect as something of a highpoint in the attempt by the developing world to redefine north-south relations, in the sense that the agreement was at least rhetorically consistent with the spirit of the NIEO.2 Unlike the Yaoundé Convention, preferences under Lomé were granted on a non-reciprocal basis (although in practice full reciprocity had never really existed under Yaoundé), while the number of preference-receiving counties increased from 18 to 46, eventually reaching 71 by the time of the Cotonou Agreement in 2000. Perhaps more importantly, Lomé established a series of highly lucrative commodity protocols – for bananas, beef, rum and sugar – offering eligible ACP states guaranteed prices way in excess of those available on the world market (due to the price-distorting effects of the Common Agricultural Policy). Reflecting the spirit of the NIEO, Lomé also included a substantial aid component financed through the European Development Fund (EDF), plus compensatory mechanisms to assist countries suffering price fluctuations for primary commodities (STABEX) and to guarantee the production of certain minerals (SYSMIN). Finally, Lomé was governed by an elaborate set of joint ACP-EU institutions, including a Council of Ministers, a Committee of Ambassadors and a Joint Parliamentary Assembly. The logic underpinning this institu­ tional design was that Lomé was said to represent a departure from traditional schemes such as the Generalized System of Preferences (GSP) in the dual sense that it was legally con­ tractual (unlike the GSP which could be withdrawn unilaterally at any time by the preference-granting country) and based on a ‘partnership of equals’. Yet this logic suffered from two crucial flaws. First, prior to Lomé the ACP did not exist; indeed, it was effectively created by the EU in order to negotiate the Lomé Convention.3 As a consequence, the ACP lacked the ability to act in a collective and coherent manner. Second, as John Ravenhill4 makes it clear, because of the vast disparities in economic power alongside the absence of reciprocity within Lomé, the ACP possessed little – if any – substantive bargaining leverage over the EU. Instead, it came to rely on what Ravenhill5 refers to as ‘collective clientelism’, by which he meant that the ACP had little alternative but to rely on the gen­ erosity of Lomé, and EU largesse more generally, to forward its collective interests. As Ravenhill argues, however, this strategy was only viable so long as the EU was prepared to continue to carry the economic and political burden of maintaining increasingly unpopular, non-reciprocal trade preferences.

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The US Caribbean Basin Initiative/Economic Recovery Act President Ronald Reagan officially launched the CBI in his address to the Organization of American States (OAS) on 24 January 1982, claiming that the programme would help Car­ ibbean countries to ‘earn their way towards self-sustaining growth.6 During the 1970s and early 1980s increasing political instability in Central America and the Caribbean became intimately linked with the virtual collapse of economic growth in the region. The CBERA therefore was an acknowledgement by the Reagan Administration that improving the region’s economic performance was key to defusing the perceived security threat posed by radical and, in some cases, revolutionary politics. The CBI was subsequently enshrined in law as the CBERA, which granted duty-free treatment to some 6,000 designated products, as well as offering a series of tax-related measures designed to encourage investment by US companies in the region. As Richard Newfarmer argued at the time, the CBI also had an additional motive, which was to improve the international competitive position of US industries facing a deteriorating world market share, by means of the encouragement of ‘production sharing’ operations.7 In practice, however, the means for achieving these ends were severely compromised by a series of exemptions from the duty-free treatment that the CBI was supposed to offer. Despite this, in the 1980s firms in the Caribbean Basin took substantial advantage of provi­ sions contained within section 807 of the US tariff code (later replaced by the Harmonized Tariff Schedule (HTS) 9802.00), which permitted duty exemption to the value of US-made components that were returned as part of articles assembled abroad. Although the HTS 9802.00 tariff regime was initially developed outside of, and prior to, the CBI, the two schemes were later linked through the Special Access Programme (SAP, but also known as 807A), which was established in 1986. The SAP regime created special market access quotas for textiles and clothing products assembled in the Caribbean Basin, in an attempt to encourage production sharing between US clothing firms and Caribbean Basin assembly operations. The initial impact of these measures on Caribbean Basin exports to the USA was impressive: during the 1980s the export of clothing and other items of apparel from the Dominican Republic, Haiti and Jamaica grew annually by more than 20%.8 In the Dominican Republic itself this growth was even more spectacular: in 1988 apparel constituted no less than 78% of all manufacturing exports, worth a total of US $183.8 million, and representing an increase of 333.4% since 1981.9 Still, on closer inspection these gains were not as impressive as initially appeared to be the case. In fact, despite undeniable benefits in terms of employment and increased foreign exchange earn­ ings, the growth of offshore garment assembly in the Caribbean Basin during the late 1980s and 1990s brought with it significant costs. First, because the 9802.00 production sharing regime provided tariff- and duty-free treatment only for US-made components it effectively penalized all the value added goods produced outside of the USA, and thus discouraged the use of local inputs in the production process. As a consequence, this scheme effectively limited the use of local resources to that of labour costs, for, as Mortimore10 put it, Caribbean Basin inputs were neither ‘needed or desired by manufacturer or buyer’. The consequences of this for limiting the growth of economic linkages between the assembly operations and the various domestic economies of the region were considerable.

US and EU relations in the twenty-first century The WTO, ‘banana wars’ and demise of preferential trade The Lomé Convention, the centrepiece of EU-Caribbean relations in the twentieth century, was renewed on three separate occasions – in 1981, 1985 and 1989 – but was ultimately 184

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deemed to have failed in its principal objectives of promoting economic growth and diversifi­ cation.11,12 Important as these policy failings were, the key catalyst for the demise of Lomé was a series of adverse legal rulings against the EU’s banana protocol under both the General Agreement on Tariffs and Trade (GATT) and the WTO. Although at the time much was made of the role of the WTO in precipitating the demise of Lomé – not least by the EU itself – it is worth pointing out that the original banana dispute was provoked, not by Lomé, but by the creation of the single banana market in 1992 as part of the implementation of the Single Eur­ opean Act.13 Despite this, in 1994 the GATT ruled that the Lomé Convention was inconsistent with the most-favoured nation clause, because it did not constitute a ‘free trade area’ or a ‘customs union’ (due to the lack of reciprocity), nor was it consistent with the 1979 Enabling Clause (because it discriminated against developing countries). In response, the EU immediately sought and received a five-year waiver for Lomé in advance of the introduction of the much strengthened dispute settlement mechanism in 1995.14 Although the EU possessed the option to seek a further waiver – for which there are numerous other precedents under both the GATT and the WTO – it soon intimated that its intention would be to recast the entire ACP trade relationship in such a way as to make it ‘WTO compatible’. Accordingly, the Cotonou Partnership Act of 2000 settled on the formula of replacing Lomé with separate EPAs based on seven ‘regions’ – the Caribbean, the Pacific, the East African Community, West Africa, Central Africa, Eastern and the Southern Africa, and the Southern African Development Community – as identified by the European Commission. In order to make this possible, the EU was granted an extension to the WTO waiver (which was subsequently granted during the 2001 WTO Ministerial Conference in Doha, Qatar) in order to allow the ACP sufficient breathing space to prepare for the EPA negotiations, scheduled to begin in September 2002 and to end no later than 31 December 2007. Although this deadline was missed in every case, the Caribbean/ CARIFORUM group became the first, and as yet the only, region to sign a comprehensive EPA in early 2008. The CARIFORUM EPA is scheduled to be implemented over a 25-year period, which began on 29 December 2008 with 83% of bilateral trade scheduled to liberalized after 15 years, 92% after 25 years, and the remaining 8% excluded from liberalization altogether. In spite of this lengthy transition period, Caribbean states have reportedly been slow to imple­ ment the agreement with only nine out of 15 countries having ratified the legal text by the end of 2017.15 Although the USA did not explicitly renounce the CBERA in the same way that EU autho­ rities renounced Lomé, by the late 1990s and early 2000s it had become increasingly anachronistic as the USA sought to recast its trade relations with the Latin American region on the basis of reciprocal free trade. This came, first, in the form of President Clinton’s highly ambitious ‘Free Trade Area of the Americas’ (FTAA). The FTAA initiative was originally conceived in the era of ‘open regionalism’ in which Western hemisphere free trade was designed to go hand-in-hand with the strengthening and deepening of the multilateral WTO system. In time, however, espe­ cially in the aftermath of ‘9/11’, ‘open regionalism’ gave way to ‘competitive liberalization’ as the USA resorted to a traditional ‘hub-and-spoke’ model to strike preferential trade deals with select regional trade partners, including Chile, Colombia and Peru, plus the six members of the Dominican Republic-Central American Free Trade Agreement (CAFTA-DR).16 Finding itself outside of the latter agreement, the insular Caribbean was left to rely on the residual economic benefits offered by the CBERA, which was renewed in 2000 under the Caribbean Basin Trade Partnership Act (CBTPA) and, again, in 2002 under the Trade Act. The CBTPA, however, was scheduled to expire on 30 September 2020 and, under the Trump Administration, it was far from clear that it would be extended for a third time. In any case, the significance of the CBERA for the increasingly service-based economies of the Caribbean is of questionable value. 185

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Caribbean external relations in the current epoch: Brexit, Trump and the changing economic order The tumultuous period since the global financial crisis of 2008–09 has dramatically challenged some of the most fundamental features of the global economic order in which the Caribbean external relations sit. Although it is not yet clear how these changes will impact directly on the Caribbean, in the penultimate section of this chapter we examine the two most widely dis­ cussed aspects of global change – the UK’s imminent exit from the EU (known as Brexit) and the ascendancy of Donald Trump – in terms of what they signify for the region’s future external economic relations.

Brexit In June 2016 the British public voted in a referendum for the United Kingdom to leave the EU by a 52% to 48% majority. With Brexit, all EU treaties will cease to apply to the UK unless an agreement specifying otherwise is reached. For third countries, such as those in the Caribbean, concerns exist regarding the implications that a post-Brexit UK will have on their economic, trade and development relationships with the UK and the EU, respectively. While the exact nature of those relationships will prove difficult to predict, actions taken since the referendum have begun to shed light on how relations are likely to and could take shape. In an ideal sce­ nario, post-Brexit Caribbean countries’ trading positions with the UK would be safeguarded and duty-free and quota-free access to the UK market for Caribbean exports currently provided for under the EPA framework would continue without interruption. In addition, the main­ tenance of current ‘preference margins’ (i.e. the difference between preferential and mostfavoured nation rates of duty), which help to ensure viability of the region’s exports to the UK would be preserved. To date, 13 Caribbean countries17 have officially signed the ‘rollover’ CARIFORUM-UK EPA.18 The Agreement replicates the CARIFORUM-EU EPA and will ensure continuity of the region’s preferential trading relationship with the UK post-Brexit. It also reiterates commitments on development cooperation to support its implementation and use. In the event that the UK and the EU do not reach any agreement by its stipulated dead­ line, on the day that Brexit takes effect, all EU treaties will cease to apply to the UK unless an agreement specifying otherwise is reached. Instead, the UK would be subject to WTO rules, and required to negotiate within the WTO if its trade barriers increase above their initial commitments.19,20 In 2018 the UK indicated that it would set its own tariffs and rules, but that it would not discard EU regulations and would abide by global rules.21 Without the CAR­ IFORUM-UK EPA arrangement, for the Caribbean EPA parties, this could mean current duty-free exports into the UK would be subject to higher UK GSP tariffs. In the case of the Caribbean’s sole least developed country (LDC), Haiti, its situation is in general likely to remain the same. But the biggest danger probably comes from what the UK will decide to do with its most-favoured nation tariffs. Here, the prospect of unilateral liberalization by the UK exists – which Boris Johnson’s Conservative government has hinted at – eroding partially or even entirely preference margins currently enjoyed by Caribbean countries.22 The CARIFORUM-UK EPA provides vital coverage for many Caribbean economies whose exporters are heavily reliant on the UK market. Eight of the 15 CARIFORUM EPA signa­ tories have a disproportionate dependence on the UK market for their exports to the EU. Belize and St Lucia demonstrate an exceptionally high dependency, Guyana and Jamaica a very high dependency, and Dominica, the Dominican Republic, Barbados and Haiti an aboveaverage dependence on the UK market.23 In 2015, 73% of Belize’s total exports to the EU

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went to the UK and were highly dependent on tariff preferences. Meanwhile, 80% of St Lucia’s exports to the EU were agri-food products, of which its entire banana exports were exported to the UK market.24 Guyana and Jamaica had a very high dependence on the UK market for their sugar exports at 100% and 84%, respectively.25 As of 2018 the UK has remained a major trading partner for the region as a whole. During the period 2001–18 the UK ranked as the fourth highest importing country of the Caribbean’s exported goods, at an estimated annual value of US $550 million.26 After Brexit, the Caribbean’s sugar exports will continue to benefit from preferential access currently offered under the CARIFORUM-EU EPA. Despite this, in the longer term, the possibility still exists of reduced Caribbean sugar exports to the UK market as a result of any new trade arrangements forged with expanding competitor markets such as Brazil, Australia and Thailand. In the meantime, for non-FTA partners in the sugar industry, the UK has expressed its support for equal competition based on precedent in the EU, adopting a simple tariff approach to third countries without the use of quantitative restrictions. Aside from tariffs, the UK’s post-Brexit agricultural trade policy could also have serious effects on the Caribbean’s primary goods exports, particularly the banana industry. The UK could adopt policies that under current treaty clauses the EU cannot.27 For instance, in the banana sector the UK could direct tariff income from bananas into a special fund that supports social and environmental improvements and develops more diverse and sustainable banana production systems across all countries of origin.28 In terms of overseas development assistance, in 2017 the UK was the third largest Develop­ ment Assistance Committee donor country, contributing approximately US $18 billion.29 Between 2013 to 2017 the majority of the UK’s bilateral assistance went to Africa (51%), while bilateral flows from the UK to the Caribbean have decreased drastically over recent years. Whether this will change post-Brexit or continue to decline remains to be seen. At least in the area of trade facilitation, some form of UK support is likely to continue for the Caribbean region. In a January 2020 opening address at a Caribbean Community (CARICOM) workshop on WTO issues, Stephen Kossoff, head of the Department for International Development (DFID) Caribbean, pointed to the UK’s contribution of up to £16 million to the Trade and Investment Advocacy Fund (TAF2) over a six-year period and pledged continued trade-related support for CARICOM.30 Over the past 40 years, the UK has also been a substantial provider of multilateral development assistance through the EU framework. Within the EU, the UK is the third largest contributor to the EDF behind Germany and France, providing nearly €4.5 billion or 15% of the total.31 Given that the UK will no longer contribute to the EDF, the question arises of whether it will maintain its 0.7% of gross national income aid target which has long had opponents in the UK Parliament. It is foreseen that policy areas and practice, which have been the trademark of UK development cooperation, will continue to be promoted to the extent that they have a direct bearing on the UK’s vision of itself as a global player and where the UK believes that it has greater expertise and can have the biggest impact.32 For the Caribbean countries, this includes security and good governance, climate change and disaster risk reduction, poverty reduction, education and wealth creation.33 In terms of finances disbursed, based on its existing allocations, post-Brexit the UK’s develop­ ment cooperation is likely to continue to be differentiated along the lines of ‘countries most in need’, namely LDCs and other vulnerable countries. Development assistance is also expected to be based on the UK’s national priorities and interest, similar to that of current EU policy approaches. In terms of implementation, within the Caribbean the UK is likely to continue to work closely with its trusted regional partners, including the Caribbean Development Bank and CARICOM.34 187

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The Trump effect Since his inauguration in January 2017, President Donald Trump has overseen a radical policy agenda with both direct and indirect effects on the Caribbean. The effects can be observed by dramatic policy changes towards the USA’s long-standing international leadership of and com­ mitment to international organizations, especially the United Nations (UN) system. The Trump Administration’s policies portray efforts to marginalize UN bodies through both direct (e.g. withdrawal from some systems, reduced funding) and indirect (e.g. increased bureaucratic requirements) efforts,35 in turn inhibiting their operational capacity. The USA is the single lar­ gest financial contributor to the UN system, contributing approximately US $2.9 billion per year.36 Since 2017 the Trump Administration has proposed notable decreases in funding for the UN system as well as the elimination of specific funds and programmes. Its proposed budget reductions in 2020 included a 57% cut in the UN’s regular budget (covering core administrative costs including the General Assembly, the Security Council, the Secretariat, the International Court of Justice, and special political mission and human rights entities) and in specialized agency funding.37 Similar to its stance towards the UN system, the current US administration has acted in ways that threaten the WTO, in both its rule-making and dispute-settlement functions. It has systematically blocked the appointment of new judges in the WTO’s Appellate Body, the core element of its dispute settlement system. With only one judge left in post, essentially the Appellate Body now lacks the capacity to resolve trade disputes.38 Historically, Republican administrations and lawmakers in Congress have advocated policies that are generally favourable to the Caribbean, including both the CBERA and the CBTPA. Yet on more than one occasion President Trump has revealed his disdain for the region, most notably in the case of Puerto Rico in the aftermath of Hurricane Maria in September 2018 and, even more notoriously, in January of the same year when Trump reportedly described Haiti, El Salvador and parts of Africa as ‘shithole countries’. Singling out Haiti specifically, Trump is alleged to have remarked, ‘why do we need more Haitians? Take them out’.39 Although in matters of trade and aid, Republican administrations as seen by many in the Caribbean as generally more supportive than Democratic administrations, in foreign policy the current administration has adopted increasingly hawkish tactics with and across the Caribbean, which in turn have important feedback loops to the economic agenda. The USA has, for instance, cautioned countries in the region against accepting support or investments from the People’s Republic of China. According to an official White House statement, ‘when China comes calling it’s not always to the good of your citizens’.40 Despite this, the ties between the Caribbean and China continue to grow.41 According to Gaston Browne, Prime Minister of Antigua and Barbuda, ‘the irony about all this, OPIC42 is already operating in these countries and China offers better credit terms: developmental loans over 20 years at two percent interest with a five-year moratorium’.43 However, other Caribbean countries, such as St Lucia, have chosen to side with the USA in its confrontation with China. In another high-profile case, that of Venezuela, Trump had promised investment opportu­ nities to those Caribbean countries whose leaders have opposed President Nicolás Maduro. On 24 January 2019 the USA along with 15 other OAS members recognized opposition leader Juan Guaidó as the interim President of Venezuela (including four Caribbean countries44).45,46 One of the means through which the USA has garnered support for its regional and foreign policy positions in Latin America and the Caribbean has been the Lima Group. Founded in 2017, the group consists of 14 largely Latin American states (including five Caribbean coun­ tries47),48 with a focus on finding a peaceful resolution to the Venezuelan crisis. As part of its policy concerning Venezuela, US actions have aimed to isolate the country as much as possible.

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This has included promises made of financial investment to CARICOM members for their backing of opposition leader Guaidó. According to Jeb Sprague, University of California Riv­ erside Research Associate, ‘the CARICOM countries have become sort of a chessboard in this hybrid war the U.S. is trying to carry out.’49 The USA’s confrontational approach has resulted in greater problems and divisions within CARICOM, creating a certain amount of internal discord. In January 2020 Barbados (then CARICOM Chair) chose to boycott a meeting to which only select Caribbean countries were invited to join US Secretary of State, Mike Pompeo, concerning matters in the Middle East and Venezuela.50 This followed similar talks held in March 2019, when President Trump met with five Caribbean countries (the Bahamas, Haiti, Jamaica, the Dominican Republic, and St Lucia) out of the 15 CARICOM member states, who were invited to attend a meeting at his Florida resort. Talks included discussions on Chinese ‘predatory economic practices’, the Venezuela situation, security cooperation and the potential opportunities for energy investment.51 The talks were viewed by some Caribbean leaders as a snub to those who were excluded and an attempt to divide the region. The meeting promoted divisive rhetoric, reflected in its media coverage with headlines such as ‘Trump meeting scorn’52 and ‘Antigua PM slams “weak-minded” regional leaders for meeting with Trump.’ Gaston Browne, Prime Minister of Antigua and Barbuda, stated that ‘I feel embarrassed for those weak-minded leaders who allowed themselves to be used’.53 Statements by Prime Minister Keith Rowley of Trinidad and Tobago reflected similar sentiments: [T]here were 15 CARICOM countries yet the conversation is about four … what we are going to do resolutely and without apology, as a tiny speck on the world’s map, is to stand with the principles of the United Nations where we all have signed on and accept as the best way for peace and security, not only in our region, but the world.54 In addition, Ralph Gonsalves, Prime Minister of St Vincent and the Grenadines raised concerns about ‘the mischief that some persons may be up to, to seek to divide us in a manner which we ought not to be divided and therefore reduce the extent of the efficacy of our work’.55 Despite the clear divisions on the position of individual CARICOM member states, the region’s formal stance reiterated at the inter-sessional summit held in February 2019 in St Kitts and Nevis remained one of non-interference in the internal affairs of Venezuela. What is clear, however, is that the US approach has already begun to sow seeds of discord within the Car­ ibbean region concerning its collective and bilateral external relations with other countries. While CARICOM has issued statements on the region’s formal external stance towards certain issues, already we see that individual member states can act in ways contrary to this in response to bilateral incentives or pressures exerted by the USA.

Conclusion In this chapter, we have reviewed key aspects of the Caribbean’s external economic relations with its two largest trading partners, the EU and USA, with which it has historically enjoyed institutionalized forms of trade and development cooperation. Although the historical origins of and motivations for these relationships are somewhat different, what they share in common is that they placed the Caribbean in a relatively privileged position compared to other developing countries and regions. In the very early days of the twenty-first century, as these privileges were steadily eroded, the political calculation in the Caribbean was that the economic costs of pre­ ference erosion could be mitigated to a certain extent by embracing reciprocal free trade within the context of the widening and deepening of the multilateral trade system. This approach 189

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reached its apotheosis with the region’s early enthusiasm for the FTAA process and, even more strikingly, in its embrace of the EU’s EPA prospectus that found much less support in the rest of the ACP.56 In the ensuing period, however, the post-2008 global context has tested the faith of the Caribbean’s political elites in economic globalization and the multilateral institutions charged with overseeing it. With both Brexit and, even more so, the rise of Trump, we are seeing an increased use of nineteenth-century-style forms of bilateral diplomacy, wherein for­ eign policy-trade/development cooperation linkages take precedence over multilateralism and rules-based cooperation. It is obviously too early to conclude whether these tendencies will prove a temporary or more enduring feature of twenty-first-century global politics. In the meantime, they nevertheless provoke urgent research and policy questions concerning the Caribbean economic model and its compatibility or otherwise with the new global realities.

Notes 1 For the purpose of this chapter, we restrict our analysis to the 15 Caribbean Forum (CARIFORUM) countries: Antigua and Barbuda, the Bahamas, Barbados, Belize, Dominica, the Dominican Republic, Grenada, Guyana, Haiti, Jamaica, Saint Kitts (Christopher) and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Suriname, and Trinidad and Tobago. 2 W. Brown (2000) ‘Restructuring North-South Relations: ACP-EU Development Cooperation in a Liberal International Order’, Review of African Political Economy, 85: 376–83. 3 C. Bretherton and J. Vogler (1999) The European Union as a Global Actor, London: Routledge, p. 126. 4 J. Ravenhill (2004) ‘Back to the Nest? Europe’s Relations with the African, Caribbean and Pacific Group of Countries’, in V. K. Aggarwal and E. A. Fogarty (eds) EU Trade Strategies: Between Region­ alism and Globalism, London: Palgrave Macmillan, p. 222. 5 J. Ravenhill (1985) Collective Clientelism: The Lomé Conventions and North-South Relations, New York: Columbia University Press. 6 See Winston H. Griffith (1990) ‘CARICOM Countries and the Caribbean Basin Initiative’, Latin American Perspectives, 17(1): 33–54. 7 Richard S. Newfarmer (1985) ‘Economic Policy Toward the Caribbean Basin: The Balance Sheet’, Journal of Interamerican Studies and World Affairs, 27(1), February: 63–89. 8 C. D. Deere, P. Antrobus, L. Bolles, E. Melendez, P. Phillips, M. Rivera and H. Safa (1990) In the Shadows of the Sun: Caribbean Alternatives and U.S. Policy, Boulder, CO: Westview Press, p. 167. 9 H. I. Safa (1994) ‘Export Manufacturing, State Policy, and Women Workers in the Dominican Republic’, in E. Bonacich, L. Cheng, N. Chinchilla, N. Hamilton and P. Ong (eds), Global Production: The Apparel Industry in the Pacific Rim, Philadelphia, PA: Temple University Press, p. 251. 10 M. Mortimore (1999) ‘Apparel-Based Industrialization in the Caribbean Basin: A Threadbare Gar­ ment?’ CEPAL Review, 67: 119–36. 11 European Commission (1996) Green Paper on Relations between the European Union and ACP Countries on the Eve of the 21st Century, Luxemburg: Office for Official Publications of the European Communities. 12 R. Gibb (2000) ‘Post-Lomé: The European Union and the South’, Third World Quarterly, 21(4): 457–81. 13 K. J. Alter and S. Meunier (2006) ‘Nested and Overlapping Regimes in the Transatlantic Banana Trade Dispute’, Journal of European Public Policy, 13(3) 362–82. 14 T. Heron, T. (2011) ‘Asymmetrical Bargaining and Development Trade-offs in the CARIFORUMEuropean Union Economic Partnership Agreement’, Review of International Political Economy, 18(3): 328–57; J. Ravenhill (2004) ‘Back to the Nest? Europe’s Relations with the African, Caribbean and Pacific Group of Countries’, in V. K. Aggarwal and E. A. Fogarty (eds), EU Trade Strategies: Between Regionalism and Globalism, London: Palgrave Macmillan. 15 EPA Monitoring (2019) ‘CARIFORUM EU EPA: Slow Pace of Implementation and Marginal Bene­ fits’, https://epamonitoring.net/cariforum-eu-epa-slow-pace-of-implementation-and-marginal-benefits/. 16 See N. Phillips (2005) ‘U.S. Power and the Politics of Economic Governance in the Americas’, Latin American Politics and Society, 47(4): 1–25. 17 Antigua and Barbuda, the Bahamas, Barbados, Belize, Dominica, the Dominican Republic, Grenada, Guyana, Jamaica, St Kitts and Nevis, St Lucia, St Vincent and the Grenadines, and Trinidad and Tobago.

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18 UK Department of International Trade (2019) ‘CARIFORUM-UK Economic Partnership Agree­ ment’, www.gov.uk/government/collections/cariforum-uk-economic-partnership-agreement. 19 The UK is an original WTO member (Art XI:1 WTO Agreement) under the schedules submitted by the EU in 1995. 20 L. Bartels (2016) The Ramphal Institute Conference: BREXIT and EPAS: Exploring the Implications for the Trade of Commonwealth Developing Countries, London: Ramphal Institute. 21 According to a statement made on 24 October 2018 by the UK Minister of State for Trade Policy in the Department of International Trade, George Hollingbery, during a meeting in Brussels with ACP trade ministers. 22 Bartels, The Ramphal Institute Conference. 23 E. Laurent, L. Bartels, P. Goodison, P. Hippolyte and S. Sharma (2017) After Brexit: Securing ACP Economic Interests, London: Rila Publications. 24 Ibid. 25 E. Laurent (2017) Brexit: Avoiding a Caribbean Hangover, London, Ramphal Institute. 26 International Trade Centre (ITC) (2019) ITC Trade Map, www.trademap.org/Index.aspx. 27 A. Smith (2016) The Ramphal Institute Conference: BREXIT and EPAS: Exploring the Implications for the Trade of Commonwealth Developing Countries, London, Ramphal Institute. 28 Ibid. 29 Department for International Development (DFID) (2017) Statistics on International Development: Final UK Aid Spend 2017, https://bit.ly/2RNMtN5 (accessed 25 January 2020). 30 M. Madden (2020) Barbados Today: UK Will Not Forsake Caribbean, https://barbadostoday.bb/2020/ 01/09/uk-will-not-forsake-caribbean/ (accessed 23 January 2020). 31 P. Hippolyte-Bauwens (2017) Considerations on the Future of ACP-UK Development Cooperation, London, Ramphal Institute. 32 Ibid. 33 Ibid. 34 ibid. 35 R. Gramer and C. Lynch (2018) Trump Stealthily Seeks to Choke Off Funding to U.N. Programs, https:// foreignpolicy.com/2018/10/02/trump-stealthily-seeks-to-choke-off-funding-to-un-programs/ (acces­ sed 17 January 2020). 36 L. Blanchfield (2019) United Nations Issues: U.S. Funding to the U.N. System, Washington, DC: Congressional Research Service. 37 Ibid. 38 K. Johnson (2019) ‘How Trump May Finally Kill the WTO’, Foreign Policy, https://foreignpolicy. com/2019/12/09/trump-may-kill-wto-finally-appellate-body-world-trade-organization/ (accessed 17 January 2020). 39 J. Dowsey (2018) ‘Trump Derides Protections for Immigrants from “Shithole” Countries’, Washington Post, 12 January, https://wapo.st/3gl8NZH (accessed 17 January 2020). 40 E. Beech, D. Alexander and P. Cooney (2019) Reuters, 19 March, www.reuters.com/article/us-usa-trump­ caribbean/trump-to-meet-with-caribbean-leaders-on-friday-at-his-florida-resort-idUSKCN1R02UH (accessed 21 January 2020). 41 See Chapter 14 in this volume. 42 The Overseas Private Investment Corporation was the US government’s development finance insti­ tution until it merged with the Development Credit Authority of the US Agency for International Development to form the US International Development Finance Corporation. 43 LOOP (2019) ‘Antigua PM Slams “Weak-Minded” Regional Leaders for Meeting with Trump’, www.loopjamaica.com/content/antigua-pm-slams-weak-minded-regional-leaders-meeting-trump (accessed 21 January 2020). 44 The Bahamas and Haiti. Jamaica and St Lucia later retracted this stance, reiterating CARICOM’s longheld principle of non-interference and non-intervention in the affairs of sovereign nations. 45 J. Charles (2019) As Crisis in Venezuela Escalates, Caribbean Nations Take Sides, Haiti Joins U.S., https://hrld.us/2I9X2Fv (accessed 28 February 2020); Eyewitness News (2019) The Bahamas Supports Recognition of Juan Guaidó as Interim President of Venezuela, https://bit.ly/388BpQG (accessed 28 February 2020). 46 US Department of State (2019) U.S. Government Support for the Democratic Aspirations of the Venezuelan People, www.state.gov/u-s-government-support-for-the-democratic-aspirations-of-the-venezuelan-people/ (accessed 21 January 2020).

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Ginelle Greene-Dewasmes and Tony Heron 47 Guyana and St Lucia were the Caribbean signatories to the initial agreement. Barbados, Grenada and Jamaica were the Caribbean observers and support countries. 48 Times Caribbean (2019) ‘5 CARICOM States That Are Members of or Support the LIMA Group Set to Meet with US President Trump’, www.timescaribbeanonline.com/5-caricom-states-that-are-members­ of-or-support-the-lima-group-set-to-meet-with-us-president-trump/ (accessed 21 January 2020). 49 S. Charles (2019) The New Republic, https://newrepublic.com/article/154713/trumps-venezuela-policy­ causing-turmoil-caribbean (accessed 21 January 2020). 50 LOOP (2020) ‘Trinidad Joins Barbados in Boycotting Pompeo Meeting in Jamaica’, www.loopjamaica. com/content/tt-joins-barbados-skipping-meeting-us-official-jamaica-0?fbclid=IwAR1zEa6RqND13_ 3OPfytGE3DuBSqz_lnxfJoY7VwEivALGa5MhbezD9A_pI (accessed 21 January 2020). 51 E. Beech, D. Alexander and P. Cooney (2019) ‘Trump to Meet with Caribbean Leaders on Friday at his Florida Resort’, Reuters, www.reuters.com/article/us-usa-trump-caribbean/trump-to-meet­ with-caribbean-leaders-on-friday-at-his-florida-resort-idUSKCN1R02UH (accessed 21 January 2020). 52 Jamaica Observer (2019) ‘Trump Meeting Scorn’, www.jamaicaobserver.com/front-page/trump-meeting­ scorn-rowley-dismisses-suggestion-t-dad-snubbed-by-us-says-countries-invited-are-part-of-lima-group_ 160185 (accessed 21 January 2020). 53 LOOP, ‘Trinidad Joins Barbados in Boycotting Pompeo Meeting in Jamaica’. 54 Jamaica Observer, ‘Trump Meeting Scorn’. 55 LOOP, ‘Trinidad Joins Barbados in Boycotting Pompeo Meeting in Jamaica’. 56 Tony Heron (2013) Pathways from Preferential Trade: The Politics of Liberalisation and Adjustment in Africa, the Caribbean and Pacific, London: Palgrave Macmillan.

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14 China’s increasing influence in Central America and the Caribbean Richard L. Bernal

Introduction During the past three years the People’s Republic of China has escalated the pressure on countries which continue to give diplomatic recognition to Taiwan. It started with the election of Tsai Ing­ wen of the Democratic Progressive Party, which stands for an independent Taiwan. Since then, five countries have switched their allegiance from Taiwan to China. Only 15 countries still maintain diplomatic ties with Taiwan. China continues to steadily expand its diplomatic reach and to increase its economic and political presence in the Caribbean and Central America. In January 2018, at the Second Min­ isterial Meeting of the Forum of China and the Community of Latin American and Caribbean States (CELAC), China invited the countries of Latin America and the Caribbean to participate in the Belt and Road Initiative (BRI). Trade between China and Latin America and the Car­ ibbean in 2016 amounted to US $266 billion, foreign direct investment (FDI) had reached $115 billion and development financing was $141 billion. The BRI consists of the land-based Silk Road Economic Belt and a $40 billion Silk Road Fund which was established in December 2014 to finance projects. Additional financing is available from the Asian Infrastructure Investment Bank. The jousting between China and Taiwan over diplomatic recognition is not likely to be resolved in the immediate future,1 especially given the rioting and public pro-democracy demonstrations in Hong Kong in late 2019. Taiwan has concentrated on building alliances with small developing countries in the Caribbean and the Pacific. The number of countries maintain­ ing diplomatic ties with Taiwan has declined to just 15. It is not lost on countries that the level of aid, trade and investment which a relationship with China can produce far exceeds that which Taiwan can offer. Naturally, as the number of governments supporting Taiwan declines, it will be pushed to spend even more to retain even just a few supporting countries. Even then, the sheer difference in size between the two countries means that China seems destined to overwhelm Taiwan. For example, in 2015 trade between Taiwan and Burkina Faso, one of only two of Taiwan’s allies in the African continent, was only $13 million, while it amounted to $395 million with China. There are only 30 small and medium-sized Taiwanese companies doing business in Burkina Faso, but at least 600 mainland-based companies including Huawei and ZTE.

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Country experiences The Caribbean Over the past decade, China has intensified its high-level diplomatic démarche in the Caribbean supported by loans and the promise of development financing. In June 2013 China’s President Xi Jinping met with 10 Caribbean countries in Port of Spain, the capital of Trinidad and Tobago, and announced that China would make available US $3 billion in loans. China has increased its diplomatic links with Caribbean governments through official visits of high-level Chinese leaders; for example, former Chinese Vice-President Xi Jinping visited Jamaica in 2009 and paved the way for the Montego Bay Convention Centre to be constructed and financed by the Chinese government at a cost of $52 million. Heads of governments in the Caribbean have been on official visits to Beijing where they have been treated ‘royally’. Three Jamaican prime ministers have visited Beijing in the last decade: P.J. Patterson in 2005; Bruce Golding in 2010; and Portia Simpson-Miller in 2013. Kamla Persad-Bissessar of Trinidad and Tobago made the ‘pilgrimage’ in 2014 as did Dr Keith Rowley in 2018; Gaston Browne of Antigua and Barbuda in 2014; Tillman Thomas of Grenada in 2009; Dr Keith Mitchell in 2015; Roosevelt Skerrit of Dominica in 2015; Perry Christie of the Bahamas in 2015; Freundel Stuart of Barbados in 2011; and Desi Bouterse of Suriname in 2013. In nearly every case, they were received by the pre­ sident of China. Some leaders such as President Donald Ramotar of Guyana, who did not visit China, had the opportunity to meet China’s President Xi Jinping in Port of Spain in 2013. Not much has changed since Saint Lucia decided to maintain its diplomatic links with Taiwan after trying to have relations simultaneously with both. Consistent with its One China policy, China refused to accept dual diplomatic arrangements. With the recent changes in dip­ lomatic allegiances in the wider Caribbean, in July 2019 President Tsai Ing-wen went on a 10-day sweeping tour to bolster Taiwan’s relationship with its allies.2 Increased Chinese aid made it look as if Haiti was equivocating.3 In the face of stern criticism from the USA, the Caribbean countries that have relations with China have all rejected the US assertion that they are being manipulated by China. Prime Minister Skerrit of Dominica described this as ‘foolishness’ and asserted that there is ‘nothing that Dominica has to give to China besides its friendship’.4 Meanwhile, the reaffirmation of ties with Taiwan has been vociferous from countries such as St Lucia following the switch by the Solomon Islands and Kiribati to China. Taiwan has provided financial support for improvements to airports, roads and infrastructure.5 Speaking of contributions to reconstruction after hurricane damage, the Prime Minister of Antigua said that China gave US $2 million and that the USA did not make ‘any significant contribution’.6 The small developing countries of the region have to manage simultaneous relations with the USA and China in the context of an increasingly contentious coexistence between rival super­ powers. Over the past couple years the USA has become concerned about China’s potential influence in Central America and the Caribbean7 and the attitude to this has changed with the election of Donald Trump. The Jamaican Prime Minister, Andrew Holness, made an eight-day official visit to Beijing in November 20198 within a month of the handover of the new 11-storey Ministry of Foreign Affairs building constructed by the Jiangsu Jiangdu Construction Group and financed by a grant from China.9 He was still in China when Admiral Craig Faller, Commander of the US Southern Command, was in Jamaica warning that relations with China could portent the loss of sovereignty, non-adherence to international standards of the rule of law, breaches of labour rights, and a lack of protection of the environment. The US Ambassa­ dor warned that China is a ‘two-headed dragon’.10 The Ambassador of China fired back that this attitude was ‘irresponsible’,11 and the Daily Gleaner newspaper, echoing popular sentiment, rejected ‘Faller’s template’ as a basis for Jamaica’s foreign policy.12 194

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El Salvador On 21 August 2018 El Salvador established diplomatic relations with China while Taiwan severed relations with El Salvador. The change took place in spite of opposition from the USA which ranged from persuasion of public opinion to stern warnings and resistance from exporters of sugar to Taiwan.13 Meanwhile, China signed 13 cooperation agreements on infrastructure, investment, science, technology, education, culture and tourism.14 Enhancing China’s status as a source of loans and FDI15 was the decision of the Trump Administration to cut foreign aid to El Salvador, Guatemala and Honduras16 and to send back asylum seekers.17

Dominican Republic In a major blow to Taiwan, in May 2018 the Dominican Republic and China signed an agreement to establish diplomatic ties, thus ending a status quo of almost 77 years’ duration. The Dominican Republic is the second largest trading partner in the Caribbean and Central America. In announcing the switch, the Minister Foreign Affairs of the Dominican Republic referred to Taiwan as ‘an inalienable part of China’. Taiwan has sought to downplay the change and blamed it on China’s ‘dollar diplomacy’, specifically mooting a financial package of US $3.1 billion.18 Other estimates suggest $4.1 billion.19 The motivation of the Dominican Republic was that the switch would be ‘extraordinarily positive for the future of our country’ in meeting its ‘needs, potential and future prospects’.20 In addition to the prospect of a significant increase in development aid loans and FDI, there is the possibility to increase exports to China21 especially given the large and growing trade deficit with China. In all, 18 agreements have been signed between China and the Dominican Republic22 encompassing wide range of projects.

Haiti One of the inexplicable holdouts is Haiti and hence China is stepping up its efforts to induce it to switch its diplomatic allegiance.23 The enigma is that given Haiti’s considerable need for all kinds of development assistance, it would seem to defy logic to continue relations with Taiwan in preference to China. In 2017 the Republic of Panama switched allegiance and is reported to have benefited from over US $3 billion in loans and financial aid. In the same month that the Dominican Republic made the switch to China, Taiwan also lost Burkina Faso, when it re-established ties with Beijing. Taiwan moved quickly to hold on to its allies after the Dominican Republic switched its allegiance to China. Within a month, the President of Haiti paid an official visit to Taiwan together with a 30-member delegation in order to reaffirm his loyalty.

Panama China is expanding trade and investment with Panama. Already China is the second largest client of the Panama Canal and the ‘leading provider of merchandise’ to the Colón free zone.24 Panama, which has maintained a relationship with Taiwan since 1949, shifted its diplomatic allegiance to China in June 2017. The latter’s switch to a One China policy will expand trade and investment and shipping through the Panama Canal. Panama’s decision reduces the number of countries keeping up the farce of recognizing Taiwan to 11 in the Caribbean and Central America and to 20 across the world. The changes made by Panama and China is the discarding of long-term political positions in favour of economic possibilities. Panama’s decision is far­ sighted and could have a domino effect on the other countries of Central America, and if they 195

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too adopt the One China policy there would only be a few Caribbean countries supporting Taiwan. In such a scenario there might be a diminution of China’s interest in the Caribbean. The China-Panama rapprochement will increase the competition for shipping business among the ports of the Caribbean which are likely to benefit from increased trade passing through the Panama Canal. One observer described Panama as the ‘new front door to America’s backyard’.25 Changes in relations between China and the Caribbean and Central America has provoked the ire of the Trump Administration. China’s presence in Central America and the Caribbean has increased significantly in scope and intensity in the past few years. The escalation of China’s pre­ sence prompted Secretary of State Mike Pompeo in 2018 to warn Latin America and the Car­ ibbean against what he described as China’s ‘predatory economic practices’.26 He berated Panama for not recognizing that Chinese investment is ‘not transparent, not market driven, and is designed to benefit the Chinese government’.27 It has become commonplace in the Western press and by spokespersons for the US government to accuse China of predatory economic practices, in parti­ cular ‘debt-trap diplomacy’,28 that is, a deliberate covert strategy of inducing countries into a ‘debt­ trap’ by excessive lending. While this may have been part of the economic and diplomatic jousting between Beijing and Washington, the comments were directed at countries in the region that the USA has traditionally regarded, as in the American sphere of influence, as its ‘third border’.

Costa Rica The countries of Central America were committed to the diplomatic recognition of Taiwan for 60 years. China’s presence in Central America has increased significantly in scope and intensity in the last few years with the Dominican Republic and Panama relinquishing relations with Taiwan. The leadership in these countries are acutely aware of the enormous potential to benefit from Chinese aid, loans and FDI. On 1 June 2007 Costa Rica became the first country in Central America to switch diplomatic relations from Taiwan to China. Imports of manu­ factured goods from China is increasing in all the countries of Central America and the Car­ ibbean, albeit unevenly. Imports have far exceeded exports resulting in an expanding trade deficit. China’s development aid is concentrated in those countries with which it has diplomatic relations. Costa Rica has sought to expand trade with the conclusion of a free trade agreement (FTA) with China, which entered into force on 1 August 2011. When phased implementation is completed, approximately 90% of goods will trade at zero tariff and some service sectors will be fully liberalized. The FTA also includes intellectual property rights, trade remedies, customs procedures, technical barriers to trade, and rules of origin. Now, a decade later, exports have increased by over 100% consisting mainly of food such as bananas, beef and agricultural pro­ ducts (e.g. leather). There has been substantial development financing from China for con­ struction and infrastructure. The two countries have formulated the Joint Action Plan on China–Costa Rica Cooperation 2016–2020 to further strengthen relations.

Guatemala and Honduras Guatemala and Honduras have remained steadfastly allied to Taiwan while Chinese influence has increased in Central America.29 Even before being sworn in, the president-elect of Guate­ mala was in Taipei reaffirming ties with Taiwan.30 The solidity of ties with Honduras should not be assumed after the president expressed disappointment at the Trump Administration’s cuts in aid.31 Meanwhile, Honduras is set for major reductions in budget spending on education, health and infrastructure given that GDP per capita was US $2,548.46 in 2019. The possibility of Chinese aid must be an active consideration in Tegucigalpa. 196

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Cuba Cuba has had diplomatic relations with China since 1960 and these remain strong as indicated by the visit of President Xi Jinping to Havana in July 2014.32 From 2000 to 2014 Cuba bene­ fited from Chinese official development assistance amounting to US $6.3 billion.33 China has been an important trade partner especially since the decline of Russia’s support following the implosion of the Soviet Union. Trade was valued in 2014 at $1.6 billion and important imports include locomotives and buses.34 SINOPEC, China’s state oil company, has an agreement with state-owned CUPET (Cuba Petroleum) to explore for and develop oil deposits. There is also cooperation in nickel mining, the output of which is exported to China and Canada.35 With the more restrictive policies of the Trump Administration, China’s assistance to Cuba has become more important, emblematic of which was China’s cancellation of more than $5 billion of debt.36 China has been a staunch defender of Venezuela, which in turn has rendered invaluable support to Cuba through the PetroCaribe facility.

Guyana China’s involvement in Guyana has taken the form of FDI in bauxite by the Chinese firm Bosai37 and infrastructure and construction projects such as the renovation of Cheddi Jagan international airport and the construction of the Skeldon sugar factory. Chinese firms have been involved in electricity transmission infrastructure (CEIEC), telecommunications (Huawei), log­ ging (Bai Shan Lin), and the construction of a new Marriott Hotel (Shanghai Construction Group). Perhaps more important than what has happened already is what could happen in the future depending on the extent of Chinese involvement in soon to be cash-rich Guyana based on the projected revenues from offshore oil.38 The attention of US government may have prompted the participation of China National Offshore Oil Company (CNOOC) in the Exxon-led coalition to develop Guyana’s offshore oil.39

Issues Development aid China and Taiwan have provided considerable amounts of development aid both as loans and as grants in kind. The volume and value of aid from China has dwarfed that furnished by Taiwan, yet some countries have maintained their diplomatic connections with the latter. The fewer countries that recognize Taiwan the more beneficial for those that remain tethered such as Saint Kitts (Christopher) and Nevis40 and St Lucia.41 While concerned about the steadily declining number of countries that recognize it, Taiwan only needs one country to do so to be regarded in international law as a sovereign state. Furthermore, it only takes one state in multilateral fora to raise the need for the inclusion of Taiwan. Small Caribbean states have consistently done so. Saint Vincent and the Grenadines announced that upon its accession to a seat on the United Nations’ Security Council in early 2020 it would have the ability to advocate for ‘Taiwan’s right to be legitimately recognized.42

Belt and Road Initiative Access to the resources of the BRI will be a further attraction to Caribbean governments because of the region’s infrastructure deficit. The BRI involves more than 65 countries, which account for 30% of the world’s GDP and for 62% of its population.43 In mid-May 2018 the 197

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governments of China and Trinidad and Tobago signed a BRI memorandum.44 Subsequently, the BRI was signed by Barbados45 and Jamaica.46 This will allow the Central American and Caribbean countries to access the funding for infrastructure construction, energy, finance and agriculture associated with this initiative. This will alleviate the ‘infrastructure deficit’ which has negatively impacted economic growth in the region, particularly in Jamaica.47

Visibility of Chinese aid Some of the countries that have traditionally been the largest providers of development aid feel that the public attention and expressions of appreciation from the beneficiary governments have been out of proportion to the size of China’s actual contributions.48 Part of the problem of comparative visibility is that Chinese aid is reflected in buildings and physical infrastructure which is readily visible whereas aid from the USA, Canada and the United Kingdom which has gone into security, judicial reform and social interventions are out of the public’s view. In addition, Chinese loans have grown because such funding helps governments to meet their infrastructure deficit and governments are more willing to take Chinese loans because they are less encumbered by non-economic conditionality. Furthermore, aid from China does not have a provision for graduation from eligibility for middle-income developing countries such as that applicable by the USA.

Trade: actual and prospective All the Central American and Caribbean countries are salivating at the prospect of exporting to the enormous and exponentially growing Chinese market. The best prospects are in food, agriculture, minerals and energy. There are bauxite exports from Guyana and Jamaica. Beyond this, there are a few high-end products such as lobsters and branded rum, but in general supply, capacity is very limited, particularly for the Caribbean countries other than the Dominican Republic, Guyana and Suriname. The growth of imports from China has outstripped exports and an expanding trade deficit has emerged. More worrying is that the emerging export pro­ spects are likely to reinforce the traditional role of supplier of primary products in the interna­ tional division of labour. At low per capita incomes, the Central American governments may be more concerned with immediate economic growth than with long-term transformation and that the export of primary products does not promote the level of industrialization to which these countries aspire. However, as trade grows, it raises the prospect of an enhanced role for the renminbi,49 which has been accepted by the International Monetary Fund as an international reserve asset joining the US dollar, the euro, the yen and the pound sterling.

Creeping soft power In addition to the goodwill generated by projects funded by Chinese loans, China has been quietly seeking to promote its influence through the establishment and operation of its Confucius Institutes. The institute is located in Antigua, the Bahamas, Barbados, Costa Rica, Cuba, Dominica, the Dominican Republic, El Salvador, Guyana, Grenada, Jamaica, Panama, Suriname, and Trinidad and Tobago. A new building has been constructed on the campus to house the Confucius Institute of the University of the West Indies (UWI) in Jamaica.50 The UWI offers a BSc in Software Engineering developed in partnership with the Global Institute of Software Technology (GIST) in Suzhou, PRC. The first cohort that finished the first two years of the software engineering programme is now at GIST and will graduate in 2020, with 198

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both a UWI degree and a GIST diploma. Students spend part of their fourth year on a paid sixmonth internship at one of the Fortune 500 companies located in the Suzhou Industrial Park.51

Foreign Direct Investment In addition to development loans, many developing countries are attracted to relations with China because of the prospect of Chinese FDI. In 2019 China was the second largest source of FDI in the world after the USA.52 However, to date there have been only a few major investments, that is, FDI in sugar and bauxite in Jamaica53 and in ITC, ports, logistics and energy in Panama.54 Chinese FDI in Jamaica by 15 registered Chinese companies amounts to over US $2 billion.55 In Costa Rica, Chinese FDI flows have reached a level where they are having a noticeable impact on economic growth.56 The prospects for FDI was a prominent motive of the Dominican Republic for establishing diplomatic relations with China but it is too early to evaluate what will materialize.57 FDI by privately owned Chinese firms is not entirely outside the political ambit of the Chi­ nese state. There is Chinese FDI in bauxite in Guyana and Jamaica, and in 2019 the China Investment Corporation (sovereign wealth fund) invested US $850 million to acquire a 10% interest in Atlantic LNG.58 These investments are consistent with China’s priority of investment in energy and raw materials but they are very likely to have aroused the concern of the USA. It will not have escaped the notice of Washington that the government of Trinidad and Tobago was the first country in the Western hemisphere to have purchased a naval ship from China.

Ethnic friction As Chinese people become more ubiquitous, their presence, limited as it is, has aroused some prejudice, especially when the Chinese have gone into small-scale trading.59 Locals view them as unwelcome competition and indeed, in some instances, as unfair competition. In Latin America, 80% of the negative comments about Chinese businesses relate to unfair, illegal, immoral or abusive practices.60 This is the case in small-scale retailing and in professional ser­ vices in the construction industry. Locals across the Caribbean have claimed that Chinese migrants ‘appear’ and open small retail and wholesale outlets and drive local traders and side­ walk vendors out of business. It is said that Chinese people have the advantages of capital, the Mandarin language, do not use banks, are involved in currency trading, gambling, and that they do not pay taxes. No empirical evidence has been adduced, but there is a growing venting of hearsay and anecdotal pronouncements. One observer of the proliferation of small Chinese retailers in Guyana describes the situation thus: ‘The two main shopping streets of Georgetown have been transformed into mini-Beijings’.61 Trade unions and contractors in Barbados,62 architects in Trinidad and Tobago, and engi­ neers have complained about the employment of Chinese workers on projects being executed by Chinese firms. There have been protests against Hutchinson Port Holdings of Hong Kong in the Bahamas, China Harbour in Jamaica, China Jiangsu in Trinidad,63 and Shanghai Construc­ tion Group in Guyana.64 Caribbean professionals in the fields of architecture and engineering have consistently complained that the Chinese companies which already have financing from the China Development Bank are allowed privileges not available to local companies and that this constitutes an unfair advantage which does not allow locals to compete on a level playing field. An issue which brought this ‘angst’ to public attention was the Memorandum of Under­ standing (MOU) signed between the government of Jamaica and a Chinese company, China Construction America (South American Division), to design and construct a new parliament 199

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building. The Construction Industry Council strongly urged the Jamaican government to rescind the MOU.65 Eventually, the Prime Minister gave a public undertaking that Jamaicans would be responsible for construction of the building. The Chinese Ambassador to Jamaica was uncharacteristically frank in chiding locals for complaining and invited them to do better.66 Some observers have called on the government to be more proactive in addressing the situation both publicly and through ‘diplomatic channels’.67 However, surprisingly to date there has been no intervention by the Minister of Foreign Affairs. The Chinese community has become increasingly visible in the Caribbean (e.g. in Suriname), where it now constitutes 10% of the population.68 In general, the community has two sources: Caribbean citizens of Chinese descent and those who have recently arrived from China. The newly arrived Chinese often originate as workers, brought over to work on a particular project, who choose to remain in the Caribbean after the project’s completion. Some settle with the intention of going elsewhere, in particular, the USA,69 while others opt to establish small trading businesses, supermarkets and restaurants. The new settlers are often so successful that local traders and small businesses lose customers to them. This occurs because they are able to import goods from China more cheaply than local traders by taking advantage of their language abilities and contacts. This has become an economic issue and nascent source of social friction in parts of the Caribbean. In Dominica and St Kitts, the number of Chinese immigrant entrepre­ neurs is less than 200 but their success gives them visibility in these small societies and their concentration in the small towns of Rousseau and Basseterre gives them a prominence.70 According to Green, the executive director of the St Kitts Chamber of Commerce ‘openly excoriated what he saw as unfair competition from immigrant Chinese retail merchants’.71 In Suriname, the swelling of the Chinese immigrant business community has led to hostility to Chinese investment in the country’s palm oil production.72 This phenomenon has also occurred in parts of Africa.73

Conclusion China’s presence in Central America and the Caribbean has increased steadily in recent years and this is most evident in the number of countries that have switched their diplomatic alle­ giance from Taiwan to China. This has boosted their trade and garnered a significant increase in grants and development loans mainly for infrastructure and construction projects carried out by Chinese companies. Spokespersons for the Trump Administration have publicly warned gov­ ernments in the region against forging closer ties with China. These admonishments have failed to discourage countries in Central America facing poverty, reduced US aid and a more restric­ tive US immigration policy. The small island developing states of the Caribbean Sea continue to struggle with low growth, climate change and the associated increased frequency and inten­ sity of weather-related natural disasters as well as their ineligibility for the most concessional development loan facilities. Naturally, the availability of Chinese loans for infrastructure development is extremely attractive in these circumstances.

Notes 1 Stephen M. Goldstien, ‘(When) Will Taiwan Reunify with the Mainland’, Jennifer Rudolph and Michael Szonyi (eds), The China Questions: Critical into a Rising Power (Cambridge, MA: Harvard University Press, 2018), pp. 99–109. 2 Daniel P. Erikson, ‘Taiwan Striving to Keep Caribbean Allies Beyond China’s Reach’, 22 July 2019, www.axios.com › taiwan-striving-to-keep-caribbean-allies-beyond-c… 200

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3 ‘Taiwanese President Courts Ally Haiti During Caribbean Tour’, Jamaica Observer, 19 July 2019; ‘Taiwan President Travels to Haiti to Bolster Relations in the Region’, Reuters, 13 July 2019, www. reuters.com › article › taiwan-president-travels-to-haiti-to-bols… 4 ‘Dominica: Prime Minister Defends Relationship with China’, St Lucia News Online, 30 October 2018. 5 Sarah Zhang, ‘As Taiwan’s Allies Dwindle, St. Lucia Stands Firm Against China Pressure’, South China Morning Post, 28 October 2019. 6 Antigua and Barbuda Prime Minister Gaston Browne on Rebuilding after a Hurricane’, 8 September 2019, www.npr.org › 2019/09/08 › antigua-and-barbuda-prime-minister-ga… 7 ‘China’s Engagement with Latin America and the Caribbean’ (Washington, DC: Congressional Research Service, updated 11 April 2019); and Katherine Koleski and Alec Blivas, ‘China’s Engagement with Latin America and the Caribbean’, U.S.-China Economic and Security Review Commission, 17 October 2018. 8 ‘Holness in China for Talks’, Jamaica Observer, 4 November 2019; and ‘Holness Assures China of Jamaica’s Cooperation in Economic Development’, Jamaica Observer, 6 November 2019, p. 5. 9 ‘New Foreign Affairs Ministry Building Formally Handed Over’, Jamaica Observer, 17 October 2019, p. 1. 10 Barbara Ellington, ‘China Backlash: US Ambassador Warns Jamaica to Tread Carefully with “TwoHeaded Dragon”’, Jamaica Gleaner, 12 November 2019. 11 ‘US Army Commander’s Statement Irresponsible, Says Chinese Embassy’, Jamaica Observer, 8 November 2019. 12 ‘Reshape Foreign Policy, But Not on Faller’s Template’, Sunday Gleaner, 19 November 2019. 13 Eleanor Albert, ‘China’s Continued Courting of El Salvador’, The Diplomat, 8 June 2019. 14 Ernesto Londoño ‘To Influence El Salvador, China Dangled Money. The U.S. Made Threats’, New York Times, 21 September 2019. 15 Ernesto Londono, ‘U.S. Interests and China’s Money Collide in El Salvador’, New York Times, 22 September 2019. 16 ‘Donald Trump Cuts Foreign Aid to El Salvador, Guatemala, and Honduras Over US-Bound Migrants’, South China Morning Post, 31 March 2019. 17 Nick Miroff, ‘Trump Administration Reaches Deal to Send Asylum Seekers to El Salvador in an Effort to Deter Migrants from Entering the United States’, Washington Post, 20 September 2019. 18 Nicola Smith and Neil Connor, ‘Dominican Republic Cuts Diplomatic Ties with Taiwan in Victory for China’, The Telegraph, 1 May 2018; and ‘Taiwan Dumped by Dominican Republic Amid Pressure from China’, The Guardian, 1 May 2018. 19 ‘China Forges Ties with Dominican Republic Offering $4.1 Billion’, 1 May 2018, www.abc.net.au › news › taiwan-dumped-by-dominican-republic-in… 20 Smith and Neil, ‘Dominican Republic Cuts Diplomatic Ties with Taiwan in Victory for China’; ‘Taiwan Dumped by Dominican Republic Amid Pressure from China’. 21 Austin Ramzy, ‘Taiwan’s Diplomatic Isolation Increases as Dominican Republic Recognizes China’, New York Times, 1 May 2018. 22 ‘Far Reaching Co-Operation Agreements Signed between China and the Dominican Republic’, www.caribbean-council.org › far-reaching-co-operation-agreements… 23 ‘Beijing Targets Haiti as Bid to Isolate Taiwan From Its Diplomatic Allies Heads to the Caribbean’, 16 September 2019, https://haitiantimes.com › 2019/09/16 › beijing-targets-haiti-as-bid-to-isola… 24 Benjamin Haas, ‘Panama Cuts Formal Ties with Taiwan in Favour of China’, The Guardian, 13 June 2017. 25 Don Giolzetti, ‘China’s Front Door to America’s Backyard’, The Diplomat, 28 June 2019. 26 Edward Wong, ‘Mike Pompeo Warns Panama against Doing Business with China’, New York Times, 19 October 2018. 27 Ibid. 28 K. Lindberg and T. Lahiri, ‘From Asia to Africa, China’s “Debt-Trap Diplomacy” Was Under Siege in 2018’, https://qz.com/africa/…/china-debt-trap-talk-shows-africas-weak-economic-position/ (acces­ sed 28 December 2018); Alexis Monteith, ‘As Jamaica Signs onto China’s Belt and Road Initiative, the US Congress Takes a Closer Look’, Jamaica Observer, 21 April 2019. 29 Steven Lee Myers and Chris Horton, ‘2 Pacific Nations Sever Ties with Taiwan, Bolstering Chinese Influence in Region’, New York Times, 21 September 2019, p. A7. 30 ‘Guatemala Will Stand with Taiwan’: Incoming President’, 21 October 2019, focustaiwan.tw › Politics. 31 ‘Honduras President Laments U.S. Aid Cuts, Eyes Role of China, 24 September 2018, https://www. reuters.com › article › us-honduras-politics › honduras-presid…

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Richard L. Bernal 32 ‘China, Cuba Sign Cooperation Agreements During Xi’s Visit’, 23 July 2014, www.chinadaily.com.cn › world › 2014–07 › content_17907780; ‘China’s Xi Praises Close Ties with Cuba’, Voice of America, 23 July 2014, www.voanews.com › east-asia › chinas-xi-praises-close-ties-cuba. 33 Katherine Koleski and Alec Blivas, ‘China’s Engagement with Latin America and the Caribbean ‘, Staff Research Report (Washington, DC: US-China Economic and Security Review Commission, 17 October 2018), p. 24. 34 ‘Cuba to Buy More Vehicles from China,’ Granma Internacional, 17 February 2006. 35 ‘Cuba Sees Nickel Output Topping 50,000 Tonnes’, Reuters, 13 December 2018, www.reuters.com › article › metals-cuba-nickel › cuba-sees-nickel-o… 36 ‘China Has Forgiven Nearly $10 Billion In Debt. Cuba Accounts for Half’, Forbes, 29 May 2019, https://www.forbes.com › sites › kenrapoza › 2019/05/29 › china-has-forg… 37 Richard L. Bernal, ‘Chinese Foreign Direct Investment in the Caribbean: Potential and Prospects’, Inter-American Development Bank, Technical Notes IDB-TN-1113, November 2016. 38 Anthony T. Bryan, ‘Clear De Way Guyana Coming Back: Oil, High Expectations, and Cautious Optimism’, https://caribbeannewsservice.com/now/guyana-on-high-oil-expectations/. 39 R. Evan Ellis, ‘Security Challenges in Guyana and the Government Response’, Journal of the Americas, 3rd edn, pp. 205–29. See p. 212, www.airuniversity.af.edu/Portals/10/JOTA/Journals/Volume%201% 20Issue%203/05-Ellis_eng.pdf (accessed 11 December 2019). 40 ‘St Kitts PM Defends Taiwan’, Jamaica Gleaner, 28 January 2008; ‘Taiwan-St Kitts and Nevis Rela­ tionship Strengthens’, 15 May 2019, https://www.businesswire.com › news › home › Taiwan-St­ Kitts-Nevis-Rel… 41 ‘St. Lucia Remains Committed to Diplomatic Relations with Taiwan PM’, 10 October 2018, www. stlucianewsonline.com › st-lucia-remains-committed-to-diplo… 42 ‘Caribbean Ally to be an Advocate for Taiwan: Bowman’, Taipei Times, 14 October 2019, p. 3. 43 Belt and Road Initiative (BRI) - EBRD https://www.ebrd.com/cs/Satellite?c=Content&cid= 1395268041049&d=Mobile (accessed 29 January 2019); Andrew Scobell, Bonny Lin, Howard J. Shatz, Michael, Johnson, Larry Hanauer, Michael S. Chase, Astrid Stuth Cevallos, Ivan W. Rasmussen, Arthur Chan, Aaron Strong, Eric Warner and Logan Ma, At the Dawn of the Belt and Road: China in the Developing World (Santa Monica, CA: RAND Corporation, 2018), pp. 30–32. 44 ‘Trinidad and Tobago Joins Belt and Road Initiative’, 30 May 2018, Economist Intelligence Unit, country.eiu.com › article › Country=Trinidad and Tobago. 45 ‘China Ready’, 20 April 2019, www.nationnews.com › nationnews › news › china-ready. 46 Monteith, ‘As Jamaica Signs onto China’s Belt and Road Initiative, the US Congress Takes a Closer Look’; ‘China Praises Jamaica for Signing on to Belt and Road Initiative’, Jamaica Gleaner, 4 May 2019. 47 ‘Building Opportunities for Growth in a Challenging World’, 2019 Latin American and Caribbean Macroeconomic Report (Washington, DC: Inter-American Development Bank, 2019), p. 84. 48 Three diplomatic missions in Jamaica have expressed this concern to me in conversation. 49 William H. Overholt, Guonan Ma and Cheung Kwok Law, Renminbi Rising: A New Global Monetary System Emerges (New York: Wiley, 2016); ‘A Globalized Renminbi: Will It Reshape Latin America?’ 1 October 2016, https://www.publications.atlanticcouncil.org › renminbi. 50 ‘UWI Gets New $667m Confucius Institute’, The Gleaner, 15 October 2019, A7. 51 Richard L. Bernal and Anthony O. Fisher, ‘University of the West Indies Policy of Cooperation with China’, Office of Global Affairs, University of the West Indies, December 2018. 52 ‘World Investment Report 2017: Investment and the Digital Economy’ (Geneva: United Nations Conference on Trade and Development, 2018). 53 Richard L. Bernal, Dragon in the Caribbean: China’s Global Re-Positioning. Challenges and Opportunities for the Caribbean, rev. updated 2nd edn (Kingston: Ian Randle Publishers, 2016); Richard L. Bernal, ‘Chinese Foreign Direct Investment in the Caribbean: Potential and Prospects’ (Washington, DC: Inter-American Development Bank, 2016). 54 Nehemias Jose Jaen Celada, ‘China’s Foreign Direct Investment in Panama’, in Enrique Dussel Peters (ed.), China’s Foreign Direct Investment in Latin America and the Caribbean: Conditions and Challenges (Mexico: Universidad de National Autonoma de Mexico, 2019), pp. 231–52. 55 ‘15 Chinese Companies Operating in Jamaica’, Jamaica Observer, 4 January 2019. 56 Rafael Arias R and Luis Vargas M, ‘Chinese FDI in Costa Rica’, in Enrique Dussel Peters (ed.), China’s Foreign Direct Investment in Latin America and the Caribbean: Conditions and Challenges (Mexico: Universidad de National Autonoma de Mexico, 2019), pp. 253–70.

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57 Eduardo Klinger Previda, ‘Retrospective and Prospective of Dominican Republic and China Rela­ tions’, in Enrique Dussel Peters (ed.), China’s Foreign Direct Investment in Latin America and the Caribbean: Conditions and Challenges (Mexico: Universidad de National Autonoma de Mexico, 2019), pp. 271–86. 58 Evan Ellis, ‘China’s Engagement with Trinidad and Tobago’, Global Americans, 26 March 2019. 59 This is not a new phenomenon because since the late nineteenth century the Chinese have gone into small scale trading. See the chapters on Jamaica and Cuba in Andrew Wilson (eds.), The Chinese in the Caribbean (Princeton, NJ: Markus Weiner Publishers, 2004); Jacqueline Levy, ‘The Economic Role of Chinese in Jamaica: The Grocery Retail Trade’, Jamaica Historical Review, No. 5 (1986), pp. 31–49; Ray Chen, The Shopkeepers (Kingston: Periwinkle Publishers, 2004). 60 Ariel C. Armony and Nicolas Velasquez, ‘Anti-Chinese Sentiment in Latin America: An Analysis of Online Discourse’, in Enrique Dussell Peters and Ariel C. Armony (eds.), Beyond Raw Materials: Who Are the Actors in the Latin America and Caribbean-China Relationship? (Red Academy of Latin America and the Caribbean Sobre China, Frederick-Ebert Stiftung, Nueva Sociedad, University of Pittsburg, 2015), pp. 17–49. See p. 34. 61 John Mair, ‘Oil and Chinese Investment to Bring Record Revenue to Guyana’, The Voice, 21 May 2017. 62 ‘Influx of Chinese Workers Irks Local Unions’, 27 July 2007, www.ipsnews.net/…/caribbean-influ x-of-chinese-workers-irks-local-union. 63 Evan Ellis, ‘China, S.A. as a Local Company in Latin America’, Regional Insights, No. 1 (William J. Perry Center for Hemispheric Studies, 2013), p. 3. 64 Denis Scott Chabrol, ‘Chinese Must Employ, Teach Guyanese-Private Sector Arm’, 4 March 2013, www.demerarawaves.com/…/chinese-businesses-must-employ-teach- … 65 ‘Gov’t Urged to Withdraw Chinese from Heroes’ Circle Projects’, Jamaica Observer, 22 August 2017, p. 5. 66 Jovan Johnson, ‘Stop Complaining! Chinese Ambassador Chides Professionals, Players Who Want MOU Halted’, The Gleaner, 22 August 2017, p. 1. 67 Howard Gregory, ‘Cauterising the Wound: A Pressing Imperative’, Jamaica Observer, 27 August 2017. 68 Simon Romero, ‘With Aid and Migrants, China Expands Its Presence in a South American Nation’, New York Times, 11 April 2011. 69 Concern about new Chinese migrants/settlers is also evident in the USA because the US government is concerned about Chinese workers entering the USA from the Bahamas rather than staying there or returning to China. See Brent Dean, ‘U.S. Fears Baha Mar Chinese Migration’, Freeport News, 14 June 2011, http://freeport.nassauguardian.net/national_local/65829088305882.php (accessed 5 July 2012). 70 This is discussed in greater detailed in Cecelia A. Green, ‘Outbound China and the Global South: New Entrepreneurial Immigrants in the Eastern Caribbean’, Ideaz, vols 10–12 (2012), pp. 24–44. For more on the Chinese in the Eastern Caribbean see Cecilia A. Green and Yan Liu, ‘“Transnational Middleman Minority” in the Eastern Caribbean? Constructing a Historical and Contemporary Fra­ mework of Analysis’, Social and Economic Studies, 66(3 & 4) (2017), p. xxx. 71 Green, ‘Outbound China and the Global South’, p. 35. 72 R. Evan Ellis, ‘Suriname and the Chinese: Timber, Migration, and Less-Told Stories of Globalization’, SAIS Review, XXXII (2) (Summer-Fall, 2012), p. 91. 73 Chris Alden, China in Africa (London: Zed Books, 2007), pp. 47–56.

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15 Regional cooperation in Latin America and the Caribbean New challenges and agendas Cintia Quiliconi and Renato Rivera Rhon

Introduction Regions and regionalism in Latin America and the Caribbean have gained important relevance in debates about International Relations and International Political Economy over the past 20 years in particular. Latin America has proved to be a prolific testing ground for explanatory discussions of intermediate theories dedicated to studying regionalism given its dynamic trends and variety of initiatives. Based on this premise, Briceño Ruiz1 argues that at least three main models of integration prevail in the region, while other authors2 point out that a dislocation or an à la carte model of regionalism predominates in Latin America, ‘in which new institutions have been created to address different topics related to political and strategic objectives of regional leaders instead of deepening or adapting traditional integration initiatives focused on trade’.3 The different models of regionalism in Latin America have been characterized as post-liberal,4 post-hegemonic5, open6 as well as a diplomatic regionalism.7 Although the surge in new trends in regionalism can be seen as a response to global market transformations in which new actors such as multinational enterprises, non-state actors, civil society and business corporations interact with one another within a region in order to increase their presence and competitiveness in the global economy,8 regionalism in Latin America and the Caribbean (albeit to a lesser extent) appears as a platform promoted by states in order to endorse political objectives9 and as a means to generate regional cooperation agreements based on lower levels of cooperation, mutual trust, shallow trade agreements and, in some cases, overlapping agendas with other regional institutions.10 In this sense, regional cooperation in Latin America depends on ideological convergence and regional leadership in order to succeed.11 In this regard, the practice and diffusion of regional cooperation have led to the development of various forms of regionalism,12 which include a complex and dynamic process made up not only by a single actor, ‘but a series of interacting and often competing logics’.13 Thus, region­ alism could be defined as a space in which states can cooperate and regulate and coordinate policies through the harmonization of education, health and defence issues in order to pursue

Challenges and agendas in regional cooperation

peace and stability, formulate social rights, redistribute benefits and promote trade. It is even more important to create a geographical identity in which to promote formal or informal regional institutions that modify patterns of behaviour and that build political strategies that encompass a degree of mutual interdependence.14 Based on the fact that the three types of regionalism focus on different issue areas and privi­ lege different drivers, we believe that is necessary to abandon the analysis anchored to the dichotomy between regional integration versus regional cooperation15 owing to the reduc­ tionist institutionalism view that cooperation has a supranational or intergovernmental design. This is because cooperation and integration are related concepts based on interdependence in several areas besides trade. Therefore, regionalism is not a question of either/or but a question of the extent of mutual interdependence and cooperation that exists between states.16 In this sense, we argue that there is an intrinsic limitation on middle-range theories of rational choice that predicate integration aimed at coordinating policies through trade and economic policies.17 Nevertheless, we highlight the fact that regional cooperation in Latin America occurs mainly as a state-driven process in which interests and preferences are defined by heads of state and achieved through the creation of regional arrangements. In other words, Latin American regionalism emphasizes the state as the main unit of analysis, while the dee­ pening of regional institutions is usually very dependent on the ideological convergence of the member states. Thus, the main difference between regional cooperation and regional integration in Latin America has to do with the fact that regional cooperation centres on explaining that states’ main interests are not exclusively focused on trade and economics. As Hettne and Soderbaum argue: The point of departure lies in the diverse forms of regional cooperation that have devel­ oped due to the new wave of regionalism. Since the mid-1980s new regionalism has changed the structure and content of regional cooperation, making it more complex and varied. Achieving public goods is not only an economic problem, but also a political problem. A broader political economy approach drawing from social science is needed.18 Thus, accepting that decision-making in regional affairs is concentrated in the hands of heads of state and, most importantly, recognizing that the delegation of policymaking and political authority are feasible so long as institutions do not demand jurisdiction over the pre-existing states, we argue that in Latin America and the Caribbean the concept of regional cooperation is a better reflection of recent trends in the region rather than regional integration that encom­ passes the idea of the implementation of a deep sovereignty that hitherto it has not been possible to achieve in the region. This chapter aims to synthetize the theoretical approaches of Latin American regionalism, contrasting the importance of ideological convergence in regional cooperation in new initiatives that seek to bring together Latin America and the Caribbean such as the Union of South American Nations (Unión de Naciones Suramericanas – UNASUR) and the Community of Latin American and the Caribbean States (Comunidad de Estados de América Latina y el Caribe – CELAC). Both were established in 2000 but have recently found themselves in crisis. The chapter is divided into three main parts. The first section discusses the literature dedicated to the study of the different models of Latin American regionalism, such as post-liberal, open, post-hegemonic and diplomatic regionalism; the second section analyses regional cooperation within CELAC and its current stalemate; and the third section examines UNASUR high­ lighting the ideological divergence and the lack of regional leadership to explain the current crisis facing the organization. The chapter concludes that regional cooperation in Latin America 205

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depends on ideological convergence and regional leadership in order to succeed,19 arguing that Latin American diplomacy promotes institutions based on non-binding collective rules or agreements with low levels of transference of authority and delegation from national institutions to the regional level. However, despite such limitations these new arrangements have fostered important levels of regional cooperation in all areas including trade.

Theoretical approaches of Latin American regionalism: post-liberal, open, post-hegemonic and presidential diplomacy regionalism Latin America, particularly South America, experimented the proliferation of regional coop­ eration initiatives that flourished during the first decade of the 2000s. In emerging regions such as South America, the characterization and scope of the regional space were redefined; refor­ mulating the regional politics of cooperation and integration20 and in some cases reconsidering the scope of regional trade agreements and regional cooperation initiatives led towards rejecting the effectiveness of preferential and free trade areas as the main dependent variable.21 Despite the fact that state preferences at the regional level depend on the political ideology of the winner of a general election, the materialization of regional cooperation in Latin America has been formalized through a ‘series of “grand bargains” among the leaders of governments of the leading states in a region’.22 In this regard, regional cooperation in Latin America includes a form of lowest common denominator bargaining, which involves a leading state bargaining for power so as to exercise a de facto veto over fundamental innovations such as inter­ governmentalism, which is based on interstate relations between leading states; and, most importantly, the initiatives which were promoted at the regional level during the last 40 years and were founded on the common belief that the formalization of regional institutions with political autonomy and which demand jurisdiction over the states will put into question the future of national sovereignty. For these reasons, Latin American regional cooperation is char­ acterized by the often excessive participation of the heads of state which has allowed them to promote regional cooperation agreements in several areas such as infrastructure, security, health and, more importantly, to enact trade treaties through informal regional practices, such as regional summits, initiatives, groups and/or forums.23 During the 1990s, with the goal of locking in market reforms recommended by the Washington Consensus at the regional level, Latin American governments saw the need to promote trade liberalization as a means to increase region participation – mainly through export policies – in the global economy.24 Since 1990 the region has embraced open regionalism, a strategy ‘based on the premise that unilateral trade liberalization was the key to enhancing more efficient participation of Latin American countries in the global economy through exports’25. Strategies implemented prior to the 2000s by some Latin American states and which have been revised since 2015 are now grounded on the need to revitalize the trade agenda by seeking greater dynamism in regional markets. Countries such as Mexico, Chile, Colombia, Peru and Panama signed free trade agreements (FTAs) with the USA and the European Union (EU) in the 2000s, and are currently expanding these agreements to the Asia-Pacific region.26 Moreover, the Latin American heads of state have pursued a strategy to increase regional cooperation in trade with the USA, maintaining its hegemonic bargaining role regarding other states’ preferences to create hegemonic practices through preferential trade agreements. Gamble and Payne argue that: the turn in US policy at the end of the 1980s is therefore very significant, signalling the willingness of the US government to consider a framework to integrate other states within

Challenges and agendas in regional cooperation

the region. Bush’s Enterprise for the Americas and the successful establishment of NAFTA, and the possibility of extending it in due course to create a Free Trade Area of the Amer­ icas (FTAA) embracing the whole of Latin America and the Caribbean, quickly became a regionalist project of considerable ambition and scope’.27 Although Latin America experienced different regional cooperation cycles, open regionalism remained the dominant game for those governments that were inclined to adopt a more neo­ liberal regional agenda, which partially explains the promotion and diffusion of the Pacific Alliance. In those countries where social policies remain the main obstacle to reducing poverty and inequality, regionalism – embedded at the formal and informal level – ‘has often been thought as a governance strategy, a pragmatic response to exogenous factors and the challenges of global political economy’.28 Thus, during the 2000s the heads of state of several Latin American states pursued an agenda based on redefining the scope of regional trade agreements in which states focused on developing regional social policies that negate the effects of globalization. Therefore, since the beginning of the twenty-first century states’ interests have relied on regional coop­ eration as a policy to counterbalance the negative effects of neoliberal globalization29 leaving aside trade as the main object of integration and embracing new agendas related to social and political issues. As Riggirozzi points out, regionalism in Latin America has thus become an arena in which new trans-national and trans-local relations are constructing new understandings of regional community in a post-hegemonic regional order.30 In Latin America, for instance, new types of regionalism or emerging types of regionalism became important due to a potential response to ‘alternative models of development that contest or reframe the neoliberal orthodoxy prevailing in the 1980s and 1990s’.31 A different model of development based on strong discursive elements of ‘leftist’ leaders thought derived from the United Nations Economic Commission for Latin America and the Caribbean’s dependency theory, reignited the importance of formulating regional policies based on reducing the structural reasons behind economic imbalances, poverty and inequality that were produced and reproduced at the regional level. Hence, the regional projects that were created at the beginning of the 2000s were rooted in a consensus that underdevelopment and more specifically regional inequality were the result of a lack of opportunities in areas such as education, health and justice. For these reasons, Latin America experienced a new era of regional cooperation in social and political issues that had not previously been part of the regional agenda. These changes in issues covered by regional agreements can explain this new type of regionalism, in which the traditional regional integration scheme that sought as its ulti­ mate aim the creation of a common market was no longer the main purpose to be achieved.32 The tensions experienced by the newly emerging regional leaders such as Brazil, Venezuela and Argentina were exacerbated by the presence of the USA as a regional hegemonic power that never ceases to loom large.33 In this regard, the need to consolidate cooperation specifically on issues such as military affairs and narcotics – implicit in the ideology of left-wing leaders – was built based on mutual trust between the South American countries who were opposed to ‘foreign or external threats’, specifically those historically and ideologically represented by the US influence in the region. More specifically, the demand to challenge the role of the USA in the region was related to the financing and presence of the USA in the military and police forces based on the promotion of the ‘war on drugs’. This is why during the first decade of the 2000s, several countries such as Argentina, Bolivia and Venezuela held a negative view of the role of the USA in the region, due to the increase in the number of military bases in Colombia 207

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and the transformation of the Colombian armed forces by giving them the power to prosecute domestic crimes, a task normally attributed to the police.34 Nevertheless, the rise of post-liberal or post-hegemonic regionalism during the past decade was the result of initiatives enacted by left and centre-left governments35 which were respond­ ing to an the need to challenge the hegemonic role of the USA, the neoliberal practices implemented by development banks, and policies with a different narrative. According to Briceño Ruiz, regionalism goes beyond the economic integration, involving a complex process which includes a space of cooperation and political contestation. In the post-hegemonic region­ alism, even the idea of economic integration changes, since it is not only trade but also its focus on productive, financial, social and infrastructure integration.36 More importantly, during the post-hegemonic era, ‘new and often contingent policies were introduced to rebuild and extend the role of the state in the regulation, provision, and dis­ tribution of economic resources’.37 Post-hegemonic regionalism tries to recapture the role of the state in the creation and reg­ ulation of social policies at a regional level, in which an alternative model of development is applied and further implemented in those sectors historically forgotten by neoliberal govern­ ments, thereby introducing an ideological element into the debate and focusing on explaining new practices of cooperation in areas of social policy. This type of regionalism seeks to reinforce alternative programmes and at the same time create new networks and regulations to promote a different model of development. Finally, and on an instrumental matter, the manifestation of these initiatives was evinced in the creation of new regional organizations based on an inter­ governmental model, such as the Alianza Bolivariana para los Pueblos de Nuestra América – Tratado de Comercio de los Pueblos) (ALBA-TCP – Bolivarian Alliance for the Peoples of our America – People’s Trade Treaty), UNASUR, Petrocaribe and CELAC.

Ideological trends and regional leadership Ideological convergence or divergence is key to explaining regional cooperation. During the regionalism cycles that occur in Latin America, the political ideological convergence/divergence of the heads of state explain how and why regional cooperation has been promoted during the last 40 years. On the one hand, some governments promote trade liberalization and FTAs. Such governments are commonly inclined to encourage an ideological convergence with the USA and tend to cooperate with those governments that prioritize trade liberalization as the main concern in their foreign policy. On the other hand, governments involved in posthegemonic regionalism criticize the hegemonic role of the USA in the region, and are uncomfortable with orthodox economic policies and tend to cooperate with countries such as Brazil that have emerged as regional powers over the past decade. In this regard, independently of this ideological convergence/divergence, due to the proliferation of more than a dozen regional institutions, Latin American presidents are able to choose which organizations and cooperation strategies fit their interests best. Various authors have highlighted the importance of ideological convergence as a means of boosting regionalism in Latin America. The literature has focused on the causes of this shift in regionalism38 being the most important of alleged reasons for the rise of numerous left-wing governments at the beginning of the 2000s that facilitated the constitution of new regional organizations. However, other authors39 argue that even though there was an ideological 208

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coincidence of governments in power, the outcome of regionalism is still uncertain and ideo­ logical convergence has not acted as an engine to deepen regionalism. In fact, it has helped to generate a proliferation of new organizations. We agree with these authors that ideological convergence is not proven to explain regional cooperation patterns. In this regard, diplomatic regionalism tends to recreate the institutional democratic design of the majority of states at the regional level, resulting in the creation of regional institutions with weak accountability mechanisms, high uncertainty and short time horizons, as actors cannot reliably use formal rules to guide their expectations about others’ behaviour. As the creation of newer organizations is a feasible strategy to respond to the demands of the ruling political par­ ties, this explains why ideological convergence has not deepened regionalism and why Latin American heads of state prefer to promote new institutions instead of developing and strengthening existing organizations. Taking into consideration that the diplomatic manoeuvering of Latin American countries tends to reproduce the domestic practices of whichever political party is in power – such as the elimination of domestic institutions or the rejection of the policies implemented by previous presidents – the regional cooperation promoted by presidential diplomacy will have decisionmaking mechanisms founded on ideological convergence, that is ‘consensus or dialogue’. Since foreign policy in Latin America is represented mainly in the executive branch, the creation of newer organizations or the promotion of forums or regional meetings based on presidential diplomacy will have three main characteristics. First, heads of state must con­ sensually approve all the decisions taken by ministers of foreign affairs or of the interior. Second, fixed preferences might be absent, meaning that a higher level of uncertainty and short time horizons in regional cooperation agreements and informal rules procedures will be the main features of the institutional design. Third, the pro tempore presidency (PTP), or indeed any other mechanism in charge of complying with the agreements reached by heads of state, will have a leading role in the organizations. Taking into account that at the domestic level the heads of state are the main custodians and definers of a country’s interests, this practice will be further implemented at the regional level, meaning that the incumbent PTP will be allowed to govern as the president sees fit.40 In this regard, diplomatic regionalism or presidential diplomacy in Latin America and the Caribbean could be explained as high-level multilateral political dialogues that are institutiona­ lized through presidential summits or any type of institution that concentrates decision-making in the hands of heads of state. The actions and decision-making processes of these mechanisms emerge through the creation, design and proposal of foreign policies at the regional or sub­ regional level, and are characterized by short-term cooperation agendas to resolve conflicts or crucial decisions that need to be made.41 Therefore, ideology plays a crucial role because in Latin America traditionally presidents are key players in the formulation of regional agreements.42 In this regard, diplomatic regionalism needs ideological convergence and regional leadership in order to succeed. Hence, we expect that during periods in which ideological convergence is strong vis-à-vis a clear willingness and capacity to lead on the part of the regional leaders the level of cooperation is expected to be higher than scenarios in which ideological divergence and/or a lack of leadership prevail.43 Leadership – or the lack thereof – in regional cooperation has been extensively addressed in the literature on regionalism.44 The debate on the subject has defined leaders as those with regional powers, who interact with other regional actors that often pursue specific relations. In this regard, since diplomatic regionalism, such as that exemplified by CELAC and UNASUR, is founded on institutions or agreements with a low transfer of political authority and little influ­ ence over states, a leading state is necessary to assume the transaction costs of integration, to 209

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provide public goods and to generate a consensus favouring the pursuit of regional interests. According to Mattli, the willingness to lead or to follow depends on the pay-off of integration to political leaders or a ‘paymaster’.45 In this sense, to enhance the level of regional cooperation when a leader decides to support a new regional organization is to build political consensus among members concerning important topics for the region46 and the regional connection to the international system, since regional powers often represent their regions in multilateral forums.47 In other words, the presence of an actor with a capacity for leadership and having the respect of their peers is necessary to achieve convergence support for a regional project. In the case of post-hegemonic regionalism, since the 2000s the main players have been Brazil and Venezuela, acting as passive leaders or as ideological representatives who oppose the free market in a reactionary.48 Meanwhile, countries that have maintained open regionalism have followed the leadership of the USA, which is seen as hemispheric in nature and is accompanied by signing FTAs and promoting agreements on security. At present, Latin American regional leaders are in crisis, accompanied with a high ideological divergence between the heads of state, which makes it difficult to promote and spread regional cooperation.

Diplomatic regionalism: the paralysis of CELAC CELAC was founded in 2010. The heads of state of the Rio Group agreed to establish CELAC as a regional body to strengthen cooperation on political, cultural, social and economic issues. The Rio Group was born in 1987 as a presidential summit of Latin American and some Car­ ibbean states, supported by Argentina, Brazil, Colombia, Mexico, Panama, Peru, Uruguay and Venezuela. To some extent, the Rio Group was perceived as an alternative body to the Orga­ nization of American States (OAS) that was founded by the USA as a countermeasure to potential Soviet influence in the region during the Cold War. Since the OAS was dominated by the USA, the Rio Group challenged US military interventions in Central America, claiming to have ‘regional solutions to regional problems’.49 Its early success was related to its flexibility and capacity to coordinate regional solutions without the hegemonic role of the USA. In a similar vein to the Rio Group, CELAC also poses a challenge to the OAS. It is the only initiative that unites all the South American and Caribbean countries, whose presidents play a strong role in setting the regional foreign policy agenda in many of the current regional initia­ tives. According to Sanahuja, the relevance of CELAC is related first to its regional scope to act as a common framework for cooperation and consultation based on the slogan ‘unity in diver­ sity’, chosen by the leaders to represent the main meaning of CELAC.50 Second, CELAC has brought Cuba back into the international forum as a strong sign of the region’s autonomy vis-à­ vis the USA. Third, CELAC has reclaimed the historical legacy of unionism and a common Latin American identity to empower the region’s role in international and regional matters, and brought Mexico back into the fold after it became isolated from the rest of the region when that country signed the North American Free Trade Agreement (NAFTA) with the USA and Canada.51 In fact, through CELAC, Mexico has found a way to access the South American diplomatic channels that had been closed to it since the creation of UNASUR.52 On the other hand, despite being a forum, CELAC posed the necessity to articulate sub­ regional dialogues that were absent in the OAS. In this regard, from 2011 to 2015 sub-regional organizations such as the Caribbean Community (CARICOM) were included as potential lea­ ders in decision-making mechanisms such as the troika (cuarteto) which represented CELAC in multilateral organizations such as the UN or the EU. Saltalamacchia Ziccardi argues that CELAC differs from previous regional initiatives in three ways. First, the forum assumes explicitly political rationality that determines the way 210

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cooperation takes place in all issue areas. Second, it tries to generate a space that is autonomous from the USA. And third, it acts as a platform to influence discussions on international eco­ nomic and political governance in a world characterized by multipolarity or ‘region polarity’ in which regions are defining and claiming new roles for themselves.53 CELAC, however, replicates the regional preference for intergovernmentalism that regionalism pessimists have criticized, thus bringing back the sense of Latin American and Caribbean identity. In terms of how regional cooperation was instrumentalized, CELAC cannot be seen as a formal organization with political autonomy and institutional capabilities. The forum is a poli­ tical platform characterized by strong presidentialism and weak institutionalism.54 In other words, CELAC might be considered to be a forum similar to the G77, an organization that represents the result of Latin American and the Caribbean presidential diplomacy since its councils do not have an institutional design that strictly limits states’ sovereignty. Moreover, the PTP mechanism, controlled by the heads of state, has limited functions of technical and insti­ tutional support on specific matters, such as the organization of events and the monitoring of agreements. Nevertheless, the PTP in CELAC has a crucial role in inter-regional dialogues, such as the CELAC-EU dialogues. Furthermore, the organization has limited responsibilities and its non-state institutions do not have any specific role besides reaching consensus based on dialogue and political agreements.55 Finally, since Mexico and Brazil have been unable to reach consensus on some topics, the absence of a regional leader has made it difficult to effect continuity and the deepening of regional policies. The main value of CELAC is political dialogue, particularly at a time when the region is facing challenges such as the ongoing political and humanitarian crises in Nicaragua and Vene­ zuela. However, CELAC has found itself in a state of a paralysis due mainly to ideological dif­ ferences among its member states. The lack of ideological convergence among its main members has produced a stalemate in its actions. CELAC membership is divided between two ideological groups of countries. The first group comprises countries gathered together under the Group of Lima and includes with a more cautious position since president Fernandez assumed the presidentcy at end of 2019 Argentina, Brazil, Canada, Chile, Colombia, Costa Rica, Gua­ temala, Honduras, Mexico, Panama, Paraguay and Peru. They were later joined by Guyana, Saint Lucia, Bolivia and Haiti. This group does not recognize Nicolas Maduro regime in Venezuela. However, it supports the application of the OAS Democratic Charter that was initiated to seek a peaceful and effective solution to the political and social crisis in Nicaragua. On the other hand, the second group of countries comprises members of the ALBA-TCP including Antigua and Barbuda, Cuba, Dominica, Grenada, Nicaragua, Saint Kitts (Christopher) and Nevis, St Lucia, Saint Vincent and the Grenadines, and Venezuela, and these states do support the current Venezuelan and Nicaraguan governments and oppose the international sanctions that have been levied against them. This ideological fracture has directly affected CELAC and as a result various sectoral and ministerial meetings, including the Sixth Summit of Heads of State in 2018, have been can­ celled. In fact, there was consensus to elect the PTPs for 2017 (El Salvador) and 2019 (Bolivia), but not for 2018 as no member state was keen to assume the presidency resulting in the extension of the El Salvador mandate. Similarly, this paralysis impaired relations with extraregional partners, as was the case of the Third CELAC-EU Summit, scheduled to take place in October 2017 in San Salvador (El Salvador), which had to be postponed due to internal splits within the mechanism.56 In the light of this situation, CELAC decided to carry out a process of reflection on its future to generate diagnoses and recommend solutions to overcome its state of paralysis. The first result of this process took place at the 15th Meeting of Foreign Ministers, held in New York in 211

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September 2018. During the meeting a Concept Note was adopted in which the five priority themes of CELAC for 2019 were established: food security for the eradication of hunger; the promotion of international cooperation; risk management of natural disasters; the relationship with extra-regional partners; and the evaluation of results. 57 At the Sixth Meeting of Foreign Ministers of CELAC, it was agreed by consensus that Mexico would become president pro tempore for the first time in 2020. The Mexican pre­ sidency began with two open wounds: that of Bolivia, which was embroiled in a deep political crisis and whose new government suspended its participation in meetings, and that of Vene­ zuela, which continues to be beset by difficulties following the attempt by the radical leftpopulist movement, Chavismo, to wrest control of the National Assembly. In fact, the other important absentee from this meeting was Brazil whose conservative government decided to suspend its participation from the organization in January 2020 claiming that CELAC allowed the participation of non-democratic regimes such as Cuba, Nicaragua and Venezuela. CELAC has extra-regional associations that strengthen the dialogue of the region with the world, the main one being the CELAC-EU bi-regional relationship, which brings together the 61 countries of both blocs. The CELAC-China Forum is also of strategic importance as it connects the region with the Asian economic giant in terms of investments, infrastructure and technology. This external agenda has been very important for the organization, but it has also experienced a stalemate given the ideological fractures that have appeared within the organization. In summary, CELAC is the most representative forum in the region and the most ambitious initiative in the recent history of Latin American and Caribbean integration. Even though CELAC should be a privileged space for dialogue and cooperation to address the issues that affect Latin America and the Caribbean as a whole, the lack of ideological convergence has obstructed the practice of the ‘unity in diversity’ principle under which the organization was been created.

The crisis in post-liberal regionalism: UNASUR in perspective The constitution of UNASUR in 2008 began a new process of cooperation with characteristics that differ from earlier conceptions of integration because the organization addressed a new range of social and political issues that had not previously been prioritized on the regional agenda. A Constitutive Treaty, signed by 12 heads of state in May 2008, entered into force in March 2011 with the objective of promoting political, social and economic cohesion. Never­ theless, the organization only functioned as a forum that promoted political and social discus­ sions particularly fostering cooperation mainly in defence, health, education, infrastructure and energy issues. Thus, the concept of regional integration that revolves around economic integration is an alien concept for an organization that has never developed such a typical integration agenda. During the initial negotiations, UNASUR created new momentum in the South American region, with the emerging drive of leftist governments particularly Brazil, Venezuela, Bolivia, Ecuador, Argentina and Chile, reflecting a new struggle for leadership between Venezuela and Brazil. As Dabène explains, Brazil and Venezuela emerged as the key actors in South America with a different cooperation agenda, specifically in those sectors related to infrastructure and defence.58 Although its institutional density explained its crisis, UNASUR developed an important number of agreements, forums and administrative organs. It was driven by Brazil – the regional power in Latin America –and its political allies, the countries that have been critical of 212

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neoliberal agreements and Preferential Trade Agreements with the USA. During the presidency of ‘Lula’ Da Silva (2003–11), UNASUR became the favourite regional arena in which Brazil decided to strengthen its regional power in order to confront the global hegemon. Through discrete regional guidance, Brazil adapted its leadership towards ‘flexible cooperation, without ties or automatisms’59 which went hand in hand with the advances made by the members during the formulation of the Constitutive Treaty of UNASUR.60 Brazil’s geopolitical defini­ tion of a South American space was reinforced in various dimensions including security through the Defence Council, democratic stability through mediation in political crises in South America, as well as health, infrastructure and energy through cooperation. Nevertheless, the absence of a common trade agenda, the pronounced change in the political economy in South America due to the ending of the commodities boom,61 the excessive con­ centration of presidents in decision-making based on a consensus mechanism, and the reliance on ideological convergence caused stagnation and UNASUR fell into a deep crisis. More importantly, due to the proliferation of several organizations during the post-hegemonic era, UNASUR’s destiny depended on the ideological willingness of centre-right politicians who saw these initiatives as an opposite place to promote trade and economic insertion agendas. In April 2018 six Southern Cone countries – Argentina, Brazil, Chile, Colombia, Paraguay and Peru – suspended their membership of UNASUR, and in August of the same year, Colombia announced its withdrawal from the organization. Their withdrawal was in view of discord within the organization. The causes of the disintegration of UNASUR are explained by the combination of the following reasons: a turn in the political economy of the region, new economic interests in South America in terms of regionalism, and crisis among the regional leadership. The first cause of the stagnation of UNASUR has had to do with a pronounced change in the political economy of the South American region. The end of the commodities boom in South America marked the end of a decade during which the region made significant economic and social advances at the hands of progressive governments whereby many of the dividends from these exports were used to promote regional political projects such as UNASUR. How­ ever, since the ending of the boom period in 2012 the economies of the region have gradually been weakened both by a fall in commodity prices and the slowdown in the Chinese economy, as well as by internal structural problems that have prevented a rebound. This had a direct impact on the regional political landscape that is now characterized by a new turn to the right in many of the largest countries in the Southern Cone such as Brazil, Chile and Peru. Second, in tandem with the end of the commodity bonanza, many of the South American countries began to resurrect the idea of opening new markets and encouraging intra- and extraregional trade. This idea was neglected by UNASUR due to the prevalence of political and social agendas as the organization has focused on regional non-commercial cooperation. Nonetheless, in a scenario of external restriction, the countries of the region have once again embraced this economic agenda and are seeking to revitalize regional markets as well as looking for better conditions of market access in the north. This will particularly appeal to countries such as Argentina and Brazil that do not yet have FTAs with either Europe or the USA. They have propelled this agenda and have approached the Pacific Alliance. The literature on the subject has already raised the idea that regionalism prevails in those countries which choose according to their own interests the topics which they are willing to discuss with regional institutions that they belong to.62 Third, most debates on regionalism have highlighted the idea that in order to establish and operate regional institutions it is always necessary to have one or more regional leaders that can underpin the process. In this sense, the role of regional powers is central to guiding a group of countries towards the construction of the region and its institutionalization. That is, the 213

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presence of a regional leader who is recognized by their peers is necessary to achieve the con­ vergence of preferences among the members of the organization. Brazil, and sometimes Vene­ zuela, have officiated as regional leaders in UNASUR. But the marked political and economic crisis of Venezuela on the one hand and the deep political crisis in Brazil followed by the election of Jair Bolsonaro left UNASUR without leaders to support the regional cooperation process.

Conclusion Latin American regionalism is currently at a juncture due to three factors that have changed the region’s incentives and needs. First, the decline in the price of commodities had an adverse effect on the regional political economy. Second, the crisis in regional leadership and the lack of ideological convergence polarized regionalism into the organizations promoted by left-wing rather than right-wing governments. Third, there seems to be regional uncertainty regarding the future of regional cooperation, due to the reactivation of older organizations such as the OAS as well as with the stagnation of Latin American institutions such as CELAC and UNASUR. In this regard, some states prefer to cooperate in prioritizing trade through an open region­ alism strategy, and some through prioritizing social policies and rejecting the hegemonic role of the USA through a post-hegemonic regionalism strategy. Either way, Latin American regional cooperation/integration cycles are grounded in diplomatic regionalism, which depends on ideological convergence and regional leadership in order to succeed.63 The two different outcomes of regional cooperation whether based chiefly on trade or on social policies are unlikely to influence the regional institutional outcome in Latin America. In fact, since the creation of the Asociación Latinoamericana de Integración (ALADI – Latin American Integration Association) in 1980 Latin American states have pursued a presidential diplomacy strategy focused on intergovernmental and bilateral agreements. These are based on non-binding collective rules or agreements with low levels of transference of authority and delegation from national institutions to non-state institutions on a regional level as a resource to promote regional cooperation.64 Since 2015 it seems that Latin American regionalism is facing a new cycle in which the most traditional trade integration agendas will prevail with new reg­ ulatory elements. Nevertheless, post-hegemonic regionalism has opened up broad spaces for regional cooperation in social agendas that are also key to the various aspects of Latin American cooperation. In this regard, the future of regionalism will depend on its flexibility and pragmatism to adapt to the regional ideological fragmentation.

Notes 1 J. Briceño Ruiz, (2013) ‘Ejes y modelos en la etapa actual de la integración económica regional en América Latina’, Estudios Internacionales, 45(175): 9–39, doi: http://dx.doi.org/10.5354/0719-3769. 2013.27352. 2 C. Quiliconi and R. Salgado (2017) ‘Latin American Integration: Regionalism à la Carte in a Multi­ polar World?’ Colombia Internacional, 92: 15–41. 3 Quiliconi and Salgado, ‘Latin American Integration’. 4 J. Sanahuja (2009) ‘Del Regionalismo Abierto al Regionalismo Postliberal: Crisis y cambio en la Integración Regional en América Latina y el Caribe’, in L. Martinez, L. Peña and M. Vazquez (eds), Anuario de la integración de América Latina y el Gran Caribe 7, Buenos Aires: CRIES, pp. 11–54; José Sanahuja (2012) ‘Cambio de Ciclo en el Regionalismo y la Integración Regional en América Latina: Enfoques Diferenciados y Búsqueda de Marcos Comunes’, in Adrián Bonilla and María Ortíz (eds), De Madrid a Santiago: Retos y Oportunidades, Balances y Perspectivas de las Relaciones entre la Unión Europea, América Latina y el Caribe, San José: FLACSO, pp. 143–156. 214

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5 P. Riggirozzi and D. Tussie (eds) (2012) The Rise of Post-Hegemonic Regionalism, London and New York: Springer. 6 B. Balassa (2013) ‘Towards a Theory of Economic Integration’, in Philippe De Lombaerde and Fredrik Söderbaum (eds), Regionalism, vol. 1, London: SAGE, pp. 169–80); R. Baldwin (2013) ‘The Causes of Regionalism’, in Philippe De Lombaerde and Fredrik Söderbaum (eds), Regionalism, vol. 3, London: SAGE: pp. 169–80. 7 Quiliconi and Salgado. 8 A. Gamble and A. Payne (2003) ‘The World Order Approach’, in Fredrik Söderbaum and Timothy Shaw (eds), Theories of New Regionalism: A Palgrave Reader, Basingstoke: Palgrave Macmillan, pp. 43–62. 9 A. Bianculli (2016) ‘Latin America’, in Tanja A. Börzel and Thomas Risse (eds), The Oxford Handbook of Comparative Regionalism, Oxford: Oxford University Press, pp. 340–96. 10 R. Rivera Rhon (2017) ‘Latin American Regional Organizations from 1948 to 2011: Pooling, Dele­ gation and the Presidential Diplomacy Problematique’, Ciencias Políticas y Relaciones Internacionales. Revista de Investigación, 6(1): 98–120. 11 C. Quiliconi and R. Rivera Rhon (2019) ‘Ideology and Leadership in Regional Cooperation: The Cases of Defense and the World against Drugs Councils in Unasur’, Revista Uruguaya de Ciencia Política. doi: http://dx.doi.org/10.26851/rucp.28.1.8. 12 T. Börzel (2011) ‘Comparative Regionalism: A New Research Agenda’, KFG Working Paper Series, 28, Berlin: Freie Universität Berlin; K. Klecha-Tylec (2017) The Theoretical and Practical Dimensions of Regionalism in East Asia, Crakow: Springer. 13 B. Hettne (2005) ‘Beyond the ‘New Regionalism’, New Political Economy, 10(4): 543–71. 14 T. Börzel (2016) ‘Theorizing Regionalism: Cooperation, Integration and Governance’, Tania Börzel and Thomas Risse (eds) The Oxford Handbook of Comparative Regionalism, Oxford: Oxford University Press, pp. 99–148; B. Deacon, M. C. Macovei, L. Van Langenhove and N. Yeates (eds) World-Regional Social Policy and Global Governance: New Research and Policy Agendas in Africa, Asia, Europe and Latin America, London: Routledge; R. Keohane and J. Nye (1972) ‘Power and Interdependence Revisited’, International Organization, 41(4): 725–53. 15 Börzel, Comparative Regionalism:. 16 R. Axelrod and R. Keohane (1985) ‘Achieving Cooperation under Anarchy: Strategies and Institu­ tions’, World Politics, 38(1): 226–54; M. Zürn (2004) ‘Global Governance and Legitimacy Problems’, Government and Opposition, 39(2): 260–87. 17 Axelrod and Keohane, ‘Achieving Cooperation under Anarchy; J. Nye (2003) ‘Comparative Regional Integration: Concept and Measurement’, in Philippe De Lombaerde and Fredrik Söderbaum (eds), Regionalism, vol. 3, London: SAGE, pp. 255–80; F. Laursen (2008) ‘Theory and Practice of Regional Integration’, Jean Monnet/Robert Schuman Paper Series, 8(3): 3–22; W. Mattli (1999) The Logic of Regional Integration: Europe and Beyond, Cambridge: Cambridge University Press; W. Mattli (2003) ‘The Vertical and Horizontal Dimensions of Regional Integration: A Concluding Note’, in Finn Laursen (ed), Comparative Regional Integration: Theoretical Perspectives, Farnham: Ashgate. 18 B. Hettne and F. Soderbaum (2006) ‘Regional Cooperation: A Tool for Addressing Regional and Global Challenges’, in International Task Force on Global Public Goods, Meeting Global Challenges: Inter­ national Cooperation in the National Interest, Final Report, Stockholm: 179–244. 19 Quiliconi and Rivera Rhon, ‘Ideology and Leadership in Regional Cooperation’. 20 Riggirozzi and Tussie, The Rise of Post-Hegemonic Regionalism. 21 Börzel, ‘Theorizing Regionalism’. 22 F. Laursen (2008) ‘Theory and Practice of Regional Integration’, Jean Monnet/Robert Schuman Paper Series, 8(3): 3–22. 23 Rivera Rhon, ‘Latin American Regional Organizations from 1948 to 2011’. 24 P. Rigirozzi (2012) ‘Region, Regionness and Regionalism in Latin America: Towards a New Synth­ esis’, New Political Economy, 17: 421–43; Quiliconi and Salgado. 25 Ibid. 26 Ibid. 27 Gamble and Payne ‘The World Order Approach’. 28 Rigirozzi, ‘Region, Regionness and Regionalism in Latin America’. 29 B. Deacon, M. C. Macovei, L. Van Langenhove and N. Yeates (eds) (2010) World-Regional Social Policy and Global Governance: New Research and Policy Agendas in Africa, Asia, Europe and Latin America, London: Routledge.

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36 37 38 39

40 41 42 43 44 45 46 47

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50 51 52 53 54 55 56 57 58 59

Rigirozzi. Ibid. Quiliconi and Salgado. Rigirozzi. Quiliconi and Rivera Rhon. J. Briceño Ruiz and A. Ribeiro Hoffmann (2015) ‘Post-hegemonic regionalism, UNASUR, and the Reconfiguration of Regional Cooperation in South America’, Canadian Journal of Latin American and Caribbean Studies, 40(1): 48–62; T. Legler and A. Santa-Cruz (2011) ‘El patrón contemporáneo del multilateralismo latinoamericano’, Pensamiento Propio, 33: 11–34; Riggirozzi and Tussie. Briceño Ruiz, ‘Ejes y modelos en la etapa actual de la integración económica regional en América Latina’. Riggirozzi and Tussie. Riggirozzi and Tussie; Legler and Santa-Cruz, ‘El patrón contemporáneo del multilateralismo latinoamericano’; M. Petersen and C. Schulz (2018) ‘Setting the Regional Agenda: A Critique of PostHegemonic Regionalism’, Latin American Politics and Society, 60(1): 102–27. G. Caetano (2009) ‘Integracion regional y estrategias de reinserción internacional en America del Sur’, Nueva Sociedad, 219: 157–72; A. Malamud and G. Gardini (2012) ‘Has Regionalism Peaked? The Latin American Quagmire and its Lessons’, The International Spectator: Italian Journal of International Affairs, 47 1): 116–33; Quiliconi and Salgado. Rivera Rhon. Ibid. C. Scartascini (2008) ‘Who’s Who in the Policymaking Process: An Overview of Actors, Incentives and the Role They Play’, in M. Stein and M. Tommasi (eds), Policymaking in Latin America: How Politics Shapes Policies, Washington, DC: Inter-American Development Bank, pp. 29–68. Quiliconi and Rivera Rhon. D. Flemes (ed.) (2010) Regional Leadership in the Global System: Ideas, Interests and Strategies of Regional Powers, Burlington, VT: Ashgate; N. Godehardt and D. Nabers (2011) ‘Introduction’, in N. Godehardt and N. Dirk (eds), Regional Powers and Regional Orders, London and New York: Routledge. Mattli, The Logic of Regional Integration. D. Nolte (2011) ‘Regional Powers and Regional Governance’, in N. Godehardt and D. Nabers (eds), Regional Powers and Regional Orders, London and New York: Routledge, pp. 49–67. L. Van Langehove, Z. Marieke and G. Papanagnou (2016) ‘Conceptualising Regional Leadership: The Positioning Theory Angle’, in S. Kingah and C. Quiliconi (eds), Leadership of the BRICS at the Regional and Global Levels: Willingness, Capacity and Acceptance in an Era of Multi-Polarity, London: Springer, pp. 49–67. J. Altmann Borbón (2009) ‘El ALBA, Petrocaribe y Centroamérica: ¿intereses comunes?’ Nueva Socie­ dad, 219: 27–144. M. Meyer McAleese (2014) ‘Contending (with) Latin American Regionalisms: Theoretical and Policy Implications from a North American Perspective’, submitted at the FLACSO-ISA Joint International Conference, Buenos Aires, 23–25 July; J. G. Tokatlian (2010) ‘El retorno de la cuestión militar a Latinoamérica’, Política Exterior, 135: 136–52. J. Sanahuja, J. (2014) ‘Enfoques diferenciados y marcos comunes en el regionalismo latinoamericano: Alcance y perspectivas de UNASUR y CELAC’, Pensamiento Propio, 39: 75–108. Quiliconi and Salgado. R. Manaut (2015) ‘México: La trampa diplomática entre Estados Unidos y América Latina: Soft Power sin Hard Power’, Pensamiento Propio, 42: 79–106. N. Saltalamacchia Zicarrdi (2014) ‘Regional Multilaterialism in Latin America’, in J. Domìnguez and A. Covarrubias (eds) Routledge Handbook of Latin America in the World, Abingdon: Routledge. Legler and Santa-Cruz. Rivera Rhon. E. Duarte Gamboa (2019) ‘La CELAC en el nuevo escenario regional’, Foreign Affairs Latinoamerica, http://revistafal.com/la-celac-en-el-nuevo-escenario-regional/. Ibid. O. Dabène (2012) ‘Consistency and Resilience through Cycles of Repoliticization’, in Pia Riggirozzi and Diana Tussie (eds), The Rise of Post-hegemonic Regionalism: The Case of Latin America, London: Springer, pp. 41–64. N. Comini (2015) ‘El origen del Consejo de Defensa Suramericano: Modelos en pugna desde una perspectiva argentina’, Revista de Estudios en Seguridad Internacional, 1(2): 109–35.

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60 Quiliconi and Rivera Rhon. 61 C. Quiliconi (2017) ‘From Open Regionalism to Neo-Extractivism: A New Geography of Trade in Latin America?’ in J. Briceño Ruiz and I. Morales (eds), Post-hegemonic Regionalism in the Americas, New York: Routledge, pp. 57–72; E. Vivares and M. Dolcetti-Marcolini (2016) ‘Two Regionalisms, Two Latin Americas or Beyond Latin America? Contributions from a Critical and Decolonial IPE’, Third World Quarterly, 37(5): 66–82, doi:10.1080/01436597.2015.1109438. 62 Quiliconi and Salgado. 63 Quiliconi and Rivera Rhon. 64 Rivera Rhon.

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Part IV

Country case studies

16 The Puerto Rican economy Brad Setser and Sergio Marxuach

Introduction Puerto Rico has been in the headlines since 2015, when then Governor Alejandro García Padilla proclaimed the island’s US $70 billion public debt to be ‘unpayable’. Then, in Septem­ ber 2017, Hurricane Maria battered the island, laying to waste much of its infrastructure, leaving parts of Puerto Rico without reliable electricity for almost a year and causing approximately 3,000 deaths. Yet these headlines mask a more fundamental and enduring question: should Puerto Rico be viewed as the most American part of the Caribbean, as the most Caribbean part of the USA, or a hybrid of both? Culturally and geographically, Puerto Rico is clearly a part of the Hispano­ phone Caribbean. In strictly legal terms, Puerto Rico is an unincorporated territory that belongs to, but is not part of, the USA – a unique status that limits its political representation in the American Union. Puerto Rico’s self-government is contingent upon a grant of authority from Congress, in which the country has nominal representation, at best, and Puerto Ricans cannot vote in US presidential elections. Economically, Puerto Rico is simultaneously the richest among the larger economies in the Caribbean – with a higher per capita income than Cuba, the Dominican Republic, Haiti and Jamaica – and the poorest region in the USA, with a median family income of only half that of Mississippi. In some important ways, Puerto Rico is fully integrated into the American economy. It is inside the US customs border, it belongs to the American currency union, its banks are federally supervised and bank deposits are federally insured, Puerto Rico’s debt trades in the domestic US municipal bond market, and Puerto Ricans pay federal Social Security and Medicare taxes and receive most of the associated benefits. In other ways, though, Puerto Rico stands apart from the 50 US states. Most notably, personal and corporate income earned in Puerto Rico is not subject to the federal income tax, and equally importantly poorer families in Puerto Rico do not benefit from the federal earned income tax credit. Puerto Ricans receive some federal benefits – often subject to arbitrary caps (for example, food stamps and Medicaid) – but not others. Puerto Rico cannot be understood as a fully independent nation, nor can it be understood as just another US state. Puerto Rico’s peculiar political status inside the USA thus affects any

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Figure 16.1 Puerto Rico versus its Caribbean peers: real GNI per capita in 2018 (2010 US$) Source: World Bank, World Development Indicators, https://databank.worldbank.org/reports. aspx?source=world-development-indicators#.

Figure 16.2 Puerto Rico versus its mainland peers: 2018 median household income (nominal US$) Source: US Census Bureau, ‘Household Income: 2018’, Table 1, www.census.gov/content/dam/ Census/library/publications/2019/acs/acsbr18-01.pdf.

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analysis of the current challenges facing Puerto Rico’s economy. Yet the roots of Puerto Rico’s economic difficulties also stem from the long-term historical forces that have shaped the island’s political economy, including almost five centuries of Spanish rule. In this chapter, we seek to highlight the most relevant of those forces; how they influenced the island’s development; and how they still affect policy decisions, both in San Juan and Washington, DC.

The Spanish legacy and the laws of ‘political gravitation’ The Spanish disembarked in Puerto Rico for the first time in 1493, but did not commence the settlement of the island until the early sixteenth century. The new colony’s meagre gold deposits were promptly exhausted, leaving the island as little more than a strategic garrison for the Spanish navy which would now be able to control the eastern approach to the Caribbean Sea. Many of the issues that arose during Spanish colonial rule are still relevant in the twenty-first century. Marshall Alejandro O’Reilly (1745) commented on the large informal economy, the instability of public finances, and dependence on monetary transfers from Mexico; while Fray Iñigo Abbad y Lasierra (1782) stressed the need for economic measures to develop the island’s economy and reported the large-scale trade in smuggled goods.1 Only after Spain lost most of its American colonies during the first quarter of the nineteenth century did it take an active interest in developing Puerto Rico. The Cédula de Gracias (1815) promoted migration to the island, exempted exports from taxes and tariffs, and distributed land for the cultivation of crops for export. Sugar production soon dominated the Puerto Rican economy. However, the modernization of Puerto Rico’s economy only got under way during the last quarter of the nineteenth century: slavery was abolished; sugar cane production declined as a result of competition from sugar beet producers and coffee production increased; Spain allowed Puerto Rico to mint its own currency, which facilitated commercial and financial transactions even as Spanish merchants retained control over Puerto Rico’s trade with Spain; and the first Puerto Rican banks and financial institutions were established. The USA had long had an interest in the Caribbean: back in 1823 Secretary of State John Quincy Adams observed that ‘Cuba and Puerto Rico comprised “natural appendages to the North American continent”’ and those Caribbean islands ‘could not but gravitate North’ towards the USA.2 But until the 1890s the USA preferred that these islands remain in the hands of the relatively weak Spanish empire to keep them out of British control. By that time, the USA had become a rising force in the world – and an increasingly important trading partner for Puerto Rico. For example, the USA purchased most of Puerto Rico’s annual sugar output during the second half of the nineteenth century.

‘A state of ambiguous existence’ The war with Spain that led to the American conquest of Puerto Rico turned out to be rela­ tively short. It took considerably longer for the USA to figure out what to do with its new acquisitions. Indeed, the still unsettled status of Puerto Rico is evidence that the USA has yet to fully come to terms with the legacy of its colonial experience.3 Congress initially established a civil government for the island loosely based on the territorial model of the Northwest Ordinance (1787). A governor and an executive council were appointed by the president and a House of Delegates was locally elected to serve two-year terms. Eventually, in 1917 a Senate, to be elected by Puerto Ricans, replaced the executive council, but the island’s governor continued to be appointed by the US president until 1948. 223

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Congress established the position of ‘Resident Commissioner’ to provide Puerto Rico with nominal representation in Washington; included Puerto Rico in the US monetary system, introducing the dollar and retiring the peso in 1900; bestowed US citizenship on Puerto Ricans in 1917; created a customs union with the USA, and required that all trade between Puerto Rico and the mainland be carried out on US flagships. However, it would be up to the US Supreme Court to define the scope and limitations of the relationship between the USA and Puerto Rico. In a long line of decisions, known as the Insular Cases, the Supreme Court determined that the US Constitution did not apply with full force and effect to the residents of the new territories. Furthermore, the Court made a distinc­ tion, not to be found in the Constitution, between ‘incorporated’ territories that were part of the USA and on the path to becoming a state; and ‘unincorporated’ territories, such as Puerto Rico, which belonged to, but were not part of, the USA. According to Daniel Immerwahl: The significance of the Insular Cases goes beyond the law. In distinguishing between ‘incorporated’ and ‘unincorporated’ parts of the United States, these cases enshrined the notion that some places in the country weren’t truly part of the country. Some territories – namely, the ones filling up with white settlers – could hope for statehood. Others would hang, as the chief justice put it, like a ‘disembodied shade, in an intermediate state of ambiguous existence for an indefinite period’.4 It is difficult to think of another equally succinct, yet still accurate, statement of Puerto Rico’s current political status. After years of complex litigation, the end result was that (1) Congress had broad leeway to legislate with respect to the territories pursuant to Article 4, Section 3, Clause 2 of the US Constitution (the ‘Territories Clause’); (2) ‘incorporation’ was not automatic, even after terri­ torial subjects became US citizens; and (3) Congress could provide for unequal treatment of, and even discriminate against, the territories, as long as the ‘fundamental’ rights of territorial citizens were not violated. Therefore, Congress could exempt Puerto Rico from the application of certain laws, for example tax statutes, and it could apply some programmes unevenly, as remains the case with Medicaid and Medicare. The economic effects of the USA’s acquisition of Puerto Rico were intense and widespread. Sugar producers, for example, benefited from free access to the mainland market while being protected from foreign competition through US sugar tariffs and quotas. Separation from Spain also meant the loss of some markets: for example, local coffee manufacturers lost their preferred access to their principal markets in Cuba and Europe, leading to a broad shift from coffee production towards sugar manufacturing controlled by mainland business interests.

From the Great Depression to 1945 After 30 years of widespread economic, social and political change, the turmoil of the 1930s presented significant challenges to the American dominance of Puerto Rico. Gross national product (GNP) fell by 23.9% between 1929 and 1933; aggregate wages and salaries declined from US $131 million to $95 million;5 and about one-third of the working-age population was unemployed. Coffee and tobacco producers were hit particularly hard; while sugar producers continued to make significant profits from their Puerto Rico operations – due, in part, to a decrease in Cuban production. The USA set up the Puerto Rico Emergency Relief Administration to provide short-term relief, but this relatively short-lived agency was unable to supply what was needed and it was 224

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replaced by a larger-scale New Deal programme. Some of the policies instigated by its substitute, the Puerto Rican Reconstruction Administration, namely agrarian reform and land redistribution, faced stiff opposition from local sugar cane growers and their allies in Washington. Other initiatives met with better results; for example, the rural electrification programme, the construction of rural health clinics, and the construction of cement housing in rural areas. However, Puerto Rico’s economy did not bounce back fully until the early 1940s. The USA rationed access to whisky, as alcohol production was needed for the war effort. This led to a large increase in demand for Puerto Rican rum, and, thanks to the 1917 Jones Act ‘carry over’, the proceeds of the federal excise tax collected on Puerto Rico’s rum sales were returned to Puerto Rico’s treasury. The resulting fiscal windfall, together with the federal military expen­ ditures in preparation for the war, drove a full recovery.

The post-war period to 2000 After the Second World War, a group of relatively young technocrats sought to modernize Puerto Rico’s economy as Puerto Rico itself moved towards greater self-governance: the first gubernatorial election was held in 1948 and a constitution providing for home rule was enacted by Puerto Ricans and ratified by Congress in 1952. The initial effort, a state-driven economic development strategy, with state-owned enterprises (cement, glass, cardboard, shoes and bricks) leading the way, proved short-lived. Instead, Puerto Rico settled on a strategy that sought to use its privileged duty-free access to the US market, local and federal tax exemp­ tions (Section 931 of the Internal Revenue Code), and its political stability to spur light manufacturing. Matching US capital with the surplus pool of local labour resulted in increased volumes of manufactured goods exported to the USA and, to a lesser extent, the rest of the world. By some accounts this ‘industrialization by invitation’ model, with some later re-tooling, was relatively successful. Puerto Rican economic growth rates soared between 1948 and 1974, and real GNP expanded at an annual average rate of 6% between 1950 and 1975 with comparable growth in output per worker.6 Living standards increased as well, as measured by most standard indicators: literacy rates and educational attainment; health outcomes and life expectancy; infant mortality; access to clean water, electricity and safer housing; and persons per physician all improved significantly. Yet by other measures the structural transformation of Puerto Rico’s economy and society fell short of the mark. A rapid increase in the number of jobs in the manufacturing sector did not replace all the jobs lost in the agricultural/traditional sector and total employment in 1960 was lower than in 1950. The apparent contradiction between rapid growth and relatively high unemployment is explained by a very low participation rate and a large reservoir of underutilized labour. Even with strong internal growth, Puerto Rico experienced massive out­ migration.7 Over 650,000 persons left the island during the period between 1945 and 1964, out of a total population of 2.2 million in 1950.8 By the mid- to late 1960s the government of Puerto Rico had already identified what it saw as four deficiencies of its industrialization project: persistent high unemployment, which never fell below 10–11 percent; the volatility of labor-intensive operations of U.S. companies, able and willing to move to other low-wage areas; the overconcentration of industrial activities in a few urban areas; and the particularly acute pro­ blem of unemployment among men.9 225

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One response to fears that footloose light manufacturing would leave Puerto Rico after the suc­ cess of the Kennedy Round of tariff reductions was the construction of a massive petrochemical complex in the southern part of the island, spurred by a presidential Executive Order that exempted Puerto Rico from US crude oil import quotas. The objective was to move to higher value added, capital-intensive manufacturing operations that created high-wage jobs that were more deeply embedded in the local economy and which generated positive spillover effects. This quixotic plan did succeed in bringing some of the largest firms in the petrochemical industry to the island. Yet it suffered from one obvious weakness: Puerto Rico’s new indus­ trialization strategy was based on cheap access to a raw material, namely petroleum, which Puerto Rico neither produced nor controlled. This weakness became palpably clear with the enactment of an oil embargo by the Organization of the Petroleum Exporting Countries fol­ lowing the Yom Kippur War of 1973. In some ways, Puerto Rico has never fully recovered from the first oil shock, which ended Puerto Rico’s petrochemical dreams and highlighted the danger of Puerto Rico’s dependence on imported fuel oil for electricity. Events called for a thorough questioning of the prevailing economic strategy. However, instead of rethinking the existing economic model and restructuring the productive basis of the economy, the Puerto Rican government essentially refurbished the existing one. Section 936 of the US tax code, which replaced Section 931, created a powerful incentive for US pharma­ ceutical and medical device firms to operate in Puerto Rico, as Section 936 allowed US firms operating there to repatriate profits without having to wind down their operations in the island. In addition, it created a ‘possessions tax credit’ that effectively exempted all repatriated income from federal tax liability and it also allowed up to 25% of the income that qualified for the credit to derive from ‘passive’ or financial investment-related activities in Puerto Rico, thereby spurring the development of Puerto Rico’s financial sector. The unsurprising result was that pharmaceutical, medical device and electronics multinational corporations set up operations in Puerto Rico. These firms relied heavily on intellectual prop­ erty created in the USA, which then was licensed or transferred to the Puerto Rican subsidiary or affiliate, where it was used to generate tax-free profits for the duration of the patent. The mark-up on these firms’ exports back to the USA is the underlying cause of the persistent gap between Puerto Rico’s gross domestic product (GDP), which is inflated by the high prices on Puerto Rico’s pharmaceutical, medical and software ‘exports’, and Puerto Rico’s GNP, which more accurately measures real economic activity in the island. Capital intensive manufacturing was an imperfect substitute for traditional light manufactur­ ing, as it failed to create as many jobs as had been envisaged. But the decline in manufacturing employment was offset by the rapid expansion of government employment, which increased from 62,000 in 1960 to 184,000 in 1980.10 Essentially, as migration decreased and economic growth slowed, the government became the employer of first resort for many Puerto Ricans and public employment was eventually pushed to its upper limits. This economic ‘model’ allowed Puerto Rico to rebound from the oil shocks, but growth never again came close to matching the levels seen during the 1950s and 1960s. Indeed, between 1975 and 2004 the island’s GDP grew at an average annual rate of 3.9%, well below the growth rate of the 1950s and 1960s and, with the expansion of Puerto Rico’s population during this period, at a rate insufficient to result in significant convergence towards the living standards enjoyed in the continental USA. In addition, it perpetuated the trading model under the Spanish but with medicines having replaced agricultural commodities. Pharmaceutical manufacturing in Puerto Rico produced large ‘offshore’ profits for US firms, but generated surprisingly few technological spillovers to the broader economy. Indeed, total factor pro­ ductivity growth slowed after the enactment of Section 936.11 226

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Figure 16.3 Year-on-year change in real GNP: USA versus Puerto Rico Source: Puerto Rico Planning Board, ‘2019 Fiscal Plan for Puerto Rico’, https://drive.google. com/file/d/13wuVn04–JKMEPKu-u-djZJHqTK-55aV/view; US Bureau of Economic Analysis, Table 1.17.6, Real Gross Domestic Product, Real Gross Domestic Income, and Other Major NIPA Aggregates, Chained Dollars, https://apps.bea.gov/iTable/iTable.cfm?reqid=19&step=2#reqid= 19&step=2&isuri=1&1921=survey.

By the first decade of the twenty-first century it became evident that Puerto Rico’s eco­ nomic model had run its course. Those advantages that were specific or particular to Puerto Rico in 1945 had either disappeared, in the case of cheap labour, or ceased to be unique to Puerto Rico, in the case of a stable exchange rate and privileged access to the US market. The tax advantages that Puerto Rico had enjoyed under Section 936 were phased out in a budget compromise in 1996. By 2006 firms operating in Puerto Rico were operating on the same basis in the US tax code as other low-tax jurisdictions – and increasingly Puerto Rico started to lose out to other low-tax jurisdictions. In short, globalization eroded the advantages linked to Puerto Rico’s special access to the US market that drove Puerto Rico’s post-war growth, without giving rise to new opportunities that Puerto Rico was able to capitalize on, given its subordinated political status.

Crisis and stagnation: 2000 to the present day With hindsight, it is clear that Puerto Rico’s growth in the early few years of the new millen­ nium was built on an unstable foundation. Lacking the tariff preferences that drove growth in the 1950s and 1960s, or the tax preferences that supported growth after the early 1970s, Puerto Rico’s economy became dependent on a construction boom. Expectations of rising prices drove speculative demand and spurred employment. At its peak construction accounted for just under 10% of Puerto Rico’s GNP. However, construction outpaced actual demand, and when the market turned in 2006, Puerto Rico entered into a self-reinforcing downturn.12 227

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Figure 16.4 Real GNP: USA versus Puerto Rico (indexed to 1990) Source: Puerto Rico Planning Board, ‘2019 Fiscal Plan for Puerto Rico’, https://drive.google. com/file/d/13wuVn04–JKMEPKu-u-djZJHqTK-55aV/view; US Bureau of Economic Analysis, Table 1.17.6, Real Gross Domestic Product, Real Gross Domestic Income, and Other Major NIPA Aggregates, Chained Dollars, https://apps.bea.gov/iTable/iTable.cfm?reqid=19&step=2#reqid= 19&step=2&isuri=1&1921=survey.

Puerto Rico was particularly vulnerable to a real estate shock, as the surge in residential construction had been financed primarily by the local banks – which, after the elimination of the tax incentives tied to Section 936 had come to rely on more expensive brokered deposits from the mainland. By the end of 2010 nearly all the local banks had received federal support, three had been taken over by the Federal Deposit Insurance Corporation, while another two received equity injections from the federal Troubled Asset Relief Program.13 Given this con­ catenation of events, it is perhaps unsurprising that in 2006 Puerto Rico’s economy entered a period of sustained decline – real output in 2018 was roughly 15% below its 2006 level. Meanwhile, Puerto Rico’s economic crisis slowly turned into a fiscal crisis. The Puerto Rican government was, understandably, reluctant to cut current expenses even as revenues slumped – laying off government employees when the private economy was contracting would not only have left many families without any source of income, but also added to the country’s general economic woes. However, sustaining current spending in the face of a declining economy increasingly required long-term borrowing to fund chronic budget deficits and short-changing the pension system. In theory, the government of Puerto Rico is required to run balanced budgets and the bor­ rowing of the ‘Commonwealth’ (Puerto Rico’s equivalent to the state government) is limited by the requirement that annual debt service should not exceed 15% of a trailing two-year average of tax revenues. However, the government found ever more creative ways around this constraint. Notably, it pledged a portion of future sales tax collections to back a new class of bonds – the so-called COFINA (sales tax-backed) bonds – while structuring the tax revenue used to pay the bonds so that it did not appear in the budget. Puerto Rico ultimately issued 228

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approximately US $17 billion of long-term COFINA bonds, a stock equal to the outstanding stock of ‘constitutional’ bonds, mostly to finance current expenditure. The COFINA bonds were particularly pernicious because they included many capital appreciation bonds – effectively zero coupon bonds – that did not pay a current coupon but created a burgeoning debt burden over time. The annual pledged sales tax revenue at the time that Puerto Rico entered the formal debt restructuring process was set to rise from just over $600m in 2018 to almost $2 billion in the 2030s. The off-budget pledge of sales tax revenue through a special public corporation is indicative of the broader financial gymnastics that Puerto Rico engaged in to mask the true extent of its budget shortfalls. A portion of annual debt service was disguised in the budget as rent payments to the Puerto Rico Building Authority, which in turn used the ‘rent’ to pay interest and prin­ cipal on its own bonds, which in turn were ‘guaranteed’ by the Commonwealth. The electric utility issued new bonds to cover the cash flow shortfalls created by electricity prices that remained below the break-even price of generation and ongoing maintenance. The Govern­ ment Development Bank issued bonds to provide cash advances to the central government (with repayment disguised as expenditure to skirt the constitutional debt limit) and to the Highway Authority. Puerto Rico, of course, is different from other Caribbean economies in that it can borrow in the domestic US tax free market. But that advantage proved to be a double-edged sword. By 2014 Puerto Rico’s debt had basically doubled – the total public sector debt increased from US $37.5 billion in 2004 to $70 billion in 2014. However, the growing debt stock concealed the true extent of Puerto Rico’s financial diffi­ culties. In addition to running up its debt, Puerto Rico scaled back investment in its public infrastructure – and covered budget gaps by short-changing its pension system. Pension pledges were never fully funded, but back in 2006 the country’s pension fund had around US $7 billion in assets and no debt. By 2016, after years of drawing on the pension system’s assets to make current pension payments, the public pension system (the three ‘core’ public pension funds) had more financial debt ($3 billion in Pension Obligation Bonds) than financial assets. Puerto Rico, lacking voting representation in Washington, never received the policy atten­ tion its deepening downturn deserved, and its deteriorating economy did not prompt any spe­ cific federal policy response before the passage of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) in 2016. But it would be a mistake to argue that Puerto Rico did not receive any federal support. Puerto Rico automatically benefits from some cate­ gories of federal spending, like food stamps – albeit subject to strict caps. Moreover, in response to the fiscal shortfall, Puerto Rico enacted a 4% excise tax on the sales of multinational com­ panies operating in Puerto Rico to their offshore affiliates, known as Act 154. The Internal Revenue Service ruled that Act 154 payments could be credited against federal corporate income tax on an interim basis. This influx of revenue, which now accounts for approximately 20% of the island’s General Fund Revenues, acted as a form of backdoor fiscal support – even allowing Puerto Rico to reduce local income taxes in 2012. But by mid-2015 it was obvious that Puerto Rico would not be able to postpone its day of reckoning much longer. The economy had been in a prolonged secular decline, a depression really, since 2006. Net migration to the mainland was increasing, thus reducing the island’s population. The government had lost access to the bond market after placing an expensive bond offering with non-traditional investors in 2014 and had no way to finance chronic budget deficits. Puerto Rico’s government and public corporations owed US $72 billion in bonded debt (an amount larger than Puerto Rico’s GNP) and the government had no assets set aside to cover $50 billion in promised future retirement benefits. Antonio Weiss, the US treasury official 229

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who led the Obama Administration’s work on Puerto Rico’s finances, declared that ‘Puerto Rico’s government is out of cash and running out of options’.14

PROMESA and Hurricane Maria Two other developments have shaped Puerto Rico’s subsequent economic history. First, in mid­ 2016, Congress, acting pursuant to the Territories Clause, enacted PROMESA, a law providing for (a) the establishment of an unelected Financial Oversight and Management Board (FOMB) with ample powers (known as la junta in Spanish) to impose fiscal discipline on Puerto Rico, and (b) a court-supervised process for the orderly adjustment of the territory’s debts and obligations. Second, on 20 September 2017 Hurricane Maria struck Puerto Rico with devastating force. The National Oceanic and Atmospheric Administration estimated that Hurricane Maria caused about US $90 billion in damage to the island’s already withered infrastructure and capital stock.15 Economic activity, as measured by the government’s Economic Activity Index, declined by approximately 12% over the three months immediately following the hurricane, and, according to some estimates, the true fall in real GDP could have been as steep as 15%.16 The human toll was ghastly. Thousands of people were left homeless or were forced to live in unsafe conditions without electricity or access to clean water for months; while tens of thousands migrated to mainland USA. Approximately 3,000 people died, but the exact number of fatalities is not known. Perhaps it never will be.17

The outlook To the best of our knowledge, Puerto Rico is the only jurisdiction to undergo a debt and fiscal crisis while seeking to recover from a large-scale natural disaster. Thus, it is an understatement to assert that Puerto Rico’s long-term outlook remains difficult.

Figure 16.5 Puerto Rico Economic Activity Index (indexed to 2000 average) Source: Economic Development Bank for Puerto Rico, Economic Activity Index, www.bde.pr. gov/BDESite/PRED.html. 230

Puerto Rico

The island’s economic outlook over the next few years will be a function of the complex interaction among (1) the outcome of the debt restructuring process; (2) Puerto Rico’s ability to access appropriated but not yet disbursed funding for the long-term reconstruction of the island; (3) the effect of the FOMB’s fiscal and structural change policies; and (4) a declining population.

Restructuring the debt burden By the end of 2019 the broad contours of Puerto Rico’s debt restructuring had become increasingly evident, even if many of the legal details had yet to be finalized. The most important restructuring is that of the tax-supported debt – a measure that excludes the debt of the electricity and water uti­ lities, and other public corporations. When it entered into the restructuring process set out by PROMESA, Puerto Rico had around US $50 billion of tax-supported debt, and annual debt ser­ vice of around $3 billion a year. If the FOMB’s proposed restructuring of Puerto Rico’s General Obligation (‘constitutional’) bonds and the junior debt of the Commonwealth is approved by the courts, Puerto Rico would emerge from the PROMESA restructuring process with about $25 billion in tax-supported debt, and just under $1.5 billion in annual debt service. This amounts to about half of the tax-supported debt and half of the annual debt service Puerto Rico owed before entering into its court-supervised restructuring. But Puerto Rico would still have a relatively high debt burden compared to a typical US state. Its restructured debts would far exceed those of Mis­ sissippi, a poor state with a comparable population. Indeed, its debt per capita would be above that of Massachusetts and Connecticut, states with economies that generate roughly four times as much income per capita as does Puerto Rico. Debt relative to state GNP would be exceptionally high, and debt service relative to Puerto Rico’s revenue, excluding funds from federal transfers, would be only just below that of the most indebted US states.18 The other critical restructuring is that of Puerto Rico’s electric utility – which has around US $10 billion in outstanding debt. Under the terms of the proposed restructuring, the debt would be reduced by 32.5%, but the bond holders would receive a guaranteed payment out of a special 2.768 cents per kWh surcharge on electricity that is expected to increase over time to 4.552 cents per kWh. That charge would structurally raise Puerto Rico’s future energy costs, keeping them relatively high even if Puerto Rico moves away from fuel oil towards a mix of natural gas and renewables.19 The mechanics of Puerto Rico’s debt restructuring usefully highlight the ways in which Puerto Rico stands out from other economies in the Caribbean. Puerto Rico’s debt was sold in domestic US municipal market (and thus is tax-free inside the USA), not on global markets. It is supported by a tax base that is a function of Puerto Rico’s position inside the USA – one where Puerto Ricans do not pay US income tax on income generated from Puerto Rican sources. But its ability to repay its debt is also constrained by Puerto Ricans’ ability to freely migrate to another state if Puerto Rico’s tax burden becomes too onerous. Finally, Puerto Rico’s debt was restructured through a process supervised by the US courts that was modelled on US municipal bankruptcy, a process that superseded the voting provisions found in the actual bond contracts. The debt restructurings of most Caribbean countries, by contrast, have followed the norms for international debt and bond restructuring. Ironically, given the island’s subordinated political status, Puerto Rico’s restructuring was, in a sense, truly unique.

Access to disaster funding Federal disaster relief funds allowed Puerto Rico’s economy to bounce back from the devasta­ tions of Hurricanes Irma and Maria. The emergency recovery funds, together with the 231

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protection provided by the bankruptcy process, also helped to stabilize Puerto Rico’s budget. The disaster relief package included two years of Medicaid funding and thus directly supported the budget. Moreover, the funds for disaster relief and reconstruction boosted local corporate income tax collections as well. However, the initial economic recovery was short-lived and by the end of 2019 Puerto Rico’s economic output, judging from the higher frequency indicators, appeared to have sta­ bilized at a level slightly below its pre-Maria levels. That is disappointing, and it reflects both out-migration in the period immediately after the hurricane and the relatively slow pace of disbursing funds for permanent reconstruction work. Federal funds for rebuilding are administered through a complicated patchwork of pro­ grammes managed by a number of different agencies, with the bulk of funding coming from the Federal Emergency Management Administration (FEMA) and the Department of Housing and Urban Development (HUD).20 According to data from the website of the FEMA Recov­ ery Support Function – Leadership Group, as of 30 September 2019 (1) Puerto Rico had been allocated US $43 billion in disaster assistance funds through 17 federal different agencies; (2) of the total allocated amount, some $21.3 billion had been obligated; and (3) of the total obligated amount, only $14.4 billion had been disbursed. The disbursement of Community Development Block Grant – Disaster Relief funds by HUD has been particularly sluggish, and only $1.5 bil­ lion has been obligated out of approximately $20 billion that was allocated to Puerto Rico. This delay is largely attributable to the federal bureaucracy, the use of FEMA alternative processes which have so far not functioned as expected, and the burdensome conditions imposed on Puerto Rico by the FEMA, the HUD, the US Congress and the FOMB. As a result, the reconstruction of Puerto Rico will probably take longer than anticipated. This delay, in turn, will adversely affect the economic forecasts made by the FOMB and that were included in the certified Fiscal Plan for the Commonwealth. There is a short-term risk that the negative economic impact of the fiscal consolidation proposed by the FOMB will not be outweighed by the expansionary effect of federal reconstruction expenditure. Furthermore, federal funds will eventually run out. While the pace of disbursement has been disappointing, federal spending has still provided a US $6 billion jolt to the economy, and its gradual removal will weigh on Puerto Rico’s economy in the absence of any new drivers of growth.

Change in institutions and policies The outcome of the debt restructuring process is largely outside of the direct control of the government of Puerto Rico, as it now hinges on decisions made by the FOMB and the federal courts. Similarly, the pace of disbursement of already appropriated federal funds is only partly determined by the government (although accusations in 2019 that the Rosselló administration misused federal funds for education and health care certainly have had an impact on the pace of disbursements). Puerto Rico lacks monetary policy autonomy as a part of the US currency union and the ability of the Puerto Rican government to implement fiscal policy is constrained by the FOMB. Although Puerto Rico does not have control over a range of structural policies, it could take steps to reduce corruption and improve its governance. The government of Puerto Rico is fragmented into many administrative agencies, and split even further between the Common­ wealth and 78 municipalities. There is clearly room for administrative consolidation and other steps to improve performance and accountability. For example, Puerto Rico’s formal economic statistics are only produced once a year, and the figures emerge only after a long lag (the federal Bureau of Economic Analysis is now attempting to generate its own quarterly statistics, which

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would be a significant improvement). But combining agencies and adjusting the structure of municipal government is always politically difficult, and reductions in headcount and budgets have a short-term drag on activity that needs to be factored into any economic forecast rather than assumed away. There are also potential long-term gains to be made from moving away from an economic culture built around the negotiation of tax concessions in return for invest­ ment – which has produced a complex tax code with many firm-specific derogations as well as fostering a culture of tax avoidance. Puerto Rico ranks relatively poorly on many measures for the ease of doing business, and there are obvious gains from simplifying the permitting process and making it easier to set up a legal, tax-paying business. Many of the inefficiencies stem from the large number of different municipalities in Puerto Rico – firms moving into Puerto Rico to take advantage of federal disaster funding have often found it administratively difficult to set up shop.21 One of the most controversial issues facing Puerto Rico is the minimum wage and more broadly Puerto Rico’s labour laws. Some outside economists – notably Anne Krueger – have attributed Puerto Rico’s low labour force participation rate to the federal minimum wage, which she argued was too high for Puerto Rico.22 However, there is no clear empirical evi­ dence for this: Alan Krueger did not find a large impact back in 1994.23 A low labour force participation rate could also be a function of the absence of a federal earned income tax credit, which acts as a subsidy for low wage work on the mainland and thus makes formal employment more attractive than the combination of Supplemental Nutrition Assistance Program (SNAP) benefits and informal work. With the minimum wage in the cities and states that now attract the most migration from Puerto Rico (Orlando and the New York metropolitan region) well above the federal minimum wage, this is not as large an issue as it once was. Ultimately, there is a fundamental limit on how far wages in Puerto Rico can fall below wages on the mainland given that Puerto Ricans have the right to move freely within the USA. The FOMB also has sought to make employment ‘at will’ and thus to make it easier to fire workers on the theory that if workers are easier to fire they will be easier to hire. Furthermore, the board has pushed to eliminate Puerto Rico’s ‘Christmas’ bonus and relatively generous vacation days. There is no doubt that there is some scope for Puerto Rico’s labour market practices to converge with those in the 50 US states. But the impact of these policies should not be exaggerated: even with mandatory Christmas bonuses pushing wages in Puerto Rico slightly above the federal minimum, Puerto Rico remains one of the parts of the USA with the lowest wage costs. Ultimately, Puerto Rico cannot compete with its neighbours in the Caribbean on labour costs alone – it needs to offer employers a mix of a well-educated, bilingual labour force, easy access to the US market, an efficient regulatory infrastructure and a modern hurricane-resilient infrastructure.

Demographic challenges There is also a limit on how much even radically improved economic policy can boost Puerto Rico’s growth rate. Annual deaths now exceed births, so even in the absence of any outmigration, Puerto Rico’s population is projected to decline over time. And with wages on the mainland now rising, the natural pull of out-migration will remain. The FOMB’s long-term forecast assumes an annual decline in Puerto Rico’s population of roughly 1% and an even more rapid decrease in the working-age population. Thus, even if productivity growth in Puerto Rico roughly matches that on the mainland, Puerto Rico’s economy is hardly likely to show much growth.24 233

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In sum, while it is natural to compare Puerto Rico to its Caribbean neighbours, its demo­ graphic profile – and historical dependence on manufacturing – mean that Puerto Rico actually has more in common with the ‘left behind’ manufacturing communities on the mainland.

Conclusion Governor Alejandro García Padilla’s announcement of Puerto Rico’s insolvency in 2015 was the perfect moment for the USA to reassess its policy towards Puerto Rico, particularly by questioning which US strategic objectives are furthered by keeping the island as a permanent unincorporated territory? What does it mean at the beginning of the twenty-first century for the USA to keep 3.1 million people as second-class citizens? Hurricane Maria equally could have been a catalyst for a thorough reconsideration of Puerto Rico’s economic and political relationship with the USA. But Congress had little interest in addressing these structural questions. Bankruptcy protec­ tion provided Puerto Rico with a bit of time and a process for reducing its debt, at a high political cost. Disaster aid addressed the immediate risk that Hurricane Maria would turn into an economic as well as a humanitarian crisis. However, neither of these factors changed the broader set of policies that underpin Puerto Rico’s economic relationship with the other 50 US states. They acted as band-aids that stopped the bleeding and halted 10 years of relentless economic decline, rather than producing real reform. There can be little doubt that Puerto Rico’s current economic relationship with the USA is not working. An economic bargain that in effect allowed Puerto Rico to engage in tax competition with the other 50 US states in exchange for only limited participation in many key federal programmes has generated larger benefits for footloose multinational firms than for the residents of Puerto Rico. Rather than converging towards US living standards, Puerto Rican living standards have been steadily slipping further behind those of the other 50 states. The number of Puerto Ricans living off-island already far exceeds those living on the island, a trend that is likely to accelerate in the coming years. A new bargain is needed, one that is suited for an island that will soon be home to one of the oldest populations of any part of the USA. Restarting Puerto Rico’s economy and putting it on a renewed trajectory of convergence will take more than the completion of the current debt restructuring process and the disburse­ ment of already appropriated federal aid. It will require a fundamental rethinking of how Puerto Rico’s economy fits into the broader US economy.

Notes 1 Francisco Moscoso and Luis E. González Vales, ‘Economía, 1492–1816’, in Historia de Puerto Rico, Ana Crespo Solana and María Dolores González-Ripoll (eds) (Rio Piedras: Ediciones Doce Calles: 2012), p. 137. 2 See Thomas Jefferson, ‘Letter to the President of the United States (James Monroe), October 24, 1823’, in Thomas Jefferson: Writings (New York: Library of America, 2011), p. 1482; Peter H. Smith, Talons of the Eagle: Dynamics of U.S.-Latin American Relations (Oxford: Oxford University Press, 1996), p. 25. 3 Brad W. Setser and Antonio Weiss, ‘Puerto Rico: America’s Forgotten Colony’, Foreign Affairs, July/ August 2019, www.foreignaffairs.com/articles/puerto-rico/2019-06-11/americas-forgotten-colony. 4 Daniel Immerwahr, How to Hide an Empire: A History of the Greater United States (New York: Farrar, Straus and Giroux, 2019), p. 87. 5 James L. Dietz, Economic History of Puerto Rico: Institutional Change and Capitalist Development (Princeton, NJ: Princeton University Press, 1986), p. 137.

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6 Barry Bosworth and Susan Collins, ‘Economic Growth’, in The Economy of Puerto Rico: Restoring Growth, Susan M. Collins, Barry P. Bosworth, and Miguel A. Soto-Class (eds) (Washington, DC: Brookings Institute, 2006), p. 31. 7 José J. Villamil, ‘Puerto Rico 1948–1976: The Limits of Dependent Growth’ in Transnational Capital­ ism and National Development: New Perspectives on Dependence (Atlantic Highlands, NJ: Humanities Press, 1979), p. 249. 8 Jorge Duany, Blurred Borders: Transnational Migration between the Hispanic Caribbean and the United States (Chapel Hill: University of North Carolina Press, 2011), p. 51. 9 Cesar J. Ayala and Rafael Bernabe, Puerto Rico in the American Century: A History Since 1898, (Chapel Hill: University of North Carolina Press: 2007), p. 181. 10 Dietz, p. 258. 11 Bosworth and Collins, p. 31. 12 Gregory Makoff and Brad W. Setser, ‘Puerto Rico Update: PROMESA, Population Trends, Risks to the Fiscal and Economic Plan – and Now Maria’, Centre for International Governance Innovation Paper Series, 28 September 2017, www.cigionline.org/publications/puerto-rico-update-promesa­ population-trends-risks-fiscal-and-economic-plan-and-now. 13 Daniel Gros, ‘Puerto Rico and Greece: A Tale of Two Defaults in a Monetary Union’, Center for European Policy Studies, 30 June 2015, www.ceps.eu/ceps-publications/puerto-rico-and-greece­ tale-two-defaults-monetary-union. 14 Antonio Weiss, ‘Hearing on Puerto Rico: Economy, Debt, and Options for Congress’, Senate Com­ mittee on Energy and Natural Resources, 22 October 2015, www.energy.senate.gov/public/index. cfm/files/serve?File_id=E1CB62A5-657C-4A53-BE21-044A33333F53. 15 Bernard Yaros, ‘The Economics of Puerto Rico’s Post María Recovery’, Moody’s Analytics, September 2018, pp. 1–4. 16 Government of Puerto Rico, ‘Transformation and Innovation in the Wake of Devastation: An Eco­ nomic and Disaster Recovery Plan for Puerto Rico’ (San Juan: Government of Puerto Rico, August 2018), pp. 41–44. 17 Sergio M. Marxuach, Puerto Rico’s Unfinished Business after Hurricane Maria (San Juan: Center for a New Economy, October 2018), https://grupocne.org/wp-content/uploads/2018/10/CNE-Policy-Paper_­ Puerto-Ricos-Unfinished-Business-After-Hurricane-Mar%C3%ADa-.pdf. 18 Desmond Lachman, Brad W. Setser and Antonio Weiss, ‘Puerto Rico’s Debt Deal Leaves no Room for Error’, Bloomberg, 15 October 2019, www.bloomberg.com/opinion/articles/2019-10-15/puerto­ rico-s-debt-deal-leaves-no-room-for-error; Brad W. Setser, ‘Is Puerto Rico Back on a Path Toward Debt Sustainability’, Follow the Money, 30 September 2019, www.cfr.org/blog/puerto-rico-back­ path-toward-debt-sustainability; and ‘Commonwealth Plan of Adjustment,’ Financial Oversight and Management Board for Puerto Rico, September 2019, https://oversightboard.pr.gov/plan-of-adjustment/. 19 Sergio M. Marxuach, PREPA Debt Restructuring 3.0: It Is Worse Than You Think (San Juan: Center for a New Economy, May 2019), https://grupocne.org/wp-content/uploads/2019/05/PREPA-Debt­ Restructuing-3.0-FINAL.pdf. 20 Sergio M. Marxuach, The Bureaucracy of Reconstruction, 15 August 2019, https://grupocne.org/2019/ 09/15/the-bureaucracy-of-reconstruction/. 21 Mark Walker and Zolan Kanno-Youngs, ‘FEMA’s Hurricane Aid to Puerto Rico and the Virgin Islands Has Stalled’, New York Times, 27 November 2019, www.nytimes.com/2019/11/27/us/poli tics/fema-hurricane-aid-puerto-rico-virgin-islands.html. 22 Anne Kreuger, Ranjit Teja and Andrew Wolfe, ‘Puerto Rico: A Way Forward’, Government Develop­ ment Bank of Puerto Rico, 29 June 2015, www.gdb.pr.gov/documents/puertoricoawayforward.pdf. 23 Alan B. Kreuger, ‘The Effect of the Minimum Wage When It Really Bites: A Reexamination of the Evidence from Puerto Rico’, National Bureau of Economic Research, June 1994, www.nber.org/papers/ w4757. 24 ‘2019 Fiscal Plan for Puerto Rico’, Financial Oversight and Management Board for Puerto Rico, 10 May 2019, https://drive.google.com/file/d/13wuVn04–JKMEPKu-u-djZJHqTK-55aV/view.

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17 Haiti Wenche Iren Hauge

Introduction During 2018 and 2019 a series of violent demonstrations took place in Haiti. The social unrest that has characterized Haiti almost continuously since July 2018 was provoked by increases in fuel prices, the high cost of living, and corruption allegations against the government of Pre­ sident Moïse and that of his predecessor, President Martelly. The mass demonstration that took place on 4 October 2019 became known as the ‘Mobilizasyon san Limit’ (‘Unlimited Mobili­ zation’). Thereafter, the humanitarian and security situation in Haiti deteriorated, leading to the closure of hospitals, schools, government institutions, embassies and businesses.1 The severe crisis has had a detrimental effect on the precarious humanitarian situation of more than half of Haiti’s 11 million inhabitants, who in 2019 were living on less than US $2,41 per day.2 The recent events have added to the long cycle of troubles that the Haitian people have had to face since colonial times. In 1804 Haiti became the first country in Latin America to achieve independence. Haiti was colonized in 1659 by the French, who named the territory Saint-Domingue. French sover­ eignty was formally recognized by Spain in 1697. However, in exchange for French recognition of Haiti as a sovereign republic, France demanded payment of 150 million francs as compen­ sation for its loss of slaves and its slave colony. Thus, independence came at a very high price. Haiti occupies the western part of the Caribbean island of Hispaniola (the Dominican Republic occupies the remaining two-thirds) and some smaller offshore islands. It lies close to the USA. Haiti’s geographic location has strongly affected its economy. Haiti’s economic elite has tradi­ tionally maintained close ties to the USA, particularly to businessmen and actors within the International Republican Institute (IRI). The country remains important to the USA for several reasons, not least as a crucial importer of American rice. Moreover, many Haitian workers have found work on Dominican sugar and banana plantations and there has been a relatively large migration of Haitians to the Dominican Republic over a period of many decades. Between 1957 and 1986 Haiti came under the dictatorial rulership of the Duvalier family, whose actions contributed to the destruction of the Haitian economy. This prompted the intervention of international financial institutions, such as the International Monetary Fund (IMF) and the World Bank, particularly during the 1980s, and later international aid donors, as

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a series of natural disasters battered Haiti. Not only has Haiti had to confront numerous eco­ nomic challenges, the island has also suffered from chronic political instability and periodic outbursts of protests and violence. United Nations (UN) peacekeepers were sent to the country to help to restore order and strengthen its rule of law, and since 1993 eight different UN forces have been deployed in Haiti, mandated to improve security, instil the observation of human rights and initiate peacebuilding in the country.3 Controversially, the UN introduced cholera to Haiti after peacekeepers accidentally dumped infected sewage into a river during recovery efforts after an earthquake in 2010, and the country is still suffering from the after-effects. Thus, Haiti remains trapped in an endless vicious circle of exploitation by colonial powers, foreign dominance over the economy and internal inequality. However, the country’s resilient popu­ lation has never given in. This chapter will examine the numerous factors that continue to affect the Haitian economy. The chapter is divided into six sections. The section that follows looks at the structure of Haiti’s economy, how it has been shaped and influenced by external actors as well as by national politicians, and what the consequences have been for food security, economic stability and employment in the country. The third section explores the consequences of natural dis­ asters for the Haitian economy and for the presence of UN and external actors in Haiti, parti­ cularly in the wake of the 2010 earthquake, and the many hurricanes and cyclones that struck Haiti before and after the earthquake. The fourth section examines the role of the economic elite in Haiti, its members’ influence on Haiti’s economy and politics, and their links with for­ eign bodies and organizations. The fifth section describes and discusses the impact of the regional context on Haiti’s economy. Finally, the sixth section concludes the chapter.

The structure of the economy, food security and external influences Traditionally, agriculture has been an important pillar of the Haitian economy. However, its share of Haiti’s gross domestic product (GDP) decreased from 50% in 1980 to 35% in 1997.4 Agriculture’s share of GDP continued to shrink after 1997, and declined to 20% in 2017 (see Table 17.1).5 In 2015 services constituted the largest share of Haiti’s GDP (59%). However, as much as 40.2% of this was from financial services (11.62%), and trade, restaurants and hotels (28.6%).6 These are services that the large majority of the poor Haitian population is by nature excluded from enjoying. Haiti does not have a strong agricultural export sector. Most of the country’s agricultural production is for domestic consumption or is sold in rural home markets. However, in 1980 agriculture accounted for 65% of the country’s limited export earnings. By 2008 this figure had decreased to 5.6%. Up until 1986 Haiti’s policy had been to protect certain industries and local producers, including rice farmers, against external competition. At the time, taxes on trade were a major source of revenue for the Haitian state.7 Import taxes protected Haitian industries from Table 17.1 Percentage of Haiti’s GDP by economic sector

Year Agriculture Industry Services

1995

1997

2000

2005

2010

2015

2017

44 12 44

35 17 48

28 17 55

28 17 55

27 18 55

22 21 57

20 n.a. n.a.

Source: ECLAC (2018) Economic Survey of Latin America and the Caribbean 2018, Santiago: ECLAC; MEPyD (2018) Informe País Haití, Santo Domingo: MEPyD; UNDP (1998) Human Development Report, New York: Oxford University Press.

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unfair competition with foreign producers (many of which received subsidies from their own governments). During this period Haiti was largely self-sufficient in the production of rice. Even though rice was imported in modest volumes, domestic production succeeded in meeting the needs of the Haitian population.8 During the 1970s and early 1980s food prices were con­ trolled by administrative regulations and through the state’s purchase and storage of large quantities of grains in magasins de l’état. These stores could be released to wholesalers during times of shortage.9 Through these mechanisms the Haitian state therefore maintained control of the economy and could provide a certain level of food security in the country. However, this changed in the 1980s. The assembly industry has traditionally been important in Haiti. The assembly industry pro­ duces a limited range of products and in 1992 accounted for more than 50% of all exports, including electronics, clothing, sports goods and toys.10 By 2018 the assembly industry’s share of total exports had increased to 75%.11 Haiti suffers from a strong trade imbalance (see Table 17.2). The country imports much more than it exports, and this imbalance has increased over the years. Exports have marginally increased, while imports have exploded. In 2018 Haiti’s trade figures were particularly dismal, declining by 10%, mainly due to the rising cost of hydrocarbons and other commodities such as rice, chicken and wheat, which make up 75% of Haiti’s food imports from the USA. On average, the cost of these food items increased by 11% in that year.12 It is almost impossible to understand Haiti’s economy without taking a look at some of the key moments in the country’s history that have contributed strongly to shaping its economic structure and to its current dependence on imported food. The economic policies and devel­ opments of the 1980s are the main reasons for Haiti’s chronic food insecurity. During the second half of the 1970s Haiti experienced annual average growth of 5.3%, chiefly owing to an increase in public investments supported by foreign aid and a large expansion of Haiti’s export assembly industry. US investment in the assembly industry was primarily attracted by the freely determined wage structure in Haiti.13 However, growth ended in the period 1980–85 for sev­ eral reasons. The US recession in 1980–82 drastically reduced Haiti’s export market. There was also a sharp drop in earnings from coffee exports. These difficulties followed oil price increases that took effect in the previous decade and were combined with very high interest rates on foreign borrowing.14 The corruption of the Duvalier government, the virtual absence of investment in agriculture, and inefficient institutions and practices such as trade monopolies also contributed strongly to the downward economic spiral.15 In 1981 the Haitian government launched a new development plan, calling for an unprece­ dented US $1 billion in external economic assistance over the next five years. The plan was heavily criticized by aid donors as well as by the Inter-American Development Bank, the World Bank and the US Agency for International Development (USAID).16 Owing to their Table 17.2 Economic indicators

Year

2016

2017

2018

GDP annual growth rate Terms of trade annual growth rate Exports of goods and services (US $ million) Imports of goods and services (US $ million) Current account on the balance of payments (US $ million)

1.5 –6.1 1,602 4,197 –83

1.2 6.3 1,558 4,690 –246

1.4 –10 1,643 5,594 –358

Source: Official figures, ECLAC (2018) Economic Survey of Latin America and the Caribbean 2018, Santiago: ECLAC.

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disappointment with the Haitian government’s earlier lack of commitment and efforts to carry out its development plans, the international agencies now took steps that would give them greater influence over planning and implementation of the development programmes. For practical purposes the task of coordinating international aid was transferred from the Joint Commission for the Implementation of Foreign Assistance, which had coordinated international aid to Haiti up to 1981,17 to the Caribbean Group for Cooperation in Economic Development, which meets under the aegis of the World Bank. In 1981 the World Bank drafted a new medium-term economic plan for Haiti in readiness for the first meeting of an ad hoc sub-group to discuss Haiti. The plan was presented in an Economic Memorandum in 1982 and outlined an export-led development strategy for Haiti. The development strategy identified Haiti’s greatest comparative advantage to be its hard­ working and low-cost labour force.18 It also identified other advantages, including the potential diversification of Haiti’s agriculture sector, its climate, which is favourable to yearround cultivation, and its proximity to the USA. The World Bank’s strategy was to exploit Haiti’s comparative advantages by developing the export potential of its agricultural and assembly industries.19 The World Bank and USAID (which is active in Haiti) acknowledged that development based on agro-industrial and assembly exports would require a major structural transformation of the Haitian economy and society. In line with USAID’s intention to introduce crops for export, marginal hillsides that previously had been used to cultivate food for local consumption and which were suffering from soil erosion were to be planted with trees that were particularly suited to protecting the soil against further degradation and yielding export crops such as coffee or cacao. Larger tracts of flat land were to be reoriented towards the production of export crops such as fruit and vegetables that could be sold to the USA during the lean winter months. Thus, USAID proposed to shift as much as 30% of all cultivated land from food production for local consumption to the production of crops for exports.20 However, the World Bank admitted that the strategy had some limitations: Although prospects for agricultural growth do exist, they are not of the magnitude required to sustain even the existing rural population. In addition, if soil conservation and refor­ estation efforts are to succeed, rural emigration will be needed to alleviate pressure on the land.21 USAID advisers anticipated that the drastic reorientation of Haiti’s agriculture sector would cause a decline in income as well as in nutritional status, especially for small farmers and peasants, and that it would lead to migration – which it did. In 1982 USAID’s Food and Agriculture strategy team predicted that over the next decade migration to the capital, Port­ au-Prince, would continue and bring about a ‘major, perhaps massive shift in population out of agriculture’.22 However, USAID defended the strategy by arguing that employment and income possibilities would be better in urban areas and that a large migration of the country’s inhabitants offered many advantages as ‘one of the price mechanisms for moving large segments of a population out of poverty’.23 The growth of the assembly industry was expected to provide employment and to facilitate the absorption of the displaced rural population into urban Port­ au-Prince. It was also envisaged that the assembly industry would provide the necessary foreign exchange earnings to pay for imported foods that were no longer produced in Haiti.24 However, in its Country Development Strategy Statement for 1986 USAID admitted that ‘agricultural output was stagnant’ and that ‘industrial growth (which had been quite high in the 1970s (author’s comment)) had stalled in the 1980s’.25 Between 1980 and 1985 real wages in 239

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Haiti fell by 9%. GDP per capita and agricultural production per capita also declined.26 Low wages meant that workers could not afford to increase their consumption of local products. Although in 1985 the assembly sector generated more than half of the country’s industrial exports, it provided few advantages and opportunities for the Haitian economy. Few, if any, Haitian inputs, apart from cheap labour, were used in the process. Goods to be assembled were shipped from the USA, pieced together in Haiti, and shipped out of the country again. More­ over, most of the tax-free profits were not reinvested in Haiti but repatriated by US investors. The development strategy that was proposed by the World Bank and supported by the donor community in 1981 had several negative effects, particularly for Haiti’s peasants. The international aid agencies did not work directly with peasant producers but directed their resources towards large landholders and urban industrialists to establish new processing plants. Smallholder peasants had almost no access to any credit facilities at all,27 as these almost exclusively were made available to agribusiness entrepreneurs and industrialists. USAID’s strategy to persuade Haiti’s peasants to abandon food crops in favour of export crop production was to reduce the price paid for food in local markets while increasing the prices that producers received for export food crops.28 Through the US Title III food programme USAID sold and distributed freely low-cost foods worth mil­ lions of dollars in the Haitian local markets, thus further depressing the incomes of peasant pro­ ducers.29 Many peasants were unable to sustain their families by farming and increasingly migrated to Port-au-Prince and to other cities. This has also resulted in land sales, thus increasing the concentration of landholdings among the wealthier farmers and absentee landlords.30 Even today, under President Jovenel Moïse, Haiti continues to subsidize its import industry, rather than investing massively in the development of its agriculture sector. However, as can be observed above, the structural foundations for these policies were laid during the 1980s. When the former president, Jean-Claude Duvalier, fled the country in 1986, the military junta that took over was expected to undertake economic reforms and to implement a structural adjustment programme provided by the IMF and the World Bank. By 1985 the country’s foreign exchange reserves had been exhausted, and Haiti was unable to pay its foreign creditors, including the IMF and the World Bank. To enable continued repayment of the multilateral debt, further external loans were needed.31 The adjustment programme called for tax reforms, the reduction of public expenditure, privatization, the dismantling of monopolies and the strengthening of indus­ trial incentives, as well as changes in agricultural pricing. In particular, the programme called for trade liberalization.32 In accordance with the programme, all but seven out of 111 quantitative restrictions were eliminated. The remaining products represented less than 20% of imports and became subject to import licensing without formal ceilings. The general level of protection was drastically reduced and the export tax on coffee was phased out.33 US exporters benefited from the new economic policies, especially the removal of trade bar­ riers on imports. The value of agricultural exports to Haiti from the USA increased from US $44 million in 1986 to $93 million in 1989.34 The Haitian economy, on the other hand, remained depressed. Economic growth from 1986–87 averaged slightly less than 1% per annum.35 Food production fell. Minimum wages fell even further, decreasing by 45% between 1985 and 1990. The value of exports also dropped due to declines in international prices of coffee.36 As the Haitian markets were liberalized and protective tariffs greatly reduced, rice imports from the USA immediately shot up from 7,400 metric tonnes in 1980–82 to 74,200 tonnes in 1986–88 before reaching 109,200 tonnes in 1990.37 This was a heavy blow to the rice farmers in the Artibonite region of Haiti. The US corporation, Erly Rice, held a virtual monopoly on rice imports to Haiti and imported 40%–50% of the rice consumed in Haiti. Owing to subsidies to US producers and exporters, the Rice Corporation of Haiti, which is a subsidiary of Erly

240

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Rice in Haiti, was able to sell its rice for significantly less than that produced locally. The company was the biggest processor and marketer of rice in Haiti.38 In a report prepared for USAID in 1987, aid donors to Haiti were warned that the liber­ alization of imports would have a detrimental effect on Haiti’s rice producers. The authors estimated that if the rice quotas were lifted in an effort to reduce smuggling and increase Haiti’s imports, this would reduce the income of rice-growing peasants in the Artibonite region by some US $15 million per annum.39 Haiti’s economy actually never fully recovered after the economic liberalization period in the 1980s. The country’s ability to provide food security for its citizens had become permanently weakened. Haiti became gradually more dependent on imported food, particularly staple foods. With increasing world market prices on imported food like rice, one crisis after another has followed in Haiti, with hungry and poor protesters marching in the streets. In April 2008 international rice prices rose by almost 40%. This dramatic rise in the price of rice led to widespread food riots in the country. Most of Haiti’s rice is imported from the USA. Rice and wheat account for one-third of the Hai­ tian population’s calorie intake. A report by the US Department of Commerce illustrates Haiti’s dependence on rice imports from the USA: Rice is staple food for a majority of Haitians. Although previously self-sufficient in this area, eighty percent of rice now consumed in Haiti is imported. The U.S. is especially competitive in medium quality (10 to 20 percent broken) milled rice and in best quality (2 percent) broken rice. The total amount of rice imported was valued at $196 million in 2016, which represented a 0.48 percent increase over 2015. Of that amount, $190 million of the imported rice came from the U.S. … The U.S. remains Haiti’s largest supplier for wheat, sorghum and millet as well as rice, while the Dominican Republic has become Haiti’s largest corn provider.40

Natural disasters and the environment The Haitian economy and the food security situation in the country has been worsened by a series of natural disasters. Haiti is a small island developing state, and such countries are parti­ cularly vulnerable to the impact of climate change, including water shortages, reduced food production, increased storm intensity and rising sea levels. Maplecroft’s 2014 Climate Change and Environmental Risk Atlas ranks Haiti in fourth place globally in terms of vulnerability to impact from climatic events.41 Poverty, low agricultural production, environmental depletion and limited national capacity to respond to crises have made Haiti especially exposed to natural disasters. According to the World Food Programme (WFP), ‘Even in the case of moderate shocks, there is often the need for WFP to respond’.42 In 2008 no fewer than four major hur­ ricanes (Ike, Fay, Hanna and Gustav) struck the country within a period of 30 days, resulting in devastating damage, and displacing some 800,000 people.43 Haiti straddles several geological fault lines; one of these resulted in the devastating earthquake that shook Port-au-Prince, Léo­ gâne, Jacmel and Petit Goâve on 12 January 2010. The earthquake caused more than 220,000 deaths, with long-term effects that have persisted. It resulted in an estimated US $7.8 billion in damage. Since then, Haiti has faced other disasters, such as the drought in 2015, Hurricane Matthew (a Category 4 storm) in October 2016 – which hit the southern part of the island especially hard – and two major hurricanes in September 2017 – Irma and Maria (Categories 5 and 4, respectively) – that passed north of Haiti.44 These disasters have resulted in a series of food shortages and emergencies. The disasters have exacerbated the structurally based problem that Haiti has been struggling with for a long time. 241

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Among international aid agencies and donors there has been little awareness of Haiti’s need to implement structural changes to improve food security. Hurricane Matthew serves as a per­ tinent example of this. The hurricane struck Haiti on 4 October 2016 with violent winds and heavy rainfall, causing widespread damage in the south-west part of the country. The four most affected departments were Grande-Anse, Sud, Sud-Est and Nippes.45 Hurricane Matthew caused damage to crops, livestock and fisheries, as well as to rural infrastructure such as mar­ ketplaces and irrigation systems. In the worst affected areas, up to 100% of the crops were damaged or destroyed; pastures used for livestock grazing were also affected.46 Subsistence agriculture, the primary food source for most Haitians, was hit particularly hard. The hurricane aggravated the effects of the 2015 drought, and the combined effects of these disasters further reduced the inhabitants’ ability to purchase food to feed their families or the agricultural inputs needed to resume production. Less than a week after the passage of Hurricane Matthew, the UN Office for the Coordi­ nation of Humanitarian Affairs launched an emergency appeal for relief aid of US $120 million. Some $60 million (50%) of the total aid requirements concerned food security, nutrition and emergency agriculture sector.47 However, most of these funds, $46 million, went on short-term food assistance through the WFP, leaving only approximately $9 million for the restoration of rural productive capacity. Moreover, some 85% of the requested funding was for the use of UN agencies, while the remaining 15% was overwhelmingly allocated to large foreign non-gov­ ernmental organizations such as CARE and Save the Children. Haitian institutions and orga­ nizations appear to have had an extremely limited role in the appeal.48 On the whole, the actual contribution to restoring rural productive capacity and to statebuilding, and to exercising con­ trol over the assistance seems to have been quite limited. In addition, although post-disaster agricultural planning has sought to expand production for both the export and domestic markets, this has been done either by displacing smallholders with larger consolidated farms or through a strengthened commercial orientation and input intensity of peasant production.49 There has been little understanding of the role of subsistence agri­ culture and its contribution to food security.

The economic elite In 2017 Haiti ranked 168th out of 189 countries and territories on the UN Development Programme’s Human Development Index (HDI), which put the country in the low human development category. As shown in Table 17.3, when adjusted for inequality, in that year Haiti’s HDI value fell from 0.498 to 0.304 – i.e. by seven places in the HDI rankings. According to the World Bank, inequality in Haiti is the highest in the region, with a Gini coefficient (a statistical measure of distribution often used as a gauge of economic inequality) of 0.61, which has been constant since 2001.50 However, the Dominican Republic’s Ministry of the Economy, Planning and Development reported a Gini coefficient of 0.64 in 2012, reflect­ ing a further decrease in living standards after the earthquake in Haiti that year.51 According to the latest available annual measure, the Gini coefficient for Haiti was 0.59 in 2013.52 In Haiti, there is also a rural-urban cleavage, as rural poverty in general is considerably higher than urban Table 17.3 Haiti inequality measures, 2017

HDI

Inequality adjusted HDI55

Overall loss56

Difference in HDI rank57

0.498

0.304

39.0

–7

Source: UNDP.58

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Haiti

poverty. In 2012 as much as 38% of the rural population was poor, compared to 12% of the urban population.53 Government allocations for health and education in Haiti remains at a low level and has even decreased from the 2012–13 level of 2.9% of GDP, to 2.6% of GDP in 2018.54 For the average Haitian, achieving economic mobility is almost impossible. According to the World Bank: Though publicly available information on privately held businesses is limited, many of the same families who dominated the Haitian economy during the era of Duvalier in the 1970s and the 1980s seem to remain in control of large segments of the economy today, resulting in high concentration in a number of key industries, distorted competition, and non­ transparent business practices in many instances. Several of the most important food pro­ ducts in the Haitian consumption basket are sold in concentrated markets, and a pre­ liminary analysis indicates that the prices of these products are on average about 30% to 60% higher in Haiti than in other countries from the region.59 The monopoly over essential foodstuffs exercised by a few extremely rich and powerful families and individuals is a key factor in the tendency of the economic elite to perpetuate themselves in power and persist across time. Some of the most important figures are Gregory Brandt, Clifford Apaid, Marc-Antoine Acra, Reuven Bigio, Fritz Mevs and Michael Madsen. Following the election of former businessman Jovenel Moïse to the presidency in 2016, Haiti’s economic elite has firmly consolidated its power once again. Michel Martelly of the Parti Haïtien Tèt Kale (PHTK) was President of Haiti between 2011 and 2016 and selected Moïse as his successor. Moïse’s company, Agritrans, operates a banana plantation in Trou-du-Nord. This enterprise was set up with government financing under Martelly’s administration. During the presidential election campaign Moïse branded himself as the ‘Banana Man’, and pledged to revitalize Haiti’s agriculture. The election process in 2015/16 was long drawn-out, and took its toll on the less wellfunded parties, whereas the consolidation of private sector funding behind the PHTK, estab­ lished by former President Martelly, certainly helped this party to benefit from the time avail­ able to conduct campaigning and build support. Moïse’s campaign had been financed by the business community and by the same Spanish firm, Ostos, Sola & Asociados, that had helped Martelly to win the presidential election in 2010.60 Relations between the Haitian economic elite and the USA are deeply entrenched, particu­ larly through the IRI. Most of those constituting the so-called civil society group in 2004, which called itself the ‘Group of 184’ and at that time advocated for the ouster of President Jean Bertrand Aristide, have now become political allies or financiers of PHTK. When ‘Convergence Démocratique’ was established in 2000, and ‘the Group of 184’ in 2004, this platform became the basis of political work for the economic elite in Haiti. These organizations enjoyed strong economic and political support from the IRI.61 Some critics even purport that the ‘Convergence Démocratique’ had been crafted by the IRI.62 When Aristide was re-inaugurated as president in February 2001, leading figures from the ‘Convergence Démocratique’ openly called for a US invasion of Haiti, to oust Aristide and reinstate the dis­ banded Haitian army.63 As this did not happen, representatives from the same group later declared to the Washington Post that ‘the CIA should train and equip Haitian officers exiled in neighboring Dominican Republic so they could stage a comeback themselves’.64 The support that the economic elite in Haiti enjoyed from the USA prior to the 1991 coup against Aristide had been highlighted by US Congressman Walter Fauntroy already in 1989. Fauntroy, a Democrat who chaired a US Congressional Task Force on Haiti, wrote a letter to 243

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President H. W. Bush in which he identified the most powerful families in Haiti and denounced them and their alliances within the US apparatus. Fauntroy called these families ‘economic barons’ and argued that they ‘constitute the brains and wealth behind the unrest and anti-democratic agitation carried out by thugs at their service’.65 Fauntroy singled out five families – the Brandts, the Mevs, the Accra, the Bigios and the Behrmans – as the ‘major players in blocking change in Haiti’. In the past these families gave financial support to General Henry Namphy.66 Of the five, the Brandts and the Mevs are the most powerful.67 The current and former presidents of Haiti, and their respective governments, have also been accused of corruption. In November 2017 a Special Haitian Senate Commission issued a 656-page report on the management of US $2 billion loan received by Haiti as part of Venezuela’s dis­ counted PetroCaribe oil programme. The investigation accused 15 former government officials, including the two former prime ministers Jean-Max-Bellerive and Laurent Lamothe, and President Jovenel Moïse’s chief of staff, of corruption and poor management.68 In May 2019 Haiti’s Supreme Court of Auditors and Administrative Disputes issued a report in which it alleged that the Martelly administration had contracted a company led by Moïse to carry out infrastructure projects. However, these projects were never completed. Moïse denied these allegations.69 Then, on 19 June 2019 the Organization of American States (OAS), at the request of the Haitian government, despatched a high-level delegation to Haiti with a view to facilitating dialogue in the conflict-ridden country. However, the delegation also proposed to establish an OAS-sanctioned commission of international experts to help the Haitian government auditors to investigate and establish how much money had been stolen from the PetroCaribe fund and who should be prosecuted for this. Moïse reportedly agreed to this proposal from OAS.70

The regional context and the Haitian economy Remittances are important for the survival and consumption of many poor Haitians, and in general for the Haitian economy. Table 17.4 below reveals that the inflow of personal remit­ tances constitutes a relatively high percentage of GDP, particularly during the period 2017–18. Following the earthquake that struck Haiti in 2010, the US government granted Temporary Protected Status (TPS) for 18 months to Haitians living in the USA at the time of the earth­ quake.71 Haitians arriving in the USA up to one year after the earthquake were later also included in the arrangement. The TPS arrangement was extended several times until the US Department of Homeland Security announced that TPS for Haitians would cease permanently on 22 July 2019.72 However, in October 2018 a US district court issued a preliminary injunc­ tion that blocked the implementation and enforcement of the order. In April 2019 another district court did the same. The TPS arrangement for Haiti therefore remains in effect pending further court orders. At the end of 2019 there were an estimated 56,209 Haitians living in the USA under the TPS arrangement.73 Should it be terminated, and the Haitians returned to their homeland, it would not only represent a blow to these individuals and their families, but also to the Haitian economy in general. In 2017 GDP growth in Haiti declined to 1.2%, compared with an average of 2.2% from 2014–17; there was almost no growth in per capita income Table 17.4 Personal remittances received (% of GDP) in Haiti

Year

2005

2010

2015

2017

2018

% of GDP

22.88

22.25

25.17

32.37

32.54

Source: World Bank (2019) ‘Personal Remittances Received (% of GDP) – Haiti’, http://data.worldbank.org/indicator/BX. TRF.PWKR.DT.GD.ZS?locations=HT.

244

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during the same period.74 The main driver of growth was consumption supported by a significant rise in remittances, which stood at 32.54% of GDP in 2018 (see Table 17.4).75 Another country in the Caribbean region which has been important for poor Haitians and for the Haitian economy in general, is the Dominican Republic. For decades Haitians have crossed the border to work on sugar plantations in the Dominican Republic, and many Haitians have also migrated there. However, the relationship between the two countries has often been tense, and in 2013 a Dominican Republic court ruling stripped Dominicans of Haitian descent of their citizen­ ship as the court ruling was applied retrospectively to 1929, essentially rendering them stateless. Following the court ruling, the government of the Dominican Republic established a ‘regulariza­ tion of foreigners’ plan in 2013. This plan required all foreigners, whether immigrants or descen­ dants of immigrants born between 1927 and 2007, to register. After this they were promised that they could obtain temporary residence or possibly confirm their eligibility for naturalization. However, thousands of people had difficulty obtaining the necessary documents that could prove they were born in the Dominican Republic. The reason for this was that Dominican Republic officials have denied birth certificates to many Dominican-born people of Haitian descent. A deadline of June 2015 was set for the registration, and after this date the Dominican Republic government authorized its officials to expel forcibly persons of Haitian descent who lacked the new documentation. Thus, according to the International Organization for Migration, between July 2015 and September 2017 58,271 people were officially deported and another 37,942 claimed to have been deported .76 This has not gone unnoticed. In April 2019 the Inter-American Com­ mission on Human Rights found that the Dominican Republic had not complied with the court ruling over the past four years, thus affecting the rights of Haitian-descended people seeking Dominican Republic nationality.77 The deportations also most likely have had serious economic effects, although these are difficult to measure.

Conclusion This chapter has demonstrated that the Haitian economy and the majority of poor Haitians are trapped in a vicious circle of inequality, an unhealthy economic structure, dependence on imports of crucial food staples and fuel, a corrupt economic elite that has ensured that it remains in power, and a lack of access to essential public welfare services such as education and health. This situation has led to frequent uprisings and demonstrations, paralysing the functioning of society at many levels and having strong negative effects on the economy and the humanitarian situation. The roots of Haiti’s problems can be traced back to the time of the country’s independence and the so-called debt that France forced Haiti to pay for the loss of slaves and its slave colony causing Haiti to ‘service this debt’ for almost one and a half centuries afterwards. However, in more recent times the structural adjustment policies of the 1980s made the greatest contribution to destroying Haiti’s ability to produce its own food because of the lowering of tariffs and the removal of almost all import quotas, leading to an influx of US rice at dumping prices. Haiti has never recovered from the damage inflicted on its economic structure during this period. It led to large numbers of Haitian peasants leaving the agricultural sector and migrating to Port­ au-Prince in search of alternative employment, eventually settling in the shanty towns where most of the current political unrest and violence is taking place. Ever since the destruction of Haiti’s food production during the 1980s, the country has experienced a series of food riots. Haiti is also highly dependent on oil imports. For some time the country benefited from a very generous import agreement through PetroCaribe. However, owing to the escalation of troubles in Venezuela, this has come to an end. Moreover, the governments under the two most recent presidents, Martelly and Moïse, have been accused of embezzeling money from the 245

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PetroCaribe fund. Now Haiti is importing more expensive oil from the USA, thus also increasing its dependency on all kinds of imports from the USA. A small economic elite controls the political power and the economic policies of Haiti. Despite the precarious situation that Haitians live in following a series of natural disasters, this elite has done almost nothing to improve the lives of poor and marginalized Haitians. As explained in this chapter, both of the governments led by Presidents Michel Martelly and Jovenel Moïse have been accused of corruption. Haitians’ frustration with corrupted govern­ ments and with the international actors that support them, have led to almost chronic political instability. This has negatively affected the economy and the governability of Haiti. Some issues will be of key importance for Haiti’s future political stability, and hence also for its economic development and the possibility of achieving a decent level of welfare for its citizens. The first is food security and the need to increase the agricultural production of food for domestic consumption. Second, a redistribution of wealth is essential, not only for humanitarian and welfare reasons, but also to achieve a level of political stability in the country. Third, given the island’s vulnerability to the impact of climate change, disaster preparedness is essential. Finally, a juridical process against the politicians who have been accused of corruption is necessary if politicians are to have any credibility in the eyes of ordinary Haitians. Voter turnout in Haiti during the most recent elections in 2019 were extremely low. Finally, international actors should cease to support the elitist corrupt politicians in Haiti and carry out a serious analysis of economic and political power there, paying attention as to why poor Haitians continue to hold protests in the streets.

Notes 1 International Federation of Red Cross and Red Crescent Societies (IFRC) (2019) ‘Haiti: Civil Unrest’ Information Bulletin no. 2, p. 2, https://reliefweb.int/report/haiti/haiti-civil-unrest-information­ bulletin-no-2. 2 Ibid. p. 3. 3 UN Security Council, Resolution 2350 (2017), 13 April, S/RES/2350 (2017). 4 Jean-Germain Gros (2010) ‘Indigestible Recipe: Rice, Chicken Wings, and International Financial Institutions: or Hunger Politics in Haiti’, Journal of Black Studies, 40(5), 974–86; United Nations Devel­ opment Programme (UNDP) (1998) Human Development Report, New York: Oxford University Press; Ministerio de Economía, Planificación y Desarollo (MEPyD) de la Republica Dominicana (2018) Informe País Haití, Unidad de Estudios de Políticas Económicas y Sociales del Caribe (CUPESC), Santo Dom­ ingo: MEPyD, http://economia.gob.do/despacho/unidad-de-estudios-de-politicas-economicas-y-sociales­ del-caribe-uepesc/serie-informe-pais-republica-dominicana-y-el-caribe/. 5 Economic Commission for Latin America and the Caribbean (ECLAC) (2018) Economic Survey of Latin America and the Caribbean 2018, Santiago: ECLAC, https://repositorio.cepal.org/bitstream/handle/ 11362/44327/101/BPI2018_Haiti_en.pdf 6 MEPyD, Informe País Haití. The information from the MEPyD is elaborated with data from CEPAL and the Banco de la Republica de Haití. 7 Gros, ‘Indigestible Recipe’. 8 Marylynn Steckley and Tony Weis (2017) ‘Agriculture in and beyond the Haitian Catastrophe’, Third World Quarterly, 38(2), 397–413. 9 Gros. 10 World Bank (1992) Trends in Developing Economies 1992, Washington, DC: Oxford University Press. 11 ECLAC, Economic Survey of Latin America and the Caribbean 2018, p. 2. 12 Ibid. 13 World Bank, Trends in Developing Economies 1992. 14 Mark Weisbrot (1997) ‘Structural Adjustment in Haiti’, Monthly Review, 48(8), January, pp. 25–39. 15 World Bank. 16 Josh De Wind and David H. Kinley III (1988), Aiding Migration: The Impact of International Development Assistance on Haiti, published in co-operation with the Immigration Research Program, Center for Social Sciences, Columbia University, Boulder, CO and London: Westview Press, p. 55. 246

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17 De Wind and Kinley, Aiding Migration, p. 56. 18 World Bank (1982) Economic Memorandum on Haiti, May 25, 1982, Report No. 3931-HA, Washing­ ton, DC: World Bank, p. 40. Cited in De Wind and Kinley, Aiding Migration; United States Agency for International Development (USAID) (1982b), Food and Agriculture Sector Strategy for Haiti, Final Report. Port-au-Prince. Cited in De Wind and Kinley, p. 122. 19 World Bank (1983) Country Program Paper, Haiti (Review draft), 20 May 1983, Washington, DC: World Bank, p. 5. 20 USAID (1982a) Country Development Strategy Statement, Haiti FY 1984, Washington, DC: USAID, p. 172. 21 World Bank, Country Program Paper, Haiti, p. 5. 22 USAID, Food and Agriculture Sector Strategy for Haiti, p. 173. 23 Ibid., p. 171. 24 De Wind and Kinley, p. 59. 25 Ibid., p. 74. 26 World Bank (1987) Haiti: Public Expenditure Review, Washington, DC: World Bank, p. 1. 27 USAID describes the semi-autonomous Bureau of Agricultural Credit as ‘the only formal credit channel to the poorest of the rural poor (see USAID, Country Development Strategy Statement, Haiti FY 1984, p. 37). 28 De Wind and Kinley, p. 98. 29 Ibid., pp. 98–100. 30 Ibid., p. 76. 31 World Bank, Trends in Developing Economies 1992. 32 Ibid. 33 Ibid. 34 Nydia Suarez (1994) ‘Agricultural Exports Under Public Law 480’, USDA Statistical Bulletin, no. 876, February. 35 World Bank, Trends in Developing Economies 1992. 36 John Canham-Clyne (1994) ‘U.S. Policy on Haiti: Selling out Democracy’, Covert Action, 48, Spring, pp. 4–6. 37 World Bank (1998) Haiti: The Challenges of Poverty Reduction, report no. 17242-HA, vol. II, Technical Papers: Poverty Reduction and Economic Management Unit and Caribbean Country Management Unit, Latin America and the Caribbean Region, p. 11. 38 American Rice Inc. (1994) Annual Report, FY 1994, Houston, TX: American Rice. 39 USAID (1987) Haiti: Agriculture Sector Assessment, prepared for USAID by Ronco Consulting Cor­ poration, November 1987. 40 US Department of Commerce (2017) ‘Haiti Agricultural Sector’, Haiti Country Commercial Guide, 26 June 2017, Washington, DC: US Department of Commerce, p. 1, www.export.gov/article?id=AgriculturalSector. 41 This is calculated as the product of Haiti’s exposure to climate-related events, the health of the population, educational status and the country’s overall adaptive capacity. Maplecroft Global Risk Analytics (2014) Climate Change and Environmental Risk Atlas 2014, Bath: Maplecroft. 42 World Food Programme (WFP) (2016) ‘WFP Haiti Country Brief’, November, p. 2, www.wfp.org/ countries/haiti. 43 UNICEF (2009) ‘Haiti Prepares for Another Hurricane Season’, 8 September, www.unicef.org/info bycountry/haiti_51083.html. 44 WFP, ‘WFP Haiti Country Brief’; Food and Agriculture Organization of the United Nations (FAO) (2017) Haiti: Hurricane Matthew, Situation Report, 16 March, www.fao.org/emergencies/resources/ documents/resources-detail/en/c/852828/. 45 FAO, Haiti: Hurricane Matthew, Situation Report. 46 Ibid., p. 2. 47 Jake Johnston (2016) ‘OCHA’s Flash Appeal for Haiti: Reinforcing Failed Aid Modalities’, 28 October, p. 3, http://CEPR.net/blogs/haiti-relief-and-reconstruction-watch. 48 Ibid., p. 2. 49 Steckley and Weis, Agriculture in and beyond the Haitian Catastrophe’. 50 World Bank (2014) Poverty and Inclusion in Haiti: Social Gains at Timid Pace, report no. 89522, http:// documents.worldbank.org/curated/en/643771468257721618/Poverty-and-inclusion-in-Haiti-social­ gains-at-timid-pace. 51 The MEPyD (see Informe País Haití) elaborated its figures on the basis of a survey on living conditions in Haiti in 2012.

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Wenche Iren Hauge 52 UNDP (2018) Human Development Indices and Indicators: 2018 Statistical Update, New York: UNDP, http://hdr.undp.org/en/content/human-development-indices-indicators-2018-statistical-update. 53 World Bank, Poverty and Inclusion in Haiti. 54 World Bank (2018b) International Development Association Program Document for a Proposed Grant in the Amount of SDR 14.3 Million to the Republic of Haiti for a Fiscal and Social Resilience Development Policy Financing, report no. 129435-HT, http://documents.worldbank.org/curated/en/947711537213968669/Haiti-Fiscal-and­ Social-Resilience-Development-Policy-Financing-Project. 55 Inequality adjusted HDI: ‘HDI value adjusted for inequalities in the three basic dimensions of human development – a long and healthy life, knowledge and a decent standard of living’ (see UNDP, Human Development Indices and Indicators: 2018 Statistical Update, p. 33). 56 Ibid. Overall loss: Percentage difference between the IHDI value and the HDI value. 57 Ibid. Difference in HDI rank: Difference in ranks on the IDHI and the HDI, calculated only for countries for which an IHDI value is calculated. 58 Ibid. 59 World Bank (2015) Haiti: Towards a New Narrative: Systematic Country Diagnostic, Washington, DC: Latin America and Caribbean Region, World Bank, p. xi. 60 Jacqueline Charles (2016) ‘Banana farmer wins Haiti presidency, according to preliminary results’, Miami Herald, 28 November, www.miamiherald.com/news/nation-world/Americas/Haiti/article117626878html. 61 Wenche Iren Hauge (2018) Haiti: A Political Economy Analysis, report commissioned by the Norwegian Ministry of Foreign Affairs, Oslo: Norwegian Institute of Foreign Affairs (NUPI) and Peace Research Institute Oslo (PRIO), p. 10. 62 Alex Dupuy (2005) ‘From Jean Betrand Aristide to Gerard Latortue: The Unending Crisis of Demo­ cratization in Haiti’, Journal of Latin American Anthropology, 10(1), 186–205. 63 Peter Hallward (2007) Damming the Flood: Haiti and the Politics of Containment, London: Verso. 64 Edward Cody (2001) ‘Haiti Torn by Hope and Hatred as Aristide Returns to Power’, Washington Post, 2 February, https://washingtonpost.com/archive/politics/2001/02/02haiti-torn-by-hope-and-hatred-as­ aristide-returns-to-power. 65 Walter E. Fauntroy (1994) (1989) ‘Haiti’s Economic Barons: Memo from Congressman Walter E. Fauntroy’, in James Ridgeway (ed.), The Haiti Files: Decoding the Crisis, Washington, DC: Essential Books/Azul Editions, pp. 35–40. 66 Lieutenant General Henry Namphy was Provisional President of Haiti from 19 June 1988 to 18 Sep­ tember 1988 (Laguerre (1993) The Military and Society in Haiti, Knoxville: University of Tennessee). Fauntroy, ‘Haiti’s Economic Barons’, p. 36. 67 James Ridgeway (1994) The Haiti Files: Decoding the Crisis, Washington, DC: Essential Books/Azul Editions. 68 Sénat de la République de Haïti (2017) Rapport Final de la Commissión Sénatale Speciale d’Enquete sur les fonds PetroCaribe couvrant les periodes annuelles allaint de Septembre 2008 à Septembre 2016, October, Port­ au-Prince: Sénat de la République. 69 Maureen Taft-Morales (2019) Haiti’s Political and Economic Conditions, Congressional Research Service (CRS) Report, https://fas.org/sgp/crs/row/R45034.pdf. 70 Ibid. 71 The TPS provides temporary lawful status to foreign nationals in the USA from countries experiencing armed conflict, natural disaster, or extraordinary circumstances preventing their safe return (see TaftMorales Haiti’s Political and Economic Conditions, p. 12). 72 Taft-Morales, Haiti’s Political and Economic Conditions. 73 Ibid. 74 World Bank (2018) International Development Association, International Finance Corporation and Multilateral Investment Guarantee Agency: Performance and Learning Review of the Country Partnership Strat­ egy for the Republic of Haiti for the Period FY16-FY19, report no. 124812-HT, p. 4, http://documents. worldbank.org/curated/en/167021530329615895/pdf/Haiti-PLR-06062018.pdf. 75 Ibid. 76 International Organization for Migration (IOM) (2017) ‘Haiti 2018: Humanitarian Compendium’, 28 September, https://humanitariancompendium.iom.int/appeals/haiti-2018. 77 Economic Intelligence Unit (2019) Country Report: Haiti, 24 June 2019, London: EIU.

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18 The Cuban economy Socialist stagnation with Caribbean characteristics Richard E. Feinberg

The Cuban economy shares many characteristics with its Caribbean neighbours. As the largest of the islands that make up the Greater Antilles archipelago, Cuba’s physical footprint and human population surpass those of most Caribbean nations. Yet Cuba’s 11.2 million population and annual gross domestic product (GDP) of some US $100 billion are tiny specks in the vast global system in which Cuba struggles to survive. Smallness is not necessarily a roadblock to development, as successful countries as diverse as Singapore, Estonia and Uruguay demonstrate, but small economies typically struggle under the constraints of a narrow resource base and diminutive market size. Moreover, like other Caribbean nations, Cuba suffers from energy insecurity, recurrent natural disasters and disruptive climate change. Typical of many Caribbean entities, many educated Cubans seek their fortunes off-island in deeper employment markets offering wider opportunities. Proximity to the USA, with its massive markets and technological dynamism, is a driver of economic expansion for many Caribbean Basin nations. The USA offers preferential market access through the Dominican Republic-Central America Free Trade Agreement (CAFTA­ DR) and to other regional economies through the Caribbean Basin Initiative. However, the USA has imposed comprehensive economic sanctions intended to drive a wedge between the USA and Cuba and, albeit with weaker results, to impede Cuban interchange with the rest of the world. Since the 1959 revolution Cuba has set off on a separate path, adopting a model of highly centralized socialism, placing the means of production in the hands of the state. Government officials and the hegemonic Cuban Communist Party decide on resource allocation, sidelining market mechanisms. Especially in the early decades, Cuba had notable success in extending universal access to quality health care and to K-9 education. The equalization of income and wealth meant that resources were shared with previously neglected neighbourhoods and regions. Racial and gender divisions were diminished if not erased. Overall, the socialist model privileged collective consumption and public goods over private consumption items whose availability was restricted even in the ‘golden years’ of the 1980s. When the large subsidies provided by the Soviet Union were suddenly cancelled in the early 1990s, the Cuban economy fell into a tailspin, with output declining by 35% over a period of 249

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three years. The island economy has still not fully recovered from the traumatic collapse of its great power patron. But Fidel Castro clung to his model of state control, permitting just those minimum reforms necessary to earn some foreign exchange and keep the economy afloat. When an ailing Castro handed the baton to his younger brother Raul in 2008, it appeared as though Cuba might finally be moving forward towards a post-Soviet process of comprehensive economic reform. In 2011 the Sixth Congress of the Communist Party of Cuba (PCC) published a lengthy document containing 313 points entitled ‘Guidelines of the Economic and Social Policy of the Party and the Revolution’ (known as the Lineamientos).1 A bureaucratic compromise, the document was laced with contradictions. The lengthy text affirmed the primacy of central planning and state ownership but also advocated for many characteristics of market socialism as practised in Vietnam and China with such stunning results. Promising initiatives authorized the emergence of a private sector of small-scale businesses and proclaimed a wider opening to for­ eign investment and international tourism. However, in 2017–18, to the chagrin of reform advocates, conservative factions in the gov­ ernment and the PCC regained ascendency and froze the reform process, even reversing some measures. In 2018 Raul Castro, while expected to remain in post as the first secretary of the PCC until 2021, handed over the presidency to Miguel Díaz-Canel. Early in his tenure, the career PCC politician emphasized policy continuity and showed little inclination to risk new measures. Rather, the government has devoted itself to managing a gruelling austerity, reserving scarce foreign exchange to import the essential foodstuffs and energy that the economy is failing to produce on its own. One bright spot had been international tourism; however, renewed US sanctions, including the cancellation of cruise ships and reductions in airline flights, caused international tourist arrivals to decline in 2019.2 Since 2016 the Cuban economy has stalled and the outlook has become increasingly grim (Figure 18.1). Cuban authorities asserted that the economic malaise would not be as severe as the deep depression of the early 1990s. Yet so far the government of

Figure 18.1 GDP growth (% change) 2010–20 Note: The value for 2019 is a government estimate and the value for 2020 is a government forecast. Source: ‘Anuario Estadístico de Cuba’ (Havana: Oficina Nacional de Estadística e Información (ONEI), various issues), Table 5.1. 250

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Diáz-Canel has offered the long-suffering population little in the way of a strategic vision that might light the way towards a brighter future.

The triumph of the Revolution: social justice In his famous 1953 court oration, ‘History Will Absolve Me!’, Fidel Castro promised the Cuban people a more equitable development model: The problems of the land, of industrialization, of housing, of unemployment, the problems of education and of the people’s health: these are the six problems we would take immediate steps to resolve, along with the restoration of civil liberties and political democracy.3 Cuban politics soon veered away from the promised pluralistic democracy, but the Revolution did invest heavily in social services. The national ministries of health and of education delivered free universal access to their services, constructing health clinics and public schools throughout the island. Although some of the earlier gains have eroded since 1990, the results remain impressive. Adult literacy is virtually universal, mean schooling is 11.8 years and expected years of schooling is 14.4. The child mortality rate is low, at four per 1,000 births, maternal mortality per 100,000 births is under 40, and life expectancy averages 79 years.4 The following factors are indicative of Cuba’s determination to invest in human capital: in Cuba there are 82 physicians per 10,000 persons, compared to a scarcer 26 physicians per 10,000 persons in the USA; and in Cuba the pupil/teacher ratio in primary schools is 9:1, compared to the less favourable 14:1 in the USA.5 Cuba continues to score relatively well in global rankings of social indicators. According to the United Nations Development Programme (UNDP) Human Development Index (HDI), which measures progress in health, education and access to utilities, Cuba ranks 72 out of 189 nations (Figure 18.2). Within the western hemisphere, Cuba lags behind Chile, Uruguay and Costa Rica (although not by much), while surpassing such Caribbean neighbours as the Dominican Republic, Jamaica and impoverished Haiti as well as the northern tier of Central

Figure 18.2 HDI 2019: rankings for Latin American and Caribbean nations Source: UNDP, HDI Report 2019. 251

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America and Nicaragua. Cuba achieved many of the UN’s Sustainable Development Goals decades ago. There has also been progress in gender and racial equity, although just how much remains a subject of intense debate, in the absence of comprehensive official statistics and few independent expert studies. Uniquely, the Cuban government does not publish quantitative indices of dis­ tributions of income and wealth, nor does it encourage scholars to undertake their own field surveys. Certainly, female educational levels and labour force participation rates have increased markedly. The racial complexion of the island has changed dramatically since 1959; returning exiles often comment on the much higher proportion of Afro-Cubans in Havana, the result of the emigration of middle-class white people and the internal migration of Afro-Cubans from the eastern provinces to the capital. Not readily captured by quantitative data are these indica­ tors of educational quality and social inclusion, of subjective ‘dignity’ and pride in national identity: many Cubans now speak articulately in full sentences, even in paragraphs, and look each other directly in the eye, regardless of status. In sharp contrast to the rest of the Caribbean and Central America, another gain of the Cuban Revolution is the relatively low rate of common crime and transnational organized criminal activity (the Cuban government does not publish crime statistics). It is safe to walk just about anywhere in Cuba, even at night. We can speculate as to the various causes of this feli­ citous reality: a wide if shallow social safety net; low unemployment; relatively equal distribu­ tions of income and wealth (although statistics are few); a culture of social solidarity (even if it is fraying); strict prohibitions on firearms; ubiquitous surveillance systems; and tough sentences for many crimes.

The legacy of central planning In 1961 Fidel Castro publicly proclaimed himself to be a Marxist-Leninist. He relied heavily on the Soviet Union for economic assistance as well as for a security guarantee. Cuba adopted an economic model that was integrated into the Soviet-dominated Council for Mutual Economic Assistance (COMECON) system. Central planners designed detailed five-year and one-year plans that assigned resources according to material balances. Monetary variables were assigned passive secondary roles. Government planners negotiated with managers of state-owned enter­ prises to set input allocations and output goals. Those non-state actors that survived waves of expropriation were subject to detailed, restrictive government regulations. According to a leading Cuban economist at the University of Havana, the multiple defi­ ciencies of Soviet-style central planning as practised in Cuba had the following effects: [T]he vertical transmission and administration of signals inhibited horizontal relations among productive entities, fomenting inefficiency and the underutilization of productive capacities … [combined with] high discretion at the hour of assigning resources, which produced a lack of transparency and predictability.6 Industrial production in many sectors remains below 1989 levels, the sugar harvest is a pale shadow of its once proud self, and wages in the grossly inefficient state sector average under US $50 a month. National savings and investment rates remain too low to finance a sustained recovery, and the unattractive business climate discourages most foreign investors. Merchandise exports have declined to under $3 billion – a clear indication that the economy cannot compete on international markets. Consequently, the chronic crisis in the balance of payments is a major constraint on both investment and consumption. 252

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When Raúl Castro formally took up the reins of power in 2008, per capita GDP in Cuba had fallen well behind levels attained elsewhere in the region (Figure 18.3). Today, according to official Cuban statistics, national per capita GDP stands at $7,800 (on a purchasing-power parity (PPP) basis), well below the $14,900 registered by the Latin American and Caribbean region.7 Countries such as Chile and Uruguay but also the Dominican Republic and Costa Rica surpass Cuba’s per capita output by a wide margin. Countries such as El Salvador and Jamaica register productivity levels that are comparable to Cuba’s. A stroll around Havana is revealing. The housing stock is dreadfully dilapidated and US brand cars from the 1950s still circulate widely. The Cuban Revolution allocated resources to public goods, neglecting individual consumer goods, sometimes even denouncing those who indulged in them as egotistical and bourgeois. Consumer items produced by the domestic economy were often in short supply, of shoddy quality, and with outdated designs, while the scarcity of foreign exchange constrained imports. Within most people’s apartments, the few visible household durables, such as air conditioners, refrigerators and blenders, are often badly in need of repair. And this is in the relatively well-heeled capital. The eastern provinces are poorer still.

The tentative reforms of Raúl Castro (2008–18) In many respects the 2011 Guidelines (Lineamientos) were reminiscent of the tepid reform documents commonly promulgated during the 1970s and 1980s in socialist Eastern Europe. Such documents suggested both the leadership’s recognition that the system was not working and its failure to fully grasp why; nods in the direction of market mechanisms and non-state management were repeatedly subsumed under genuflections to the hegemony of socialist planning.

Figure 18.3 Economic development: GNI per capita (PPP) Source: UNDP, HDI Report 2019. 253

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Small-scale private enterprises Despite the persistent resistance of the orthodox old guard, the reformists were able to press ahead with significant changes that benefited many Cubans. While the state sector continued to be responsible for some 80% of output, the government authorized private activities in a range of small businesses. The 600,000 licenses authorized by 2017, up from 138,000 in 2007, certi­ fied such business activities as restaurants, bed-and-breakfasts (B&Bs), private taxis and pedicabs, beauty parlours and barber shops, and appliance repair shops.8 But many middle-class profes­ sions (lawyers, engineers, architects) remained off-limits for private enterprise. Some of the newly authorized businesses had existed previously in informal black markets; once legalized and subject to taxes, the businesses became a source of fiscal revenue. Apparently frightened by the rapid expansion of the non-state sector, in 2017 the government suspended the issuance of new licenses and in 2018 promulgated a compendium of tough new regulations governing private enterprises.9 The new regulations made it abundantly clear: the Cuban government, the ruling Cuban Communist Party and managers of state-owned enterprises did not want to risk major competition to their own interests – economic, commercial, political – from a potentially capital-rich emerging private sector. Among the restrictive measures, the new regulations established an upward-sloping wage scale (whereby wages rise as more workers are hired); hiring more than 20 workers became prohibitively expensive (six times the average wage). Unlike in the past, employers would have to pay taxes on the first five workers hired as well. To reduce tax evasion, businesses would have to record their transactions (revenues and expenditures) in an account at a government financial institution. Investors were also obliged to explain their source of funding. The new regulations also included astoundingly specific performance require­ ments and innumerable legal breaches that seemed crafted to allow government officials wide dis­ crimination to impose heavy fines (or to extort bribes), suspend licenses, and even seize properties.

Urban cooperatives Urban cooperatives – in which each worker has a stake in the business – were legalized in 2012. Because the government viewed cooperatives as a form of non-state business that was less ‘petty bourgeois’ than purely individual enterprise, it decreed favourable tax treatment and other advantages for cooperative ventures. However, whereas municipal authorities could authorize individual self-employed businesses, cooperatives required approval at the exalted level of the Council of Ministers! By May 2014 498 non-agricultural cooperatives had been approved, some 329 of which were operating by mid-2015, employing approximately 18,000 people.10 Of those approved, most had been spun off from the state sector and leased their outlets from the state. By sector, cooperatives favoured gastronomy, transportation, construction, accountancy, and fruit and vegetable sales, and were located in Havana. A wary Cuban government froze the creation of new cooperatives in 2017. In 2019 new regulations placed limits on cooperatives’ potential growth. Cooperatives of 101 members or more could not grow by more than 10% per year. Caps were placed on prices to limit profits relative to expenses. Cooperatives could not hire a number of individual contractors greater than 10% of their total members, nor pay directors more than three times the lowest-earning member of staff.

Idle state farms To bring vast tracts of idle land into production, the government authorized farmlands to be distributed freely to homesteaders. Some 200,000 plots were authorized in ‘usufruct’, a form of 254

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leasing by the government, initially under 10-year and later under 20-year renewable contracts. Farmers were permitted to build homes and barns on their plots, practices that had been pro­ hibited in the past. But formidable restrictions remained in place, including limitations on the hiring of contract labour and the compulsory sale of about 70% of production at state-fixed prices. Many Cubans complained that with these caps on profitability and entrepreneurship, the prospective returns were not worth the hard labour and inherent risks in agriculture.

The political business cycle By 2017, at the zenith of its expansion, as many as 40% of the Cuban workforce of 5 million had at least one foot in private sector activities.11 In addition to authorized private enterprises, urban cooperatives and land-lease farmers, a number of small-scale farmers retained their family’s pre-revolutionary plots, while some 350,000 farmers worked on service and credit cooperatives that allowed aspects of private property. Joint ventures with foreign capital added a further 40,000 employees. In addition, many Cubans exercised their entrepreneurship without registering with the government, including moonlighting public sector employees and indivi­ duals who had dropped out of the officially reported workforce entirely. Such entrepreneurship included grey-area or even illegal activities, including selling goods pilfered from state-owned entities on the black market. In 2018–19 the new rounds of burdensome regulations coincided with a downturn in market conditions. The macroeconomic outlook dimmed (although official statistics claimed that there had been a low level of positive growth) as the balance of payments tourniquet twisted ever more painfully and tourism dipped due to renewed US sanctions. Heavily dependent on international visitors, many private enterprises, including restaurants, B&Bs and taxi drivers, did not survive. Other firms strove to alter their market strategies to attract more non-US and local consumers. Overall, the fate of the private sector remained in the hands of a divided govern­ ment. The more orthodox factions worked to repress competition and tighten government control, while the liberals continued to argue that private initiatives could drive investment and job creation and help to ignite a recovery.

Opening up to foreign direct investment Once wide-open to foreign capital, after 1959 Cuba nationalized foreign-owned firms while the USA prohibited American firms from investing in revolutionary Cuba. In the early 1990s, in order to stave off complete economic collapse, Fidel Castro had selectively re-opened the door to foreign direct investment (FDI), primarily in international tourism and resource extraction (nickel, oil and gas). Under Raúl, the government declared that FDI had become ‘essential’ for economic development: Law 118 of 29 March 2014 offered expanded tax and other incentives to attract foreign firms. The government’s goal was to close the wide gaps in investment ratios, science and technology, and management and marketing, that were plaguing the island’s international competitiveness. Periodically, the government has released a ‘Portfolio of Opportunities for Foreign Invest­ ment’. Each edition has become fatter and glossier; the 300-page 2017–18 version featured 456 projects with a cumulative price tag of US $11 billion, while the expanded 2018–19 version offered 525 projects.12 Most investment projects required the formation of joint ventures with Cuban state-owned enterprises. These ‘Portfolio’ offerings were generated by an inter-agency process whereby many ministries and state-owned enterprises joined in a collective waving of hands to the international commercial community. 255

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However, so far capital inflows have been disappointing, falling well below the official target of US $2.5 billion per year. Many visiting investors have departed the island disheartened, citing several deep-seated obstacles. Especially irritating was the prolonged multilayered approval process involving various government agencies. Larger investments required cabinet-level approval. Investors complained of a non-transparent ‘black box’, denying access to many of the decision-makers or even knowledge as to which personalities were at the table. Many applica­ tions simply languished unanswered. Within the government and the PCC, not all officials were on board with the opening up to foreign capital. Some officials retained a fear of dom­ ination and exploitation by powerful multinational corporations, or simply rejected the marketoriented system of which multinationals form an integral part. Some officials were concerned that approval of any high-priced deals would expose them to accusations of corruption by aggressive anti-corruption campaigns. In fact, the Cuban business ecosystem offered several advantages to foreign investors, including an educated workforce, PCC-controlled unions that aligned workers with company productivity goals, a stable political outlook, and personal security for executives.13 Once operating in Cuba, firms often enjoyed exclusive market access, and could bargain with gov­ ernment officials for prices and production targets that guaranteed cost-based profit margins. But these advantages were balanced against several serious challenges: firms had to hire workers through a government-run labour contract system which taxed wages heavily, thus adding to production costs while depriving workers of effective productivity incentives; the Cuban legal system offered few guarantees of due process and was subject to political influence; infra­ structure, including transportation and telecommunications, was often below international standards; and although profit remittances were guaranteed by law balance of payments constraints often resulted in payment arrears. Ever tighter US sanctions under the Trump Administration added to investor caution. In 2014 the government opened the ZED Mariel special development zone west of Havana. The new regulations promised an important reduction in the implicit labour tax, and the higher wages paid by the official employment agency were intended to attract and retain a productive and stable labour force. The government also promised a more streamlined approval process for new investment proposals. Nevertheless, as of the end of 2019 ZED Mariel reported only 50 approved businesses with US $2.3 billion investment.14 Moreover, the top four investments were by firms that were not new to Cuba: Unilever, Nestlé, Ambev and Brascuba Cigarrillos (British-American Tobacco) were looking to expand their on-island operations even in the absence of the additional Mariel incentives. One major obstacle facing Mariel’s export promotion business strategy is that the nearby US market remains closed to most Cuban products. In the meantime, the port facility is being dredged to permit passage for the large container ships sailing through the Panama Canal. The anticipation is that the containers will be off-loaded for transport to the Gulf Coast and the Eastern Seaboard of the USA.

Diversification of international commerce Arguably, Raúl Castro’s greatest achievement was in foreign affairs, when he succeeded in diver­ sifying Cuba’s diplomatic and commercial relations around the globe. Cuba had been a colony of Spain, a dominion of US capital, a cog within the Soviet-dominated COMECON system. Now, for the first time in its 500-year history, Cuba had escaped the grip of a single world power. Today, Cuban traders circumnavigate the globe, engaging with both state-directed and freemarket economies. The top 10 trading partners in total merchandise goods (exports plus 256

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imports) in 2018 were (in order of ranking): Venezuela, the People’s Republic of China, Spain, Canada, Mexico, Brazil, the Russian Federation, Italy, Germany and France (Figure 18.4). The next tier of merchandise trading partners included Vietnam, Algeria, Argentina, the USA and the Netherlands. The combined merchandise trade with countries of the European Union (EU) was on a par with Cuba’s vital energy-based trade with Venezuela, followed by exchange with China. Trade with Cuba’s Latin American neighbours (excluding Venezuela) totalled $2 billion in 2018. No single country accounted for more than one-quarter of total merchandise trade. This trade diversification began in the 1990s following the collapse of the Soviet Union, but Raúl’s economic team extended and consolidated it. Under Raúl, Cuba also expanded the number of countries that purchase its main service export – the labour of educated professionals, especially in the medical field. While Fidel initiated large-scale service exports to Venezuela, Raúl followed suit with dozens of other developing countries, including Brazil (although this exchange was cancelled upon the ascendency of Jair Bolsonaro to the Brazilian presidency). Over the past decade, Cuba has also diversified its sources of foreign investment. For exam­ ple, in the economy’s bright spot, international tourism, investors hailed from Spain, France, Canada, Germany, Switzerland, Canada, China, and Malaysia, among other countries. A small island economy cannot hope to be fully autonomous; it must adapt to global constraints. But by diversifying its economic partners, Cuba has reduced its vulnerability to external dictates, and widened its own margins for manoeuver. Consequently, when the Trump Administration discouraged tourism to Cuba, the sanctions hit Havana particularly hard but the sun-and-surf beach resorts (which even under President Barack Obama were off-limits to US citizens) continued to attract millions of tourists from Canada, Latin America, Russia and the EU. Despite these market openings and diversification, merchandise export earnings fell from US $5.6 billion in 2013 to under $2.7 billion in 2018, a paltry sum for a country with 11 million inhabitants (Figure 18.5). To accommodate the decline in its merchandise export

Figure 18.4 Merchandise trade by country 2018 (imports and exports) Source: ‘Anuario Estadístico de Cuba’ (Havana: ONEI, 2019), Table 8.4. 257

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Figure 18.5 Merchandise exports and imports (2009–18) Source: ‘Anuario Estadístico de Cuba’ (Havana: ONEI, various issues).

earnings, Cuba was forced to pare back its merchandise imports from $14.8 billion in 2010 to $11.5 billion by 2018. The chronic deficit in merchandise trade reached $8.8 billion in 2018, equivalent to over 300% of merchandise export earnings. Of these earnings, leading exports were raw materials and their derivatives, including sugar, tobacco and mining (nickel), with little participation by industrial products with the notable exception of pharmaceutical exports. As a result of its export impotency, Cuba was running persistent deficits on merchandise trade with its major trading partners. In the context of severe strains on the balance of pay­ ments, Cuba was often unable to fully service these bilateral deficits, falling into arrears which then forced renegotiations of debt service schedules. These chronic problems in Cuba’s external accounts had a negative impact on the country’s already low external credit ratings. The tragedy of Cuba’s external relations is that its productive structure has proven unable to take advantage of its diplomatic prowess. Markets have been opened, foreign investors have flocked to visit Havana, but Cuba’s ministries and state-owned enterprises have failed to close the deals. No international economic strategy will work unless Cuba can transform itself into a more efficient and reliable business partner. No amount of geopolitical alliances will provide Cuba with the capital and technology it needs unless it creates a more welcoming investment climate. And no international alliances, by themselves, will loosen the balance of payments pressures until Cuban farms and factories churn out products that can compete on international markets. In contrast to this stark failure in goods exports, exports in services were more robust, sur­ passing US $11 billion per year (2015–18). Service exports included the export of skilled labour, as the government negotiated contracts worth billions of dollars to provide medical personnel and other professionals to Venezuela and many other developing countries. The expansion of tourism added to service revenues. In addition, Cubans living abroad sent remittances to their families on the island. Estimates of remittances vary widely, with the US Census Bureau sug­ gesting that they amount to about $4 billion per year, including both cash and in-kind 258

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transfers.15 This export of labour – whether via bilateral government contracts or via individual emigrants sending remittances back home – is, by far, Cuba’s leading foreign exchange earner. This pattern is not unusual in the Caribbean and Central America, where remittances make up a significant percentage of foreign exchange inflows and even of GDP.

Two strategic failures: energy and agriculture16 Non-discretionary spending on essential imports of energy and foodstuffs quickly consume Cuba’s hard currency export revenues. Food imports alone consume some US $1.7 billion per year, or over half of all merchandise earnings. These evident threats to national security have endured for many years, without eliciting corresponding corrective measures. To equate supply and demand, the authorities have in effect depressed energy and food consumption, through combinations of rationing and high prices. Yet the island has the natural capacity to develop more sustainable national models in energy and food. Production in the agricultural sector, which still employs 13% of the labour force, has for many crops remained stagnant for over a decade. Travelling around the island, one encounters great expanses of uncultivated lands, animal-drawn ploughs working subsistence farms, and depressed small towns formerly dependent upon shuttered sugar mills. Ageing Soviet-era tractors outnumber the occasional shiny new Chinese machinery. For many crops, including sugar, coffee, tobacco, citrus and fisheries, pre-revolutionary production levels far exceeded today’s harvests. During the post-Soviet depression of the 1990s the government experimented with liberal­ izing prices and allowing farmers to directly market portions of their harvests (above govern­ ment production quotas). However, the anticipated increases in production did not materialize, and as a result prices of some foodstuffs rose. Alarmed at consumer discontent, the government partially reversed course and reimposed some price controls. For farmers to respond to higher prices, they would require the critical ingredients necessary to bolster production: more seeds and other material inputs including fertilizers and energy supplies; new machinery to clear, cultivate and harvest lands brought into production; and more credit and technical assistance. Farmers also depend upon efficient systems of transportation and marketing. To incentivize investment, farmers would require greater security of land tenure. Yet the government has failed to address adequately these complementary vital measures. The resulting imbalances in demand and supply suggest the dangers of partially halting reforms in systems already plagued by massive distortions, where fixing one problem can all too readily spark additional distortions elsewhere. When the collapse of the Soviet Union ended shipments of cheap oil, the Cuban National Assembly approved energy plans that emphasized renewables, including sugar cane biomass (bagasse). Small-scale solar systems and micro-hydro plants were installed in rural areas. Fidel Castro also welcomed a Canadian company, Sherritt International, to develop the island’s rich nickel resources and to participate, with the state oil and gas company Cupet, in shallow off­ shore drilling, and with the state energy company, Union Electrica, in energy generation and distribution. Then Hugo Chávez came to power in Venezuela and replicated the Soviet practice of sup­ plying cheap oil for barter (this time for Cuban medical personnel instead of sugar). As a result, despite some success increasing on-shore oil (mostly low-quality, high-sulphur crude) and gas production (the country now produces around 50,000 barrels per day, or roughly 30%–40% of its consumption needs), the Cuban energy system remains heavily dependent upon imported hydrocarbons; about half of Cuba’s electric power comes from imported fuel. Cuba’s energy shortfall has persisted despite low economic growth (and hence low energy demand) and a small 259

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automobile fleet. Per capita electricity consumption in Cuba is significantly below the average for Latin America and the Caribbean. Drenched in tropical sunshine, as is the case for much of the Caribbean, Cuba should be a natural producer of solar energy. In addition, much of the island’s extensive coastline would lend itself to generating wind power. Furthermore, the island has great biomass potential, pri­ marily from sugar cane. But despite years of being officially committed to a future of renewable energy, the country currently only generates about 4% of its electricity from renewables, only 1% of which is from wind and sugar (the larger shares being biomass and hydro). The government’s goal is to generate 24% of its electricity from renewable sources by 2030, with an officially estimated price target of US $3.5–$4.0 billion in international investment. Cuba is advertising many renewable projects in the above-referenced ‘Portfolio of Opportu­ nities for Foreign Investments’, but thus far the international response has been underwhelming. It is highly unlikely that Cuba will approach its target of 24% at the current annual rates of investment.

Tourism17 In the Cuban economy, international tourism has become the most dynamic sector. Visitor numbers jumped from 1.7 million in 2000 to 4.7 million in 2018 (Figure 18.6). However, renewed US sanctions caused international tourist arrivals to descend to 4.3 million in 2019, even as state tourism enterprises continued to construct new hotels in anticipation of an eventual recovery.18 Tourism receipts reached an annual average of US $3 billion in 2016–18.19 American tourists had come to Cuba during prohibition (1920–33) in order to freely con­ sume alcoholic beverages. Following the hiatus of the Second World War, tourism peaked at 272,000 arrivals in 1957; many US tourists came to try their luck in the casinos, as US law enforcement in all but a few states fought to suppress gambling at home. In offshore Cuba, large hotel-based casinos and nightclubs were famously owned or operated by well-known ‘mob’

Figure 18.6 International tourism arrivals (millions) Source: ‘Anuario Estadístico de Cuba (Havana: ONEI, various issues), Table 15.1; José Luis Per­ elló, ‘El turismo en Cuba, entre sanciones y prohibiciones’, Excelencias Cuba, 10 January 2020. 260

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criminals, including Lucky Luciano, Santo Trafficante and Myer Lansky. To many excluded Cubans, these luxury hotel-casinos symbolized all that was decadent and wrong under the bloody rule of the strongman and President, Fulgencio Batista. Among its early initiatives, the Cuban Revolution nationalized US-owned hotels in order to erase US economic and political influence and to clean up the vices of the tourism industry. Following the collapse of the Soviet Union, in order to earn foreign exchange Cuba again returned to its natural comparative advantages and reopened its seemingly endless expanses of beautiful beaches to sun and surf tourism and began to gradually renovate the colonial legacy of Old Havana. This time the hotels and resorts came under the ownership of state-owned enterprises (SOEs). The largest and most rapidly growing SOE has been the Gaviota Tourism Group, itself controlled by GAESA (Enterprise Administration Group) which in turn fell under the aegis of the Cuban military.20 GAESA was particularly strong in the higher-end four- and five-star hotel market. The Ministry of Tourism controlled the other two large state tourism conglomerates, Cubanacán and Grande Caribe. Each of the large SOEs was a tourism ‘group’, which in addition to hotels managed various tourism-related businesses such as tourism agencies, transportation companies and even small shopping malls. The three major tourism groups included construction firms and real estate developers. In operating their higher-quality properties, the SOEs cooperated with major foreign hotel chains, such as Melía Hotels International (Spanish), Iberostar (Spanish) and Blue Diamond (Canadian), either as joint ventures (the Cuban SOE typically retaining a majority 51% share) or through management and service contracts. Cuban beach tourism entered the international markets catering primarily to value-seeking visitors, befitting the modest quality of construction and service. By source country, workingclass tourists flocked from Canada (especially Quebec Province), Russia and the EU (especially from Italy, Germany, France, the UK and Spain). Gradually, Cuba has sought to cater to more affluent travellers, opening VIP sections within resorts. In Havana, Iberostar and Kempinski, a European luxury brand, are among the international hotel operators managing sparkling new accommodations, in anticipation of a vibrant post-Trump surge in US travellers. As in other economic activities, the state is the dominant actor in the tourism sector. How­ ever, in recent years the non-state sector has expanded through the proliferation of private room rentals (casas particulares) or B&Bs, restaurants (paladares) and those self-employed, such as taxi drivers and private construction companies, catering to the tourism sector. The extensive family-based B&B system adds a unique feature and flavor to urban tourism in Cuba. In addi­ tion, B&Bs are unusually efficient engines of growth, mobilizing savings – from Cuban families and their overseas relatives – and channelling them into productive investment. Adding or remodelling a room for rent might cost US $15,000–$25,000, whereas each new hotel room costs some $200,000. B&Bs offer roughly one-quarter of Cuba’s available accommodation. The number of rooms available in hotels reached 64,000 in 2018, of which 57,000 could be found in the four- and five-star category that is attractive to most international travellers.21 Altogether, of the total international tourism revenues of US $3 billion, the private sector accounted for an annual average of $573 million in 2016–18, even though many transactions with private entrepreneurs are unlikely to be fully captured in these official statistics.

Toward a more sustainable prosperity Sooner or later, Cuba will fully rejoin the global economy, of which it has been an integral part since the arrival of Christopher Columbus. In retrospect, the post-1959 revolutionary era of 261

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semi-autarkic development— with linkages to the Eastern European economic bloc led by the Soviet Union – is likely to be viewed as a historical aberration. Despite its modest size, Cuba has sufficient resources, natural and human, to embark on a trajectory of sustainable growth. Cuban agriculture could produce an abundance of export crops (tobacco, coffee, sugar, citrus fruits, organic vegetables, animal husbandry) while feeding both its own population and a rising number of tourists. Cuba could dramatically reduce its dependency upon imported energy by building out its renewables of solar, wind and sugar cane-based biogases. The Cuban educational system produces well-educated technologists who, rather than emigrate as they do today, could elect to remain on the island once the telecom infrastructure is in place and the government fully authorizes their activities. The island has just begun to cultivate its multidimensional tourism destinations, that can expand beyond sun and surf tourism, which is vulnerable to sea rise, to eco-tourism, adventure tourism, aquatics and medical tourism. The extensive system of national parks and reserves are a solid foundation upon which to build a model of sustainable tourism. In addition, Havana and Santiago de Cuba, with its rich Afro-Cuban culture, are sophisticated urban destinations. Selective industrialization is also feasible, if embedded in global supply chains, with the ZED Mariel special development zone serving as a logistics hub. As it transits to a more open society, Cuba could build upon its strong social services, extensive social safety net and low crime rates to escape the extreme forms of inequality and poverty that still plague other nations in the Caribbean Basin. But two binding constraints must be released before the island can blossom. Geography is destiny: the US market must open its gates to Cuban commerce, as initiated by the Obama Administration but reversed by the Trump Administration. Unlike during the pre-1959 era, Cuba can engage with the USA with greater self-confidence. Having established commercial relations with widely diverse partners, Cuba is positioned to keep its large northern neighbour from exercising undue leverage. Second, following in the footsteps of Raúl Castro, the Cuban government must finally break free of the shackles of the anachronistic central planning. This will serve not merely to tolerate but to positively celebrate the emergence of a private sector and to grant administrative auton­ omy to those efficient state-owned firms that can survive in a more competitive environment. Then Cuban firms – private and SOEs – can partner with multinational firms from around the world, to inject the technology, management and marketing skills that characterize the twentyfirst century. The Dean of the Faculty of Economics, University of Havana, Anthony Romero, issued this clarion call: The current unfavorable external environment should lead to a more profound and rapid process of structural change in the Cuban economic and social model that is already underway. Most definitely, overcoming the high levels of external vulnerability requires – sine qua non – the radical transformation of the productive forces, the elimination of important sources of macroeconomic distortions and a redefinition of the inter-connections among the various forms of property that characterize the national economy.22 During the past decade Cuba has undertaken to gradually open its economy to the emergence of a domestic private sector and to flows of international investment and tourism, and most recently to modern telecommunications. The remaining questions are in what time frame and under what conditions will Cuba definitively reopen its shores to the winds of global exchange that naturally lap the shores of island nations in the Caribbean. 262

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Notes 1 www.cuba.cu/gobierno/documentos/2011/ing/l160711i.html. 2 José Luis Perelló, ‘El turismo en Cuba, entre sanciones y prohibiciones’, Excelencias Cuba, 10 January 2020, www.excelenciascuba.com/es/turismo-turismo-cubano-por-dentro/el-turismo-en-cuba-entre­ sanciones-y-prohibiciones. 3 http://college.cengage.com/history/world/keen/latin_america/8e/assets/students/sources/pdfs/87_fidel_ castro.pdf 4 ‘Anuario Estadístico de Cuba 2018’ (Havana: ONEI, 2019). 5 HDI Report 2019 (New York: UNDP, 2019). 6 Ricardo Torres Peréz, ‘La transformación productiva e inserción international: Discusión de propuestas contenidas en el Plan 2030’, in Ricardo Torres Peréz and Dayma Echevarría León (eds), Miradas a la Economía Cubana: Un plan de desarrollo hasta 2030 (Panama: CEEC and Ruth Casa Editorial, 2019), p. 30. 7 In socialist Cuba, government-fixed exchange rates and internal prices are so distorted, so far removed from reflecting either the true costs of production or some realistic supply-demand equation, that the per capita income measure can be only a rough estimate. Weighing the various government subsidies to private consumption is an especially fraught task. 8 Carmelo Mesa-Lago (ed.), Voices of Change in Cuba from the Non-State Sector (Pittsburgh: University of Pittsburgh Press, 2018). 9 Richard E. Feinberg and Claudia Padrón Cueto, ‘Cuba moves backwards: New regulations likely to impede private sector growth’, blog post (Washington, DC: Brookings Institution, 13 July 2018), www.brookings.edu/blog/order-from-chaos/2018/07/13/cuba-moves-backwards-new-regulations-likely­ to-impede-private-sector-growth/. 10 Sarah Marsh, ‘Cuba unveils tighter rules on cooperatives in clampdown on non-state sector’, Reuters, 30 August 2019, www.reuters.com/article/us-cuba-economy-cooperatives/cuba-unveils-tighter-rules­ on-cooperatives-in-clampdown-on-non-state-sector-idUSKCN1VK2MY?mc_cid=1a3b629f69&mc_ eid=97942f5627. 11 Richard E. Feinberg, Open for Business: Building the New Cuban Economy (Washington, DC: Brookings, 2016), Ch. 6, pp. 131–71. 12 www.cubatrade.org/blog/2018/11/2/cuba-releases-2018-2019-portfolio-of-opportunities-for-foreign­ investment. 13 See Chapters 4 and 5 in Feinberg, Open for Business. 14 www.zedmariel.com/en. 15 Current Population Survey, US Census Bureau. The US Treasury announced in September 2019 a limit of US $1,000 per person per quarter for family remittances to a single close relative in Cuba. 16 This section draws on Richard E. Feinberg, Cuba’s Economy after Raúl Castro: A Tale of Three Worlds (Washington, DC: Brookings Institution, 2018). 17 This section draws on Richard E. Feinberg and Richard S. Newfarmer, Tourism in Cuba: Riding the Wave Toward Sustainable Tourism (Washington, DC: Brookings Institution, 2016). 18 Perelló, ‘El turismo en Cuba, entre sanciones y prohibiciones’. 19 www.onei.cu/aec2018/15%20Turismo.pdf. 20 The Trump Administration declared Gaviota establishments off-limits to US citizens arguing that its revenues fuelled the budget of the Cuban armed forces. 21 www.onei.cu/aec2018/15%20Turismo.pdf. 22 Antonio F. Romero Gómez, ‘Cuba: En entorno internacional y el proceso de transformación eco­ nómica’, Miradas a la Economía Cubana: Un plan de desarrollo hasta 2030 (Panama: CEEC and Ruth Casa Editorial, 2019).

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19 Trinidad and Tobago Lester Henry

Introduction Due to the early discovery of oil and efforts to exploit this resource, Trinidad and Tobago developed along a different path than the rest of the islands in the Caribbean region. Unlike most of its neighbours, its economy has, for the most part, been driven by energy exports; first oil then later natural gas. For this reason, it has been mainly classified as a middle-income developing country since its independence from the United Kingdom in 1962. For example, ‘in 2012 its gross national per capita income of almost US$ 22,000 (purchasing power parity) was more than twice the average for Latin America and the Caribbean as a whole’.1 Hence in recent years Trinidad and Tobago has graduated to a high-income country. This small resource-rich open economy has shown all the signs associated with commodity-dependent monocrop economies. Periods of booms have been followed by long and deep recessions with very little diversification taking place.

Brief review of the economic history of Trinidad and Tobago Even though the country gained its independence in 1962, there had been internal selfgovernment since 1956. The government at that time set out to develop the country based on a series of five-year plans. The First Development Plan (1958–62)2 was designed to address the problem of ‘backwardness’, and overcoming reliance on primary commodity exports: oil and sugar. Motivated by W. Arthur Lewis’s ‘industrialization by invitation’ model, incentives were given to attract both domestic and foreign investment via the Industrial Development Cor­ poration (IDC). Focus was also placed on development of the basic infrastructure needed to support industrial expansion. There was to be large domestic investment in areas such as elec­ tricity, water, health, housing and roads. These accounted for a significant share of government expenditure. The main aim was to encourage industry and tourism in order to expand eco­ nomic activity and provide greater employment. Apart from the IDC, this period also saw the establishment of the Hotel Development Corporation and the creation of a tourism board. The Second Development Plan (1964–68)3 identified unemployment and dependency as two key issues facing the country. Although the petroleum sector was the predominant driver 264

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of economic activity over the period, its contribution to employment was a mere 5% compared to the agricultural sector which accounted for 20% of employment, with services accounting for 23% of employment.4 The manufacturing and construction sectors accounted for more employment opportunities than their contribution to output. There was renewed focus on attracting foreign investment while combining the efforts of the government and the domestic private sector to develop the manufacturing and agricultural sectors. Import substitution policies were adopted to support the development of the industrial sector.5 The main instrument of protection was the ‘Negative List’ which introduced quantitative restrictions or outright prohibition of the importation of several items without a government-approved licence. Specific incentives were also given particularly to encourage the development of manufactures for export: pioneering industries were offered allowances such as an income tax-free period during which to begin operations and duty-free imports of inputs. In many instances, government financing was necessary due to the lack of private sector financing alternatives. The Third Development Plan (1969–73)6 recognized the need for greater diversification within the economy to overcome structural problems such as persistent unemployment and the dependence on external parties for development. The overall strategy of the plan focused on developing national awareness, fostering self-confidence and facilitating certain key government initiatives. Emphasis was placed on developing technical knowledge in agriculture, the manu­ facturing sector was to be developed for export purposes due to the small size of the domestic market. The government sought to use the revenues from the energy sector to facilitate the strengthening and development of other sectors. It was envisaged that the government would become directly involved in the petroleum sector. Hence, it was proposed that a National Petroleum Company should be established and that the ministry responsible for the sector should be strengthened. During the 1970s the government moved away from development plans and became involved in most areas of economic activity. This stimulated diversification within the energy sector, through increased ownership of energy-based enterprises (petrochemicals) and the establishment of ammonia, steel and fertilizer plants. For example, agreements were finalized with W. R. Grace, a US high-performance specialty chemicals manufacturer, to construct an ammonia plant in 1975, a joint Amoco fertilizer plant in 1976 and an independent steel com­ pany, ISCOTT, in 1977. In the budgets of 1972 and 1973, natural gas was identified aa a nat­ ural spin-off industry with opportunities for the production of liquified natural gas (LNG) and ammonia.7 It was important for upstream activity in the proposed Point Lisas industrial estate. This estate became the industrial hub of the country. The revenue windfall from the first oil shock of 1974 brought many tangible benefits to the country. For example, government expenditure rose from TT $448 million in 1973 to TT $3,337 million in 1980, more than a seven-fold increase, while capital expenditure increased from TT $108 million to TT $2,418m during the same period.8 This allowed the government to carry out significant infrastructure projects, increase spending on transfers and subsidies, and raise salaries in the public sector. However, by the end of this period, the petroleum sector was still dominant, and the problems of inflation, unemployment and poverty still plagued the economy. The 1980s can best be described as a decade of stagflation: both unemployment and inflation remained high throughout. From 1983–89 there was an average annual fiscal deficit of 4.7% of gross domestic product (GDP). The balance of payments deficit averaged 1.7% of GDP. The financing of substantial current account deficits led to the depletion of accumulated interna­ tional reserves and per capita income fell on average by 4% per year. Unemployment soared 265

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and there was significant migration of relatively skilled labour. Real estate prices collapsed and there was also significant capital flight. By this time, the number of state enterprises (in airlines, shipping, cement, printing, food processing, property development, hospital management, tel­ ecommunications, hotels, finance, quarries and the energy industry) totalled 62 at its peak – the largest anywhere in the Caribbean with the exception of Cuba. A comprehensive adjustment programme was initiated in 1986. This programme was aimed at reducing the fiscal and balance of payments deficits, liberalizing trade and exchange con­ trols, and improving the incentive environment. It was in this context that Trinidad and Tobago began the process of trade and financial liberalization during the late 1980s. How­ ever, the major policy shifts occurred during the period 1991–93. For example, the abolition of the Negative List for imports, on the trade side, and the abolition of exchange controls and the switch to a flexible exchange rate, on the financial side, took place within this period. These policy shifts came as a response to the collapse of the oil boom and several years of negative economic growth. The country’s need to access resources from the International Monetary Fund (IMF) would also have contributed to the urgency with which they were implemented. The government was also required under the IMF’s structural adjustment programme to reschedule its external debt. This debt peaked at US $2.5 billion at the end of 1990. The 1990s marked a period of transition from negative to positive economic growth. Fol­ lowing the negative growth of the previous decade, a spike in oil prices in the 1990s led to a favourable recovery of the economy and a reduction in the deficits. Growth continued to be driven by the oil sector and a revitalized manufacturing sector. With regards to foreign direct investment (FDI), Trinidad and Tobago had the most significant share in the Caribbean at 48% in 1997. However, this was mostly channelled into the energy sector, particularly the devel­ opment of LNG plants. Figure 19.1 offers a comparison of such flows between the 1980s and the 1990s. This heavy FDI inflow laid the foundations for the prosperity that was to come in the next decade (see Figure 19.1).

Figure 19.1 Trinidad and Tobago, FDI (US $ million) 1980–2000 Source: Central Bank of Trinidad and Tobago, www.central-bank.org.tt/statistics/handbook­ key-economic-and-financial-statistics. 266

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Indeed, the 2000s marked a period of tremendous prosperity for the country.9 According to the Central Bank, Over the eight-year period from 2001–2008, real GDP growth averaged 7.6 per cent a year. While the main driver was the expansion of the energy sector, whose growth aver­ aged 11.2 per cent a year, the non-energy sector also grew at a very healthy 5.4 per cent per year.10 During the period the energy sector benefited from the steady increase in the number of oil, gas and methanol facilities. The rapid growth of the non-energy sector was fuelled by the increase in government spending financed by buoyant energy revenues. Per capita income almost tripled during the period and unemployment fell to historically low levels. The collapse in energy prices and the onset of the global financial crisis in 2008 put a halt to almost 15 years of economic expansion. Oil prices fell by 61.9%, down from US $147 to $56 per barrel in that year.11 The impact of this was exacerbated by declining local oil pro­ duction, maturing oilfields and limited new oil and gas discoveries. Since then the Trinidad and Tobago economy has showed little or no economic growth. With the exception of a brief recovery between 2011and 2014, oil and natural gas prices have remained at fairly low levels compared to the pre-crisis period. This has had a strong impact on government reven­ ues from the energy sector. From 2015, therefore, any increase in spending would not have been matched by increases in revenue. This has led to several consecutive years of budget deficits and increases in the national debt. The next two sections examine some of these issues in greater detail.

Macroeconomic structure: output, unemployment and inflation As noted above, the Trinidad and Tobago economy is closely linked to the vagaries of energy prices. In fact, ‘as the oil portion of the trade balance increases, so does overall GDP, the cor­ relation between the two series is a strikingly high 0.92’.12 The energy sector, which includes both oil and natural gas, accounted for as little as 20%–25% of GDP in difficult times when prices are low. However, in boom years, this has reached as much as 50%. In recent years, there has been a roughly 60:40 split between the so-called non-oil and oil sectors. This dichotomy is widely used to highlight the country’s dependence on its energy sector and to emphasize the need to for diversification and growth in the other sectors of the economy. The largest of the energy sub-sectors is natural gas exploration and extraction. This has replaced oil production that dominated during the 1970s and 1980s. It accounted for about 9.8% of GDP in 2019. The sector has gone through a period of contraction in the last five years but is showing signs of recovery as new finds are made and long-standing projects implemented. The manufacture of petrochemicals (ammonia, urea and methanol) is the second largest energy sub-sector. These represent the efforts to achieve diversification within the energy sector that benefited from the large FDI flows in the 1990s and continue to be significant sources of export earnings for the country. Other important components of the energy sector include crude oil exploration and extraction and the refining of LNG. It should be noted, however, that in 2018 a decision was taken to close down the major oil refinery at Pointe-à-Pierre and to disband the Petroleum Company of Trinidad and Tobago (PETROTRIN). This was done because the company was highly indebted and reportedly over-staffed by thousands of personnel. Furthermore, the refinery was singled out as the main contributor to the overall losses that were continuously being incurred within the sector. 267

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This meant that after many decades the country would no longer be, at least for a period of time, an exporter of refined petroleum products. The non-oil sector is dominated by services, which at times comprises up to 71% of GDP. This can be decomposed into four main areas of activity: distribution, finance insurance and real estate (FIRE), construction and government services. When the energy sector is in decline, the service sector tends to increase its contribution to GDP. As government expenditure expanded from the 1990s, the distribution sector, which includes restaurants, mirrored this, showing continuous nominal increases every year since that time. There has also been a tremendous expansion of the FIRE sector, second only to distribution. Trinidad and Tobago has become a regional hub for finance and insurance in the process. Other key areas of the service sector include transport and communication, construction and general government. At the macroeconomic level, today the general structure of the Trinidad and Tobago econ­ omy is not very much different from the 1970s. However, there have been some areas of sig­ nificant change. One of them is in the realm of unemployment. Historically, high levels of unemployment were almost accepted as the norm, and indeed worsened in times of recession. Even at the height of the first oil boom in the 1970s, unemployment remained intractable, rarely dipping below 10%. The recession in the 1980s saw unemployment spiralling to above 22% in 1987; it remained at approximately 20% for almost seven consecutive years. Never­ theless, by the early 1990s there was a steady decline in the unemployment rate that persisted up until the advent of the global financial crisis (see Figure 19.2). The official rate dipped below 10% in 2004 and has stood at under 5% for the past 15 years. This very positive result is inti­ mately linked to the expansion of the service sector and the windfall revenues derived primarily from LNG exports. Inflation, just as with unemployment, was persistently high throughout the 1970s and early 1980s. With the exception of one or two years, the country experienced double-digit inflation during the entire period. In particular, in the 1970s inflation appeared to be closely correlated to the increased income from the oil sector, suggesting that it was mainly demand-driven. Prices only started to moderate during the latter half of the 1980s, with the onset of a long period of recession. There were further spikes in the early 1990s. However, from the mid-1990s there

Figure 19.2 Growth, inflation and unemployment, 1990–2018 Source: Central Bank of Trinidad and Tobago, www.central-bank.org.tt/statistics/handbook­ key-economic-and-financial-statistics. 268

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were about 10 years of relative price stability. This can perhaps be attributed to the effects of the trade liberalization policies, as import duties were lowered and the Negative Lists of the pre­ vious two decades were abolished in 1991. Inflation rose sharply again during the late 2000s, this time shadowing the increased spending due to the revenue windfall from natural gas exports.

Debt and fiscal policy Fiscal policy during the 1970s was geared towards the long-term objectives of full development of natural resources and diversification of the economy, while at the same time seeking the short- to medium-term objectives to stabilize prices, increase employment opportunities and boost disposable incomes, particularly of the lower-income group. The nationalization agenda that commenced from 1970–73 continued during the boom years and government investment and the size of the portfolio grew considerably. By 1982 the Trinidad and Tobago government had investments in some 31 companies operating in agro-industries, energy-based industries, and both the service and manufacturing industries having an estimated total value of TT $1 billion. The downside to this was that it contributed to the massive increase in subsidies and transfers from TT $64.4 million in 1970 to TT $2,408.7 million in 1982. Government policy also included the redistribution of part of the benefits of the oil boom by way of new and expanded social programmes and reducing the burden of inflation through the subsidization of prices on a range of basic commodities. A considerable amount of current revenue thus was spent on social services from 1973 to 1982, averaging 42% of current expenditure. During the 1980s fiscal policy focused on the revision of the taxation system and concentrated on indirect taxation, particularly the system of consumption taxation. Measures introduced to generate revenue included the rationalization and expansion of a number of purchase tax rates to increase the tax base; an increase in the excise duty on many products; and the introduction of a purchase tax on several goods. On the expenditure side, measures included a reduction in expenditure on wages and salaries, goods and services and on subsidy payments in respect of a number of products as well as a reduction in current transfers to state enterprises, statutory boards and public utilities. In 1988 there was a 10% cut across the board in salaries of public servants. It was during this period that the national debt rose rapidly (see Figure 19.3). Total public sector debt reached about 60% of GDP by the late 1980s. Under the IMFsupported adjustment programme, the government continued its reforms. The main emphasis continued to be on tax reform and the intensification of expenditure restraining. The tax reform programme focus was to shift from direct to indirect taxation. Phase one involved widening the tax net, simplifying the tax system, and strengthening the incentives for savings and investment; the range of marginal tax rates was reduced. Phase two at the beginning of 1990 saw the introduction of a value-added tax of 15%.13 During the 1994–2008 boom period the government articulated a fiscal programme which involved the prudent management of expenditure, combined with revenue generating mea­ sures, debt reduction and a strategy to direct an increasing share of the nation’s resources to capital investment. To this end, the government expanded its tax reform programme with a view to strengthening the tax base, lowering taxes and making the system more transparent and efficient. Fiscal management was influenced by higher than budgeted crude oil prices, strong petrochemical prices which resulted in a relaxing of tight fiscal management during the 2000s. An ‘Interim Revenue Stabilization Fund was established in 2000 as a mechanism for saving a portion of higher than budgeted oil revenues or for funding shortfalls in budgeted oil revenues in any given year’.14 In 2007 the fund was converted to a Heritage and Stabilization Fund. 269

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Figure 19.3 Total debt and fiscal balance (as % of GDP), 1980–2018 Source: Central Bank of Trinidad and Tobago, www.central-bank.org.tt/statistics/handbook­ key-economic-and-financial-statistics.

Monetary, finance and exchange rate issues Like many other developing countries during the 1960s, Trinidad and Tobago adopted a policy which later became known as ‘financial repression’. This typically included keeping interest rates low or controlled, restrictions on banking, directed credit programmes, and the tight management of foreign exchange. In fact, there was a rigid system of exchange control throughout the 1970s and 1980s. Under this arrangement, the exchange rate was fixed and all foreign currency transactions had to be processed via the Central Bank. Exporters had to sur­ render all receipts and importers had to apply for the required foreign exchange in order to make payments abroad. Domestic residents were forbidden to hold any foreign currency accounts. In 1993, however, the abolition of exchange controls and permission being granted for resi­ dents to hold foreign currency accounts signalled a major break with the past and a full com­ mitment to financial liberalization. As reserves dried up rapidly, the fixed peg to the US dollar was also abandoned. The switch to a floating rate resulted in an immediate depreciation of the domestic dollar. However, in 1997 it levelled off at around TT $6.28 per US dollar and only depreciated mildly over the next 10 to15 years. In fact, the IMF listed the country as having a fixed exchange rate even though it was ‘officially’ supposed to be a managed float. This relative stability of the exchange rate was attributed to the country’s ability to earn foreign exchange from its natural resource industries. But this may have happened for other reasons, as discussed below. The instability usually associated with the floating of exchange rates in developing countries did not occur. Typically, upon liberalization there is a tendency for the exchange rate to depreciate sharply. This results from the fact that residents seek to hedge against expected inflation and protect the real value of their wealth by engaging in currency substitution and capital flight. Neighbouring Guyana and Jamaica provided good examples of this phenomenon, given that both countries experienced large and regular depreciations following liberalization. There were a number of other key differences that distinguished Trinidad and Tobago from its neighbours. The large capital inflows following liberalization were for FDI and were not 270

Trinidad and Tobago

speculative in nature. Additionally, each successive government, immediately upon taking office, declared full commitment to the liberalization process. Nevertheless, perhaps the most important factor in keeping the currency stable may have been the role played by the country’s commercial banks. In fact, it can be argued that the commercial banks have benefited greatly from financial liberalization. They were able to maintain the relatively high interest rate spreads that were firmly in place before liberalization. For example, during the period 1994–2000 the Central Bank pursued a policy of high interest rates aimed at dampening consumer demand and hence avoiding excess pressure on the exchange rate. The main policy tool used to implement this was the reserve requirement. This ratio peaked at 23% in 1998. The resulting reserve requirement tax was then used to justify the commercial banks keeping lending rates high even though this did not negatively affect their profits since they were ‘able to shift fully changes in this cost, over time, to their customers’.15 This adds ‘as much as 3.5 percentage points, or about a fourth, to the average loan cost’,16 the IMF report estimated. In effect, what happened was that borrowers ended up financing the exchange rate protection. In other words, what the public did not pay in higher prices due to currency depreciation they paid for in interest loan charges. The commercial banks were also able to earn considerable revenue from the margin between the buying and selling of foreign exchange. This was a new area of business presented to them by the Central Bank since they were given the almost exclusive right to distribute foreign exchange to the public. The source of the foreign exchange was mainly taxes and royalties from the energy companies. Of course, the commercial banks were allowed to buy and sell to the public directly. The exchange rate spread, particularly against the US dollar, has remained fairly wide in comparison to what happens in larger market economies. Similarly, the spread of interest rates has likewise remained wide. Hence, it was not surprising that all the commercial banks reported large and increasing profits since financial liberalization. The profitability of the banks was also linked to the rapid economic growth of the late 1990s and 2000s. This meant that there was a massive expansion in the number of transactions as the demand for imports increased drastically. In 2008 the Central Bank observed that Throughout the decade the banking sector has registered robust profitability levels … the rate of return as a percentage of capital (return on equity) has averaged 26 per cent in the period 2006–2008. Over this period, the rate of return on assets has averaged 3.4 per cent, which is relatively high by international standards.17 Given this scenario, it appeared that the banks were quite happy with the exchange rate and the allocation system. Efforts at keeping the exchange rate stable were boosted by regular Central Bank interven­ tions. Should there appear to be any mounting pressure on the exchange rate, mainly via the demand for US dollars, the bank would immediately inject such quantities of funding as might be necessary to calm the market. Therefore, a seemingly contradictory mix of high interest rates and intervention was implemented in order to maintain stability in the foreign exchange market over the period. There was a clear link between excess liquidity in the system and the exchange rate. The Bank noted that ‘financial markets experienced generally easy liquidity conditions which spilled over into the foreign exchange market and further exacerbated the relationship between demand and supply for foreign exchange’.18 Furthermore, it was argued that if injec­ tions of US dollars into the system alone did not curb the excess demand for US dollars then it would have to place greater reliance on interest rate policy to ensure that conditions in the foreign exchange market remained sustainable. 271

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Of course, the Central Bank interventions would not have been possible without having the necessary reserves. The availability of a more than adequate level of reserves was a major factor in maintaining the stability of the exchange rate. This is particularly important in small open economies. In the case of Trinidad and Tobago, net official reserves rose from a negative figure in the early 1990s, at the time of liberalization, to over US $1 billion by 2000. Despite the market interventions, there was a continuous accumulation of reserves, peaking at around US $11.5 billion in 2014. This did not include savings held in the Heritage and Stabilization Fund. This buffer provided the monetary authority with the credibility in terms of achieving its stated policy objective. It also acted as a psychological factor in calming market expectations regarding further depreciations. The efforts of the Central Bank may also have been made easier due to the relative absence of speculation and a certain cooperative spirit shown by the commercial banks. Despite attracting large inflows of FDI during the 1990s, short-term and other ‘hot money’ flows were not significant for Trinidad and Tobago. Another seldom noted result of the floatation of the local dollar was the complete elimination of the parallel market. Prior to liberalization, as in most developing countries, there existed a thriving unofficial market for foreign exchange. At that time, the parallel market premium ranged from 50 cents to 75 cents. That is, the official exchange rate was TT $4.25 while the parallel rate was TT $4.75 to TT $5.00. The initial floating rate was set at TT $5.75 per US dollar. In effect, the immediate post-float rate was much greater that the speculative premium. Additionally, on the second day of the float, the commercial banks stated jointly that they would not condone speculation in any form when foreign exchange trading resumed. Another important outcome of the financial liberalization policy was the accumulation of US dollar deposits in the domestic banking system. This may also have played a role in maintaining the stability of the exchange rate system. When the banking system holds large amounts of foreign currency, exchange rate management could become problematic. It creates the ‘risk that if a major currency depreciation is required at some point, the banking system is likely to suffer’.19 In other words, in order to avoid a run on the US dollar deposits, the commercial banks would then have a vested interest in maintaining the status quo, despite pressure from other sources to do otherwise. The build-up of foreign currency deposits in the financial system was quite dramatic following liberalization. The combined deposits at the commercial banks and the non-bank financial institutions rose from about US $325 million in 1994 to US $1.17 billion at the end of 2001. This was almost equivalent to the total amount of savings in local currency. This trend continued whereby foreign currency deposits at commercial banks reached close to US $4 billion by 2012. Therefore, it was clear that allowing domestic residents to hold foreign currency accounts led to a significant amount of currency substitution. This is common when domestic residents lack confidence in the value of the local currency. This currency substitution, or ‘dollarization’, can be an alternative to outright capital flight. By allowing the banking system to offer dollardenominated deposits, this provided an alternative to the actual movement of assets out of the country. Indeed, capital flight from Trinidad and Tobago was quite substantial by any measure. For example, some estimates suggested that a staggering US $40.9 billion, or an average of 9.1% of cumulative GDP, left the country during the period 1971–2011.20 Furthermore, despite all the positive developments noted above, capital flight increased from an average of 3.1% of GDP prior to financial liberalization, to 13.4% after financial liberalization.21 These estimates were comparable to what has been observed in other oil-producing and resource-based economies. Liberalization also had an effect on the real sector. In particular, trade liberalization resulted in a massive influx of foreign goods. Total imports, in terms of US dollars, increased by more than 272

Trinidad and Tobago

100% from 1993 to 1997. A large proportion of this increase, however, was in the areas of intermediate and capital goods. The trade balance was positively affected by the significant rise in exports to the Caribbean Community (CARICOM) region as the country’s goods appeared to be cheaper than those of its neighbours. There was also some evidence of increased pro­ ductivity across several sectors. Additionally, prior to 1993 the real estate market was very depressed. The advent of foreign exchange liberalization and the subsequent capital inflows contributed to a revival of the real estate market as housing prices began to rise after many years of decline. There was some hint that this could have been partly fuelled by capital repatriation, resulting from gains by those who arbitraged the pre- and post-float exchange rate.

Recent developments and economic outlook For the past six years, the Trinidad and Tobago economy has mainly been in decline. This was once again triggered by the collapse of oil and LNG prices in 2014. Additionally, there was also the matter of the dwindling output of both oil and natural gas. Issues related to production and exploration were mainly responsible for decreases in oil output. The decline in gas output had a ripple effect as it had an impact on all the downstream users, including the methanol and LNG companies. Initially, the gas curtailment was blamed on the need for suppliers to carry out maintenance work. In particular, it was believed that the country’s largest producer of natural gas, British Petroleum Trinidad and Tobago (bpTT), was doing so due to the Deepwater Horizon oil spill in the Gulf of Mexico in 2010. However, bpTT later stated that The lower production that has resulted in the gas curtailments recently experienced by [the Point Lisas industrial estate and Atlantic LNG] is primarily a result of a pause in new investment in recent years by upstream producers, including bpTT, due to the culmination of many factors which created an unfavorable investment climate.22 Therefore, maintenance was only a small part of the problem. The real issue was lack of investment. As a result, the government introduced a number of new incentives in 2013 to encourage greater investment in gas exploration, particularly in deep-water blocks. These incentives appeared to have a positive impact as there was some uptick in activity in the years that fol­ lowed. However, the downside to this was that it contributed to a drastic fall in fiscal revenue from the energy sector as the companies were able to expedite write-offs of investment expenditure. For example, in 2016 the combination of low prices and the write-off resulted in a 90% decline in government receipts from energy companies. The situation has improved somewhat since then, but it has raised the spectre of the country not being able to produce enough natural gas to meet its commitments to the downstream industries. This was perhaps the main driver behind the move to sign an agreement with neighbouring Venezuela which would see natural gas in borderline fields between the countries being processed in Trinidad and Tobago. Simply put, Venezuela has the natural gas and Trini­ dad and Tobago has the LNG plants. However, with the Maduro government being heavily sanctioned by the USA, this deal is not likely to come to fruition anytime soon.23 Another area of recent concern has been the proliferation gambling and gaming entities under the guise of members’ clubs, since gambling is still officially illegal. These have grown almost exponentially in the last 10 years. Trinidad and Tobago is believed to be the only country in the world with a completely unregulated gambling sector. The country was ranked fifth in the index of countries with the highest risk of susceptibility to money laundering in the 273

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Latin American and the Caribbean region after Paraguay, Haiti, Bolivia and Panama. Not sur­ prisingly, it has been fighting to get off various international blacklists. Because of its loose legal environment and its location, it has always been seen as a potential major haven for money laundering. However, during the period December 2018 to August 2019 the government enacted about 18 legislative amendments to deal with deficiencies identified in the Caribbean Financial Action Task Force 2016 Mutual Evaluation Report. The amendments sought to address beneficial ownership, non-profit organizations, criminal activity and other gaps in the existing anti-money laundering/counter terrorist financing laws and regulations.24 In terms of financial developments, in 2019 the country was once again forced to use up its foreign reserves in order to maintain the stability of the exchange rate. An adjustment to the US dollar allocation system that was made in 2014 disrupted the foreign exchange market. Since then there have been chronic shortages of US dollars available to the public at commercial banks. This has led to a certain amount of rationing by the banks. It also has resulted in the re­ emergence of a parallel market for dollars and frequent calls for a major devaluation. Thus far, the monetary authorities have remained resolute against this.

Summary Trinidad and Tobago remains among the most prosperous of the Caribbean islands. Its abun­ dant endowment of oil and natural gas has provided its citizens with a relatively high standard of living. From the first year of independence to the present day, successive governments have recognized the need for diversification of the economy. Several initiatives were tried, including import substitution industrialization (ISI) along the lines suggested by W. Arthur Lewis. How­ ever, there was very limited success in changing the basic structure of the economy. There was a degree of diversification within the hydrocarbon sector, with the expansion from exports of simple crude oil to other energy-based products such as urea, methanol and LNG. The country has also developed a comparatively small but important manufacturing sector which dominates the protected CARICOM market, accounting for roughly 70% of intra-regional exports. Other sectors such as agriculture and tourism have either declined or remained stagnant. Therefore, heavy reliance on the energy sector shows no sign of abating. Initially, trade and financial policies were mainly geared towards supporting the ISI initiatives. For example, restrictions on imports or Negative Lists were not abolished until 1991. Also, foreign exchange was rationed under a system of exchange controls administered by the Central Bank. These policies associated with financial repression were abandoned following the collapse of oil prices in the 1980s that led to a long and severe economic recession. In the 1990s the shift to more financially liberalized policies, the rebounding of oil prices and large inflows of FDI into the energy sector provided the impetus for an extensive period of economic expansion. From 1994 a period of positive growth was only halted with the onset of the global financial crisis in 2008. External debt was almost eliminated, and unemployment reached a record low. The exchange rate remained stable and there were adequate reserves at the Central Bank. Since 2010, however, economic growth has been almost flat or negative. The country has not returned to the sustained growth of the pre-crisis years, despite buoyant energy prices during the period 2011–14. Public debt, both external and internal, has started to rise once more as government budget deficits have accumulated over the past decade. Inflation and unemployment remain manageable, but foreign reserves are once again being used up to pro­ tect the exchange rate. There is some hope that an amicable resolution of the crisis in Vene­ zuela may result in a much-needed boost in natural gas supply to Trinidad and Tobago’s LNG plants and this could provide the catalyst for renewed prosperity. 274

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Notes 1 Romero, Indira and Moreno Brid, Juan Carlos (2015) ‘Export Competitiveness in an Oil and Gas Economy: The Case of Trinidad and Tobago, 1985–2010’, Revista CEPAL, December, p. 42. 2 Government of Trinidad and Tobago (1957) ‘First Five-Year Plan 1958–62’, Port of Spain: Govern­ ment of the Republic of Trinidad and Tobago. 3 Government of Trinidad and Tobago (1963) ‘Second Five-Year Plan 1964–68’, Port of Spain: Govern­ ment of the Republic of Trinidad and Tobago. 4 Ibid. 5 Ramsaran, Ramesh (1998) ‘Aspects of Growth and Adjustment in Post-Independence Trinidad and Tobago’, paper presented at 15th Annual Monetary Studies Conference, Paradise Island, the Bahamas, 26–30 October. 6 Government of Trinidad and Tobago (1968) ‘Third Five-Year Development Programme 1969–73’, Port of Spain: Government of the Republic of Trinidad and Tobago. 7 Racha, Sandra (1998) ‘Natural Gas Based Industrialization in Trinidad and Tobago: A First Assess­ ment’, paper presented at the Annual Review Seminar, Research Department, Central Bank of Bar­ bados, 28–31 July. 8 Government of Trinidad and Tobago (1968) ‘Report of Fiscal Review Committee, Ministry of Finance 1981’, Port of Spain: Government of the Republic of Trinidad and Tobago. 9 Barclay, Lou Anne A. (2003) ‘FDI-Facilitated Development: The Case of the Natural Gas Industry of Trinidad and Tobago’, UNU-INTECH Discussion Paper Series 7, Maastrich: United Nations Uni­ versity – INTECH. 10 Central Bank of Trinidad and Tobago (2008) ‘Financial Stability Report 2008’, Port of Spain: Central Bank of Trinidad and Tobago, p.11. 11 Central Bank of Trinidad and Tobago (2008) ‘Monetary Policy Report’, Port of Spain: Central Bank of Trinidad and Tobago. Central Bank of Trinidad and Tobago (2008) ‘Monetary Policy Report’, 8(2), October, Port of Spain: Central Bank of Trinidad and Tobago, p. 44. 12 John D. Burger, Alessandro Rebucci, Francis E. Warnock and Veronica Cacdac Warnock (2010) ‘External Capital Structures and Oil Price Volatility’, IDB Publications (Working Papers) 1127, Washington, DC: Inter-American Development Bank. 13 Government of Trinidad and Tobago (1989) ‘Review of the Economy’, Port of Spain: Government of the Republic of Trinidad and Tobago, p. 28. 14 Central Bank of Trinidad and Tobago (2000) ‘Annual Economic Survey 2000’, Port of Spain: Central Bank of Trinidad and Tobago, p. 12. 15 International Monetary Fund (IMF) (1997) ‘Trinidad and Tobago: Select Issues’, Staff Country Report No. 97/41, IMF: Washington, DC, p. 51. 16 Ibid. 17 Central Bank of Trinidad and Tobago (2008) Financial Stability Report, September, Port of Spain: Central Bank of Trinidad and Tobago, p. 17. 18 Central Bank of Trinidad and Tobago (2000) Economic Bulletin 2(1), Port of Spain: Central Bank of Trinidad and Tobago, p. 7. 19 See R. Dornbusch and A. Reynoso (1993) ‘Financial Factors in Economic Development’, in R. Dornbusch (ed.), Policy Making in the Open Economy, World Bank: Washington, DC, pp. 64–89. 20 M. Salandy and L. Henry (2018) ‘The Determinants of Capital Flight from Beautiful Places: The Case of the Small Open Economy of Trinidad and Tobago’, Journal of Developing Areas, 52(4): 85–98. 21 Ibid. 22 www.spglobal.com/platts/en/market-insights/latest-news/natural-gas/091914-natural-gas-curtailm ents-in-trinidad-and-tobago-due-to-lack-of-investment-bptt (accessed 24 December 2019). 23 Trinidad and Tobago has also had to absorb a number of Venezuelan citizens fleeing the unrest in their country. 24 Ministry of Finance, Review of the Economy 2019, Port of Spain: Government of the Republic of Trinidad and Tobago, p. 121.

275

20 Belize Victor Bulmer-Thomas

Introduction Belize became independent on 21 September 1981 after 120 years as a British colony.1 During that time its economy had performed relatively poorly – especially when comparisons are made with the rest of the Caribbean. Indeed, Belize began life as an independent country ranked 22nd in terms of gross domestic product (GDP) per head among the 28 countries of the Car­ ibbean.2 This placed Belize in the bottom quartile and indicated the long distance the country needed to travel in order to regain the status it enjoyed after the Napoleonic Wars when it had been ranked first in terms of exports per head.3 The first part of the chapter is devoted to production and is concerned with the change in the output of the economy as measured by GDP and GDP per head. The second part is devoted to distribution. This refers to the way in which the fruits of production are divided among the population. The third part explores employment. This is one of the biggest pro­ blems throughout the Caribbean and Central America, since these economies have struggled to find jobs for all their citizens of working age. The final part analyses the macroeconomic fra­ mework since independence, looking in particular at the exchange rate, monetary and fiscal policies.

Production Belizeans had been in control of most aspects of economic policy for nearly two decades before the end of colonization as a result of internal self-government. However, independence still brought some immediate changes.4 Belize was now free to join those international institutions where membership was limited to independent countries and these included the United Nations (UN), the World Bank, the International Monetary Fund (IMF), the Inter-American Development Bank (IDB) and the UN Economic Commission for Latin America and the Caribbean. In due course, Belize would also join the Organization of American States (OAS) and the Sistema de Integración Centroamericana.5 Membership of these organizations gave Belize access to funding that would not otherwise have been available as well as the prospect of influence on the world and regional stage. At the same time independence meant that Belize was eligible for the Preferential Trade Agreements 276

Belize

(PTAs) that could only be signed by sovereign countries. The first was the Caribbean Basin Initiative (CBI), launched in 1984, that gave Belize duty-free entry to the USA on a range of exports.6 The second was the Lomé Convention that defined the terms under which exports from the Africa-Caribbean-Pacific (ACP) countries could enter the European Community (EC).7 For a country that depended on exports for its development, these trading arrangements were important. However, they excluded many goods and all services, so that Belize – together with other countries in the Caribbean – became frustrated at times with the arrangements. This sense of disappointment was then aggravated when the USA and the European Union (EU) signed PTAs with other countries and regions that eroded the preferences given to Caribbean states.8 Belize had specialized in forestry for much of its existence. However, the timber industry went into sharp decline after 1950. By the time Belize became independent, the structure of its economy was similar to that of other countries in the Caribbean and Central America. Primary activities (mainly agriculture, but also forestry, fishing and mining) accounted for just over onequarter of GDP (see Table 20.1). This was roughly the same as secondary activities (mainly manufacturing, but also construction, electricity and water), but less than services which accounted for some 40% of GDP. Forty years later, however, primary activities constituted little more than 10% of GDP, while nearly 75% was accounted for by services. Secondary activities had fallen to just under 15%. Belize therefore became specialized in services – in common with most countries in the Caribbean. Since one of the most important services is tourism, it is no surprise to find that the pattern of final expenditure also changed. Although household consumption is still the largest item of expenditure, exports of goods and services (see Table 20.1) are now almost as impor­ tant. However, imports of goods and services usually account for an even higher share of GDP than do exports with the difference explained by current transfers (mainly remittances) and net capital inflows. Public current spending, on the other hand, accounts for only a small share of final expenditure, while investment has averaged around one-quarter of GDP. If we first take into consideration the whole post-independence period (roughly four dec­ ades), the Belizean economy measured by GDP at constant prices has grown by 4.3% per year. Most of this growth, however, is explained by the increase in population so that the annual growth of GDP per head has been a very modest 1.5%.9 Furthermore, most of the growth took place in the first three decades after independence (see Figure 20.1) with no increase at all since 2010. As a result, in 2016 Belize ranked 32nd out of the 34 countries of Latin America and the Caribbean in terms of GDP per head at constant prices.10 Only Haiti and Guyana were poorer Table 20.1 Sectoral and final expenditure shares of GDP (%), 1980–2018

1980 1990 2000 2010 2018

Primary

Secondary

Services

Exports of goods and services

Household expenditure

Public expenditure

Investment

Imports of goods and services

27.4 20.0 17.4 14.0 11.9

30.9 22.2 20.6 21.5 14.1

41.7 57.8 62.1 64.5 74.0

55.4 62.2 53.0 59.1 57.7

71.9 64.6 74.1 70.4 68.5

17.2 12.9 12.9 16.2 17.5

24.1 20.4 31.7 19.4 16.6

68.6 60.1 71.7 59.0 60.2

Source: World Bank, World Development Indicators (annual), Washington, DC: World Bank, and Belize Statistical Institute, Statistics (annual), Belmopan: Government of Belize. Note: Shares are based on GDP at current prices.

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Figure 20.1 Belizean GDP p.c. (2010 US$), 1980–2019 Source: Belize Statistical Institute, Statistics (annual). Belmopan: Government of Belize.

and Guyana will soon overtake Belize as a result of the discovery of oil in commercial quantities. By the time of independence in 1981 Belize had shaken off its dependence on forestry exports. Instead, exports came mainly from a small number of agricultural and marine products such as sugar, bananas, citrus and shrimp. Indeed, in the year of independence these four pro­ ducts accounted for almost all domestic exports and about two-thirds of merchandise exports.11 Since their prices were determined in world markets over which Belize had no control, there were bound to be fluctuations in the value of export earnings and this could easily be com­ pounded by changes on the supply side due to the weather. In that year, service exports were still small, accounting for a little over 10% of total exports.12 Forty years later the main commodity exports are the same, but the situation has changed in other respects.13 Service exports, as in much of the Caribbean, have become much more sig­ nificant. By far the most important is tourism (overnight and cruise ship visitors). Belize, as so often before, has therefore reinvented its export sector. However, it has not eliminated the problem of volatility. World commodity prices are still very important, but they have been joined by income fluctuations and exchange rate variations in the countries from which the tourists come. And tourism is almost as susceptible to weather conditions in Belize as agricultural and fisheries exports.

Distribution We can think of ‘production’ as the cake and ‘distribution’ as the way in which the cake is divided. It can be in equal portions or done very unequally. One distribution may also be 278

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economically efficient, but socially very unfair. This in broad terms is what happened in the USA in the 30 years after the mid-1970s when the share of income received by the richest 1% of the population jumped from 10% to 20%. On the other hand, it is possible to give priority to distribution even at the expense of production. This is what happened in Cuba in the 1960s when output rose very slowly, while income inequality declined dramatically. What has been the situation in Belize? We are limited in what we can say, because until 2002 there were no reliable studies on distribution. At the time of independence, however, all con­ temporary observers were struck by the lack of extremes in the Belizean distribution of income. There were many poor people, but the rich did not flaunt their wealth and the Prime Minister, George Price, was famous for the example of austerity that he set. The contrast with the neighbouring countries, where the rich engaged in conspicuous consumption while living in gated communities with high security, could not have been more marked. Nor, at first, did Belize experience the problem found in many parts of the Caribbean where a large part of production accrued to foreigners, making gross national income (GNI)14 – the income received by residents – much smaller than GDP. The extreme case was Puerto Rico, where foreign-owned companies were so dominant that GNI had fallen to two-thirds of GDP by the 1980s. However, many Caribbean countries had a similar experience as a result of the presence of key foreign companies in the crucial export sector. The position in Belize is now much more typical of that found in the rest of the Caribbean and the neighbouring countries. In that narrow sense there is no special cause for alarm. However, Belize has a relatively large number of expatriates from rich countries whose pay­ ments of income received in Belize to their own foreign bank accounts are almost certainly not fully captured in the Central Bank figures. Indeed, large parts of the real estate and other busi­ nesses are ‘under the radar’ as far as the authorities are concerned and there is anecdotal evi­ dence that transfer pricing is widespread in the import trade as a way of transferring profits abroad.15 Thus, 85% is probably a realistic figure for the ratio of GNI to GDP in Belize today. The first reliable study of poverty and inequality in Belize was not carried out until 2002 and a second one, using the same methodology, was done in 2009. The first year, however, was one of moderate growth while the second coincided with a recession. This needs to be remembered when evaluating the published statistics. Nonetheless, these two studies are of excellent quality and are the first opportunity to address in detail the question of distribution in Belize. The 2002 Poverty Assessment Report revealed the extent of extreme poverty (indigence), which occurs when an individual’s income is insufficient even to purchase the minimum food requirements for their gender and age. The level of indigence was estimated at just over 10% (see Table 20.2). The report then estimated the minimum non-food expenditure needed to avoid poverty and found that a further 23% did not have sufficient income for this. Thus, onethird of all Belizeans were defined as poor in 2002 – despite the fact that the economy had been Table 20.2 Poverty and distribution as a percentage of population, 2002 and 2009

Indigence 2002 2009

10.8 15.8

All poor 33.8 41.3

Gini coefficient 0.40 0.42

Expenditure by quintile Top

Bottom

n.a. 48.8

n.a. 5.8

Source: Government of Belize, 2002 Country Poverty Assessment (2004) and Government of Belize, Country Poverty Assessment (2011). Note: Numbers refer to individuals – not households.

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growing over the past few years (see Figure 20.1). Income inequality, however, was not severe with a Gini coefficient estimated at 0.40.16 The results of the 2002 study suggested that poverty in Belize was comparable to the levels found in other countries with similar incomes per head, while income inequality was a little lower. However, any complacency that might have been suggested by these findings was swept away with the publication of the 2009 Poverty Assessment Report. Although the survey was carried out in a recession year, the results were nonetheless very shocking. The most striking result was the increase in indigence. This had jumped to 15.8% by 2009 (see Table 20.2), meaning that Belize now had the same level of extreme poverty as Guatemala in 2000. Overall, poverty had climbed to 41.3%, so that ‘moderate’ poverty had also increased. The survey also estimated that the top quintile was responsible for nearly half of all expenditure, while the bottom quintile accounted for only 5.8% (see Table 20.2). The Gini coefficient had increased, but not greatly – a result that some might find surprising in view of the rise in conspicuous consumption since 2002.17 The 2009 Poverty Assessment Report, made widely available in 2011, suggested that something had gone seriously wrong in Belize as the country prepared to celebrate 30 years of indepen­ dence. Indeed, in the Caribbean only Haiti and the Dominican Republic had higher levels of poverty. The report was also exceptionally useful in identifying the characteristics of indigent and poor households.18 The first characteristic identified was the extent to which indigence was associated particu­ larly with rural areas. No less than 80% of indigent households were found in the rural econ­ omy. This helps to explain why Belize is different from the rest of the Caribbean, since in Belize the proportion of the population in rural areas is high (55% in 2019) and has continues to rise. This, in turn, reflects the increase in immigration from Central America – especially Gua­ temala – since so many of the migrants come from an agricultural background. In the long term this may prove to be beneficial for Belize, but in the short term it is a major factor behind the increase in indigence. A second characteristic has to do with education levels. Among indigent households, only 12% of heads of family had a secondary or post-secondary education compared with 35% for heads of households nationally. In other words, nearly 90% of heads of indigent households left school with only a primary school education – and in a few cases not even that. Sec­ ondary school attendance rates in Belize are low by international standards, so it is not sur­ prising that so few heads of indigent households have had access to it. This is clearly an area where Belize is falling badly behind in comparison with other countries in Central America and the Caribbean. Unfortunately, no Poverty Assessment Report has been carried out in the last decade. Since income per head at constant prices has been stagnant during this period, it is quite possible that poverty indicators have deteriorated further. A proxy for what might have happened is provided by the data on employment and unemployment, which are collected regularly. It is to this that we now turn.

Employment Employment has been the Achilles heel of the Caribbean development model in the last half century. The rate of unemployment is high in almost all countries. This is the case in relatively rich countries like Martinique as well as poor countries such as Suriname. Only Cuba has had a very low rate, but this has been due to the existence of high rates of disguised unemployment in the public sector rather than being a true reflection of the state of the labour market. 280

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The highest rates of unemployment (in excess of 20%) are found in a number of former British colonies such as Dominica and Grenada. The labour market in Belize is far from satisfactory and that has been true for almost all the period since independence (and, indeed, for many years before it). New entrants to the labour force struggle to find work, while employers complain about the quality of those they hire. Unemployment is high, although just how high depends on how it is measured (the decennial census, for example, uses a definition that is very different from that used in the annual labour market survey).19 Whichever measure is used, however, cannot disguise the fact that the employment situation in Belize leaves a lot to be desired. The Belizean labour market has many features in common with other countries in Central America and the Caribbean. However, there are also important differences. This is perhaps not surprising in view of the fact that Belize is the only country that belongs to both regions. We will explore the similarities below, but first we will look at the differences. Most countries of Central America and the Caribbean, including Belize, have experienced net outward migration in the last 30 years. Yet Belize has also experienced high levels of gross inward migration since independence. In other words, Belizeans may have emigrated, but at the same time many others have come to Belize to take their place. The 2010 census estimated the foreign-born to comprise 14.8% of the population with over 80% of these migrants having arrived from Guatemala, El Salvador, Honduras and Mexico. Most of these immigrants to Belize have come from an agricultural background. Not sur­ prisingly, therefore, they have chosen to work in the agricultural sector. Thus, the proportion of the labour force employed in agriculture has remained high (it was 17.7% in 2019).20 Whereas in most countries there has been a marked shift in employment from agriculture to industry and services, Belize has experienced a smaller decline in the agricultural share of the working-age population. At the same time there has been a fall in the industrial share (from around 20% in 1993 to 15% in 2019). Owing to the importance of agriculture, Belize has therefore remained a relatively rural country. Indeed, the rural share of the population has remained around 50% throughout the period since independence. This is very different from other countries in Central America and the Caribbean, where rising levels of income per head have been associated with an increase in urbanization. And Belize has not experienced the extreme concentrations in a single city found in many of the countries in these two regions. These are the main differences and they help to explain the workings of the Belizean labour market. Agriculture remains important and its growth has enabled Belize to become self-suffi­ cient in a number of important foodstuffs such as rice. Industry, especially manufacturing, has suffered from the combination of a small domestic market and declining tariff rates. There are also many similarities with neighbouring countries. The service sector has been growing in importance and now accounts for around two-thirds of all jobs compared with per­ haps 50% at the time of independence. This trend seems set to continue with its share increasing in the future at the expense of agriculture rather than industry. This is a result of industry being reduced to a core of activities that have learnt to survive in the face of import competition while many agricultural sectors will struggle to move from self-sufficiency to exports. And existing agricultural export activities, such as sugar and bananas, face very uncertain prospects. Belize has also experienced the same rise in female participation21 as other regional countries. While male participation in Belize has risen slowly to 80% in 2019, the female rate has jumped from around one-quarter at the time of independence to 53% nearly 40 years later.22 As a result, the total participation rate has steadily increased. More Belizeans of working age are

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therefore in the labour force, although this does not mean that they are necessarily employed as they may be seeking work rather than being in a job. Another similarity is the gendered nature of sectoral jobs. Some 85% of female jobs in 2019 were in services with only 6% in agriculture. Female jobs in industry are also relatively unim­ portant today, although they were much more important before the collapse of garment exports.23 By contrast, only 55% of all male jobs were in services in 2019 compared with 25% in agriculture and 20% in industry. If the service sector continues to be the main driver of the Belizean economy in the face of a decline in the relative importance of agriculture, this can therefore be expected to favour female over male employment unless jobs become less ‘gendered’ than in the past. In 1984, shortly after independence, the Central Statistical Office conducted a labour force survey. Although not strictly comparable with the results of the annual surveys carried out from the 1990s onwards, this was the most thorough attempt to date to understand the workings of the Belizean labour market. One of the most striking features of the survey was what it revealed about unemployment. It estimated the rate of unemployment to be at 14% with female unemployment at 24.1% and male at 9.1%. Furthermore, the survey also showed a wide dis­ parity among the six districts with the highest rate (male and female combined) in Stann Creek (23.7%) and the lowest in Corozal (8.4%).24 Part of the gap between labour supply and demand could be attributed to the recession that Belize experienced at the time of independence. However, when surveys started to provide annual data in the 1990s, the rate of unemployment was still very high. In 1991, for example, when the economy was growing rapidly, the rate was 8.1 % (see Table 20.3) with a female rate of 13.1% and a male rate of 6.0%. The unemployment rate then rose before reaching a peak of 11.7% in 1998. Youth unemployment (see Table 20.3) was roughly twice as high throughout this period. The unemployment rate in Belize is very sensitive to the business cycle, falling when the economy is booming and rising when it is stagnant. This explains the sharp rise after 2009 when the economy entered a recession. However, the trend rate is flat with the total unemployment rate averaging around 10% (higher for women and lower for men). It has proved very difficult to lower this trend rate despite recognition by policymakers that unemployment carries huge economic, social and political costs. The persistence of such high rates of unemployment demands explanation. Minimum wage rates are higher than in neighbouring countries, but this can always be justified if the labour force is more productive. This depends on skills, which in turn are highly correlated with the level of education of the employed population. Unfortunately, despite recognition by all poli­ tical parties that education should be a priority, the Belizean workforce is not highly skilled. Table 20.3 Belize unemployment (%), 1991–2019

Female Male Total Youth female Youth male Youth total

1991

2000

2010

2019

13.1 6.0 8.1 23.3 11.3 15.4

17.8 7.0 10.6 31.3 13.6 19.9

17.9 7.7 11.7 29.6 15.3 20.9

15.4 5.5 9.5 32.6 12.0 19.9

Source: Belize Statistical Institute, Statistics (annual), Belmopan: Government of Belize.

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The Belizean population is still very rural and access to secondary schools for pupils outside the main towns is often difficult. In time, with increasing urbanization, this problem will resolve itself. However, Belize does not have the luxury of waiting and the skill levels of the future labour force need to be addressed as a matter of urgency. There is, however, a big difference between males and females with respect to education. While the 2010 census revealed that there were slightly more boys than girls in pre-school and primary education, there were more girls than boys in secondary and tertiary institutions. Indeed, at university level the number of women outnumbered men by two to one. Coupled with the strong presence of women in the service sector, the prospects for female employment are clearly a lot brighter than for men. This is not, however, peculiar to Belize as similar trends are found in other parts of Central America and the Caribbean. Faced with high rates of unemployment and poor job prospects, it is not surprising that so many Belizeans have emigrated. This outflow started in the first decade of the twentieth cen­ tury when many Belizeans left for Panama to find work in the Canal Zone. It accelerated after Hurricane Hattie in 1961. It did not stop with independence, with some 40,000 persons leaving in the 1980s. Tighter entry requirements, especially in the USA, reduced the outflow in the 1990s when an estimated 25,000 people left with an additional 20,000 following in the first decade of the twenty-first century.25 Outward migration in the first two decades after independence was so high that it exceeded the large number of immigrants coming to Belize. The rate of gross outward migration was 2% of the population in each year in the 1980s and a little over 1% in the 1990s. During these two decades net births exceeded the change in the population so that there was net outward migration despite the large numbers coming to Belize as immigrants. It was only after 2000 that the numbers entering exceeded the numbers leaving. Although the rate of immigration slowed down as a result of improved economic conditions in Central America, emigration became more difficult. Furthermore, there was an improvement in the average education of the foreign-born population. According to the 2000 census, 60% had no education at all, while this had fallen to less than one-third by 2010. The biggest impact of these changes has been on Belizean ethnicity. By 2019 the Creole population had fallen to 22% compared with 53% for the mestizos (in 1980 the shares were 39% and 33%, respectively). Yet, despite the change in the balance of ethnicities, there was no real prospect of Belize becoming ‘just another’ Central American country. The children of the foreign-born population were being rapidly assimilated into Belizean culture and these changes – including a largely bilingual population – increased Belize’s claim to be a ‘bridge’ between Central America and the Caribbean.

Macroeconomic policy After independence, Belize was in theory free to determine its own policies. However, Belize soon discovered that its freedom of action could still be restricted in various ways. The balance of payments crisis at the beginning of the 1980s forced the People’s United Party (PUP) gov­ ernment to seek a loan from the IMF and that loan came with numerous strings attached. The IMF would later apply pressure to Belize through its regular Article IV consultation process and the same would happen through other international agencies when they wanted a change in policy.26 These pressures could come not only from multilateral institutions, but also from foreign governments. The British government in the mid-1990s, for example, used the bilateral tax treaty between the two countries to ensure that the United Democratic Party (UDP) 283

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government did not end the fiscal privileges extended to the companies owned by Michael Ashcroft, a British citizen, by the 1990 International Business Companies (IBC) Act.27 The US government, for its part, used its unilateral drugs certification process to pressure Belize into signing other bilateral treaties that may in some cases have had nothing to do with the trade in narcotics.28 Governments in Belize have also faced external challenges to their economic policies from the judicial system, since the Court of Appeal is composed mainly of non-Belizean judges, while the final Court of Appeal until recently was the judicial committee of the Privy Council in London (it is now the Caribbean Court of Justice in Trinidad and Tobago). The nationali­ zation in 2009 of Belize Telemedia Ltd was challenged in this way, as was the ninth amend­ ment to the Constitution in 2011 mandating that public utilities should have a majority government stake.29 Economic policy in Belize, therefore, has had to be shaped so that it takes external realities into account. However, the domestic constraints have been even more important and at the centre of the macroeconomic framework since independence has been exchange rate policy. Indeed, the mandate of the Central Bank of Belize, established in 1982, could not make this clearer since Clause 6 of the Bank Act states: Within the context of the economic policy of the Government, the Bank shall be guided in all its actions by the objectives of fostering monetary stability especially as regards stability of the exchange rate and promoting credit conditions conducive to the growth of the economy of Belize. ‘Stability of the exchange rate’ in the above quotation refers to the peg of the Belize dollar against the US dollar. This was set in 1976 when the newly established Belize Monetary Authority broke the link with the pound sterling set on 31 December 1949. Belize therefore once again linked its currency to the US dollar, as it had first done in 1894, but this time at a ratio of 2:1 rather than at parity. The main economic argument for linking the Belize to the US dollar rather than to the pound sterling was the overwhelming importance of the USA in the country’s external trade. The USA was already the country’s most important partner before 1976 and its importance subsequently increased even further. However, the US share of Belize’s trade peaked in the early 1990s and then declined. The latest figures suggest that the USA is now responsible for only one-third of merchandise imports and exports and it is likely to account for a similar share of service trade. Belize is a small open economy and it can be argued that the exchange rate peg has served the country well. By avoiding devaluation, Belize has escaped the fate of Guyana, Jamaica, Nicaragua, Suriname and many other Caribbean nations where exchange rate collapse led to very high rates of inflation. Furthermore, it is widely assumed that it would be suicidal for any political party when in government to devalue. However, there are other exchange rate pegs available, including to a basket of currencies, and at some point in the future it may be necessary to change. In addition to maintaining stability of the exchange rate against the US dollar, the Central Bank of Belize has responsibility for monetary stability. This was almost virgin territory for Belize when the bank began operations in 1982. When the Belize (British Honduras) dollar came into existence for the first time in 1894, monetary stability was guaranteed by a currency board that required 100% backing by sterling of any notes and coins issued.30 The Belize Monetary Authority, established in 1976, was able to take a slightly more active role. However,

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the monetary system that the Central Bank was asked to regulate and supervise in 1982 was still extremely primitive. All this changed rapidly after independence as Belize acquired a modern financial system. The most significant change was the steady ‘financial deepening’ of the country, as the ratio of the money supply (broadly defined) to GDP rose from around one-quarter at the time of inde­ pendence to nearly three-quarters 40 years later.31 Indeed, the money supply has expanded in almost every single year. This is all the more remarkable in view of the fact that the annual change in the money supply is heavily influenced by the change in net foreign assets, which has fluctuated greatly in Belize from year to year and has often been negative.32 One feature of the monetary system that has not changed, however, has been the enormous spread between lending and deposit rates by banks. The high spread in 1980 could be attributed to the ‘shallow’ financial system under the colonial currency board system, but the spreads have persisted and have become a source of major concern to the authorities as high lending rates by banks undermine investment and make the return on capital needed by new firms extremely challenging.33 There are many explanations given for the high spreads. However, the most compelling is the oligopolistic nature of the banking system whereby one bank (the Belize Bank) accounts for nearly 40% of all deposits and loans. This makes the Belize Bank the market leader and allows it to set rates that other financial institutions are only too happy to follow. And, as the market leader, the Belize Bank has been able to pass on to its customers the increased costs associated with the rise in non-performing loans after 2006.34 Other explanations include the problems caused by US banks no longer providing corresponding banking services to some Belize banks as a result of the high cost of compliance associated with new rules on money laundering. The Belize Bank, renamed as such following the purchase of the Royal Bank of Canada by Michael Ashcroft, has been the main beneficiary of the tax concessions given to Public Invest­ ment Companies by the International Business Companies Act in 1990. These tax concessions, although no longer as generous as they once were, allowed the bank to build market share at the expense of its competitors through aggressive promotion of its services. The dominant market position it acquired then enabled it to maintain the high spread between borrowing and lending rates that should have declined sharply with financial deepening. The high spreads in Belize are therefore a direct consequence of the generous tax concessions granted in 1990. Tax concessions have an impact on government revenue, which brings us to fiscal policy in Belize. Governments know only too well that fiscal policy can undermine a fixed exchange rate despite the best efforts of central banks to pursue monetary stability. Thus, the gap in Belize between public revenue and expenditure – the central government surplus/deficit – has been subject to careful scrutiny.35 Public revenue in Belize comes mainly from indirect taxation. This used to be derived largely from taxes on external trade. However, concessions on import duties to numerous companies, coupled with zero tariffs on imports from CARICOM, have reduced the importance of this source of income. The main source of revenue is now taxes on goods and services closely fol­ lowed by taxes on income and profits. There are also non-tax revenue streams, which normally represent a little over 10% of the total. There has been no strong tendency for revenue to increase as a share of GDP despite the growth of GDP since independence. This stands in contrast to what normally happens as countries become richer. This might not matter if public expenditure, including investment, had moved in line with revenue. However, as in all democracies, public expenditure has been subject to strong upward pressure (especially before elections) so that deficits on public spending have been the normal practice. 285

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The deficit at the time of independence could be attributed to the impact of the recession on public revenue, but the large deficits in some years in the 1990s and between 2000 and 2006 cannot be explained away so easily. These were years of high public investment, which was particularly important when the PUP was in power.36 The deficits have had to be financed and the central government has resorted to both internal and external borrowing to meet its requirements, although the main source has been external. This led to a big increase in public sector external indebtedness. In addition, the central government guaranteed the borrowing of public sector institutions leading to a further increase in the public external debt. The ratio of public sector external debt to GDP was kept below 60% until the late 1990s. This is the ratio that is often regarded as prudent, as it avoids the need for a high proportion of public expenditure to be spent on external debt servicing. However, by 2003 the ratio was above 100% and external debt servicing became increasingly onerous for Belize. As Belize struggled to meet its external obligations, there was even a risk of devaluation. Belize was forced to restructure its external public debt in 2006, but the instrument used (the ‘super bond’) can be likened to a ticking bomb as it carries an interest rate that increases over time.37 Fiscal policy has been the weakest part of the macroeconomic framework in Belize since independence and it invites the question of whether it could have been improved. There is no denying that there are numerous fiscal concessions for companies. Indeed, it is hard to find a company that is paying the full range of taxes that in theory apply to firms, since most qualify for concessions under either the Fiscal Incentives Act, the Export Processing Zone Act, the Commercial Free Zone Act or – in the case of the Belize Bank – the International Business Companies Act.38 In addition, Belize collects very little from cruise ship visitors and the high tax threshold for individuals (BZ $20,000) means that most pay no income tax at all. The performance of the Belizean economy since independence has therefore been very mixed. Macroeconomic stability has been preserved with low rates of inflation and responsible monetary policies. GDP growth for the first three decades was in line with the Caribbean average, but GDP per head has fallen since 2008. The proportion of households living in pov­ erty has almost certainly increased since the last survey in 2009, while the rate of unemploy­ ment has remained a concern. Most worrying has been the high rate of external indebtedness, making it very difficult for the Belizean government to invest in the programmes that might improve labour productivity and allow the country to end the stagnation in GDP per head. The Belizean economy has therefore been caught in a debt trap that prevents it from grow­ ing – not poor enough to qualify for debt relief, but not rich enough to find the resources to restructure its economy in a more sustainable way. The playing field for the private sector is not level with small companies unable to compete with those large firms able to access funds abroad and having the leverage to secure substantial tax reductions. At the same time Belize’s reputa­ tion has been damaged by the endless cycle of litigation brought against the government by Michael Ashcroft’s companies in the last decade, thus deterring other foreign investors and distracting the government.39

Notes 1 Belize had been a British settlement since 1763 subject to Spanish sovereignty. It became the colony of British Honduras in 1862 and changed its name to Belize in 1973 eight years before independence. 2 Defined as all the islands plus the three Guianas and Belize. 3 See V. Bulmer-Thomas (2012) The Economic History of the Caribbean since the Napoleonic Wars, Cambridge, MA: Cambridge University Press, Figure 4.1, p. 79. 4 Belize was already a member of the Caribbean Community (CARICOM). 5 OAS membership was not possible immediately after independence because of Guatemalan objections. 286

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6 The CBI would be expanded in later years to include more goods. 7 The EC would become the EU in 1993, while the Lomé Convention would be replaced by the Cotonou Convention in 2000. Finally, in 2008 the PTAs were replaced by an Economic Partnership Agreement between the EU on the one hand, and CARIFORUM on the other, with the latter consisting of all CARICOM states together with the Dominican Republic. 8 The North American Free Trade Agreement (NAFTA) was especially problematic, as it gave Mexico unrestricted access to the USA across a whole range of goods in which the Caribbean could only compete with preferences. 9 The population, numbering some 400,000 in 2019, is estimated based on births, deaths and net migration since the last census in 2010. It is therefore subject to a large margin of error and will be revised after the next census is published. 10 Owing to constitutional changes in the Dutch- and French-speaking countries, there are now six more countries in the Caribbean than in 1980. 11 Merchandise exports are the sum of domestic exports and re-exports. 12 Total exports are the sum of merchandise exports and service exports. 13 Oil started to be exported in 2006, but the value peaked in 2011 and has declined sharply since then. 14 GNI adjusts GDP by adding income from abroad and subtracting income paid abroad. 15 Transfer pricing occurs if a merchant pays a higher price for imports than is actually necessary, the excess being then paid into a foreign bank account owned by the merchant. It is also a way of reducing tax liability. 16 The income reported in the survey should include remittances from abroad. It is likely that these favour the poorer groups in Belizean society and this may help to explain the relatively low Gini coefficient. 17 The Gini coefficient shown in Table 20.2 is based on income as reported by those sampled. All groups tend to under-report their incomes, but the degree of under-reporting is often greatest among the rich. 18 The Poverty Assessment Reports have much less to say about the characteristics of the rich. In general, however, the top decile – in Belize and elsewhere – receives less of its income from wages and salaries and more from rents, distributed profits and bank interest. These non-labour sources of income are not heavily taxed in Belize so that fiscal policy contributes very little to the distribution of income. 19 In 2000, for example, the census suggested a rate of unemployment of 20.3%, while the annual survey estimated it at 10.6%. 20 Agriculture is defined here to include forestry and fishing, although forestry today is unimportant. If we compare the figure for agriculture alone (i.e. excluding forestry), it was 29% in 1946 (see N. S. Carey-Jones (1953) The Pattern of a Dependent Economy: The National Income of British Honduras, New York: Cambridge University Press, p. 97). Thus, Belize has experienced a much smaller decline in the share of agricultural employment in the last 70 years than almost any other country. 21 The participation rate is defined as the ratio of those aged 15 and above in work to the total popula­ tion of that age. 22 See Statistical Institute of Belize (2019) Labour Force Survey, Belmopan: SIB. 23 In the 1990s industrial jobs accounted for between 10% and 13% of all female employment. 24 In every district, the female unemployment rate was much larger than the male rate. 25 See J. Straughan (n.d.) Emigration from Belize since 1981, University of Vermont website (www.uvm. edu/~gflomenh/Belize-projects/articles/Straughan_Emigration_final_1_ref.doc), which is a wideranging survey of Belizean emigration based on the secondary literature. 26 One example was the sustained campaign by the Organisation of Economic Co-operation and Development at the end of the 1990s against Belize’s offshore financial industry. 27 The 1990 IBC Act, drafted by Michael Ashcroft’s lawyers, authorized the establishment of Public Investment Companies (PICs) with major fiscal concessions. Only two PICs were established before the Act was amended in 1995, the most important being Ashcroft’s holding company that has changed names several times since it was created. The 1995 amendment preserved the tax privileges of the two PICs that had already been established. 28 In a presentation to a US/CARICOM summit in May 1997, Dean Barrow – at the time Deputy Prime Minister – stated: ‘The suspicion, too, can never be far from our minds that certification is a form of pressure to force us to sign certain treaties … that … in individual clauses, require modifica­ tion to bring them into conformity with our Constitutions.’ 29 Both judicial challenges were led by Michael Ashcroft’s associates, leading to the media coining the phrase ‘Ashcroft Alliance’.

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Victor Bulmer-Thomas 30 See B. Bulmer-Thomas and V. Bulmer-Thomas (2012) The Economic History of Belize, Benque Viejo: Cubola, p. 103. 31 The money supply can be narrowly defined (current accounts, notes and coins only – M1) or broadly defined (to include time and saving deposits – M2). Whichever definition is used, ‘financial deepening’ refers to the ratio of the money supply to GDP. 32 Broad money, i.e. M2, represents the liabilities of the consolidated banking system and is therefore equal by definition to the sum of the banks’ domestic and foreign assets. Thus, the change in M2 is equal to the change in net domestic assets (‘money of internal origin’) and the change in net foreign assets (‘money of external origin’). In Belize, the change in money of external origin has often been negative, which makes the growth in the money supply in almost every year all the more notable. 33 There was a significant decline in lending rates in 2011, but deposit rates fell as well as leaving the spread roughly the same as it was before. 34 These jumped sharply, as the economy slowed down and eventually went into recession in 2009. 35 See, for example, D. Martin and O. Manzano (2010) Towards a Sustainable and Efficient State: The Development Agenda of Belize, Washington, DC: IDB, Chapter 2. 36 The World Bank became so exercised by this that it cancelled its programme for Belize in 2001 on the grounds of ‘fiscal and governance concerns’. It re-established its programme in 2011. 37 The interest rate started at 4.25%; it rose to 6.0% in 2010 and to 8.5% in 2012. The principal was due to be repaid from 2019, but the UDP government, in power since 2008, was able to negotiate an extension. 38 For more details, see also G. Jenkins and C.-J. Kuo (2006) Fiscal Adjustment for Sustainable Growth in Belize, Washington, DC: IDB. 39 This chapter was written before the spread of coronavirus (COVID-19) in 2020. While the impact of the virus will be very serious for Belize in terms of public health, social conditions and economic performance, I have not attempted to update the chapter to take this into account as there is insuffi­ cient evidence at the time of writing to make an informed judgement.

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21 Guyana and the advent of world-class petroleum finds Clive Y. Thomas

Introduction On the eve of the 50th anniversary of Guyana’s independence, I penned a newspaper column themed ‘Guyana then and now’. In it I lamented: Sadly, as we approach Republic Day 2015, the classic [colonial] description of Guyana as small (even micro by global standards), poor, highly open, and exceptionally dependent on trade in primary commodities, remains as broadly accurate today as it was back then.1 Examples of these descriptors included:




Guyana’s then current gross domestic product (GDP) at basic prices (US $2.6 billion) represents a micro-market, compared to a global GDP of around $100 trillion. Its population is similarly micro (0.75 million persons), compared to 7.1 billion worldwide. Its per capita GDP ($3,500) represented less than one-half of the global average. It was also then:







Trade (exports and imports) totalled 125% of GDP; while






the second lowest in CARICOM;2 one-quarter or less that of other Caribbean Community (CARICOM) members including the Bahamas, Trinidad and Tobago, and Antigua and Barbuda; only 8% of Organisation of Economic Co-operation and Development countries.

imports are wide-ranging and include capital goods, intermediate equipment, fuel, consumer goods, food and services; and exports are narrowly concentrated in primary commodities (gold, sugar, rice, bauxite, sugar, forest products, fish).

Foreign savings finance two-thirds of domestic investment.

I was unaware then, that four months later, Exxon (operator, 45%) and its partners (Hess Corporation (30%) and China National Offshore Oil Company, CNOOC Nexen (25%) would 289

Clive Y. Thomas

make the first commercial discovery of petroleum offshore Guyana, within a decade of the group’s initial exploration that took place in 2008. Five years after that discovery, in December 2019 Guyana became the world’s newest oil producer. From zero reserves in early 2015, the group’s reported recoverable reserves are now in excess of 8 billion barrels of oil equivalent (boe) following successful drilling of 16 offshore wells. This rapid growth indicates a steep creaming curve. 3 Guyana’s exploration success rate for commercial discoveries has been reported by the energy research and consultancy group Wood Mackenzie at 82%, compared to a global average of under 20% (15 November 2018). This is world-class, and reputedly one of the fastest rates ever recorded in the sector. Furthermore, the Guyana Basin’s yet-to-find reserves ratio is now being reported by Wood Mackenzie at 8–10 billion boe. As a result, Guyana’s annual average real GDP growth during the period 2018–28 is projected at 16.7% by the International Monetary Fund (IMF), with non-oil GDP growth estimated at 5%. Guyana is expected to rank among the top five growing economies worldwide during this period.4

Before the advent of oil and gas in Guyana This section highlights the economic conditions in Guyana during the decade immediately preceding the lifting of its first oil in 2019. Table 21.1 presents basic socio-economic data as of 2019 or the most recent available year. These data reveal population characteristics (size, life expectancy, child mortality and age structure); social features (poverty rate, Gini coefficient, Human Development Index – HDI); and economic characteristics (per capita GDP, public debtto-GDP ratio and the size of government in the economy). The country’s small size, high level of income poverty and striking inequality stand out among these data. Table 21.1 Guyana: key socio-economic indicators (most recent year)

1 2 3 4 5

6 7 8 9 10 11 12 13 14

Total population (‘000s) Population: growth rate Literacy rate Life expectancy at birth Population: median age Population: age structure (under 15) Age structure 15–64 Age structure 64+ Under-five mortality rate per 000 live births Population living under the poverty line (%) 2000–06 Population rank Gini coefficient HDI ranking Per capita GDP (US $) (2018) Public debt-to-GDP ratio (%) Government revenue-to-GDP ratio (%) Government expenditure as a percentage of GDP

779 0.01% 89% 67.1 24.6 31.9% 63.3% 4.8% 31.3 35.0 164 of 232 44.6 125 5,252 55.4 28.0 34.3

Source: United Nations, National Accounts Statistics: Main Aggregates and Detailed Tables, https://unstats.un.org/ unsd/nationalaccount/madt.asp; Statistics Guyana, National Accounts and Production, https://statisticsguyana.gov.gy/ data/data-tables/; World Economic Outlook Database (Washington, DC: IMF, October 2019), www.imf.org/external/p ubs/ft/weo/2019/02/weodata/index.aspx; World Development Indicators (Washington, DC: World Bank, various years), https://databank.worldbank.org/reports.aspx?source=World-Development-Indicators.

290

Guyana Table 21.2 Guyana’s principal foreign trade and investments agreements

Item

Status/In force

Agreements

Type

1

Active/1995 Multilateral Active/2001 Regional Active 1980–2019 USA and CARICOM Active 1986 CARIBCAN Active/2008 CARIFORUM

World Trade Organization

Goods and services, etc.

CARICOM

Regional integration

Caribbean Basin Economic Recovery Act Canada and Commonwealth Caribbean EU-CARICOM- Dominican Republic

USA and CARICOM

2 3 4 5

Non-reciprocal trade Goods, services and development

Source: See Department of Foreign Trade, Guyana, Information Portal, September 2019, www.minfor.gov.gy/category/ department-of-foreign-trade/. Note: Other agreements have been concluded with Colombia, Costa Rica, Cuba, the Dominican Republic, Venezuela, Saint Kitts (Christopher) and Nevis, Kuwait, Barbados, Argentina, the People’s Republic of China, Switzerland, Germany and Ecuador.

The introduction to this chapter has emphasized the open features of Guyana’s economy, especially trade and investment flows. These have driven the formation of CARICOM, whose two primary rationales are (1) the need to overcome the challenges posed by member countries’ small markets and population size; and (2) to broaden CARICOM’s natural resources, beyond its members’ current over-dependence on sea, sand and sunshine. CARICOM’s largely island nations are over-reliant on tourism and other services (e.g. offshore finance). Table 21.2 pro­ vides data on Guyana’s principal foreign trade and investments agreements, the majority of which embodies the CARICOM dimension. Figure 21.1 shows the annual percentage change in Guyana’s real GDP for the period 2007–19. Of note, this period has a consistent GDP series, as this was rebased in 2006; and, with petroleum coming, it is being rebased at 2020 prices. Annual average and median growth rates during the period were just over 4%, with a range of 2% (minimum) to 7% (maximum). Other descriptive statistics show a variance of 1.84 and a standard deviation of 1.36.

Figure 21.1 GDP annual % change (2007–19) 291

Clive Y. Thomas

With most of the annual fluctuation in growth rates confined to the initial rebased GDP years (2007 and 2008), the size of Guyana’s GDP has been reasonably satisfactory for more than decade. Indeed, it has been above CARICOM’s average. Other key macroeconomic indicators for 2015–19 reveal that this income performance has been consistent (see Table 21.3 and Figure 21.2). Real GDP growth has fluctuated between 2.1% in 2017 and 4.4% in 2019. Consumer prices and per capita GDP movements have been modest, while the size of the government in the economy reveals no strong fluctuations.

Projecting the macroeconomic impact of oil and gas This section covers the projected medium- and long-term macroeconomic impact of Guyana’s emerging petroleum sector. In preparation for this impact, the Guyanese authorities, in close collaboration with international financial institutions (IFIs), have undertaken significant pre­ paratory work. The IMF has focused on macroeconomic modelling; economic performance and measurement; governance of the petroleum sector; and wider structural reforms. Together with the authorities, the IMF has also concluded Article 1V Consultations 2019 and provided a debt sustainability analysis (jointly with the International Development Association). These analytics

Table 21.3 Guyana: macroeconomic indicators (2015–19)

Real GDP % Real GDP per capita Consumer prices (end of period) Government revenue including grants (% of GDP) Expenditure2 (% of GDP)

2015

2016

2017

2018

20191

3.1 2.7 –1.8 25.6 27.0

3.4 2.5 1.5 25.5 30.0

2.1 1.5 1.5 26.8 32.2

4.1 3.6 1.6 28.2 31.6

5.4 5.1 2.7 29.3 34.3

Source: Guyana: IMF Country Report No. 19/296 (Washington, DC: IMF, September 2019). Note: 1Preliminary; 2Total (current and capital).

Figure 21.2 Macroeconomic indicators (2015–19) 292

Guyana

offer rich, official up-to-date projections for both the medium term (about five years) and the long term (at least 10 years). The major conclusions arrived at in these studies are striking. For a start, the projections reveal that Guyana’s oil income ‘has the potential to transform the economy’.5 Furthermore, the government’s current macroeconomic policies are ‘broadly in line with Fund advice’, and consequently its external outlook is expected ‘to improve gradually’. Four policy issues have been identified for special consideration: the fiscal policy stance; monetary policy and stability; strengthening financial sector resilience; and fostering competi­ tiveness, inclusive growth and governance. Within this framework, scenario risks have been identified. On the downside, these are (1) challenges linked to ‘measurement’ of economic performance in Guyana (given structural changes induced by oil); (2) increased reliance on oil revenues (which are traditionally volatile); and (3) macroeconomic challenges (created by an expanded share of petroleum in GDP, exports and government revenue). Table 21.4 shows the medium-term projections for key macroeconomic variables. Guyana’s predicted real GDP growth rate to 2024 is similar to projections for the top five IMF members. Table 21.4 Guyana: medium-term macroeconomic projections (2020–24)

Projections

2020

2021

2022

2023

2024

(Annual % change) Production and prices Real GDP1 Non-oil real GDP Consumer prices (average)

85.6 4.8 3.3

4.8 4.6 3.5

20.6 4.7 3.5

26.2 4.9 3.3

3.2 5.0 2.8

15.7 15.9 17.9

17.1 17.2 15.5

(In % of GDP) Central government revenue Expenditure Total public sector gross debt

18.5 19.7 29.3

18.7 19.8 28.0

17.3 17.5 23.0

(In % of GDP, unless otherwise indicated) External sector Current account balance, incl. official transfers Gross official reserves (US $ million) Months of imports of goods and services

–18.4

–15.9

–5.6

–0.7

1.7

858 2.4

1,072 3.2

1,347 3.8

1,590 4.5

1,727 4.5

(In % of GDP, unless otherwise indicated) Other items Central government primary balance General government overall balance (CG and NIS) Per capita GDP, US $

–0.1 –0.5 10,249

–0.2 –0.6 10,990

0.4 0.1 13,502

0.3 0.1 17,636

0.3 0.1 19,405

Source: Guyana: 2019 Article IV Consultation – Press Release; Staff Report; and Statement by the Executive Director for Guyana (Washington, DC: IMF, 17 September 2019), www.imf.org/en/Publications/CR/Issues/2019/09/16/Guyana -2019-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-48678. Note: 1Projected 2020 growth is potentially overstated and subject to large subsequent revisions. The rate is elevated because oil-GDP base in 2019 was zero. Consequently, even small changes of oil output could result in large changes in oil and overall GDP. Work is on-going to rebase the real GDP. Due to the Covid-19 pandemic, the IMF has revised the 2020 growth rate to 52.8 percent.

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Clive Y. Thomas

Figure 21.3 GDP annual % change (2019–39)

Non-oil GDP annual growth is estimated at just under 5%. The inflation rate is projected to reach less than 3.5%. The other variables displayed suggest sound overall macroeconomic per­ formance. Figure 21.3 projects spectacular economic growth in 2020 (86%), 2022 (21%) and 2023 (26%). Significantly, beyond the medium term, the projections indicate an annual average rate of real GDP growth of 16.7%. This growth reflects (1) continued expansion of petroleum dis­ coveries and output; (2) the spillover/linkage effects to the non-oil economy; and (3) the ‘additional stimulus to the domestic economy’ generated by public spending on social/eco­ nomic and infrastructure deficits. Moreover, the average annual rate of domestic inflation is projected to be relatively low (2.8%), considering likely strong demand pressures and bottle­ necks. With supporting government reforms and appropriate policy stances, this expansion is projected to continue for another two decades to 2039. Of course, the further into the future that these projections go, the less reliable they become, due to the several known and unknown unknowns, which bedevil the functioning of small, poor, highly open economies. For what it is worth, therefore, Figure 21.4 shows the IMF/authorities’ combined annual rate of growth of GDP over the historical (2007–2018), estimated (2019), and projected (2023–39) periods.

Baseline scenario It is crucial to note that, underlining the medium- and long-term projections is a baseline sce­ nario, which is used by the authorities and the IFIs. This scenario is conservative in projecting petroleum output. Starting from the first quarter of 2020, the authorities and the IMF project oil output at 102,000 barrels per day (b/d), rising to an average of 424,000 b/d by 2025. This is based on output from only two of the 14 successful wells, which have already been dug. Moreover, this is confined solely to discoveries by Exxon and its partners. The next section will put Exxon on record as stating that it expects to produce 750,000 b/d by 2025. The stated intermediate targets to that goal are an output of 120,000 b/d by 2020, based on its first well (Liza 1); followed by 220,000 b/d from its second well (Liza 2) by 2022; with the third well (Payara) expected to produce another 220,000 b/d by 2023. Exxon also projects that there will be five floating production, storage and offloading vessels in operation by 2025. 294

Guyana

Figure 21.4 GDP annual % change

In the next section, I shift the focus from the macroeconomic effects of the advent of oil and gas on Guyana’s economy to a more microeconomic and sectoral appraisal of the country’s emerging oil and gas industry, taking into account its wider developmental impacts.

Guyana and its emerging petroleum industry This section depicts the likely industry-level, sectoral and microeconomic impacts of Guyana’s emerging petroleum industry, in contra-distinction to the macroeconomic impacts considered thus far. Guyana’s expected petroleum revenues are a function of six key variables, namely the fiscal rules of the Production Sharing Agreement (PSA); Guyana’s geological features and resource discoveries, (quantity and quality); the expected daily rate of oil production (DROP); petro­ leum prices; existential risks to the industry’s emergence; contractor capabilities; and estimated cost-price relations. The fiscal rules regulate revenue yield, while discoveries indicate recover­ able reserves, thereby fixing the DROP. Severe risks confront Guyana’s petroleum projects, with three considered existential, yielding the probability of ‘stranded assets’. The monetary value of the DROP depends on ruling petroleum prices. Under the PSA, Guyana owns the petroleum resources and international oil companies (IOCs) contract to produce and sell the output. Their capabilities are, therefore, central to outcomes because Guyana possesses neither the capital nor the know-how to commercialize its petroleum. The profitability of petroleum projects is a function of their cost-price relations. In this section, I make pertinent observations on these variables.

Government take Government take from petroleum earnings determines the size of public spending. Government priorities for its spending, however, are constrained by macroeconomic challenges, which invariably emerge as the petroleum sector expands. While Guyana’s PSA fiscal rules cannot be discussed in detail here, the tricky consideration is recovery cost, as claimed by IOCs. Such costs depend on the maximum amount set in the PSA (75%), and the variable life cycle of petroleum fields. Government take represents the government’s share of each project’s net cash flow. 295

Clive Y. Thomas

Worldwide, PSA arrangements have proved to be ‘risky’. They cannot guarantee out­ comes, owing to several known and unknown unknowns that are embedded in the petro­ leum industry. The division of earnings between the host country and the contractor, as stated in the PSA, is therefore dynamic, changing and evolving over time. Guyana’s present PSA, like all others, is likely to be amended/changed/renegotiated through time, albeit at an unknown cost. PSAs, however, strive to attain multiple objectives, and are not exclusively revenue-sharing. Thus, Guyana’s PSA addresses concerns such as protecting the nation’s wealth against adverse environmental effects; promoting efficiency; and establishing ‘local content’ requirements (LCRs). Guyana’s PSA rules include (1) a signature bonus of US $18 million; (2) a 2% royalty; (3) cost-recovery provisions and production-sharing; (4) income tax provisions; (5) miscellaneous taxes and revenue imposts; (6) rental charges and fees; (7) profit-sharing; and (8) domestic market obligations. There are three published calculations of expected Guyanese government take. These are Open Oil’s estimates of 52%–54% (2018), Rystad Energy’s estimate of 60% (2018), and Wood Mackenzie’s estimate of 50%-plus (2017/18). These estimates range between 50% plus and 60%. The mid-range is approximately 55% (see Table 21.5). Pressure to increase this ratio is expected to grow, as Guyana strengthens its petroleum sector capabilities and the industry is progressively de-risked. Petroleum contracts always evolve. In 2019, however, Rystad Energy claimed that its estimate (60%) compares with those of other frontier countries, where the range is 50%–65%. Wood Mackenzie similarly reported that Guyana’s revenue realization will fall in ‘the middle of the pack for a frontier area’, including being among the top 10 of African countries surveyed, the top five in Europe, and fourth in the Americas.6

Massive resource potential My assessment of Guyana’s potential petroleum reserves stands at 13–15 billion boe. This is a high prediction. To compare, the BP Statistical Review of World Energy ranking of countries with proven oil reserves lists Brazil 15th (with a holding of 13.0 billion boe); Algeria is 16th, (12.2 billion boe); and Angola and Ecuador are ranked joint 17th and 18th (8.3 billion boe) (see Table 21.6). In 2020 estimates of recoverable reserves by the two leading IOCs were (1) Exxon and partners (>8 billion barrels) and (2) the Eco Atlantic Group (3 billion barrels). The latter is based on a Competent Persons Report. Together, these yield a total of >11 billion boe, with exploration continuing apace.

Table 21.5 Guyana: government take (estimates)

Source Open Oil (2018) Rystad Energy (2018) Wood Mackenzie (2017–18) Range Approximate mid-range Source: compiled by the author.

296

% 52–54 60 50+ 50+ to 60 55

Guyana Table 21.6 Proven oil reserves and ranking among selected countries

Country

Rank

Reserve estimate (billion boe)

Brazil Algeria Angola Ecuador

15 16 17/18 17/18

13.0 12.2 8.3 8.3

Source: BP Statistical Review of World Energy 2020,www.bp.com/en/global/corporate/energy-economics/statistical-revie w-of-world-energy/downloads.html.

Two justifications My larger estimate is supported by two lines of argument. First, an appreciation of Guyana’s petroleum geology, as expressed in the geological principle of the ‘Atlantic mirror image’, and second, estimates provided by the US Geological Services (USGS). From all indications, and across all reservoirs, Guyana’s crude is reputedly ‘light sweet’; with an American Petroleum Institute gravity of 32 and a low sulphur content that is less than 0.51. Geoscientists have posited that Guyana’s discoveries reflect the earlier drifting apart of what was originally a unified super-continent, combining South America and Africa. A separation took place over geological time, resulting in the Guianas Equatorial Margin (encompassing offshore and onshore portions of Guyana, Suriname and French Guiana, as well as parts of Venezuela and Brazil). The petroleum geology of the Guianas area closely resembles that of West Africa. It includes two sedimentary basins, namely the Guyana-Suriname Basin and the Foz do Amazonas Basin (collec­ tively known as the Guianas Basins). It has also been reported that the Guianas Equatorial Margin/ Guianas Basins are separated by the Demerara Plateau, which is a structurally high, thick succession of Jurassic and Lower Cretaceous carbonate-rich sediments. This circumstance yields the thesis that the petroleum system of the Guianas Basins is a ‘mirror image’ of West Africa’s petroleum system, where several large hydrocarbon accumula­ tions have been found recently, including the celebrated Jubilee discovery offshore Ghana.

USGS assessment My second justification is based on two USGS World Energy Assessments of Undiscovered Oil and Gas Resources in Central and South America as well as the Caribbean (2000 and 2012). The information provided is ‘fully risked’, with estimates provided at levels of 95%, 50% and 5% probability. The mean probability is also reported (where fractiles are additive, assuming perfect positive correlation). The estimates provided for gas include all liquids. Undiscovered gas resources are the sum of non-associated and associated gas. Both survey results are shown in Table 21.7A and Table 21.7B. Table 21.7A Guyana-Suriname Basin (USGS assessment: oil and gas – undiscovered fully risked resources, 2000 and 2012)

Oil (billion barrels)

Gas (billion cu ft)

Natural gas liquids (million barrels)

95%

50%

5%

Mean

95%

50%

5%

Mean

95%

50%

5%

Mean

2.8

13.9

32.6

15.2

7.0

36.8

96.1

42.1

0.4

2.0

5.6

2.3

Source: US Geological Survey World Petroleum Assessment 2000: Description and results (Washington, DC: USGS Digital Data Series DDS−60,4CD-ROMs, 2000).

297

Clive Y. Thomas Table 21.7B Guyana-Suriname Basin (USGS assessment: oil and gas – undiscovered fully risked resources, 2000 and 2012)

Oil (billion barrels) 5.2

12.5

26.0

Gas (billion cu ft) 13.6

7.0

18.3

45.2

Natural gas liquids (million barrels) 21.2

0.2

0.5

1.2

0.6

Source: Assessment of Undiscovered Conventional Oil and Gas Resources of South America and the Caribbean, 2012 (Washington, DC: US Geological Survey, Fact Sheet 2012–3046, May 2012), https://pubs.usgs.gov/fs/2012/3046/ fs2012-3046.pdf.

For the 2000 assessment, estimates range from 2.8 billion boe (95% likelihood) to 32.6 billion boe (5% likelihood). The 50% likelihood is at least 13.9 billion boe and the mean is 15.2 billion boe. For the 2012 assessment, estimates range from 5.2 billion boe at 95% and 26.0 billion boe at 5%. The 50% likelihood is 12.5 billion boe and the mean is 13.6 billion boe. Discoveries thus far reveal amounts that are considerably greater than the 95% likelihood estimate for both assessments. Two observations are warranted. First, these estimates are for a virgin frontier region and therefore remain reliant on petroleum geology assessment. Second, the mean natural gas estimates are for 42.1 billion cu ft and 21.2 billion cu ft, respectively.

Bullish expert opinion Readers may find the following sample of public statements instructive. 1 Drilling Offshore 2 In a release, Drilling Offshore (3 December 2018) cites petroleum expert Luiz Hayum: ‘With about 17 projects still to drill [Guyana] will easily become the fourth largest oil producer within the Americas by the end of the next decade, if Venezuela and Mexico’s production decline continues’. 3 Offshore Energy Today 4 A 14 February 2019 release states: ‘US oil major Exxon Mobil can’t stop finding oil in Guyana’ (emphasis added). This claim followed two discoveries in January 2019, which carried the then total to 12 discoveries. To date there are now 16 discoveries. 5 Exxon Mobil 6 According to Exxon Mobil’s website, ‘We see a lot of development potential in the Turbot area [in the Stabroek Block] and continue to prioritize high potential prospects … we expect the area to progress to a major development hub providing substantial value to Guyana, our partners and Exxon Mobil’. 7 Rystad Energy 8 A press release also reminded us that: ‘US oil major Exxon was the leader of the pack among the top oil and gas explorers in 2018. Exxon Mobil was exceptional both in terms of discovered volumes and value creation for exploration’. 9 Energy Group, Canada 10 This group has labelled Guyana’s ‘reservoir quality exceptional with low development costs and low risk’. Furthermore, ‘of the top 50 developments surveyed [by the group], on average, Guyana’s figures are among the lowest’. 11 Wood Mackenzie 12 In September 2018, Wood Mackenzie depicted Guyana as ‘a new planet in oil’s solar system’ (emphasis added). This same release projected that Guyana would become one of an ‘elite 298

Guyana

13 14

15 16 17 18

group’ of oil exporters ‘exporting more than one million barrels a day, when four years ago it produced none’. The National Robin Mills at The National asked the question, ‘who will be world’s largest oil producing country per person in the 2020s?’ He believes that ‘Guyana may be the next big beast in global oil’ (emphasis added). Hess Corporation Hess predicts a Guyana break-even cost of US $35 per barrel, falling to $25 in some fields. Creaming curve At the Guyana Oil and Gas Association Conference in 2017 Kevin Ramnarine, the Trini­ dad and Tobago Minister of Energy, noted: ‘if we believe in the creaming curve, we know that Guyana will find more and more oil and we begin to find more and more oil closer and closer to the shoreline’. In energy economics, a creaming curve depicts a graph showing the relationship between cumulative aggregated volumes of oil reserves (on the linear Y axis) and, on the linear X axis, the number of wells dug over time. The steeper the curve, the more rapid is the revealed rate of discovery. And the flatter the curve, the more gradual that rate is and/or the smaller the size, or the drier the wells are.

Exxon Mobil’s public reporting reveals that wells dug to date and recorded as successful (16) suggest a success rate of about 82%, which is more than four times the global average of less than 20%. Significantly, it also reports the break-even cost for this oil is less than US $35 per barrel.

Existential risks Historical experience suggests that Guyana’s oil and gas development will be fraught with severe risks. Three of these are potentially existential. I refer here to (1) a threat to the mate­ rialization of Guyana’s petroleum sector as currently envisaged, and/or (2) a substantially delayed transition to fully ramped-up production, thereby wasting Guyana’s assets, whih have already been sunk in exploration, pre-production activities, and planning. These threats include (1) the geostrategic risk posed by Venezuela’s aggression surrounding its border claims; (2) the ever-present threat of unprecedented environmental catastrophe; and (3) the risk of intensified internal political conflict/strife. The threat of Venezuelan aggression arises from Venezuela’s claim that Guyana’s current petroleum finds are located in that country’s territorial waters. This chapter cannot delve into the historiography of Guyana–Venezuela border relations. My starting point is that Guyana is on public record concerning several instances of ‘Venezuelan aggression’. Geostrategic con­ siderations are entrenched as Guyana transitions from petroleum discoveries to materialization of this sector. Guyana argues that Venezuela’s territorial claim is (1) a de facto veto over Guyana’s development and the location of specific projects; (2) discourages investors in the offshore energy sector; (3) challenges its sovereignty over two-thirds of the territory held at indepen­ dence (1966); and (4) in 2018 Venezuela intercepted a petroleum exploration vessel. As regards the environmental threat, the government of Guyana and the IOCs recognize the risks and have publicly committed ‘to operate in an environmentally responsible manner’. 7 The third existential threat, national strife/conflict, arose in 2019 when Guyana faced a series of con­ stitutional crises. A national election was held as scheduled on 2 March 2020. There were allegations of fraud and a recount was agreed to by the two main contending political parties. That recount process ended in the formation of a new Government.

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Contractor capability While a significant number of companies, local and foreign, are currently positioning them­ selves for petroleum licences, two IOC groupings stand out, namely ExxonMobil and partners, and the Eco Atlantic/Tullow/Total grouping. The ExxonMobil grouping comprises Esso Exploration and Production Guyana, EEPG (a wholly owned subsidiary of Exxon Mobil, 45%), Hess Guyana Exploration, (a wholly owned subsidiary of the Hess Corporation, 30%), and Nexen Petroleum Guyana, (a wholly owned subsidiary of CNOOC, 25%). The Eco Atlantic/ Tullow/Total grouping comprises Eco (Atlantic) Guyana Inc and Tullow Guyana B.V., which jointly hold a Petroleum Agreement with the government of Guyana (January 2016). The agreement/licence has been granted for four years, with two renewals permitted for terms of three years each. ExxonMobil and partners have established a firm lead in terms of discoveries and production schedules. Eco (Atlantic) and Eco (Atlantic/Tullow) are comfortably in second place. Eco (Atlantic) has a 15% working interest in the Orinduik Block. This is the next most likely start-up block. Tullow Oil is the operator with 60% of the shares. The French multinational Total E&P Activités Pétrolières (Total) holds 25%, after exercising an option to acquire part of Eco (Atlantic’s) interest in September 2018. In March 2019 Gustavson and Associates produced a Competent Persons Report for this contractor grouping, which projects a ‘low case’ estimate of 2.01 billion boe, and a ‘high case’ of 7.2 billion boe. Their ‘best’ estimate is 3.98 billion boe. Recently, two wells dug by this grouping have yielded disappointingly heavy sulphurous oil of doubtful commercial potential.

Assessment Two observations are warranted; first, both IOC groups include a member of the top 10 oil super-majors. Thus, Exxon and Mobil (a private company) is ranked in the top half of that list, while Total (a publicly owned company) is in the bottom half. Second, the mixture of nationalities in both groupings reduces the risk of purely national geopolitical considerations consistently overriding commercial considerations.

Government spending priorities: scope Government spending priorities for its petroleum revenues fall into three broad categories, essentially separated by their time frame. First, those which are well underway (in terms of their conceptualization and/or implementation). Such priorities include Guyana’s membership of the Extractive Industries Transparency Initiative; the creation of a National Resources Fund/ Sovereign Wealth Fund; LCRs; the establishment of a Department of Energy; and a Petroleum Commission. The list represents preparation efforts for a competent governance framework. Second, the long-term priorities, as captured in the Guyana Green State Development Strategy 2040. Linked to the strategy is the Guyana government’s long-term international commitment to support the UN Sustainable Development Goals (SDGs) to 2030. Third, in between these two time frames lie the government’s annual to medium-term priorities as expressed through its annual national budgets. The government of Guyana is in regular consultation with IFIs that frame their support, technical assistance and oversight of Guyana’s economy within mediumterm frameworks and outlook. Table 21.8 summarizes the above descriptions. Guyana has established a Natural Resources Fund which may become the largest public spending area from petroleum revenues. Owing to its likely size and the somewhat minimal public discussion of the Fund, I believe it warrants some attention here.

300

Guyana Table 21.8 Government priorities for spending petroleum revenue

Time frame

Type

Item

2015–20

Pre-first oil

Mid-2020s–40s 2021 to mid-2020s

Long term Medium term

Extractive Industries Transparency Initiative, LCR, Department of Energy, National Resources Fund/Sovereign Wealth Fund, Petroleum Commission Green State Development Strategy, SDGs National budget, IFIs, framework agreements

Source: compiled by the author.

The claim has been consistently made that a National Resources Fund or Sovereign Wealth Fund protects the long-term interests of small developing petroleum exporters. I would advo­ cate caution on this orthodoxy. Why? Such funds recycle surpluses generated from Guyana’s exploitation of its natural resources into explicit global capital accumulation circuits that exist to drive global capitalist expansion and growth, rather than Guyana-specific growth. This feature is rarely highlighted. Instead, it is globally asserted that such funds (solely) perform essential roles for the primary benefit of the petroleum exporters. The global driver is never readily conceded in any discourse about these funds. In truth, natural resources-based funds such as Guyana’s constitute a long-term state-owned pool of investment income generated from exporting nat­ ural resources, which is then invested in real and financial assets offshore. Some investors claim that a central bank is similarly structured. However, a central bank’s goal is normally currency stability and avoiding inflation. The goal of these funds is typically to maximize returns on its holdings, while acting as an insurance pool for hard times. Guyana’s National Resources Fund requires the state (as the owner) to operate in a pre­ dominantly private global capitalist economy. This is contentious, given the reported global size of Sovereign Wealth Funds (more than US $8 trillion in total assets, of which the petroleumbased Sovereign Wealth Fund controls about 54%). Such enormous state capital invariably generates tension in a universe of private investors, operating in financial markets, where private risk-return incentives prevail. Guyana’s National Resources Fund/Sovereign Wealth Fund is, in reality, a conduit for redistributing ‘surpluses’ generated from Guyana’s export earnings into non-domestic-based income-generating activities located outside of Guyana. Given that local public statements on the usefulness of these funds are based on the ‘fine example of Norway’, it is therefore worth noting that that country was not the first to establish such a fund. Four decades before Norway, both Kuwait and Saudi Arabia (1953) had established theirs. My recommendation is, therefore, that the design and operation of Guyana’s fund should be guided by two basic factors, namely (1) promoting its Green State Strategy and SDG vision, and (2) macroeconomic management of the risks/uncertainties associated with petroleum, which all small, poor, open developing economies face. This means that Guyana’s National Resources Fund should be integrated into the country’s national budgetary processes, while utilizing global best practices (especially in the area of governance). This requires (1) a careful balance between rules and discretion in the fund’s operational areas (both extremes must be avoided); (2) avoid­ ing ambiguities in the key areas of regulation, oversight and surveillance; and (3) securing a long-lasting commitment from successive Guyana governments to define the fund’s objectives; provide disclosure requirements; use specific numerical targets; avoid unambiguous investment rules; and always ensure the backing of legislation that clearly defines the responsibilities of stakeholders. To date this has not occurred. 301

Clive Y. Thomas

Conclusion Several conclusions flow from the discussion presented above. First, the petroleum discoveries offshore Guyana are, undoubtedly, ‘world class’. An exceptional exploration success rate (over 80%) and a steep creaming curve testify to the truth of this. Second, despite major development challenges, including the small size of Guyana; high levels of income poverty and inequality; and low overall societal ‘capability’, the projections of spectacular GDP growth to the 2030s consequent to the discoveries are warranted. However, some features of this growth are note­ worthy. First, the zero base from which the finds are being measured must be taken into con­ sideration, as should be the swift movement from discovery to production (a period of less than five years). Third, high as they are, the GDP projections generated by the authorities and the IFIs are conservative. They are premised on a baseline scenario that is roughly two-thirds of the estimated DROP publicly released by the Exxon and partners grouping alone. The likely pro­ duction of the other IOCs in operation is not considered. Fourth, Guyana’s rapid progress from exploration to discovery to production combined with its limited capability has put considerable pressure on the governance of the country’s emerging petroleum sector. Fifth, historical lessons from other petroleum producers are widely canvassed in Guyana. From what they say, the authorities/IFIs seem cognizant of these. Indeed, their preparatory work in macroeconomic management, economic measurement and monetary-fiscal policy preparation is testimony to this concern. Sixth, on the whole, however, when all the dimen­ sions of preparation and guidance (monitoring, institutional, legal and regulatory, oversight, and review) are considered, efforts thus far remain a substantially limited work in progress. There have been significant implementation delays. Seventh, as regards these delays, I remain positive and hopeful that Guyana will learn by doing and thus achieve moderate success. Elsewhere I have advocated for two recommendations, as policy advice to the authorities. One is that while Guyana’s petroleum finds are clearly world class, both in absolute and per capita terms, its renewable resources are, potentially, equally formidable. Based on this I argue that investment of windfall profits from petroleum in this sector, for both domestic use and export, is a priority. Why? Guyana has made solemn commitments to ‘sustainable development’ over the past few decades. These are expressed in its global (SDGs), regional (CARICOM’s Sustainable Energy Road Map and Strategy) and domestic pledges (Guyana Green State Development Strategy to 2040). Meeting these commitments is incompatible with a singularly carbon-based economic growth strategy. The other is, as indicated in the introduction to this chapter, Guyana’s high level of income poverty. This impedes development and increases inequality. Through a recommended cash transfer to households scheme (whether conditional or unconditional, a variant of universal basic income proposals), and based on a spending constraint of 10% of government take, I have welcomed these world-class petroleum finds as an opportunity to address, in a ‘root and branch’ manner, income poverty in Guyana.

Notes 1 Stabroek News, 1 February 2019. 2 CARICOM comprises 15 Anglophone Caribbean countries plus Suriname and Haiti. 3 The creaming curve is a graph showing the relationship between cumulative aggregated volumes of oil reserves (on the linear Y axis) and, on the linear X axis, the number of wells dug over time. 4 This projection can be found in the IMF Staff Country Report: Article IV Consultation and Debt Sustainability Analysis (Washington, DC: IMF, 2019). 5 Guyana: IMF Country Report No. 19/296 (Washington, DC: IMF, September 2019).

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6 Quoted in Clive Thomas, ‘Oil Government Take & Spending: Navigating Guyana’s Development Challenges – 1’, Stabroek News, 1 July 2008, www.stabroeknews.com/2018/07/01/sunday/guyana­ and-the-wider-world/oil-government-take-spending-navigating-guyanas-development-challenges-1/. 7 Public Comment, Department of Public Information, Guyana, 2017.

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22 Development and underperformance in the Barbados economy, 1946–2018 DeLisle Worrell

Introduction The story of the Barbados economy in the post-Second World War period is one of successful development. What was in 1946 a desperately poor society, with low life expectancy, high infant mortality, crowded and poorly maintained housing and great disparities of wealth, is today an emerging market economy with a human development index that is the highest in the Caribbean, and puts the country in 56th position in the world, in the highest category of the United Nations Development Programme’s classification. The story of the economy is one of underperformance and the squandering of much of society’s potential. It is a story of missed opportunities, lack of vision, and a failure to develop a body of thought that enriches the global knowledge with insights which are unique to the experiences of small societies worldwide. The consequences have been especially harmful for economic policy: except for a brief moment in the late 1960s and early 1970s, economic poli­ cies in Barbados and the rest of the Caribbean have imitated those in advanced countries. Unsurprisingly, that has led to disappointing performance. In this chapter, we begin with a review of economic growth and macroeconomic stability in Barbados since 1946. Investment is the engine of growth, adding to the capacity to pro­ duce and improving productivity; investment is the subject of the second section. That is followed by an analysis of fiscal policy, and its impact on macroeconomic stability. An important question is the extent of diversity in the goods and services produced in the country. We will see to what extent all the eggs are in one basket in the next section. As is widely recognized, the objective of economic growth is development; we will spend some time on the available measures of development, and what they tell us about the material well-being of Barbadians. We then move on to a discussion of government policies and the extent of the government’s success in stimulating growth and development. We end with an assessment of Barbados’s economic performance, a discussion of what might have been done better, and some thoughts about future economic development in Barbados and the Caribbean.

304

Barbados

Macroeconomic growth and stability The phases of real economic growth that may be identified in Figure 22.1 are summarized in Table 22.1. The 1950s marked a period of high growth, almost 5% annually, ending in 1963; the economy contracted in 1964, 1965 and 1967. There was a weak recovery in the early 1970s, with growth a little less than 3% per year, followed by another fall in output, in 1974 and 1975. The recovery in the second half of the 1970s was stronger than in the 1960s, matching the 5% per annum of two decades earlier. Once again, recession overtook the econ­ omy, in 1981 and 1982. The subsequent recovery lasted until the end of that decade. The years 1990–92 were a period of balance of payments crisis and economic contraction, as emergency fiscal measures were taken to reduce domestic spending and imports in defence of the exchange rate peg. Renewed growth in 1993 petered out in 1999. An upswing in 2002 peaked in 2006 with a growth rate of 9%. The impact of the global recession saw a contraction in 2009, and on this occasion the economy stagnated for the rest of the period up to the present day.

Figure 22.1 Real growth rates, 1947–2018 Table 22.1 Growth, investment and productivity

Period

Growth

Investment

Foreign savings

1950–63

4.6

6.8

15.5

1964–67

–3.5

1968–74

2.8

5.8

19.9

1974,75

–2.1

11.4

12.1

1977–80 1981,2 1983–9 1990–2 1993–99 2000–08 2009 2010–18

5.2 –3.4 2.8 –4.6 2.6 2.3 –4.1 0.8

8.5 19.2 19.7 13.0 16.1 21.2 19.2 17.9

9.3 6.0 –2.4 –0.8 –1.5 7.5 9.0 6.6

(Labour productivity)

16.7

1.8 –1.9 1.0 –2.0 –0.3 1.7 –1.3 1.0

Source: compiled by the author.

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DeLisle Worrell

Instability, in a small open economy with a fixed exchange rate like Barbados, manifests itself in a loss of foreign reserves which depletes the central bank’s war chest for defending the exchange rate, and provokes capital flight. Market perceptions of what constitutes an adequate store of foreign reserves have changed over time in Barbados. Up until the late 1980s there was no apparent market apprehension about the exchange rate, even though from time to time foreign reserve levels were only 50% of the amount required to cover three months of imports, which became the norm following the 1991 balance of payments crisis (see Figure 22.2; the foreign reserves line is the ratio of actual reserves to the three-month cover). As we will argue later, that reassurance was probably a reflection of the confidence afforded to the market by the soundness of fiscal policy. Perceptions changed with the balance of payments crisis of 1991, the result of three successive years of deficits in the overall balance of external payments, which almost completely exhausted the Central Bank of Barbados’s stock of external assets. The root cause of the problem was a persistent increase in government spending which provoked unsustainable levels of imports; strong fiscal correction in 1991 restored foreign reserve adequacy by the following year. Reserve levels remained healthy until 2010, when a precipitate decline started, which eventually drove the economy into a balance of payments crisis once again in 2018. The root cause, as in 1991, was fiscal: the failure to fully correct imbalances which had emerged as a consequence of the global recession.

Investment and growth Table 22.1 shows the relationship between investment and growth during the various phases outlined earlier. During the periods of highest growth (the 1950s and 1977–80) investment was quite low, less than 5% of gross domestic product (GDP); during the periods of highest invest­ ment (1983–89 and 2000–08), growth was only moderate, at just over 2%. Investment reached

Figure 22.2 Overall balance of payments, % of GDP; foreign exchange reserves, % of minimum 306

Barbados

almost 20% of GDP during the economic slumps of 1981–82 and 2009, and was recorded at 13% during the balance of payments crisis of 1991–92. This suggests that investment was much more productive in the first three decades from 1950, than it became thereafter. This thesis is borne out by other evidence that can be brought to bear. Changes in productivity may give an indication of the efficiency of investment; productive investment in technology, skills and organization can provide increasing returns, creating an upward spiral of growth in production and investment. Figure 22.3 captures the combined effects of growth, investment and labour productivity for the periods for which we have all the data. Investment seems to have been most efficient in this sense during the 1977–80 growth period, when growth averaged 5.2%, even though investment was only 8.5% of GDP on average; labour productivity in this period grew at an average of 1.8% per year. Much higher investment levels in the 1983–89 and 2000–08 growth periods yielded more modest growth rates of 2.8% and 2.3%, respectively. That may be partly because the corresponding labour productivity growth rates were a little lower, at 1.7% and 1% per year for these periods. Furthermore, an average annual invest­ ment rate of 16% of GDP during the 1993–99 growth period was associated with an average growth rate of only 2.3%; that rate would probably have been higher but for the fact that labour productivity fell during that period, at an annual average of 0.3%. Since 2010 an investment ratio of 18% of GDP has contributed to anaemic growth, averaging only 0.8% per year, with pro­ ductivity increasing at an average annual rate of 1%. Labour productivity fell in all three crisis periods, by 1.9% in 1981–82, by 2% in 1990–92 and by 1.3% in 2009. Other evidence of productivity growth in earlier years comes from Cox (1982: 56), who showed that labour productivity in manufacturing grew over by one-third between 1970 and

Figure 22.3 Growth versus investment 307

DeLisle Worrell

1979. In the same publication, I measure output per 1,000 employees at Bds $2.2 million in 1946, rising to $8 million in 1980, for the economy as a whole (Worrell 1982: 39). A factor which would have contributed to the low productivity of investment in the 2000s was the fact that much of the surge in investment at that time was on account of a boom in foreign investment for the purchase of second homes in Barbados, in contrast to investment in manufacturing and tourism in earlier periods (see Figure 22.3).

Fiscal policy and macroeconomic stability Fiscal policy in Barbados was heavily influenced by the election cycle: the overall deficit exceeded 6% of GDP in 1959, 1973, 1976 and 1977, 1981, 1986 and 1987, and 1990. Five of these eight large deficits occurred around the time of an election, in 1971, 1976, 1981, 1986 and 1991. In the years prior to Barbados’s first balance of payments crisis in 1991, large fiscal deficits were usually followed by corrective measures which brought the overall deficit to 4% of GDP or less, and restored savings on the fiscal current account (Figure 22.4). The economy suffered a major scare in the wake of the 1991 election, when the expenditure stimulated by fiscal expansion caused a surge of imports that all but exhausted the Central Bank of Barbados’s foreign reserves and brought the country to the brink of a devaluation of the exchange rate. A programme of deep cuts in the middle of the fiscal year restored the govern­ ment’s current account surplus within the year, and the associated cutback in imports brought the balance of payments back into an overall surplus by 1992. Financial support from the International Monetary Fund (IMF) helped to recharge the Central Bank’s foreign reserves, which were 20% above the minimum of three months of imports by the end of 1992. Over the next two decades it seemed that the lessons of the 1991 crisis had implanted in the social con­ sciousness of Barbadians the crucial importance of maintaining surpluses on the current account

Figure 22.4 Government revenue, expenditure and balance, % of GDP 308

Barbados

of the government’s operations and maintaining low overall deficits. Throughout the 1990s and up until 2006 surpluses were maintained on the current account, and the overall deficit was contained to 4% of GDP or less. However, the public memory proved unexpectedly short, as evidenced by the fallout of the global recession in 2008. The recession caused the collapse of the booming UK property market, which had fuelled investment in properties in Barbados. The construction boom in Barbados was abruptly deflated, and foreign investment and government revenues fell sharply. The fiscal deficit was 8% of GDP in 2009, rising to almost 10% the following year, when the sudden death of the Prime Minister and Minister of Finance, David Thompson, left a vacuum in the leadership of the country and in the management of its finances. The new Minister of Finance, Chris Sinckler, tried to bring the situation under control, and succeeded in reducing the deficit to 5% in 2011. However, with elections approaching in 2013, and with an unproven leader in Freundel Stuart, the temptation to prime the fiscal pump proved irresistible. Against the odds, Stuart narrowly won the 2013 election, but the fiscal deficit ballooned to a record 12% of GDP. Over the next four years, government made efforts to reduce the deficit, but they were never of the magnitude required, and by 2016, with another election looming, the deficit was still at 5% of GDP. Even more alarming, the government’s current account by then had been in continuous deficit since 2008, with the excess of operating and financing expenses over revenue ranging between 2% and as much as 10% (Figure 22.5). The relentless pressure of government deficit spending fuelled consumption and imports, with no investment to stimulate improve­ ments in competitiveness and additional foreign earnings. The governing party held on until the bitter end, but with high debt, deteriorating credit-worthiness, and plunging foreign reserves, a severe risk of exchange rate devaluation loomed. The incoming administration under Mia

Figure 22.5 Fiscal balance, % of GDP 309

DeLisle Worrell

Mottley has gained a reprieve from devaluation with the help of finance from the IMF and other international financial lenders, with an adjustment programme that involves a com­ bination of contraction of government expenditure, increased burden of taxation, and the repayment of old privately held debt on restructured, non-market terms. A comparison between the fiscal response to the balance of payments crisis of 1991 and the prolonged struggle to restore fiscal prudence in recent years is instructive. In 1991 the cut to the fiscal deficit was swift and decisive: the deficit of 7% of GDP in 1990 was reduced to 1% in 1991, principally by means of deep expenditure cuts, amounting to four percentage points of GDP. They included an across-the-board wage cut, together with a reduction in employment in the public sector. In contrast, more recently expenditure has not been brought decisively under control, and this has made it more difficult to return the fiscal accounts to sustainability. Government expenditure burgeoned from 33% of GDP in 2006 to 41% in 2013. Budget tigh­ tening in 2013 brought expenditure back down to 33% of GDP in a single year. However, rev­ enue, which had been falling as a ratio to GDP since 2003, when the ratio was 33%, experienced a further sharp decline in 2013 and 2014, to only 26% of GDP by the end of the latter year. As a result, the 2014 deficit stayed stubbornly large, at 7.5% of GDP, despite the expenditure cuts. Backlash against the expenditure correction induced the government to relax some measures and to abandon reform of state-owned companies and other measures needed to achieve the targets of the fiscal correction. The ratio of expenditure to GDP rose in 2015, resulting in a worsening deficit despite the imposition of additional taxes. Tax increases and expenditure cuts in the next two years succeeded only in reducing the deficit from 9% to 5% of GDP. By the end of 2018 the new government’s IMF-supported adjustment programme had yet to take full effect, and the impact on expenditure was not yet apparent. The government’s wage bill remained at 8% of GDP in 2018, not much changed from the previous year, and transfers to public enterprises had increased slightly, also to 8%. The bulk of the reduction of four percen­ tage points of GDP between 2017 and 2018 was facilitated through cuts in interest paid to holders of domestic government debt (two percentage points) and arrears of interest on foreign debt (one percentage point). Additional taxation contributed about one percentage point to closing the fiscal gap (see Figure 22.4 and Table 22.2). Table 22.2 Fiscal correction, 1991 and 2018, % GDP

Current balance Overall balance Revenue/GDP Exports/GDP Wages and salaries Domestic interest Foreign interest Goods and services Pensions, NIS, personal transfers Other transfers Other expenditure Current expenditure Capital formation

310

1990

1991

2017

2018

–0.2 –6.8 26.2 33.0 11.8 2.2 1.6 3.2 0.0 0.0 7.6 26.4 6.5

2.3 –0.9 27.7 28.6 11.6 3.2 1.3 2.9 0.0 0.0 6.4 25.4 3.1

–2.8 –4.5 28.6 33.1 7.9 6.0 1.7 3.7 3.6 7.6 0.9 31.4 1.7

1.7 –0.3 29.4 29.7 8.0 3.6 0.5 3.5 3.6 8.0 0.7 27.8 1.9

Barbados

Growth and structural change During the period 1946–2018 the Barbados economy was transformed from dependence on sugar as the main engine of economic growth, with tourism a secondary source of foreign exchange, to today’s tourism-dependent economy, with international business and financial services the secondary source of foreign earnings. Along the way, manufacturing rose to a level of importance almost equal to that of tourism by 1980, but manufacturing then suffered a long decline which has left it of minor importance in the economy. Like all small open economies, Barbados specializes in exporting a limited range of inter­ nationally competitive goods and services, earning the foreign exchange to purchase inter­ nationally the wide range of products needed to sustain the modern economy. The competitiveness of exports attracts incoming investment which increases capacity and fuels growth and employment (see Worrell et al. 2018). In the 1940s the sugar industry was the main export, providing 55% of foreign currency inflows (Haynes 1982), followed by tourism. Sugar output grew significantly in the 1950s, with sales to the United Kingdom guaranteed at remunerative prices under the Commonwealth Sugar Agreement (CSA). Output peaked in 1957, and production averaged in the region of 200,000 metric tonnes per year until the late 1960s. By that time rising domestic production costs were undermining profitability in the industry, and output fell precipitously. By 1974 output had been reduced by half; in that year the CSA ended, to be replaced by the sugar protocols of the newly formed Africa-Caribbean-Pacific (ACP) group of countries trading with the European Union (EU). The sugar industry never returned to profitability, and output and exports have since declined to insignificance (see Figure 22.6). Tourism and manufacturing both overtook sugar as the most important foreign exchange earning activity in 1971. Tourism then entered a sustained growth period which lasted until

Figure 22.6 Real GDP, Bds $ million 311

DeLisle Worrell

2004, by which time foreign earnings from tourism were well in excess of the combined earnings from other services and manufacturing, the only other international earnings sources of any importance. There was no overall increase in hotel accommodation in Barbados during this period; the increases in real value added in tourism were a result of enhancement of the pro­ duct, through upgrading of hotels, the development of ancillary and support services, and the emergence of purchases of second homes as a significant source of foreign earnings. The prop­ erty market boom, which was a spillover of the UK pre-recession boom, came to an abrupt end in 2007, and tourism lost ground in this segment which it is yet to recover, over a decade later. In the early 1980s the Barbados economy was more diversified than it has been before or since. Tourism, the main driver, was closely followed by a manufacturing sector which expor­ ted garments, processed foods, electronics, household chemical products and other items. The still declining sugar industry remained a significant third pillar of the economy. Manufacturing, which like agriculture benefited from Barbados’s relatively low wages at the time, grew steadily over the preceding decades to a peak real value added in 1980. Soon thereafter, a one-third devaluation of the Trinidad and Tobago dollar against the US dollar reversed the comparative wage costs in Trinidad and Tobago and Barbados. Unskilled and semi-skilled labour was now much cheaper in that country, and Barbados lost its most impor­ tant regional market for manufactured exports. This was followed, over the subsequent decades, by the loss of electronics and service suppliers to the US and other markets. Manufacturing declined until its contribution to GDP in 2018 was only one-third as large as tourism. For about three decades, from the late 1970s, companies established in Barbados to provide international business and financial services (IBFS) made a significant contribution to foreign earnings and economic activity. Although incentives for the establishment of such companies were in place since the late 1960s, active promotion by the government began only in 1976. By the early 1980s this new sector’s foreign earnings were over 40% of the earnings from tourism, which remained in the lead by a very wide margin. Earnings from IBFS activities fell back to 30% of tourism receipts at the time of the 1991 balance of payments crisis. After slow recovery in the 1990s, the sector experienced a boom period from 2000–10, when its contribution to foreign earnings was 50% of those from tourism. Sadly, the business case for locating services in Barbados has largely been eroded by tightening international regulations aimed at curbing money laundering and tax evasion by international companies; revenues from the IBFS sector have declined to one-fifth those of tourism, their level of the mid-1970s.

Development indicators The most substantial gains in the quality of life for Barbadians were realized in the 1950s, 1960s and 1970s. In the 1940s Barbados already had achieved virtually full adult literacy, but in every other regard the country was among the most wretched in the Caribbean. According to the 1946 West Indian census, life expectancy at birth was reported as 53 years for females and 49 years for males. The country had a tiny middle class of artisans, teachers, policemen and public workers, and a wealthy upper class of landowners, businessmen and colonial adminis­ trators. The majority of the population lived in poverty, working on the sugar plantations and doing unskilled manual labour. For many, there was a regular source of income only during the sugar harvest, which lasted for five months of the year. The inequality of income which resulted is reflected in the high Gini coefficient of 0.518 recorded in 1950. The emergence of tourism and manufacturing in the 1960s and 1970s were major factors in transforming Barbados into an essentially middle-class society by the 1980s. Wages were sig­ nificantly higher in tourism than in agriculture, and even though there was large seasonal 312

Barbados

variation in tourism, the degree of price and wage uncertainty was far less than in agriculture. An important contribution of the manufacturing sector was in providing jobs for the female labour force, which previously had few options other than agriculture and domestic service. The universal emphasis on education which was a feature of Barbadian society reinforced the beneficial impact of economic diversification. The government devoted resources to widening educational opportunities, and there was a strong response from the population. In 1960 only 8% of the population had a secondary education or better; by the mid-1990s that proportion had risen to 80%. The result was the emergence of a vibrant middle class of business professionals and skilled service providers. In 1950 annual incomes per head in Barbados were no more than US $168; with the great disparity in wealth reflected in the high Gini coefficient, this translated into widespread poverty. A majority of the population lived in overcrowded conditions in houses in poor repair, with poor sanitation, no running water or electricity, and in indifferent health. Infant mortality rates were among the highest in the Caribbean. A major transformation took place in the economy over the next three decades, and by 1980 per capita income reached US $3,474 per year. What is more, that income was far more evenly spread across the population, with a Gini coefficient that had fallen to 0.356 by 1979. Life expectancy at birth rose dramatically in the 1950s and 1960s, reaching 69 years in 1970. Over two-thirds of the labour force had a secondary education in that year. Income per head grew exceptionally fast in the 1980s (see Figure 22.7; the data is shown in logarithmic form so as to accurately reflect rates of growth over time), providing households and the government the wherewithal to consolidate the improvements in health, housing and nutrition which were made in the previous two decades. Education had long been seen as the best tool of social mobility, and growing incomes enabled families to invest more in the

Figure 22.7 GDP per capita, US $ 313

DeLisle Worrell

education of their children. Permanent employment opportunities afforded improved diets, and non-agricultural jobs offered more time for personal and household care. With growing tax income, the government was able to widen educational access, particularly at the secondary level, provide affordable public housing and establish a network of public health clinics. An effective non-governmental agency promoted family planning with official support, and this, together with the expanding middle class, slowed population growth despite reduced infant mortality and longer life expectancy. After 1980 social and material improvements were harder to come by: per capita GDP, which had increased nine-fold in the 13 years between 1967 and 1980, doubled over the next 13 years. On the basis of international purchasing power parities (PPPs), GDP per capita in 2017 was two and a half times that in 1980. That compares with a 20-fold increase to 1980. There was also further improvement in health conditions, with life expectancy at birth increasing from 72 years in 1980 to 75 years in 2000. The social and economic transformation in the 1950s, 1960s and 1970s contrasts with incremental gains made since. In the 1940s Barbados was an agricultural economy characterized by widespread poverty, poor health and sanitation, and inadequate housing, with unstable extended family relationships and overcrowding the norm. By 1980 Barbados had a more diversified mix of foreign earnings, led by tourism and manufacturing, with the declining sugar industry still of importance. A new and vibrant middle class had emerged with the resources to improve their material well-being. New opportunities for women in manufacturing and yearround employment in non-agricultural activities helped to raise most of the working class out of poverty, and housing, health and sanitation all were now of good quality. In the subsequent decades incremental gains were made in all areas of human development. The Human Devel­ opment Index for Barbados, which combines measures of GDP per capita on a PPP basis with indices for health and education, rose steadily from 0.732 in 1990 to 0.813 in 2018, putting the country into 56th position in the global rankings, one of two Caribbean countries listed as having a ‘Very High’ level of human development – the highest category.

Government policy, development and macroeconomic stability In this section, we discuss the ways in which government policy affected economic growth, development and macroeconomic stability. The significant ways in which the government influences the economy are through the provision of social services and infrastructure, tax policy, fiscal incentives and the legal and regulatory framework.

Government expenditure on public services The government made major contributions to the availability and quality of public services during the period of greatest development gains (Figure 22.8). Spending on education topped the list from the 1950s, at almost 3% of GDP; by the 1970s that had increased to 7%, mainly reflective of the successful push to provide universal secondary education. During the same period spending on health services rose from around 2% of GDP to almost 5%, with the building of a new general hospital and a network of free primary care clinics distributed across the island. Substantial spending on affordable housing was a major government thrust in the 1960s, expanding greatly on the earliest efforts in the 1950s. By the late 1970s expenditure on housing had increased almost four-fold, to about 2% of GDP. Spending on pensions, personal transfers and other miscellaneous social services rose steadily during this period, to about 3% of GDP by the late 1970s. 314

Barbados

Figure 22.8 Government expenditure, % of GDP

The government’s rising importance in the economy appears to have had highly beneficial effects on development during this period. Government expenditure rose from about 25% of GDP in the early 1960s to about 35% in the late 1970s. Almost all of the expansion, relative to GDP, was accounted for by education, health, social services and housing. What is equally important is that the government increased taxation relative to GDP, maintaining a small sur­ plus on the current account, to contribute to capital expenditure. Government expenditure was productive, and prudent fiscal management maintained fiscal savings. In contrast, government spending since 1980 has had less obvious results. Most categories remained at around 1980 levels relative to GDP or a little lower. The main factor pushing up education spending in the late 1990s was expenditure on expansion of the local campus of the University of the West Indies, an effort which increased the number of persons graduating, but may have adversely affected the quality of their education and the employability of their skills. Spending on health, social services and housing more or less kept pace with GDP growth. The government’s contribution to overall economic activity declined steadily from 1990, from 16% to 10% in 2018. In contrast, in 1990 the government was already providing employ­ ment for as much as 22% of the workforce; by 2018 the employment contribution remained the same, meaning that the share of government jobs was now twice the government’s contribution to GDP. That disparity is even more disappointing in view of the revolution in technology that has taken place over the past three decades (Figure 22.9). Overmanning and the decline in public sector productivity have been major factors in the decline in the quality and efficiency of public administration, recorded in the World Bank’s Doing Business reports and the annual Global Competitiveness Report of the World Economic Forum. The Barbados public sector is rated poorly in the processes affecting the establishment and operations of businesses, including trade and taxation. Major factors negatively affecting the island’s competitiveness in the past decade included declining public trust in politicians, suspi­ cion of social decisions, legal inefficiencies, wasteful government spending and the burden of government regulations, according to a recent Global Competitiveness Report.1 315

DeLisle Worrell

Figure 22.9 Government contribution to the economy

Tax policy The most important single change in tax policy in Barbados was the introduction of a valueadded tax (VAT) in 1997, to replace some indirect taxes previously collected, and to extend consumption taxes to services, which were not previously taxed. The rationale offered was to consolidate many previously disparate consumption taxes and to simplify the collection system. VAT failed in both those objectives: for various reasons, a number of levies and excises remain on the books, and VAT has been plagued with arrears of payment and of refunds by the tax authorities, errors and disputes in calculating the value of services, and other difficulties. The switch to VAT exacerbated the impact of the tax system on the distribution of income, increasing the relative burden on the lowest income groups. In the 1950s taxes on goods and services, which are more burdensome on lower incomes, contributed no more than 14% of revenues. The largest contribution at that time came from import duties, at about one-third of revenues (Figure 22.10). The progressive personal income tax contributed about 17%. Tax policy contributed to the improvement in the distribution of income in the 1960s and 1970s (Holder and Prescod 1984) as the contribution of the personal tax rose to 27% of revenue by 1978. A surge in consumption taxes and levies in the 1980s marked the beginning of a reversion to a tax system which put greater burdens on lower incomes. Goods and services taxes (not including import duties) reached 30% of total revenue in 1987. The impact of this shift would have been tempered by the effect of the income tax: Mascoll (1991) assessed the impact of the income tax in the 1980s, concluding that although the system shifted the burden somewhat towards the middle class, the income tax system remained strongly progressive. The introduction of VAT has given a distinctively regressive bias to the overall tax system. In 2018 VAT accounted for 31% of revenues, twice the contribution from the personal income tax. What is more, a study by Boamah et al. (2006) found that the redistributive impact of the income tax had decreased between 1987 and 1999. The study has not been updated, but if that remains true, it aggravates the regressive impact of the increasing bias towards indirect taxes. 316

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Figure 22.10 Select taxes to revenue, %

Capital expenditure Capital expenditure was above 2% per annum of GDP and occasionally as high as 6%, right up to the time of the global recession (Figure 22.11). Most years, capital expenditure was funded, to a significant extent, from surpluses on the current account. In years of fiscal difficulty (1976–77, 1981–82, 1990) the government dis-saved, meaning that it was forced to borrow in order to close gaps between the current government spending and insufficient revenue. In such cases fiscal correction in subsequent years restored a surplus on the current account. From 2008 onwards, however, capital expenditure has averaged just 2% per year, and the government has

Figure 22.11 Government capital formation, government savings, % of GDP 317

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been obliged to fund such expenditure entirely by borrowing, because current account deficits have been large. Not only has capital expenditure been lower in relation to overall activity, it has been less efficient. Maintenance of government properties and facilities has been inadequate, and there were numerous examples of temporary closure or abandonment of schools and public buildings as a result. The partially completed sewerage system failed in 2016, and plans for completion of the system and installation of modern sewerage treatment plants appear to have been abandoned. Insufficient investment in water sourcing, storage and distribution has left parts of the island chronically short of potable water. Piecemeal and inconsistent maintenance of the road network has resulted in poor surfaces and a need for large investments in rehabilitation and upgrades. There was also insufficient investment in the island’s port and airport, critical bottlenecks in an economy where international trade, tourism and international business are at the heart of all economic activity. Both the port and the airport are in need of major upgrades that would significantly reduce costs and improve throughput. What is more, Barbados may be missing out on possibilities for port and airport expansions to link into global transportation networks. Barbados’s geographic position, the easternmost of the Caribbean islands, gives it a natural advantage in providing a node for transportation links across the Atlantic, north and south to the Americas, and west to the Panama Canal. However, successive administrations in Barbados have shown no interest in partnering with international transportation companies to take advantage of this potential.

Government policy and changes in the structure of production Government plans and policies for promoting production and economic diversification failed to bring lasting change at any time during this period. In the 1950s the government raised what for the time was a very large sterling bond to fund the construction of a deep-water port, with modern facilities for the loading of sugar, then the economy’s principal export. The port has proved to be an invaluable resource, except for the sugar industry, which went into decline within a decade of the port’s completion. Although responsibility for the failure of the sugar industry has to lie with the lack of a practical vision and strategy on the part of industry leaders, the absence of a consistent land use policy, and the government’s wrong-headed financing of badly run farms over several decades, served to hasten sugar’s demise. The introduction of a special low-tax regime for IBFS companies wishing to become estab­ lished in Barbados to provide services worldwide was perhaps the most innovative government policy action taken to pave the way for new activities. From small beginnings in the 1970s, the IBFS sector grew rapidly in the late 1990s and early 2000s, with a contribution to foreign earnings and government revenue second only to tourism. However, few companies established in the sector had operations in Barbados large enough to avoid the ‘tax haven’ label, and the sector has suffered a decline under relentless pressure from EU and Canadian regulators. The government’s policies for the improvement of social and public services and the building of infrastructure were arguably far more important for Barbados’s competitiveness and attrac­ tiveness to investors than were other more targeted measures such as financing and incentives. The areas in which Barbados scores above the average for Latin America and the Caribbean in the World Economic Forum’s Global Competitiveness Index are health, ICT adoption, skills, the financial system and business dynamism, reflective of the quality of health and educational systems, and the country’s open economy. On the other hand, measures such as fiscal incentives for industry, government funding of enterprise and state enterprises have all failed to have a noticeable impact on what is produced 318

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and exported. My 1989 paper on the impact of tax incentives (Worrell 1989) found a strong bias in favour of the purchase of agricultural machinery, at a time when agriculture was in decline; no bias in favour of tourism, the economy’s mainstay; and a weak bias in favour of manufacturing, which had passed its peak. The Barbados Development Bank and the Agri­ cultural Development Bank both fell into insolvency, while the Barbados National Bank, the state-owned commercial bank, proved to be a less profitable and less efficient replica of the international commercial banks operating in Barbados, until its eventual sale to Trinidad and Tobago’s Republic Bank. The largest state-owned commercial enterprise ever attempted, a cement factory, never made a surplus, and was soon sold to Caribbean investors. Miscellaneous programmes of finance, advice and support for small and medium-sized enterprises over many decades may have served some social purpose, but they made no impact on production or employment in the aggregate. In the 1970s import tariffs, quotas and other restrictions were popular with Caribbean gov­ ernments, in quixotic attempts to stimulate import substitution. As I have shown (Worrell 2012), economies as small as those of the Caribbean have no hope of competitively supplying locally produced vehicles, steel, fuels, staple foods, clothing, appliances, chemicals, building material, and all the many and varied goods and services which a modern economy needs. The Barbados government did succumb to the temptation to promote some domestic import sub­ stitution, and there remains a handful of domestic companies that depend on tariff protection. However, import substitution never made a significant contribution to output, and protective measures have largely been eliminated. The quality and appropriateness of macroeconomic policy turned out to be the most influ­ ential factor with respect to government’s impact on development outcomes. In my 1987 study of Caribbean economies I stated that ‘Fiscal policy has been the cornerstone of programmes that maintained economic stability, and the downfall of those that aggravated disequilibria’ (Worrell 1987: 212). That assessment was made on the basis of experience in the English-speaking Car­ ibbean between 1970 and the mid-1980s. Barbados’s experience since that time, discussed above, confirms that conclusion. According to the 2019 Global Competitiveness Index, Bar­ bados has fallen below the Latin America and Caribbean average for macroeconomic stability. The country ranked 59th out of 141 countries in overall competitiveness, but only a lowly 109th with respect to macroeconomic stability.

Government policy and economic development: an assessment The Barbados economy suffers from a peculiar malaise: the country boasts a very high level of human development and a wealth of talent, but within the society there is a pervasive sense of lack of purpose and direction. The economy has been in the doldrums since the time of the global recession, and young people are looking abroad to make their lives and careers, and improve their prospects. After achieving some success in diversifying sources of foreign earnings in the 1960s and 1970s, the economy has reverted to depending solely on tourism for its dynamism. Agriculture has virtually crashed out as a foreign earner, the manufacturing sector is in slow long-term decline, and the IBFS sector is faltering. The government continues to burden the tourism sector, the economy’s only vibrant source of vital foreign earnings, with an ever-heavier load of largely inappropriate taxation. Inconsistent policies and poor quality of regulation has deterred or delayed over US $1 billion in new hotel investment since 2016. Fiscal incentives that are poorly designed and inconsistently applied continue to distort the local tourism product away from Barbados’s competitive strengths in high-quality, low-volume heritage, cultural and other tourism niches, as opposed to high-volume and cruise tourism, 319

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which carry the danger of overcrowding, environmental degradation and devaluation of the tourist experience. Insufficient and inefficient public sector investment and maintenance is reflected in deterior­ ating roads, public transportation, sanitation, water supply and other public services. Public sector performance is well below the international standards required to achieve an acceptable ranking in the Global Competitiveness Report and the Doing Business report. Government policy is still characterized by capricious decision-making, inconsistent regulation, poor data and statistical flows, lack of timely publication of annual reports, and failure to make good on commitments. The new economic strategy which has secured the financial support of international financial institutions has increased the tax burden and resulted in unplanned lay-offs in the public sector. The intellectual establishment, globally and in the Caribbean, has provided no new ideas for economic strategies for growth and development in small open economies like those of the region. The current recommendations, unchanged for four decades or more, are for domestic economic diversification and regional cooperation. Those recommendations fail to reflect today’s reality, of a Caribbean nation and economy that transcends national boundaries and answers to no single sovereign. It comprises a network of social, familial, cultural, business and economic connections and transactions that reaches across the Caribbean and into the diaspora. The future development of the Barbados economy depends on its contribution to the eco­ nomic development of this Caribbean nation. Barbados’s prospects for material betterment appear very appealing when seen in this light. Already individuals and families, in Barbados and the rest of the Caribbean, are availing them­ selves of opportunities which the breadth and diversity of this Caribbean nation affords, through migration, remittances, purchase of retirement homes, charitable donations, business establish­ ment, franchising, financial networks, working remotely, travelling for work, and in many other innovative ways. Governments, including the government of Barbados, should reformulate national policy with a view to achieving progress in this regional context, to enhance the competitiveness and reputation of the Caribbean in the global market. I conclude this chapter with some concrete suggestions for government policy in Barbados that leverage the country’s competitiveness and potential, to ensure that the national space once again becomes a leading node of Caribbean development. The government would need to rework fiscal incentives to promote quality in tourism, and discourage cruise and high-volume tourism. It would have to provide more financial support for culture, heritage, sports and other tourism niches. All government support to private enter­ prise, including tourism, would be conditional on the achievement of mutually agreed perfor­ mance targets. The government would need to contract with the best international expertise to complete a three-year makeover of public services and administration, in order to bring government services to an acceptable international standard of performance, with timely publication of reports and statistics. A practical, time-bound action plan for the complete replacement of fossil fuel sources of energy is essential, with an action plan and three-yearly deadlines to keep the strategy on course. Renewable energy has the potential, in time, to provide the economy with a sector that would make a contribution to GDP comparable to that of tourism. Government incentives, legislation and regulation would have to be used to refocus the IBFS sector away from tax planning, and towards providing services domestically that are directly linked into the global value chains of international companies. The government would need to form strategic partnerships with international transport firms for the development and management of the Bridgetown Port and the international airport, with a view to providing major nodes in Barbados for international transport networks. 320

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The education system would be upgraded to provide language skills from the earliest years of schooling, together with improved quality and familiarity with modern communications tools, consistent with the country’s outward orientation. The domestic currency serves little purpose in an economy which is oriented to the outside world; it should be abolished, and the US dollar, which drives the economy both in terms of income and spending, should be used as legal tender. Barbados’s legal and regulatory framework should be recast in support of a new regionalism which incorporates services networked across the Caribbean and the diaspora. Barbadians and members of the Caribbean nation are securing their future and making a name for the Caribbean nation on the global scene. All told, including the diaspora, the Car­ ibbean is a mere sliver of humanity, but the people, the culture and the achievements of the region are legendary. The responsibility of the Caribbean governments is to find appropriate and creative ways to ensure the parallel development of regional governance, through policy reform that reflects the realities of the twenty-first century and the possibilities that are opened up by new technologies.

Note 1 See DeLisle Worrell (2017) ‘Barbados’ competitiveness in a global context’, August, www.delisle worrell.com/Barbados%27%20Competitiveness%20in%20a%20Global%20Context.

References Boamah, Daniel, Byron, Sharri and Maxwell, Chanelle (2006) ‘Examining the impact of taxation on income distribution in Barbados’, Central Bank of Barbados Economic Review, XXXIII(3). Cox, Winston (1982) ‘The manufacturing sector in the economy of Barbados, 1946–1980’, in DeLisle Worrell (ed.), The Economy of Barbados 1946–1980, Bridgetown: Central Bank of Barbados. Haynes, Cleviston (1982) ‘Sugar and the Barbadian economy, 1946–1980’, in DeLisle Worrell (ed.), The Economy of Barbados 1946–1980, Bridgetown: Central Bank of Barbados. Holder, Carlos and Prescod, Ronald (1984) ‘Income distribution in Barbados’, Central Bank of Barbados Working Papers, Bridgetown: Central Bank of Barbados Mascoll, Clyde (1991) ‘Trends in effective tax rates of representative individuals in Barbados during the 1980s’, Central Bank of Barbados Economic Review, XVIII(3), December. World Bank (2019) Doing Business Report 2019, Washington, DC: World Bank. Available at www.doing business.org/content/dam/doingBusiness/media/Annual-Reports/English/DB2019-report_web-version. pdf. World Economic Forum (2019) Global Competitiveness Report 2019, Cologny: World Economic Forum. Available at www.weforum.org/reports/how-to-end-a-decade-of-lost-productivity-growth. Worrell, DeLisle (ed.) (1982) The Economy of Barbados, Bridgetown: Central Bank of Barbados. Worrell, DeLisle (1987) Small Island Economies: Structure and Performance in the English‑Speaking Caribbean since 1970, New York: Praeger. Worrell, DeLisle (1989) ‘Taxation and investment incentives’, Central Bank of Barbados Economic Review, XVI(3): 13–19. Worrell, DeLisle (2012) ‘Policies for stabilisation and growth in small very open economies’, Group of 30 Occasional Papers No. 85, Washington, DC: Group of 30. Available at https://group30.org/publica tions/detail/157. Worrell, DeLisle, Moore, Winston and Beckles, Jamila (2018) ‘A new approach to exchange rate man­ agement in small open financially integrated economies’, in Lino Briguglio (ed.), Handbook of Small States: Economic, Social and Environmental Issues, London: Routledge.

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23 Suriname Scott B. MacDonald

Introduction Suriname’s economy is based on a long history of commodity exports, dating back to its beginnings as an outpost of European powers searching for gold and tropical products to supply home markets. The extractive nature of the colonial period, mostly under Dutch control, continued after independence in 1975. Much of the post-independence period has been defined by the gradual decline of the country’s bauxite/alumina industry and the rise of other commodities, namely gold mining, timber, oil and gas, and rice cultivation. While the 2016 departure of Alcoa, the US-based aluminium company, was a major blow to Suriname’s economy, gold mining and discoveries of oil and natural gas helped to compensate for this loss. Indeed, large commercial discoveries of oil offshore of neighbouring Guyana fed optimism that Suriname had the same potential; in January 2020 it was announced that US operator Apache, together with joint venture partner Total, had discovered a major offshore oilfield. Although considerable work is needed before Suriname joins the ranks of petro-states, the offshore find puts the small Dutch-speaking country on the global energy map and inserts it into what some are calling the Southern Caribbean oil complex that encompasses the Guianas, Trinidad and Tobago, and Barbados and might stretch someday to the underused refineries in the Dutch Caribbean islands of Aruba, Bonaire and Curaçao. Suriname’s economic narrative has been dominated by four major themes: a sensitivity to global commodity markets; a heavy reliance on external capital to develop the country’s extractive businesses; a large state role in the domestic economy, mirrored by a relative weak­ ness of small and medium-sized private sector enterprises; and a long-standing physical isolation beyond the extractive sectors partially due to a comparatively remote geographical location and challenging terrain. It can be argued that only in the late twentieth and early twenty-first cen­ tury that the country’s sense of isolation has been eroded by globalization and the improvement in communications. Furthermore, Suriname’s economic management during the independence era has been challenged by a degree of political instability due to the country’s 1980 military coup and its aftermath. Although the country’s complicated political situation has often worked to the detriment of policymaking, improvements have been made in recent years in terms of transparency, financial supervision and planning. The country has also worked hard to make 322

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itself more attractive to foreign investment, which has drawn in US, European and Chinese companies. Like many Caribbean countries, Suriname faces environmental challenges, ranging from the impact of climate change in the form of rising sea levels to the challenges of main­ taining its stewardship of one of the world’s few remaining tropical rain forests. Illegal mining of gold also poses environmental challenges. Before advancing further it is important to provide a sense of where Suriname is on the map and how it sees itself. Suriname is located on the north-east shoulder of South America, sharing borders with Guyana to the west, Brazil to the south and French Guiana (an overseas depart­ ment of France) to the east. The country’s northern boundary is defined by the Atlantic Ocean. It has a population of 598,000, most of whom are located in the northern coastal zone of the country around the capital city of Paramaribo. The country’s ethnic mix includes Creoles (people of mixed African and European descent who comprise 15.7% of the total population), Hindustanis (of Indian descent, at 27.4%), Javanese (people from modern-day Indonesia, at 13.7%), Maroons (whose African ancestors were brought to the country in the seventeenth and eighteenth centuries as slaves and who then escaped to the interior, at 21.7%), mixed race (13.4%), and smaller numbers of Amerindians, Chinese and Europeans. About 50% of the population is Christian, with 22% professing Hinduism and approximately 14% Islam. Although Suriname is located in South America, sharing an extensive interior that makes it part of the Amazon River system, it is usually regarded more as part of the Caribbean due to the ethnic mix and historical experience, including its long-standing linkages to other parts of the Dutch Caribbean (Aruba, Bonaire, Curaçao, Sint Maarten, Saba, and Sint Eustatius). Moreover, Suriname is more economically integrated with the Commonwealth Caribbean through its membership of the Caribbean Community (CARICOM) and the Caribbean Development Bank (CDB) (based in Barbados). It is also important to stress that one of the principal features of Sur­ iname has long been its relative isolation in the Guianas, something that is changing in the early twenty-first century, due to the internet and to greater economic integration with the Caribbean.

From colonial times to independence Suriname’s earliest history was defined by local indigenous or Amerindian tribes, the Arawaks, and Caribs, who mainly settled the coastal areas. Economic life was oriented to hunting and fishing. Smaller groups lived in Suriname’s hinterland. Sadly, the world of indigenous peoples in the Caribbean radically changed with the arrival of the Europeans, beginning in the late fif­ teenth century with the Spanish, who were soon followed by others. In the case of Suriname, the Dutch arrived in the 1630s and made an ill-fated venture in tobacco farming. Other efforts, including one by the French, also failed. It was not until 1650 that Lord Willoughby, the governor of the nearby English colony of Barbados, sought to settle what was to become Willoughbyland (modern-day Suriname).1 It was during this period that the future structure of the economy was established – plantation agriculture, using slave labour, initially local indigenous people, and then Africans. Willoughbyland came to an end in 1667, when the Dutch invaded the colony and kept it under the Treaty of Breda. That treaty famously allowed the Dutch to keep what was to become Suriname (sometimes referred to as Dutch Guiana) in return for allowing the English to keep New Amsterdam, present-day New York. At the time, the Dutch saw greater prospects for Suriname as a plantation economy than a small trading outpost at the end of the Hudson River. In 1683 the Society of Suriname was established, which was central to its economic development. The Society was modelled on the ideas of French mercantilist Jean-Baptiste Colbert (1619–83), who was a major supporter of the French West India Company (which 323

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played a major role in France’s ability to obtain coffee, cotton, dyewoods, fur, pepper and sugar). In a similar fashion, the Society sought to make certain that the Dutch would have access to tropical commodities and, over time, a market for Dutch goods. The Society was established in 1683 under its authority that Suriname became a plantation colony, pumping out sugar and fuelled by African slave labour. The Society lasted until 1795, when the Dutch gov­ ernment decided that the time of chartered companies was over and that it was time for the government to administer the colony. Suriname evolved as a major sugar producer, with most of its production sent to the Neth­ erlands. In many ways, sugar shaped modern Suriname’s demographic mosaic. When the Amerindians escaped the grasp of plantation owners by retreating into Suriname’s vast rain forests, the pressure was on to replace them with African slaves. Aware of the brutal nature of slavery, a number of Africans escaped into the hinterland like the Amerindians, eventually being called Maroons and forming their own societies. Despite efforts by the colonial authorities to crush the Maroons, they survived. Indeed, in the eighteenth century, the colonial authorities signed several peace treaties with the Maroons, granting them sovereign status and trade rights in their inland regions. Over time, pressure rose against slavery both internationally (led by the British) and in the Netherlands. Finally, in 1863 the Dutch abolished slavery in their colony, bringing it to a new stage in its economic development and social formation. The problem for Suriname’s plantations was labour. Most former African slaves decidedly wanted little to do with the backbreaking work associated with sugar and other plantation crops. Moreover, they understandably associated working plantation agriculture with the stigma of slavery. No longer bound to the plantations, the African population moved out of the rural areas to the main city and capital, Paramaribo. This left a labour shortage. To address the situation, the Dutch opted to find other sources of cheap labour. Thus, they turned to the Dutch East Indies (which would eventually become modern-day Indonesia), picking up num­ bers of Javanese, and to British India. Labour came in the form of indentured workers, who had few rights and were often desperate enough to take their chances in travelling thousands of miles away from their homelands to work in plantation agriculture. Both the Javanese and East Indians (who eventually came to be known as the Hindustanis) would put down roots in Sur­ iname. Lesser efforts were made to recruit Chinese and Middle Eastern workers. The result of this quest for labour was to create one of the most ethnically diverse countries in the world. As sugar declined in the last decades of the nineteenth century, other sectors like gold mining, competed to provide a new mainstay. However, the major change in Suriname’s economy came with the development of bauxite, thereby fundamentally changing the largely agrarian economy to one based on mining.2 As the world’s primary source of aluminium, bauxite gained in importance as it increasingly came to be used in industrial applications. The ore must first be chemically processed to produce alumina, which is then smelted using an electrolysis process to produce pure aluminium metal. The ore is acquired through strip mining and the refining process requires large amounts of energy. In the Caribbean, Jamaica and Guyana also possessed substantial supplies of bauxite, but the largest producers are Australia, Brazil, the People’s Republic of China and Indonesia. Much of Suriname’s history is concerned with bauxite and is thus linked to Alcoa, a US company based in Pittsburgh. Modern aluminium smelting came out of the discoveries of Charles Martin Hall in the USA and Paul T. Héroult in France in the late 1880s. Alcoa was founded in 1888 as the Pittsburgh Reduction Company. The industry expanded considerably after the Wright Brothers made their first aircraft flights, using Alcoa’s light metal. In 1907 the company assumed the name of the Aluminum Company of America or Alcoa, which intro­ duced aluminium foil in 1910 and benefited from the development of the aerospace business, 324

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including both airplanes and dirigibles. The advent of the First World War further propelled demand for the light metal, with 90% of Alcoa’s aluminium production used by the US military for mess kits, canteens, helmets, gas masks, identification tags and other applications.3 The rising demand for aluminium was mirrored by a rising demand for bauxite. In 1916 Alcoa showed up in Suriname, where a travelling Frenchman had discovered bauxite in the hinterland. Central to the development of Suriname’s bauxite industry was Alcoa’s mining and refining operations in Moengo, an isolated Maroon village in the district of Marowijne in the eastern part of the colony. The region was attractive due to large discoveries of bauxite and a will­ ingness on the part of the colonial authorities to give Alcoa and other companies (like the Dutch Billiton) considerable autonomy in running their operations.4 From these beginnings bauxite became the mainstay of the Surinamese economy from the 1940s to the 1990s, a period when it functioned as the largest exporter, foreign exchange earner, biggest taxpayer, and a significant employer (though agriculture still dominated). The company’s expansion in Sur­ iname was helped by the Second World War, when other supply lines were cut off to the USA. Indeed, during this period close to three-quarters of all bauxite used by the US war industry came from Suriname.5 US troops were actually stationed in the country during the war to protect the mining areas and transport points. There was another important development arising from Alcoa’s presence in Suriname. Alcoa’s operations in Moengo came to represent a modern economic enclave in the colony, with its own schools and housing system (segregated along ethnic and racial lines). Alcoa even had its own source of electric power generation, as it was given the authority to build a major dam to generate the massive amount of energy needed to refine raw bauxite into alumina. The dam’s creation was controversial as a number of people were cleared from the territory where the water was to collect. A total of some 618 square miles were flooded. Many of those dis­ located, mainly Maroons, either went north to areas around Paramaribo or moved further south, deeper into what is considered traditional Maroon country. As for the dam and its power plant, part of the deal between Alcoa and the government was that the company could use the power generation facilities until it stopped bauxite mining at which point in time, the facilities would revert to Suriname’s government. In the decades prior to independence economic policymaking was geared to creating a stronger, less dependent economy. The process was enhanced by the gradual shift from Dutch personnel to Surinamese policymakers. Equally important, what was to become the Central Bank of Suriname (Centrale Bank van Suriname – CBvS) opened its doors in 1957.6 While these measures were well intended and can be seen as preparation for eventual independence, there was no escaping the fact that most of the capital needed for development (especially for items such as infrastructure and education) still came from external sources, in particular the Dutch government and large multinational corporations engaged in the bauxite/alumina busi­ ness. The state sought to diversify the economy through the promotion of agriculture, a sector that employed the greatest number of people. The sectors to benefit the most from this were rice and bananas. There was also an effort to improve the colony’s transportation system through the construction of roads and airstrips, but Suriname’s vast interior could hardly be considered well connected. That lack of connection extended to roads and crossings to its neighbours, Guyana, French Guiana and Brazil.

Suriname at independence In 1975 Suriname celebrated its independence from the Netherlands. Suriname’s march to independence was accompanied by increasing democratization and the emergence of political 325

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parties. Although ethnic tensions existed, there was no history of violence between the various communities and, generally speaking, the relationship with the Netherlands was good. The violent breakdown in Creole-East Indian cooperation in neighbouring Guyana also provided some sense of what the alternative to peaceful inter-communal relations would look like. Beyond the socio-economic surface Suriname faced some dangerous undercurrents, which would come back to haunt the new state. These undercurrents would eventually surface and elevate political over economic considerations: in the run-up to independence there was a departure of people to the Netherlands, many of them professionals; as the colony gained greater self-government and then moved into independence the formation of political parties gradually polarized along ethnic lines; among the various ethnic groups, the Hindustanis were opposed to independence and felt excluded from discussions about the political future of the country; Dutch financial aid distorted the economy (as it built in a dependency on external capital) and would serve to complicate the Caribbean’s future relations with the Netherlands; and a small army was created.7 It should be added that independence was favoured by Suriname’s Creole community. At the same time, support for independence was generally lukewarm among the Javanese, Maroons and Amerindians. From 1975 to 1980 Suriname had a period of democratic government, but it was increasingly riven by ethnic differences that undermined economic policymaking and gave people cause to emigrate. Despite this, when the military coup took place in February 1980 it was a surprise to many observers. The coup was born of grievances within the armed forces (in particular among the sergeants) over policy drift in civilian government, pay differences and the inter-services rivalry with the police. The military’s leadership also lacked an understanding of their troops, many of whom wished to reorient their institution’s mission from being a barracks army into a development army; in other words, from providing border patrol and acting as a reinforcement for the police to playing a more active role in the country’s development.8 From 1980 to 1990 Suriname’s political life dominated the country’s economic affairs. The coup kicked off a period of political experimentation with a military government morphing into a revolutionary-military dictatorship (1981–84). To make matters even more confusing, divisions soon emerged among the leadership. It was during this period that Sgt-Maj. (later LtCol) Desiré (Desi) Bouterse emerged as the country’s strongman. He was to exhibit political acumen in outmanoeuvring his opponents. At the same time, he was perceived as ruthless, which was evident when he presided over the execution of 15 opponents of the regime in December 1982, the reverberations of which are still felt today. From 1984 to 1988 there was an unsteady move back to a more democratic political system. However, this was complicated by the Interior War (1986–92), which pitted the National Army against part of the Maroon community led by a former military man, Ronnie Brunswijk and his Jungle Commando. Throughout this period the dominant political figure, either as the leader of the government or behind the scenes, was Bouterse, who maintained the loyalty of the armed forces. It was not until 1992 that a more fulsome democracy was reintroduced with the election of President Ronald Venetiaan. From that point onward elections were held on a regular basis and have largely been regarded as fair. In 2010 Bouterse returned to the political stage when he was elected president and re-elected in 2015. The next elections were scheduled to be held in 2020. Considering the often confusing nature of the political situation in the country Suriname gained a reputation at different points for being a thuggish military regime, a left-wing revolu­ tionary experiment and a struggling democracy. This did little to make the country attractive to foreign investment, while the December 1982 executions brought about the suspension of 326

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Dutch aid. At the same time, the golden years of the bauxite business came and went, making Alcoa’s Suriname operation less attractive. The Interior War also raised security issues for the aluminium company. Despite challenging headwinds, the first Venetiaan government did have a number of suc­ cesses, which were positive for the economy. Venetiaan got the military back into the barracks, restored relations with the Netherlands, and concluded peace between the National Army and the Jungle Commando. Venetiaan was also able to implement an International Monetary Fund (IMF) structural adjustment programme (1994–95), which stabilized inflation and the exchange rate. He also secured a balanced budget for the country. The country’s economic recovery did not last as Jules Wijdenbosch was elected to the pre­ sidency in 1996. A close associate of Bouterse, the new president was regarded as a puppet of the former military leader and relations again deteriorated with the Dutch. The situation wor­ sened when the Dutch issued an international summons for Bouterse for drug trafficking and the next day the Suriname government officially made him an official adviser. In 1999 Bouterse was sentenced in absentia to 11 years’ imprisonment by a Dutch court, which was ignored by Suriname. Suriname’s position was also troubled on the economic side – international alumina prices were depressed and Wijdenbosch’s embrace of expansionary economic policies to sti­ mulate the economy resulted in high inflation. By 1999 the Wijdenbosch administration was highly unpopular, and plagued by demonstrations over the deteriorating economic situation. He finally agreed to early elections, which were won by Venetiaan and his New Front party. Venetiaan served as president through most of the first decade of the twenty-first century, with most of his efforts geared to restoring economic stability. While his governments made advances in restoring monetary stability, the accumulated problems from prior years of mis­ management left Suriname with severe challenges in terms of housing, poverty alleviation and education. After a decade of tough economic medicine under Venetiaan, Surinamers were ready for a change. This came from Bouterse, who headed up the Megacombinatie (‘Mega­ combination’) alliance of four political parties (including his own Nationale Democratische Partij – National Democratic Party). The former military leader won the national election in 2010, immediately putting a chill in Suriname’s relationship with the Netherlands. The USA and the Caribbean Community (CARICOM, which Suriname had joined in 1995), however, indicated that they would work with the new government.

The boom-bust years Bouterse’s presidency spanned most of the first decade of the twenty-first century, during which time Suriname underwent substantial economic changes, chief of which was a period of sus­ tained higher prices for commodities, followed by a major downturn in prices after 2014. Although the bauxite/alumina business continued to struggle during most of this period, gold and then oil became the engines for the economy in the early twentieth century. Indeed, from 2001 to 2016 the long stretch of higher commodity prices (which ended in 2014) resulted in annual average growth of 3.4%, well above the 2.1% average for Caribbean small states.9 Per capita income increased from US $1,390 to $6,990 during this period and poverty rates fell. For many Surinamese, the good times had arrived. It was during the boom years that the seeds of the next economic crisis were planted. Sur­ iname remained highly dependent on commodity exports, mainly gold and oil. According to the World Bank, gold, oil and bauxite have historically accounted directly for around 30% of gross domestic product (GDP), as much as 90% of exports and 45% of government revenues.10 At the same time, there was a failure to diversify away from this dependence. 327

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Another factor was that the state remained the dominant actor in the economy. According to the Inter-American Development Bank (IDB), as of 2015 there were 120–140 registered stateowned enterprises, with 60% of the workforce employed in the public sector.11 So long as the commodity boom persisted, revenues flowed into state coffers and bloated employee rolls could be maintained. Commodity largesse also meant that inefficiencies could continue without consequences. Consequently, when commodity prices plummeted in 2014, the government still had to pay out salaries to what was probably an oversized bureaucracy, complicating efforts to respond to a declining revenue base. While Suriname’s state sector dominated the economic landscape, the country’s private sector was, in the words of the IDB, ‘underdeveloped’.12 As Suriname’s economic boom turned to bust, a number of problems became painfully evident, including lack of finance for small and medium-sized companies, a high level of dependence of these businesses on the mining and oil sectors, and an overconcentration of businesses dedicated to importing goods to satisfy local demand (which made them vulnerable to foreign exchange valuation volatility). The combination of these factors resulted in a state-dominated economy that was unable to respond quickly to changing global market conditions. As the 2016 report by the IDB stated: ‘Suriname is characterized by high vulnerability to external shocks, Dutch disease (resource misallocation effects) and resource curse (unproductive rent seeking effects).’ When commodity prices fell in 2014, Suriname suddenly found itself faced with a decline in exports and fiscal shortfalls. While 2014 was bad, 2015 was worse, with a current account deficit that swelled to 16% of GDP and a fiscal deficit amounting to 8.8% of GDP. An ambitious government aus­ terity programme was launched in late 2015, but it stalled in the face of public discontent and economic policymaking was complicated by the elections held that year. Real GDP contracted by 2.7% in 2015 and 2016 was even worse, with another contraction of 9.0%. Compounding matters, inflation rose from 3.4% in 2014 to around 60% by the end of 2016. This was fuelled by cautious action by the authorities in raising interest rates, which stimulated a move out of local currency assets, with bouts of exchange rate depreciation. Complicating matters more was that as Suriname’s fiscal deficit widened the government turned to external borrowing. With the Dutch Treaty Funds (given at independence) having ended in 2012 and relations with the Dutch tenuous (as the Netherlands had trouble with Bouterse’s ‘criminality’), this left the Caribbean country searching for new sources of loans. Two sources of lending, however, emerged: the IDB and China. The IDB had long been engaged in the country and it recognized that Suriname needed help. In this it worked closely with the IMF, which had its own programme in the country. The IDB’s lending rose from a little over US $90 million in 2010 to $448 million as of June 2015.13 China’s emergence as an economic force in Suriname came as the Asian country moved into the Caribbean and Latin America during the early 2000s in search of raw materials, markets and outlets for Chinese workers. While Chinese companies and people moved into Suriname, Chinese official lending rose steadily, much of it tied to specific projects. Chinese loans rose from US $142 million in 2010 to $235 million in June 2015. The amount of Chinese debt is thought to have risen to about $500 million in 2020. For those looking for the penetration of Chinese influ­ ence into Suriname, these loans and the rising level of Chinese trade gave credence to a geopoli­ tical stealth move on the part of Beijing in the US strategic backyard. From Suriname’s perspective, with Dutch assistance unlikely after 2012, the two other options were the IDB and China. In contrast, US official lending to Suriname fell from $36.3 million in 2010 to under $1 million as of June 2015. By 2015 US official lending to Suriname was below that of France and India. Although Suriname was able to access external funding, the country’s debt-to-GDP ratio deteriorated during this period. This was manageable in the short term. It did, however, raise 328

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some concerns from the IMF if it were to persist over the longer term. Concerns were also quietly vocalized in Washington that Suriname’s growing dependence on Chinese loans could cause future problems, particularly if the Caribbean country assumed too much debt from China (which has occurred in some African countries and Sri Lanka in South Asia). From Suriname’s perspective, Chinese assistance was welcome. According to Winston Ramautarsing, a lecturer in economics at Anton de Kom University of Suriname in 2015, The Dutch government’s relationship with the Bouterse clan was turbulent, particularly when it suspended development aid. This prompted the regime’s top brass to look for other solutions. Closer links with China, which is keen to find its place in the Amazon basin for obvious reasons, came about almost naturally. It’s much the same trend every­ where, but given the size of our country and the way the authorities here have welcomed them with open arms, the Chinese presence is more visible.14 The bad news in 2015 also included Alcoa finally deciding to close down its operations, effec­ tively pulling out of Suriname. Although this action had been anticipated for a some time, it was a blow to the economy. In the early 2010s the company was negatively affected by increased international competition (some of it coming from China where state-owned enter­ prises were protected from external competition). At the same time, conditions in Suriname reduced the attractiveness of operations. There was a diminishing supply of bauxite and the country’s political instability, including the Interior War that marked the 1980s, raised security issues. As Alcoa underwent a tough restructuring to remain competitive, Suriname became a costly historical legacy. Alcoa’s departure was complicated by a number of issues. The company’s long stay in Sur­ iname had been accompanied by the accumulation of considerable property. This included areas that were mined out and not reforested. It also had a massive industrial facility that included the refinery, which had its own set of environmental concerns. Probably the most significant issue was the Afobaka Dam, the country’s largest. The dam was owned by Alcoa’s subsidiary in Suriname, Sirocco. Under the initial agreement in the 1960s, Alcoa could own and operate the dam as long as it had an aluminium business in the country. With Alcoa pulling out of the country, the Surinamese government felt that it had the right to the dam. And the power was needed. The government has since assumed control of the dam. Alcoa’s departure also forced a critical reassessment of the country’s lack of a comprehensive environmental code. Beyond the issue of the need to reforest areas that had been strip-mined, there were also red mud lakes of refinery tailings full of chemicals and substances that come out of the refining of bauxite to alumina. As one source observed in 2016, So you have areas that were forests which are now essentially red, stony barren fields that need to be reforested. Sometimes they encircle villages, and people have traditionally relied on the forest … some within Suriname feel that they’re still dealing with what we call the resource curse, the impacts of having a natural resources based economy.15

Recovery and sustainability During the period 2017–19 Suriname’s economy recovered. Real GDP went positive again in 2017 at 1.7% and climbed to 2.0% in 2018, with the IMF forecasting stronger growth of 2.3% in 2019. However, the IMF predicted that growth would decline to –4.9% in 2020. Inflation fell back into the single digits, unemployment shifted to more manageable numbers and the 329

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current account balance of payments, which had plunged into a steep deficit, was roughly in balance in 2017 and carried a small surplus in 2018. In many regards, Suriname staged an impressive turnaround in its economy. While Suriname’s reforms helped to move the economy from recession to recovery, the major factor was the stabilization and recovery of key commodity prices, gold in particular. The gold sector was also helped by the opening of the Merian Gold Mine in late 2016. Located south of Moengo and north of the Nassau Mountains in Suriname, the mine is owned by Newmount Mining Corporation and has bolstered the country’s exports.16 Looking ahead, how long will it take for Suriname to recover from the coronavirus (COVID-19) pandemic as well as the battering the country’s oil sector took in early 2020 from a Russia-Saudi Arabia oil price war that briefly brought prices into negative territory? The country needs to deal with a number of challenges. These range from the need to jumpstart a stalling economy and diversification of the economic base to dealing with the country’s persis­ tent brain drain and climate change, not to mention the country’s political issues. Along these lines, the 2017 Survey of Living Conditions for estimated an overall poverty headcount rate of 26%, a level that is comparable to other countries in the region. However, poverty in the country’s interior was found to be much higher at 47.0%, with one in every two households classified as poor.17

Diversification Despite efforts to widen the base of the Surinamese economy, the heavy reliance on gold and oil persists as the country enters the 2020s. Diversification is needed to help to widen both the export and tax bases. Indeed, the IMF cautioned in 2018: ‘The lack of a non-mineral engine of growth could further erode potential growth while higher external debt service or a weaker­ than-expected terms could put pressure on the balance of payments.’18 Areas that could be expanded further include rice production (a food that much of the Caribbean uses). Indeed, the IDB observed: ‘Suriname has been considered a potential “food basket” for CARICOM, since it has over 30% of the region’s total arable land.’19 The country already exports shrimp and fish, rice and bananas, but it could be done with greater efficiency and volume. Timber could also be pursued with greater vigour, but more work is required to ensure that this does not become an environmental problem. The country has granted logging concessions to multinational companies from China, Malaysia and Indonesia. The largest company in the timber business is a Chinese company, Greenheart, which is incorporated in Bermuda and listed Table 23.1 Suriname macro-economic indicators

Real GDP % Consumer prices % Central government balance/GDP % Public sector (central government) debt/GDP Current account balance/GDP %

2016

2017

2018

2019

2020

–5.6 55.5 –8.1 78.5 –5.3

1.7 22.0 –8.0 77.2 –0.1

2.0 7.5 –7.9 69.8 –2.4

2.3 5.0 –9.2 72.7 –3.4

–4.9 5.7 –9.0 77.3 –2.5

Source: IMF, Suriname 2018 Article IV Consultation (December 2018), www.imf.org/en/Publications/CR/Issues/2018/ 12/20/Suriname-2018-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-46487 and Country Eco­ nomic Review 2019 Suriname (Wildey St. Michael: CDB, 2020), www.caribank.org/publications-and-resources/resource­ library/economic-reviews/country-economic-review-2019-suriname.

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on the Stock Exchange of Hong Kong. It sells softwood logs to China, India, South Korea and New Zealand (where it also harvests wood). According to the company, Greenheart has access to 360,000 hectares of land and over the long term plans to better utilize harvesting rights to Suriname’s mature forests.20 Suriname has already had problems with illegal logging and the smuggling of timber out of the country. Sustainable forestry is a goal, but this must be handled with caution. Work has been done on a legal code for forestry and Suriname is a member of the Amazon Cooperation Treaty Organization, which promotes sustainable development of the Amazon Basin.21 Concern over the future stewardship of Suriname’s forests (and not leaving them up to the management of log-cutting companies) resulted in an offer by the Norwegian government to pay Suriname for better management. Norway already has a programme in place with neighbouring Guyana, which also has substantial forests and Asian companies ready to cut. Rent seeking through granting concessions to foreign companies is tempting for any government in Paramaribo, but if Norway pays Suriname not to head in that direction, the environment can be protected. Much of what Suriname needs to consider can be found in the Blue Economy Caribbean project, which promotes economic initiatives that prioritize coastal and marine programmes that are sustainable, inclusive and environmentally sound.22 Although the Blue Economy Caribbean is largely geared for islands, it has parts which are applicable to Suriname, including the better treatment of wastewater and the development of fisheries. Moreover, Suriname does face issues of sea water invasion of freshwater areas. The mix of economic diversification and environment are also evident in the potential fur­ ther development of Suriname’s oil industry. Oil already plays an important role in Suriname’s economy, but if large-scale amounts are found offshore as in Guyana (which appears to be the case after January 2020’s announcements by Chevron and Total), the former Dutch colony could be set for an oil rush. Suriname, like Guyana and French Guiana, is part of the Guiana Shield, a geographical formation that is thought to hold massive potential for oil exploitation and has already brought a swarm of foreign companies to the country’s offshore waters, including ExxonMobil, Hess and Kosmos Energy. Unlike Guyana, Suriname is much better prepared for such a development. The country already has its own oil company, Staatsoile (Staatsoile Maatschappij Suriname), which started exploitation of the oil deposits in 1982. In the 1990s the production of crude oil expanded from 500,000 barrels to more than 4 million bar­ rels. In 2019 Staatsoile operated a 17,000 barrel-a-day refinery near Paramaribo. The company is regarded as professional and well situated for any major oil discovery. It also would like to assume management of the hydroelectric dam left behind by Alcoa. The challenge with the further development of the oil industry is that it does not help to diversify the economy away from extractive sectors. However, it would reduce the dependency on gold. Moreover, an inflow of oil wealth (which it takes time to bring online) would give Suriname another source of funds, which if well managed with an eye to transparency and environmental concerns, would help sustainable growth prospects. One last issue for the future of Suriname as a petro-state is how the money generated from oil/natural gas revenues would be handled. The scandal at the CBvS in early 2020 in which US $100 million went missing and resulted in the firing of the head of that institution, raises deep concerns over official corruption and the need for greater transparency and disclosure.

Infrastructure Related to diversification is the need to further upgrade the country’s infrastructure, especially in terms of transportation. Better roads and bridges are needed to pull the country together 331

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(internally) as well as externally. One option that has been discussed is to develop Suriname into a transportation corridor to the Atlantic for northern Brazil (which would help that country’s economic development). The dynamics of a country largely divided by challenging terrain were caught by Rosemarjin Hoefte, a Senior Researcher and Coordinator at the Caribbean Expert Center in KITLV/Royal Netherlands Institute of Southeast Asian and Caribbean Studies, Other government issues related to the interior are the porous boundaries and the lack of border security. It shows that state power in Suriname is spatial and erratic. The available institutional resources are limited; an army of 2,500 troops and a police force of 1,500 are too small to control the vast interior and to give the state a grip on immigration and eco­ nomic activities.23 Better internal communications would certainly help the government to get a better idea of the size and scope of the country’s informal economy (estimated by the government at 10% of GDP).

Strengthening the institutional framework One of the major issues facing Suriname is the need to create a stronger institutional framework for the economy. Of particular importance in this process is providing greater transparency and disclosure in public finances, elements that are critical for accountability in any democracy. In the 2018 IMF Article IV report it was noted that ‘Strengthening governance will also support investor confidence and promote growth’. If Suriname wants to attract more foreign investment better safeguards are required in terms of how revenues are collected and who has control over the handling of the public purse. This extends to the need to improve the accuracy and time­ liness of economic and social statistics. In turn, this would help Suriname with the major ratings agencies, which currently rate the country well below investment grade. Weak institutional accountability, discretionary spending and a lack of transparency erode public confidence in the legitimacy of government, something that Surinamers need to give greater weight to, especially as efforts are being made to legislate new laws in this regard. Better governance would also go a long way to boost the development of Suriname’s private sector. According to the World Bank’s Ease of Doing Business rankings, Suriname is in 165th position, ahead of only Haiti in the Caribbean (182th) and well behind Guyana (134th), Tri­ nidad and Tobago (105th) and the Dominican Republic (102nd).24 While efforts are being made to strengthen and render the institutional framework more efficient, there remains scope for further efforts. Indeed, in 2017 the National Assembly passed a developmental plan for 2017–21 to address business and investment deficiencies. Related to greater disclosure and transparency in government finances is a tougher antimoney laundering regime. The IMF also noted that the government had made efforts in the post-bust period to improve its anti-money laundering and anti-terrorist financing regime, but that it needed ‘help to mitigate risks regarding withdrawal of correspondent banking relation­ ships’. The scandal at the CBvS was sparked by revelations in January 2020 that US $100 mil­ lion in private citizens’ savings that had been placed in the care of the CBvS had vanished. The discrepancy was discovered by the Surinamese Bankers Association, whose members had earlier been instructed by the CBvS in 2019 to deposit 50% of the foreign currency that they were holding as savings for their customers. Considering that the central bank is supposed to be the main regulatory agent for the country’s banking system, the scandal undermined the legitimacy of the government in the eyes of the public and raises questions about the seriousness of the 332

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government’s commitment to prudent bank regulation and supervision and dealing with official corruption. Over the past few years many banks from North America and Europe have de-risked from the Caribbean, a process that is meant to protect the banks from money laundering scams that can result in lost money as well as large fines in home countries. While the measure was pro­ tective for the banks, it left a number of Caribbean countries without linkages to commercial banks in advanced economies, a factor that greatly complicates economic activity in countries like Suriname, affecting everything from tourism to being able to pay for university fees in North America and Europe for young Surinamese studying in those locations.

Fiscal and debt management considerations During the recession Suriname ran a number of high fiscal deficits and increased its debt. In the aftermath of the economic downturn the National Assembly approved legislation for a Saving and Stabilization Fund (SSF). The SSF is meant to save part of mineral revenues during good times and have funds available when economic conditions deteriorate. The IDB provided a US $40 million loan to strengthen the framework for implementing fiscal policy with a focus on strengthening revenue administration, improving public financial management and upgrading the public investment system.25 Considering that fiscal policy at times has been heavily influ­ enced by political considerations (such as elections), it is important to adhere to more rigorous discipline on spending, considering that fiscal policy has been an issue and has been highlighted by the IMF, the World Bank and the IDB as an area that requires improvement. The government’s tight financial squeeze in 2020 should test this. Related to improving fiscal management is the need to have better management of public sector debt. Public sector debt has more than doubled since the 2014 recession, hitting 77.2% of GDP in 2017. As discussed earlier, the government has relied more heavily on external bor­ rowing and, in all fairness to the government, the depth of the recession forced a greater turn to external borrowing. The risk is that Suriname could find itself with a growing debt burden and heavy payments at a time when international debt markets demonstrate their periodic fickleness and close down for higher risk borrowers. In 2020 the debt issue increasingly weighed on Suriname’s economy, especially as the local currency weakened in the face of a strong US dollar (in which much the debt is denominated).

Financial sector strengthening Suriname’s financial sector has undergone a considerable makeover since independence. In recent years it has come under pressure on a number of fronts, ranging from tough economic conditions to de-risking pressures from large international banks that have radically reduced their correspondent banking relationships with local banks and other financial institutions. Further progress in the anti-money laundering and anti-terrorist financing framework could help to mitigate risks associated with the withdrawal of correspondent banking relationships.

Brain drain Like many Caribbean countries, Suriname has a brain drain. The problem started prior to independence, but has continued to be an issue into the twenty-first century. According to the Netherlands’ Central Bureau of Statistics, in 2015 almost 350,000 Surinamese immigrants were in the country, with around 39% of them having being born in Suriname.26 Although data is 333

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not readily available as to their educational level, it is likely that the large numbers of Sur­ inamese in the Netherlands has contributed to the country’s brain drain, which explains the shortage of professionally trained workers. A greater effort is required to improve governance and better business climates to provide incentives for these people to remain. Other options are to create knowledge-intensive service-oriented economies at home. With an eye to the next challenge, it would be in Suriname’s interest to become more integrated with CARICOM, and help to create a well-paid cadre of civil servants who will rotate throughout the region.

Regional economic integration Suriname also needs to develop greater economic integration with its neighbours, particularly those in CARICOM. Suriname joined the organization in 1995, but has followed a gradual approach to fuller engagement. It was only in 2015 that the Dutch-speaking country signed two agreements with the CDB that are intended to improve Suriname’s implementation of the CARICOM Single Market and Economy and the Economic Partnership Agreement.27 The two agreements seek to assist Suriname in moving to a more competitive economy, increasing its export earnings, and making the country more attractive to investment. Greater regional integration could also be developed with Suriname’s immediate neighbours, Guyana and French Guiana. Suriname’s top four trading partners for exports are Switzerland, Hong Kong, Belgium and the United Arab Emirates, with Guyana coming in fifth place. In terms of imports, Suriname’s main trading partners are the USA, the Netherlands, Trinidad and Tobago, and China. Trinidad and Tobago is Suriname’s main Caribbean trading partner. The three Guianas might find a more fruitful area of cooperation in energy areas when oil and gas exploration moves into a more rapid phase, especially if newer finds occur offshore in Guyana and Suriname.

Unfinished political business Probably the most daunting challenge facing the economy is dealing with lingering political issues, which in Suriname date back to the 1980 sergeants’ coup, the murders in December 1982 of 15 members of the opposition, criminal charges raised by the Dutch government against President Bouterse for cocaine trafficking, and allegations that Venezuelan money was taken by the president to help him win office. In 2019 further allegations pointed to the pre­ sident’s involvement in gold smuggling aimed at helping the dictatorial Maduro regime in Venezuela to beat economic sanctions.28 In Suriname, a court case over Bouterse’s role in the December 1982 murders remains in a state of limbo, a place the president obviously prefers to keep it. As chief executive of the nation he maintains immunity. However, if an opposition government comes to power that dynamic could change. The May 2020 general election was won by a group of opposition parties, although Bouterse was slow to acknowledge their victory. The new government faces a number of foreign policy challenges. It must decide whether to maintain the country’s links with Venezuela and what to do about the significant role that China plays in the economy. Both relationships could become more problematic if the US-Chinese rivalry in the Caribbean intensifies and Washington applies pressure on Suriname. Under the Trump Administration, economic sanctions against the Maduro regime have polarized the Caribbean, with the USA, Canada, Europe and most Latin American countries taking a strong stance against the dictatorship in Caracas; others mainly in the Caribbean, like Suriname, have been less inclined to condemn it. Indeed, Suriname has opted to abstain from voting against the Maduro regime at the Organization of American States. 334

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Considering Suriname’s more cordial relationship with Venezuela and the larger role of the China in its economy, Suriname must also consider its relationship with the USA, still one of its major trading partners. In November 2019 the Surinamese courts convicted Bouterse for the December 1982 mur­ ders of 15 political opponents and sentenced him to 20 years’ imprisonment. The president ignored the verdict and declared that he was running for re-election. What was significant was that the court’s decision was backed by a joint statement by the diplomatic missions of the Netherlands, the USA, the United Kingdom, Spain, Germany and France to Suriname which said to Suriname that it was ‘critical’ that the verdicts be ‘implemented and upheld in accor­ dance with the rule of law’. Bouterse, of course, ignored this, but it is likely that he will seek to maintain a close relationship with China, Venezuela and Cuba, a foreign policy alignment which could create problems for him further down the road with the USA, especially if further oil findings are discovered. As for Suriname’s domestic politics, Bouterse has been the dominant figure in Suriname’s politics through most of the period since the military coup in 1980. Born in 1945, he is in his early seventies, still vital enough to be president one more term. At the same time, he is no longer a young man. Suriname needs to think about who will come after him. It is important that the country continues to make advances in creating a more efficient civil service and an environment that is more attractive for the development of the private sector. Moreover, its political institutions will need to demonstrate the strength to keep the political system on track for competitive elections and an ability to maintain an active approach for economic policymaking.

Conclusion Suriname’s economy remains linked to the larger global economy through its reliance on extractive industries, namely gold and oil. Efforts are being made to reduce that dependence by diversifying the economy’s base, which is proving to be a major challenge and could be com­ plicated by any major discovery of offshore oil. A sudden burst of rent-generating opportunities (the collecting of royalties from foreign oil companies) could undo some of the hard work that has been done already and that still needs to be done in creating a better institutional framework for economic development. Tougher measures need to be taken in dealing with transparency and disclosure in government finances, including at the country’s central bank. Looking ahead to the next decade it is important for Suriname to gain better control over its national finances, particularly fiscal policy and debt management. At the same time, the greater political stability exhibited in the country since the first decade of the twenty-first century has helped to provide a better economic policymaking environment. If Suriname is to recover from the COVID-19 pandemic and benefit from a potential oil boom, there is a need for a more concerted effort to improve the country’s institutional framework, adhere to international norms and more deeply integrate the country with the wider world. Suriname’s economy has travelled a considerable distance since independence, but there is much more to come.

Notes 1 For an account of the English effort to establish a colony in Suriname see Matthew Parker, Willough­ byland: England’s Lost Colony (New York: Thomas Dunne Books/St. Martin’s Press, 2015). 2 Rosemarijn Hoefte, Suriname in the Long Twentieth Century: Domination, Contestation, Globalization (New York: Palgrave Macmillan, 2014), p. 113. 335

Scott B. MacDonald 3 For a complete timeline of Alcoa see the company’s website, www.alcoa.com/global/en/who-we-are/ history/default.asp. 4 Hofte, Suriname in the Long Twentieth Century, p. 113. The author noted: ‘Lack of expertise, disin­ terestedness, and other Dutch priorities gave the American multinational in effect free reign. Condi­ tions in Suriname were much more favorable to Alcoa than in British Guiana. The Staten at first protested the granting of these conditions, but then unanimously voted in favor, out of fear that Alcoa might leave the economy. Alcoa managed to gain control over almost all deposits, nearly 34,000 hectares, known at the time.’ 5 Ibid., p. 117. 6 Centrale Bank van Suriname, www.cbvs.sr/over-cbvs/geschiedenis. 7 Hoefte, p. 135. 8 Ed Dew, The Trouble in Suriname, 1975–1993 (Westport, CT: Praeger, 1994), pp. 40–41. The out­ break of communist-inspired revolutionary groups throughout much of Latin America and the Car­ ibbean during the 1960s caused a serious rethink about the role of the military in society. The Cuban Revolution destroyed the traditional military, something that armed forces establishments throughout the region were painfully aware of. The connections between social justice and social violence were seen with greater clarity by many in officer’s groups throughout the Americas. As stated by Panama’s Omar Torrijos, the country’s strongman from 1968 to 1981: ‘It started with Fidel Castro. Suddenly there was a new orientation. We had more contact with the people. In all the military schools, the orientation changed immediately. After Cuba, there was a preoccupation with social forces in the courses. We studied the case of Cuba … social justice. We came to the conclusion that there was a direct relationship between social justice and social violence.’ Quoted in Jonathan C. Brown, Cuba’s Revolutionary World (Cambridge, MA: Harvard University Press, 2017), p. 372. No doubt, by the mid­ 1970s this line of thinking had penetrated Suriname’s fledgling army. 9 World Bank, Performance and Learning Review of the Country Partnership Strategy for Republic of Suriname, 22 October 2018, p. 6, http://documents.worldbank.org/curated/en/791541544842861715/pdf/2018­ Suriname-Performance-and-Learning-Review-Board-version-11162018-636804216540567998.pdf. 10 Ibid. 11 IDB, Program Evaluation Suriname, 2011–2015, July 2016, p. 1, https://publications.iadb.org/en/coun try-program-evaluation-suriname-2011-2015. 12 Ibid., p. 2. 13 Ibid., p. 6. 14 Nicolas Bourcier, ‘China Finds an Eager South American Stablemate in Suriname’, The Guardian, 23 June 2015, www.theguardian.com/world/2015/jun/23/suriname-china-business-influence. 15 Rich Lord and Kara Holsopple, ‘Alcoa Leaves a Dirty Legacy’, Pulitzer Center, 18 September 2017, https://pulitzercenter.org/reporting/alcoa-leaves-dirty-legacy. 16 Suriname’s Ministry of Natural Resources granted environmental approval for the Newmount Mining Corporation, via its local subsidiary, Suriname Gold Company (Surgold), in December 2013. Con­ struction commenced in August 2014 and commercial production was achieved in October 2016. The Suriname government executed the option to acquire a 25% equity in the gold project in November 2013. According to the company, the open pit mine is expected to produce up to 500,000 troy oz of gold per annum over its estimated mine life of 11 years, while employing 1,100 personnel. See www. mining-technology.com/projects/merian-gold-mine/. 17 J. Khadan, ‘Suriname’, in Diether W. Beuermann and Moises J. Schwartz (eds), Nurturing Institutions for a Resilient Caribbean (Washington, DC: Inter-American Development Bank, 2018). 18 IMF, Suriname Article IV Consultation, December 2018, www.imf.org/en/Publications/CR/Issues/2018/ 12/20/Suriname-2018-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-46487. 19 IDB, p. 8. 20 Greenheart investor presentation 2018, www.greenheartgroup.com/downloads/Presentation/Green heart%20Group%20Corporate%20Presentation.pdf. 21 The Amazon Cooperation Treaty Organization dates back to 1978 when eight countries signed the Amazon Cooperation Treaty, ‘with the aim to promote the harmonious development of the region and the well-being of its people, and to strengthen the sovereignty of countries over their respective Amazon territories’. Members include Brazil, Bolivia. Colombia, Ecuador, Guyana, Peru, Suriname and Venezuela. 22 For an excellent summary of the Blue Economy see Justin Ram, Diodial Ramrattan and Raquel Fre­ derick, Measuring the Blue Economy: The System of National Accounts and Use of Blue Economy Satellite Accounts, Caribbean Development Bank Working Paper, No. 2019/2 (Barbados).

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23 24 25 26 27

Hoefte, p. 214. World Bank, Doing Business 2019: Training for Reform (Washington, DC: World Bank, 2019), p. 5. IMF, Suriname Article IV Consultation, p. 12. Cited in IDB, p. 2. CARICOM, ‘Suriname Signs Trade Agreements with CDB’, 8 July 2015, https://caricom.org/ communications/view/suriname-signs-trade-agreements-with-cdb. 28 Douglas Farah and Caitlyn Yates, Maduro’s Last Stand: Venezuela’s Survival Through the Boliviarian Joint Criminal Enterprise (Washington, DC: IBI Consultants and the National Defense University, 2019), p. 11.

337

24 The Bahamas Facing a period of climate change and slow growth Robert E. Looney

Introduction/overview The Bahamas’ economy has achieved considerable success with the country’s per capita income of US $32,997 in 2018, the highest in Latin America and the Caribbean. The country falls in the International Monetary Fund (IMF) country grouping of ‘Caribbean Tourism Dependent’ (CTD)1 countries along with Antigua and Barbuda, Aruba, Barbados, Belize, Dominica, Gre­ nada, Jamaica, Saint (Christopher) Kitts and Nevis, Saint Lucia, and Saint Vincent and the Grenadines, and enjoys a sizable per capita income lead over Aruba ($25,366), and Barbados ($17,758). The country, however, has seen growth declining gradually over time, averaging annual rates of growth of 5.9% from 1960–79, 3.5% in the 1980s, 2.2% in the 1990s, 1.0% in the 2000s, and 0.6% from 2010–18.2 In the period (1980–2007), before the international financial crisis, growth averaged 2.6% per annum, but subsequently declined to –0.1% (2008–18). Despite having by far the highest CTD per capita income, the Bahamas’ growth has lagged considerably behind that of the group average since 1980. For the CTD countries as a group, the corre­ sponding rates were 5.0% in the 1980s, 3.0% in the 1990s, 2.3% in the 2000s, and 1.2% for the period 2010–18. Growth in these countries averaged 3.8% before the international financial crisis and 0.7% subsequently. The Bahamas’ economy is mainly dependent on the tourism, real estate and financial sectors.3 Although not included as a separate item in the country’s national income accounts, the IMF estimates that tourism receipts account for around 27% of the Bahamas’ gross domestic product (GDP), while in 2018 real estate and construction activities contributed 25%, followed by finance at 9%.4 All three areas are, to a certain extent, driven by factors external to the Bahamas with tourism and real estate significantly affected by economic conditions in the USA as well as by climate change and the increasingly destructive force of hurricanes. The financial sector has come under intense scrutiny for alleged money laundering5 and tax avoidance schemes, and hence the country’s reputation in the area has been severely damaged. Following the early September 2019 devastation of large swathes of the Bahamas by Hurri­ cane Dorian,6 the country now faces the prospect of a long period of expensive reconstruction

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work and fiscal stress on government budgets that were already in a weak state. The InterAmerican Development Bank (IDB) estimates the damage wrought by Hurricane Dorian at US $3.4 billion, with the island of Abaco absorbing 87% of the losses and 76% of the damage caused by the storm.7 After a visit to the Bahaman islands of Abaco and Grand Bahama, St Lucia’s Prime Minister, Allen Chastanet, speaking not only of the Bahamas but of all the region’s small island devel­ oping states (SIDS), noted that ‘Our extinction is imminent … The climate crisis has taken away from us the ability to control our destiny’.8 The situation will only get worse. As for the future, in addition to increasingly violent storms, climate change will bring rising sea levels and temperatures, which may present insurmountable challenges to the country’s food security, tourism and health. The IMF gives the Bahamas a 20% chance of being hit by a hur­ ricane in any given year.9 With 80% of its land within 3 feet of sea level and reason to believe there may be even more areas affected,10 the country faces the threat of losing a considerable amount of land and tourism resources as the effects of climate change become more pronounced. As for the future, the IDB notes that achieving disaster and climate change resilience will require rethinking development stra­ tegies, the location of settlements, redesigning infrastructure, securing better data and information management, and strengthening environmental protection as a first protection barrier against natural hazards.11 The government of the Bahamas will be under increased pressure to undertake these actions while at the same time ensuring that adequate resources are available for improvements in the education, health and general well-being of the population.

Economic development The country’s secular growth decline occurred despite increasing rates of investment. Invest­ ment as a share of GDP increased from an average of 24.8% of GDP prior to the global financial crisis (1980–2007) to 28.3% in the years that followed (2008–18).12 As savings remained constant at 17.0% during these two periods, the deficit on the country’s current account of the balance of payments increased dramatically from 1.6% of GDP to 11.3%. A similar pattern of fiscal deficits and debt occurred before and after the international finan­ cial crisis. Government revenue increased from 10.9% of GDP before the crisis to 14.4% after it ended. However, government expenditure expanded more rapidly, increasing from 12.3% to 18.2%. As a result, the fiscal deficit increased from an average annual rate of 1.4% of GDP to 3.7%. Higher fiscal deficits produced a rapid rise in government debt. From 1990–2007 government debt averaged 20.0% of GDP, increasing to 42.9% from 2008–18.

Recent growth patterns Recent growth (2013–18) has been uneven,13 with overall GDP averaging 0.1% per annum. However, some sectors have experienced strong growth while others have contracted. During this period agriculture experienced an average annual decline of 2.1%, while mining and quar­ rying averaged a 21.8% increase. Manufacturing expanded at an average annual rate of 0.7%, but electricity, gas and water grew at an average annual rate of 12.6%. Similarly, construction contracted at an average annual rate of 4.0%, while wholesale and retail trade expanded by 1.7% 339

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annually. Other sectors’ growth rates also varied from average annual rates showing modest expansion to a number of contractions: transport and storage (0.2%), accommodation and food services (3.7%), information and communication (4.4%), finance and insurance (1.4%), real estate (0.6%), professional services (1.0%), administrative and support services (3.1), public administration and defence (–0.6), education (–3.8), human, health and social work (2.7%), and other services (2.9%). Suppressed growth in recent years stems from supply-side difficulties. Analysis by the IMF suggests that potential growth has declined significantly since the late 1990s, and in 2019 growth was expected to decline to around 0.5%. Furthermore, the IMF found that the dete­ rioration in growth stemmed mainly from negative growth in total factor productivity.14 Falling growth and productivity have negatively affected sectors such as tourism, with the country losing market share by an estimated 0.5% in the Caribbean region in terms of international tourist arrivals since 2006.

Demographics According to the World Bank,15 the population of the Bahamas reached 385,640 in 2018. As with most developing countries, the Bahamas’ demographic growth rate has declined con­ siderably over the years averaging 3.4% in the 1960s and 1970s, falling to 1.8% in the 1980s and 1990s, and to 1.4% from 2000–18. Declining birth rates led to an increase in the proportion of the population in the labour force age-groups (those aged 15–64 years). The proportion of the population aged 15–64 years increased from 55.0% in the 1960s and 1970s, to 64.2% in the 1980s and 1990s, and to 67.3% from 2000–18. Similarly, the younger population, i.e. those aged 0–14 years, declined from 41.4% of the population in the 1960s and 1970s, to 33.2% in the 1980s and 1990s, and to 26.5% from 2000–18. These patterns suggest that despite a demographic dividend16 in recent years, an ‘economic miracle’17 similar to that experienced in East Asia did not take place. The favourable demographic patterns were not even sufficient to reverse the country’s gradual deceleration in economic growth. Employment patterns in the Bahamas have remained relatively stable over the last several decades ,18 with the share of the workforce in agricultural declining from an average of 4.7% in the 1990s to 3.4% in the 2000s and to 2.7% from 2010–18. Employment in industry (mining, construction, manufacturing, utilities) increased from 14.6% of the labour force to 16.9% in the 2000s, before levelling off to 16.2% from 2010–18. Over the past three decades, slightly more than 80% of the country’s labour force has been engaged in services, averaging 80.7% in the 1990s, 79.7% in the 2000s, and increasing to an average of 81.1% from 2010–18. Labour participation rates have remained relatively stable over the past three decades, with female participation rates averaging around 68%, while those of males averaged 81%, giving an overall participation rate of 75% compared to a rough average of 65% for other Caribbean countries. The labour force is well educated, with around 59% having completed secondary education and 29% tertiary education. Higher education levels reflect the country’s compulsory education at the primary and secondary level. Unemployment averaged 10.4% of the labour force prior to the global financial crisis, and subsequently increased to an average of 13.2%. However, unemployment has declined in recent years from 15.8% in 2013 to 10.4% in 2018. According to the Department of Statistics’ Labour Force Survey for May 2019,19 the unemployment rate for women dropped to 9.9% compared to 9.2% for men. Youth unemployment is a problem across the Caribbean, with the proportion of those in the 15–24 age-group being unemployed often reaching 40%. Unemployment in the 340

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Bahamas follows this pattern, albeit at lower rates, with youth unemployment being the highest among the different age-groups. In early 2019 the rate of youth unemployment reached 20% (20.7% for women and 19.5% for men). However, the unemployment situation changed dramatically following Hurricane Dorian. By November 2019 door-to-door surveys conducted by the Department of Social Services found20 that nearly 50% of those living on Grand Bahama were unemployed. The rate of unemployment in Freeport was 47%; it was 48% in East End and 60% in West End. Some residents had left the island in search of job opportunities in New Providence and abroad.

Socio-economic development Despite relatively slow rates of economic growth in recent years, the country has achieved sig­ nificant gains in socio-economic development as measured by the United Nations Human Development Index (HDI). The HDI provides a summary measure of improvements in the standard of living by incorporating three fundamental aspects of long-term progress: life expectancy; the average number of years of education; and per capita income. The Bahamas’ HDI value for 2018 (the latest date of available data) gives the country a ranking of 60th out of 189 countries, down from 54th in 2017.21 Still, the country remains in the very high human development grouping of countries. However, the country’s progress in this area has slowed, and as a result its ranking declined by 11 places between 2012 and 2018. Declines in the standard of living, as measured by per capita income, were mostly responsible for the country’s declining ranking. This decline was an extension of earlier declines with gross national income (GNI) per capita decreasing by about 8.7% between 1990 and 2018. The country’s HDI ranking was 17 places below its per capita income ranking (GNI divided by population), suggesting a considerable lag in standards of living behind the country’s economic capabilities. The HDR can be modified to take inequality into account. The constructed index (GII), or measure of the loss in human development stemming from inequality between males and females, depicts gender-based inequalities as derived from relative scores in reproductive health, empowerment and economic activity. In 2017 the Bahamas ranked 75th on the GII. In that year, the country’s progress reflected the fact that women held 21.8% of seats in parliament, with 87.4% of adult women possessing at least a secondary level of education. For males, the corresponding rate came to 87.6% of their male counterparts. In the Bahamas, the rate of female participation in the labour force is 70.0%, while for men it is 82.0%. The UN’s assessment of country progress in its Global Sustainable Development reports provides additional insight into the progress made by the Bahamas in 17 different areas. In its 2019 report,22 the UN’s study shows the Bahamas facing significant challenges (little progress) in three areas: decent work and economic growth; responsible production and consumption; and climate action. Significant challenges where further progress is needed included zero hunger; gender equality; clean water and sanitation; industry innovation and infrastructure; life below water, and life on land. Some challenges remain in terms of achieving zero poverty, good health and well-being, and quality education. Deficiencies in the educational system, along with other structural factors, have led some observers to claim that the country is caught in a massive ‘internal brain drain’23 in the form of low labour productivity. Finally, the country’s geographic structure consisting of numerous islands spread over a vast area has led to varying levels of development and income. Inequalities exist in the delivery of and access to education and health care. This development has affected the labour market through young workers’ level of educational achievement, as well as the quality of the educa­ tion they receive. As a result, there are regional and demographic disparities, with poverty rates 341

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in the southernmost Family Islands at 17.2% , almost 5% above the national average.24 For young adults and children, estimates are roughly 6% above the archipelago’s average (18.4%). Poverty is higher in households headed by females (9.7%) than in those headed by men (7.9%). The IDB study concludes that the outcome of these developments is an unequal distribution of income whereby the richest 10% of the population consumes more than the poorest 60%.25

Institutional constraints on growth While the Bahamas faces many financial challenges following Hurricane Dorian, even more significant obstacles may present themselves. These take the form of institutional constraints in the form of weak governance structures, limited progress in opening up the economy to international competition, and increasing problems associated with rising levels of crime and violence. These factors have contributed in part to the country’s current difficulties associated with alleged money laundering and tax haven activities.

Governance Traditionally, the Bahamas has been characterized as having good governance, particularly relative to other countries in the region. However, in recent years there has been a deteriora­ tion in several critical areas monitored by the World Bank.26 After reaching the 86th percentile in the all-important voice and accountability measure of democracy in 2008, the country gra­ dually declined to the 73rd percentile by 2018. It is still ahead of Jamaica (69th percentile) and Trinidad and Tobago (67th percentile). However, in the area of political stability, i.e. the absence of violence, the Bahamas has maintained along with Barbados its relatively high ranking on the eighth percentile, considerably ahead of Jamaica (63rd percentile) and Trinidad and Tobago (55th percentile). Regarding government effectiveness, or the quality of public services, civil service, policy formulation, policy implementation and the government commitment in these areas, there has been a steady erosion since the late 1990s with the country’s ranking falling from almost the 88th percentile (1998) to the 72nd percentile by 2018. Barbados experienced a similar decline to the 69th percentile in 2018, while Jamaica improved from the 59th percentile in 2002 to the 71st by 2018. In 2018 Trinidad and Tobago continued to lag behind at the 61st percentile. The Bahamas experienced a similar decline in regulatory quality, or the ability of its gov­ ernment to ‘formulate and implement sound policies and regulations that permit and promote private sector development’.27 In this instance the country declined from the 88th percentile in 2002 to the 57th in 2014 but recovered to the 61st percentile by 2018. Although Barbados experienced a similar decline, its ranking was still at the 72nd percentile in 2018. At that time, Jamaica ranked 63rd and Trinidad and Tobago 55th. A similar erosion has occurred in the area of the rule of law, with the Bahamas’ ranking in this critical area falling from the 90th percentile in 2004 to the 57th percentile by 2018. Bar­ bados’s decline in this area was from the 92nd percentile in 2002 to the 66th in 2018. Jamaica, on the other hand, improved from the 40th percentile in 2005 to the 46th in 2018, while Trinidad and Tobago fell from the 70th percentile in 1009 to the 50th in 2018. Fortunately, the Bahamas, in sharp contrast to many developing countries, has not seen a severe deterioration in its control of corruption, with its ranking falling from the 92nd percen­ tile in 2004 to a still respectable 83rd by 2018. While still behind Barbados’ ranking at the 90th percentile in 2018, Barbados is considerably above Jamaica’s 50th percentile and Trinidad and Tobago’s 44th. 342

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Economic freedom The Bahamas ranked 58th out of 162 countries in the Fraser Institute’s 2019 economic freedom ratings,28 but this ranking represented a gradual deterioration in recent years with the country ranking 38th in 2010, and 51st in 2015 – the country had ranked 23rd in 1980. The Bahamas ranks particularly low in freedom to trade internationally (115th), and in credit market regula­ tions (77th). It is noteworthy that the Bahamas ranks 10 places higher (48th) in personal free­ dom in the Fraser Institute’s rankings for 2019. According to the Heritage House 2019 Index of Economic Freedom the country ranks 76th in terms of trade freedom,29 placing it in the ‘moderately free’ group, a decline from ‘mostly free’ throughout most of the 1990s and 2000s up to 2016. Still, the country’s overall score is above the regional and world averages. The regulatory system is generally conducive to entrepreneurial activity, and there are no individual or corporate income taxes. However, during the past few years there has been a marked decline in several vital sub-components, including property rights, government integrity and labour freedom. On the positive side, the government’s efforts to stimulate the economy have involved the simplification of business licensing, procurement and business-related immi­ gration. The government has also taken new steps to foster the development of small and medium-sized enterprises. Still, private sector growth suffers from a weak rule of law, lingering protectionism, large subsidies to state-owned enterprises, and a bloated and slow-moving bureaucracy. The World Bank’s Doing Business report for 2020 paints a similar picture.30 There, the Bahamas ranks 119th out of 190 economies and it is one of the lowest-ranked countries in Latin America and the Caribbean. It is also ranked low in several important aspects of doing business: 181st in registering property, 161st in trading across borders, 152nd in getting credit, 94th in starting a business, and 81st in obtaining electricity. The country’s trade across borders ranking was the lowest in the Latin American and Caribbean region.

Crime and violence High rates of violence have afflicted the Bahamas for several years. According to the UN Global Study on Homicide 2019,31 from 2012–16 the Bahamas had a homicide rate of about 32 murders per 100,000, the sixth highest rate in the Americas.32 With 122 murders in 2017, the homicide rate was 31 per 100,000, but in 2018 the number of murders decreased to 91, the lowest count in nine years, bringing the homicide rate to 24 per 100,000. Rising unemploy­ ment in the country following Hurricane Dorian will no doubt push crime rates higher as citizens seek alternative methods of generating an income.

Principal activities As noted above, tourism and the financial services industry dominate the economy. However, as part of the country’s diversification strategy, efforts are underway to expand agricultural production and the manufacturing sector, particularly as it relates to high-technology firms.

Tourism Tourism is the country’s dominant sector.33 The country’s proximity to the USA gives it a natural advantage over other Caribbean tourist destinations. Tourist activity began in earnest in the 1860s with the opening of the Royal Victoria Hotel in Nassau.34 However, it was not until the 1920s that winter tourism developed on a large scale. Jet travel in the 1950s provided a 343

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significant stimulus to the industry and the start of the Bahamas’ development as a mass-market destination. The expansion of the sector led to rapidly increasing per capita incomes averaging slightly over 5% per annum in the 1960s. With the Bahamas’ increasing popularity as a tourist attraction, a wave of refurbishment activities and renovations took place in the late 1990s and early 2000s. Despite their excellent beaches and wildlife resources, most of the Family Islands remained relatively undeveloped until the 2000s. Airport improvements in Nassau and the Family Islands formed a critical component of the Progressive Liberal Party government’s economic strategy, and large-scale developments occurred on several islands, including Eleuthera, Exuma, Abaco, and San Salvador. A significant development occurred in 2005 when the Baha Mar Development Company purchased a group of tourist facilities, including the Wyndham Nassau Resort, the Crystal Palace Casino, the Nassau Beach Hotel, and the Radisson Cable Beach Resort.35 In 2010 the Baha Mar formed a joint venture with the Export-Import Bank of China36 and China Con­ struction America, an affiliate of the China State Construction Engineering Corporation, to undertake a massive expansion programme. The US $3,500 million project represented the Bahamas’ most significant and most ambitious tourism project to date, with significant implications for the country’s growth prospects, employment and government revenue. Work on the development began in 2011, and when completed was to include four hotels, a casino, convention centre, golf course, and more than 40 restaurants and bars. However, the opening, initially scheduled for December 2014, did not take place. Subsequently, the project was set for a March 2015 opening, but that target was also missed. In June that year, the developer announced their intention to file Chapter 11 bankruptcy proceedings in a Delaware court,37 citing delays by the contractor, growing financial difficulties, and their inability to set a revised opening date. The court disallowed the application on 15 September.38 For its part, the government announced in July its intention to seek a winding-up of Baha Mar, and on 4 September the Supreme Court of the Bahamas appointed a provisional liquidator to preserve Baha Mar’s assets, while agreeing to consider a winding-up petition on 2 November.39 However, the development’s size and socio-economic impact, its near completion,40 and the cost of further delays combined to render it too important to fail. Following a period of sluggish growth in 2010–14, the government viewed development as an essential pillar of its growth strategy. The hope was that the project could help to increase annual GDP growth from about 1.0% per year in 2010–14 to 2.8% in 2016. The development also had the potential to provide a significant boost to government revenues. In August 2015, reflecting the importance of the development to the entire economy, credit rating agency Standard & Poor’s (S&P) lowered its country rating to BBB– with a negative outlook. S&P noted that it was unlikely that the parties would be able to resolve their disputes in time for the peak tourism season in December and that the legal disputes had created a ‘short-term economic shock’41 for the country. The risks of the ongoing delays were not only financial. They included the potential withdrawal of companies previously committed to participating in the development. In August 2016 the Export-Import Bank of China agreed to fund completion of the project, and in December the government announced the sale of the Baha Mar development to a Hong Kong company, Chow Tai Fook Enterprise Ltd ,42 with planned completion costs of US $700 million, bringing the total cost of the project to at least $4,200 million. A phased opening began in 2017, and the resort was fully operational from June 2018. The impact on tourist arrivals was dramatic.43 Arrivals grew by 2.8% in 2014, declined by 3.3% in 2015, before increasing to 2.5% in 2016. After contracting by 2.1% in 2017, arrivals jumped by 7.9% in 2018. The same pattern characterized overnight stays, which declined by 2.2% in 2013 before increasing by 2.2% in 2014, 3.9% in 2015 and 0.6% in 2016 before contracting by 2.7% in 2017. In 2018 these 344

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jumped by 7.4%. Occupancy rates, however, have remained fairly low at 56.0% in 2014, 58.5% in 2015, 58.3% in 2016, 59.2% in 2017 and 60.0% in 2018. There are lessons to be learned from this experience by the rest of the Caribbean and other small tourism-dependent economies with little fiscal room for manoeuvre. The Baha Mar development highlights the risks of large and expensive tourism developments that are too important to fail and become affected by disputes and delays. The risks include unplanned equity injections by the government, which could derail fiscal-strengthening efforts and affect the short-term economic outlook negatively. Disputes could also affect the finances of the business community through delays in payments to domestic suppliers of goods and services. With regard to the future contribution of the tourism sector to the country’s economy, the World Travel & Tourism Council estimates that the sector’s direct contribution in 2017 was 19.0% of total GDP and expected it to increase to 23.9% by 2028.44 The sector’s total con­ tribution (direct and induced impacts) was estimated at 47.8% of GDP, increasing to 59.0% by 2028. In 2017 the country’s tourism sector employed 52,500 persons (equivalent to 26.2% of total employment). The Council expects employment in tourism to increase to 72,000 jobs or 32.6% of total employment by 2028. Direct and indirect employment by the sector came to 55.7% of total employment (111,500 jobs) by 2018 with the Council anticipating that this will increase to 151,000 jobs in 2028 and amount to 68.5% of the total. Tourism accounted for 72.8% of total exports in 2017. The Council anticipates growth of 4.0% per year to 2028, which at that time will account for 80.9% of the total in 2028. Finally, the tourist sector accounted for 18.6% of total investment in 2017, and it was forecast to reach 22.0% by 2028.

Agriculture Agriculture has never played a leading role in the economy of the Bahamas, and the sector has been on the wane for years. Agriculture faces many obstacles, rainfall is low, especially in the northern islands, few areas have groundwater, and much of the land consists of limestone rock with only occasional sections of soil. Agricultural land is concentrated on the New Providence, Abaco, Andros, and Grand Bahama islands, while consumption takes place mostly on the islands of New Providence and Grand Bahama. The organization of agriculture varies considerably across the islands. There are small-scale farmers on many of the Family Islands. Larger commercial farms operate on New Providence. Several sizeable agro-businesses in the larger islands of the northern Bahamas produce crops for the export market. World Bank figures show growth averaging 0.2% in the 1990s but fell to an average annual contraction of 0.4% from 2000–18.45 As a result, the sector’s share of GDP has fallen from an average of 2.1% in the 1990s to 1.1% since 2000. In 2018 the sector accounted for 1.0% of GDP. As might be expected, there has been steady attrition of workers out of the sector with agriculture accounting for 4.7% of employed workers in the 1990s, falling to 3.4% in the 2000s, and 2.7% from 2010–18. The rural population has dropped gradually from an average of 19.2% in the 1990s to 17.8% in the 2000s and to 17.3% from 2010–18. In some rural areas, agriculture and fisheries are still the primary sources of employment, but labour productivity in the sector declined from an average annual rate of 2.8% prior to the global financial crisis (1990–2007) to a subsequent annual contraction of 1.9% (2007–17). While over 80% of the country’s food supplies are for domestic consumption, the fisheries and vegetable sub-sectors are export-oriented.46 Agricultural exports average around 15% of the country’s total merchandise export earnings with fish and crustaceans accounting for over 90% 345

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of the sector’s exports. Commercial fishing is concentrated on some of the smaller islands, such as Spanish Wells. Exports of crawfish (spiny lobster) amounted to US $47.0 million in 2017, with an additional $3.2 million from sponges and other fisheries exports47. Unfortunately, Hurricane Dorian damaged about 80% of the fishery infrastructure in Grand Bahama and nearly 100% in parts of Abaco.48 As the country attempts to diversify its economy, agriculture has been discussed as an area that offers some possibilities. However, with climate change posing an increasing threat to the country’s agriculture sector as well as to the tourism sector, the Bahamas is finding that it must increase its cooperative efforts with other countries in the region. One of the region’s first cooperative arrangements was the Caribbean Catastrophe Risk Insurance Facility (CCRIF).49 The CCRIF, located in the Cayman Islands, was created in 2007 and acts as a form of insurance by enabling member countries through contributing to a diversified portfolio to reduce risks associated with climate disasters. Risk reduction occurs because it is unlikely that many of the region’s countries will experience a significant disaster in the same year. Given the limited penetration of conventional insurance throughout the region, along with limited availability of donor assistance, the CCRIF fills a funding vacuum through providing immediate assistance. Following the September 2017 hurricanes (Irma and Maria), the CCRIF distributed US $29.6 million within two weeks to six affected countries. Between 2007 and 2017 the CCRIF distributed over $119 million to affected countries.50 It is not surprising that agriculture is on the top of the regional climate change agenda, given its importance to the Caribbean and its demonstrated vulnerability to climate-induced impacts. Regional efforts are undertaken through the Regional Food and Nutrition Security Policy (RFNSP)51. The RFNSP is a work in progress that will eventually enable Caribbean Com­ munity (CARICOM) member states to benefit from economic externalities (the diversification of risk) unavailable individual to small island countries, and at a lower cost than standard com­ mercial rates.52 Some of the measures proposed under the policy include the creation of a regional information system that can provide early warning for socio-economic and envi­ ronmental shocks. Also of importance is the setting up of agricultural insurance schemes to safeguard against natural disasters, as well as the creation of emergency reserve stocks of food.

Industry Industry (mining, manufacturing, power and construction) in the Bahamas remains relatively undeveloped. Manufacturing employed 4.2% of the working population in 2017, with a further 10.4% in construction and 1.4% in quarrying and utilities. These sectors have had spurts of growth, which are often interrupted by sharp contractions. Between 2010 and 2018 mining expanded at an average annual rate of 21.8%, but the sector accounted for only 0.7% of GDP in 2018. Manufacturing has experienced little growth in the past few decades, contracting at an average annual rate of 0.2% in the 1990s, expanding at an average annual rate of 0.2% in the 2000s, before contracting again at an average annual rate of 1.3% from 2010–18.53 As a result, manufacturing’s share of GDP dropped from around 3.5% in the 1990s to a little over 2% by 2018. The development of manufacturing has lagged due to a variety of factors starting with the country’s small domestic market. Furthermore, high labour and utility costs have discouraged potential investors. Bacardi operated a rum distillery in Nassau, which made use of imported molasses and bulk rum to produce blended rums for export to Europe under the Cotonou Agreement.54 However, a reduction of duties on all rum entering the European market sig­ nificantly reduced the comparative advantage of Bahamian production, and in 2009 production 346

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relocated to Puerto Rico.55 The Hawksbill Creek Agreement56 created a duty-free zone in Freeport along with a neighbouring industrial park designed to attract foreign direct investment into industrial ventures. Also, many smaller firms have become established on Grand Bahama in order to take advantage of the island’s tax concessions and port facilities. Grand Bahama Ship­ yard has the largest dry dock in the Americas, and it has attracted several ship/yacht repair firms.57 Recently, the construction sector has performed erratically with a contraction of 7.4% in 2013, an expansion of 2.3% in 2014 only to contract again by 29.7% in 2015.58 Growth picked up again with an expansion of 5.3% in 2016 and of 15.6% in 2017 before declining again by 10.2% in 2018. In 2018 construction accounted for 7.6% of GDP. Electricity, gas and water have also seen very erratic growth in recent years, with a contrac­ tion of 7.4% in 2013, an expansion of 2.3% in 2014, followed by a contraction of 29.7% in 2015. Growth accelerated to 5.3% in 2016 and to 15.6% in 2017 before contracting by 10.2% in 2018. The sector’s share expanded from 2.3% of GDP in 2012 to 3.1% in 2018. While the country does not possess hydrocarbons, there has been increased interest in petro­ leum and natural gas exploration. The Bahamas Petroleum Company (BPC) holds five offshore licences covering four million acres and applications for a further five.59 In August 2019, based on encouraging results from several seismic surveys, BPC entered into a series of agreements as part of a coordinated approach towards drilling an initial exploration well in the first half of 2020.60

Financial services and real estate The financial and insurance sector in the Bahamas has also experienced volatile growth in recent years.61 In 2013 the sector contracted by 12.6% with a further contraction of 11.2% in 2014. The sector then rebounded with an expansion of 27.2% in 2015 before contracting again by 3.3% in 2016. The sector then grew at 4.2% in 2017 and 2018. The sector accounted for 9.1% of GDP in 2018, down from 10.3% in 2012. In sharp contrast, the real estate sector experienced relatively stable, albeit slow growth in recent years, with a contraction of 0.2% in 2013. In 2014 growth increased to 3.0% before levelling off at 0.0% in 2015. Subsequently, the sector expanded by 0.6% in 2016 before contracting again by 0.8% in 2017. Growth resumed again in 2018, with an expansion of 0.9%. In 2018 real estate accounted for 17.6% of GDP, up slightly from 17.5% in 2012. Together with other business services, these sectors employed 6.9% of the active labour force in 2017; however, the offshore sector accounted for only 0.8% of total employment. The offshore component of the Bahamas’ banking system is considerably larger than its domestic counterpart. IMF figures indicate that as of the end of June 2018 the country had seven commercial banks.62 Of these, three domestic banks had assets of US $3.3 billion. Meanwhile, four foreign bank subsidiaries had assets of $9 billion. Additionally, ten credit unions and one development bank held $0.5 billion of domestic assets. At the same time, the country’s offshore accounts in 208 banks and trust companies amounted to $255.6 billion. The domestic banks’ business mainly involves residential mortgages and consumer loans. In contrast, the offshore banks’ focus is mainly on private banking and trust services. Domestic banks’ business, as of June 2018, consisted of residential mortgages (43%), consumer credit (38%), business credit (17%) and commercial mortgages (2%). In recent years, asset growth has remained low, mainly involving credit to the government. Meanwhile, real estate activity has levelled off with a large stock of distressed properties for sale. The financial services industry, while still a significant component of the economy, has not been nearly as dynamic as in the past. In part, it has lost business to newer financial centres around the world, particularly in Asia and the British Virgin Islands. Furthermore, in 2000 the 347

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Financial Action Task Force on Money Laundering (FATF),63 an intergovernmental organiza­ tion that combats financial crime, included the Bahamas in a list of ‘non-cooperative’ jurisdic­ tions. In response, the Bahamian authorities accelerated their efforts to fall in line with international requirements, and the Bahamas was removed from the blacklist in 2001. However, in 2009 the FATF placed the Bahamas on a ‘greylist’ of countries that had not yet taken suffi­ cient steps to negotiate tax information exchange agreements with international partners. The Bahamas was removed from the list in 2010. In 2018 the USA listed the Bahamas as one of the major international money laundering jurisdictions.64 Of concern was the increase in apparent money laundering and tax fraud. The government responded with efforts to improve its position on financial transparency and received support from FATF in this effort. Despite these actions, in January 2019 the Nether­ lands added the Bahamas to its tax haven blacklist.65 Subsequently, in February the European Union added the Bahamas to its list of 23 blacklisted countries considered high risk for antimoney laundering and counter-terrorism financing.66 This action has spurred the government into putting the appropriate regulations in place. The Bahamas has a relatively mature insurance industry by Caribbean standards.67 However, it is far from clear what impact Hurricane Dorian – possibly the worst natural disaster ever to hit the country – will have on life and non-life insurers. Property insurance has traditionally accounted for around two-thirds of the premiums written in the non-life segment. To the extent that Dorian exposes an insurance gap – particularly among Bahamaian households – the disaster may result in non-life premiums that are considerably higher than would otherwise have been the case. The financial impact on Bahamian insurers will depend on the extent to which the insured losses were covered by reinsurers.

Fiscal situation Several distinct trends characterize the Bahamas’ fiscal accounts.68 Government revenues and expenditures have increased their share of GDP since the 1990s. In the 1990s revenues averaged 10.7% of GDP, rising to 11.7% in the 2000s and to 14.7% from 2010–18. Expenditures, on the other hand, increased more rapidly from 12.1% of GDP in the 1990s to 13.3% in the 2000s and to 18.7% from 2010–18. As a result, government deficits have expanded from 1.4% of GDP in the 1990s to 1.6% in the 2000s and to 4.0% from 2010–18. Increasing deficits resulted in rising debt levels with average government debt accounting for 19.1% of GDP in the 1990s, rising to 22.5% in the 2000s and to 46.2% from 2010–18. In 2018 government debt accelerated further, to 63.3% of GDP. The deterioration in the country’s fiscal accounts stemmed from a series of causes. As with many developing countries, government expenditures rose over time due to an overexpansion of personnel. Many of the country’s state-owned enterprises remained inefficient with deficits that had to be covered by government subsidies. Moreover, post-hurricane rebuilding and clean-up activities following the passage of several Category 5 storms had an impact on revenue collections and spending levels. External competitiveness has declined due to the appreciation of the US dollar, with which the Bahamas maintains a peg.69 The May 2018 budget proposed by the new Free National Movement (FNM) government showed a significant policy shift towards the tightening of fiscal discipline.70 It introduced fiscal responsibility legislation (approved in September) to limit the fiscal deficit to 1.8% of GDP for 2018/19, to 1.0% for 2019/20, and to 0.5% for 2020/21, with expenditure growth after that not expected to exceed long-term growth in nominal GDP. An independent Fiscal Responsi­ bility Council was to supervise these limits.71 348

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State-owned enterprises, which received funding amounting to US $429 million in 2017/18, were instructed to become self-supporting within three to five years. An increase in the rate of value-added tax (VAT) to 12% and a partially successful attempt to increase taxa­ tion of internet-based ‘webshop’72 gambling operations were also to contribute to an increase in the tax take, up from 16.1% of GDP in 2017/18 to 20.1% in 2018/19, with an eventual target of 25%. There was to be a concomitant rebalancing of taxation away from customs and trade taxes. This move was also part of the preparation for accession73 to the World Trade Organization (WTO). These fiscal projections were utterly disrupted by Hurricane Dorian, which struck the islands in late August 2019. As noted earlier, the IDB estimates that the total cost of the damage wreaked on the Bahamas by Hurricane Dorian will amount to US $3.4 billion. Added to the reconstruction costs associated with Dorian, the increasing effects of climate change will impose enormous costs on the Bahamas stretching out into the future. In 2019 the government’s priority was to ensure recovery from the production and infra­ structure losses; it announced a VAT exemption74 for hurricane-affected islands and also plan­ ned to set up a trust fund75 to aid rebuilding. The government is likely to face increasing fiscal deficits with hurricane-related lost revenues and increased reconstruction expenditures. Finan­ cing these added expenses will be a crucial challenge for the country. The government’s debt is already at excessive levels, much of it incurred through investment in recovery from climate disasters and improved resilience to increasingly violent storms. Official Development Assistance is of little help because the country’s per capita income is too high to qualify for further assistance.76 Also, with US assistance under the Trump Admin­ istration problematic at best,77 and European countries mired in a pattern of slow growth and with massive climate-related allocations needed elsewhere around the world, funds are in short supply. In particular, as part of the November 2016 Paris Agreement, the developed countries agreed to provide developing countries with US $100 billion per year in 2020 to help them make the transition to lower greenhouse gas emission economies with significant climate change abatement capabilities. Unfortunately, there are already signs that aid pledges will come up significantly short.78 In late 2019 the ratings agency S&P stated that it would continue to follow the developments and pace of recovery efforts, including the government’s ability to respond effectively to the many challenges posed by recovery. Specifically, the agency indicated that We will focus particularly on the implications for long-term economic growth, govern­ ment finances, debt burden, and the country’s external position. We could lower the rating if we come to expect that public finances deteriorate compared with medium-term expectations, either because of the fiscal impact of the hurricane or weakened political commitment to fiscal sustainability.79

Prospects As a result of the damage inflicted by Hurricane Dorian in September 2019, the budget fore­ casts for GDP growth fell to 0.9% in 2019 and to –0.6% in 2020 (down from 1.8% and 1.7%, respectively, in the previous year), followed by a projected return to positive growth of 2.1% in 2021.80 Revenue for 2019/20 could be 8.8% below the budget target, with spending 34% above target, owing to emergency response expenditure. As a result, the fiscal deficits for 2019/20 and 2020/21 will increase upward from the statutory targets of 1% and 0.5% of GDP, with new projections of 5.3% and 3.8%. 349

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The storm will also have an impact on the political agenda in the Bahamas in the next few years. Prime Minister Minnis’s FNM government is likely to shift its focus from implementing fiscal consolidation measures and passing economic liberalization policies to ramping up govern­ ment spending to support reconstruction activity following the passage of the hurricane. Addi­ tionally, risks to policy continuity may rise over the long term if voters perceive the government’s response to the storm to be inadequate. This development would significantly reduce the FNM’s chances of maintaining its majority in the House of Assembly in the next election, which must be held by 2022; the FNM currently holds 35 out of 39 seats in the House of Assembly. With the onset of climate change, the country is in danger of falling into a vicious circle whereby falling government revenues result in slower rates of economic growth, leading to a further reduction in revenues. Increased budgetary pressures result in lower allocations for cli­ mate abatement measures that, in turn, expose the country to more climate-related damage, which further reduces growth and government revenues. However, there are several things the government can initiate to offset to a certain extent the financial burden imposed by hurricanes and climate change. The country has lagged in initiating a comprehensive set of reforms intended to increase competitiveness. As noted earlier, many of these stem from recent World Bank assessments of doing business in the country.81 Adminis­ trative processes are overly burdensome; trade across borders is relatively expensive; firms have poor access to credit, and electricity is often unreliable and expensive. The country’s tight peg to the US dollar, particularly during periods of increasing dollar strength, puts the tourism industry at a disadvantage relative to other flexible currency rate destinations in the Caribbean. Reforms and progress in these areas may be just as crucial as post-hurricane reconstruction in restoring economic growth.

Notes 1 World Economic Outlook Database, Washington, DC: IMF, October 2019, www.imf.org/external/ pubs/ft/weo/2019/02/weodata/index.aspx. 2 World Development Indicators, Washington, DC: World Bank, 2019, https://databank.worldbank. org/reports.aspx?source=World-Development-Indicators. 3 ‘The Bahamas: Economy’, Global Security (n.d.), www.globalsecurity.org/military/world/caribbean/ bs-economy.htm. 4 Nicole Laframboise, Nkunde Mwase, Joonkyu Park and Yingke Zhou, Revisiting Tourism Flows to the Caribbean: What Is Driving Arrivals, Washington, DC: IMF, December 2014, www.imf.org/external/ pubs/ft/wp/2014/wp14229.pdf. 5 Anti-Money Laundering and Counter-Terrorist Financing Measures: The Bahamas Mutual Evaluation Report, CFATF GAFIC, July 2017, www.fatf-gafi.org/media/fatf/documents/reports/mer4/cfatf-4meval­ bahamas.pdf. 6 Meghan Prichard, ‘Quick Facts: Hurricane Dorian’s Devastating Effect on the Bahamas’, Mercy Corps, 26 September 2019, www.mercycorps.org/blog/quick-facts-hurricane-dorian-bahamas. 7 ‘Damages and Other Impacts on Bahamas by Hurricane Dorian Estimated at $3.4 billion: report’, IDB, 15 November 2019, www.iadb.org/en/damages-and-other-impacts-bahamas-hurricane-dorian-estimated­ 34-billion-report. 8 Sean Buchanan, ‘Extinction “Imminent” for Small Islands’, InDepthNews, 12 September 2019, www. indepthnews.net/index.php/sustainability/climate-action/2967-extinction-imminent-for-small-islands. 9 Maximilien Queyranne, Wendell Daal and Katja Funke, ‘Public-Private Partnerships in the Caribbean Region: Reaping the Benefits while Managing Fiscal Risks, Washington, DC: IMF, 8 May 2019, www.imf.org/en/Publications/Departmental-Papers-Policy-Papers/Issues/2019/05/08/Public-Private­ Partnerships-in-the-Caribbean-Region-Reaping-the-Benefits-while-Managing-46239. 10 Denise Lu and Christopher Flavelle, ‘Rising Seas Will Erase More Cities by 2050, New Research Shows, New York Times, 29 October 2019, www.nytimes.com/interactive/2019/10/29/climate/coastal­ cities-underwater.html.

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11 ‘Damages and Other Impacts’. 12 World Economic Outlook Database. 13 National Accounts Report 2018, Nassau: Government of Bahamas, Department of Statistics, Ministry of Finance, June 2019, www.bahamas.gov.bs/wps/wcm/connect/0d533b7c-c62a-4f82-9ee5-7066a8cec3a6/ National+Accounts+Annual+Report+2018.pdf?MOD=AJPERES. 14 The Bahamas 2016 Article IV Consultation Press Release Staff Report and Statement, Washington, DC: IMF, 13 July 2016, www.imf.org/en/Publications/CR/Issues/2016/12/31/The-Bahamas-2016-Article­ IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-44074. 15 World Development Indicators. 16 The Bahamas: Selected Issues, Washington, DC: IMF, May 2018, www.imf.org/en/Publications/CR/ Issues/2018/05/14/The-Bahamas-Selected-Issues-45875. 17 David E. Bloom and Jeffrey G. Williamson, Demographic Transitions and Economic Miracles in Emerging Asia, Cambridge, MA: National Bureau of Economic Research, November 1997, www.nber.org/papers/ w6268. 18 World Development Indicators. 19 Preliminary Results of Labour Force Survey, Nassau: Government of Bahamas, May 2019, www.bahamas. gov.bs/wps/wcm/connect/bf831aa4-30f6-4669-9a1a-f3e1ec3b95b4/PRESS+RELEASE+-+Labour+ Force+Survey+MAY+2019.pdf?MOD=AJPERES. 20 Rachel Knowles, ‘50% Unemployment on Grand Bahama’, Nassau Guardian, 3 December 2019, https:// thenassauguardian.com/2019/12/03/50-unemployment-on-grand-bahama/. 21 Human Development Report 2019, New York: UNDP, 2019, http://hdr.undp.org/sites/default/files/ hdr2019.pdf. 22 GSDR 2019 Global Sustainable Development Report 2019: The Future Is Now: Scheme for Achieving Sustainable Development, New York: United Nations, 2019, https://sustainabledevelopment.un.org/ gsdr2019. 23 Natario McKenzie, ‘“Internal Brain Drain” Costs Bahamas $3.5bn’, The Tribune, 1 July 2014, www. tribune242.com/news/2014/jul/02/internal-brain-drain-costs-bahamas-35bn/. 24 Allan Wright, Development Challenges in The Bahamas, Washington, DC: IDB, May 2018, https:// publications.iadb.org/publications/english/document/Development-Challenges-in-The-Bahamas.pdf. 25 Approach Paper Bahamas 2010–17: Country Program Evaluation, Washington: DC, IDB, June 2016, https:// publications.iadb.org/publications/english/document/Approach-Paper-Country-Program-Evaluation­ Bahamas-2010-2017.pdf. 26 Worldwide Governance Indicators, Washington: DC: World Bank 2019, https://info.worldbank.org/ governance/wgi/. 27 Diether W. Beuermann and Moisés J. Schwartz, Nurturing Institutions for a Resilient Caribbean, Washington, DC: IDB, 2018, p. 284, https://publications.iadb.org/publications/english/document/ Nurturing-Institutions-for-a-Resilient-Caribbean.pdf. 28 James Gwartney, Robert Lawson, Joshua Hall and Ryan Murphy, 2019 Annual Report: Economic Freedom of the World, Vancouver, BC: Fraser Institute, 2019. 29 Terry Miller, Anthony B. Kim and James M. Roberts, 2019 Index of Economic Freedom, Washington, DC: Heritage Foundation, 2019, www.heritage.org/index/pdf/2019/book/index_2019.pdf. 30 Economy Profile: The Bahamas Doing Business 2020, Washington, DC: World Bank, 2019, http:// documents.worldbank.org/curated/en/596711574746166406/pdf/Doing-Business-2020-Comparing­ Business-Regulation-in-190-Economies-Economy-Profile-of-Bahamas-The.pdf. 31 Global Study on Homicide, 2019, Vienna: United Nations Office on Drugs and Crime (UNODC), July 2019, www.unodc.org/documents/data-and-analysis/gsh/Booklet1.pdf. 32 Jasper Ward, ‘Bahamas Murder Rate Sixth Highest in the Americas’, Nassau Guardian, 11 July 2019, https://thenassauguardian.com/2019/07/11/bahamas-murder-rate-sixth-highest-in-the-americas/. 33 This section draws on Mark Wilson, ‘Economy (Bahamas)’, in South America, Central America and the Caribbean, Abingdon: Routledge, 2019 and 2020, in print and online, www.europaworld.com. 34 ‘Our History’, Bahamas.com (n.d.), www.bahamas.com/our-history. 35 ‘Bahamas’ $1.2b Baha Mar Project Names Architect of Record’, Hotel Business, 15 August 2005, www. hotelbusiness.com/bahamas-1-2b-baha-mar-project-names-architect-of-record/. 36 ‘Baha Mar Resorts Ltd. Finalizes Historic Agreements with Chinese Banking and Construction Part­ ners to Realize Multi-Billion Dollar Baha Mar Resort Development Project in Nassau, the Bahamas’, Business Wire, 30 March 2010, www.businesswire.com/news/home/20100331005592/en/Baha-Mar­ Resorts-Ltd.-Finalizes-Historic-Agreements.

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Robert E. Looney 37 Stephen J. Lubben, ‘A Complex Bankruptcy Case, with Baha Mar and a Chinese Contractor, Lands in Deleware’, New York Times, 21 July 2015, www.nytimes.com/2015/07/22/business/a-complex­ bankruptcy-case-with-baha-mar-and-a-chinese-contractor-lands-in-delaware.html. 38 Stephanie Gleason, ‘U.S. Judge Dismisses Baha Mar’s Chapter 11 Filing’, Wall Street Journal, 15 Sep­ tember 2015, www.wsj.com/articles/u-s-judge-dismisses-baha-mars-chapter-11-filing-1442341845. 39 Lamech Johnson, ‘Judge Approves Petition for Baha Mar Liquidators to “Prevent Depletion of Resort’s Assets”’, The Tribune, 4 September 2015, www.tribune242.com/news/2015/sep/04/judge­ approves-petition-baha-mar-liquidators-preve/. 40 ‘Tracking Baha Mar’s Development Trek’, Hotel News Now, 12 December 2017, www.hotelnewsnow. com/Articles/27571/Tracking-Baha-Mars-development-trek. 41 ‘Bahamas Downgraded by S&P’, bnamericas.com, 26 August 2015, www.bnamericas.com/en/news/ bahamas-downgraded-by-s-p. 42 ‘Chow Tai Fook Enterprises Limited to Own and Operate Baha Mar Resort’, PR News Wire, 12 December 2016, www.prnewswire.com/news-releases/chow-tai-fook-enterprises-limited-to-own­ and-operate-baha-mar-resort-300376628.html. 43 Royston Jones, Jr., ‘Central Bank: Bahamas Economy Sustained “Upward Trajectory”’, Eyewitness News, 3 April 2019, https://ewnews.com/central-bank-bahamas-economy-sustained-upward-trajectory. 44 Bahamas Country Report, World Travel and Tourism Council, 2019, www.wttc.org/economic-impact/ country-analysis/country-reports/. 45 Ibid. 46 ‘Bahamas Country Profile’, Food Export Association of the Midwest USA (n.d.), www.foodexport. org/get-started/country-market-profiles/caribbean/bahamas-country-profile. 47 Royston Jones, Jr., ‘Fisherman Landed $57 Mil in Fisheries Products in 2018’, Eyewitness News, 1 August 2019, https://ewnews.com/fisherman-landed-57-mil-in-fisheries-products-in-2018. 48 The Bahamas: Hurricane Dorian Fact Sheet #11, (FY) 2019, Washington, DC: USAID, 24 September 2019, www.usaid.gov/crisis/dorian/fy19/fs11. 49 Caribbean Catastrophe Risk Insurance Facility, Washington, DC: World Bank (n.d.), siteresources. worldbank.org/PROJECTS/Resources/Catastrophicriskinsurancefacility.pdf. 50 ‘Regional Insurer Distributed US$119 Million During 10-Year Period’, Jamaica Observer, 15 January 2018, www.jamaicaobserver.com/news/regional-insurer-disbursed-us-119-million-during-10-year-period_122489? profile=1056. 51 The CARICOM Regional Food and Nutrition Security Policy Explained, CARICOM, 5 October 2010, https://agricarib.org/images/docs/Regional_Food__Nutrition_Policy_explained.pdf. 52 Ibid. 53 World Development Indicators. 54 Bahamas: Trade Agreements, Export Solutions, 27 September 2016, www.export.gov/article?id=Bahama s-Trade-Agreements. 55 Bacardi Closing Nassau Distillery, Ministry of Rum, 23 August 2007, www.ministryofrum.com/forums/ showthread.php?t=336. 56 Hawksbill Creek, Grand Bahama (Deep Water Harbour and Industrial Area, Arrangement of Sections, Gov­ ernment of the Bahamas, 11 September 1965, http://bahamas.gov.bs/cms/images/LEGISLATION/ PRINCIPAL/1965/1965-0048/HawksbillCreekGrandBahamaDeepWaterHarbourandIndustrialArea AmendmentofAgreementNo.2Act_1.pdf. 57 Grand Bahama Shipyard, UQP (n.d.), https://uqp.no/Shipyards/grand-bahama-shipyard-gbs. 58 National Accounts Report 2018, Nassau, Government of the Bahamas, Department of Statistics, Ministry of Finance, June 2019, www.bahamas.gov.bs/wps/wcm/connect/0d533b7c-c62a-4f82-9ee5-7066a 8cec3a6/National+Accounts+Annual+Report+2018.pdf?MOD=AJPERES. 59 Who We Are, BPC (n.d), www.bpcplc.com/about-us/who-we-are/. 60 ‘BPC Targeting Spring 2020 for Offshore Bahamas Drilling’, Offshore, 10 October 2019, www.off shore-mag.com/drilling-completion/article/14068381/bahamas-petroleum-company-targeting-spring­ 2020-for-offshore-bahamas-drilling. 61 National Accounts Report 2018, Nassau, Government of the Bahamas, Department of Statistics, Ministry of Finance, June 2019, www.bahamas.gov.bs/wps/wcm/connect/0d533b7c-c62a-4f82-9ee5-7066a 8cec3a6/National+Accounts+Annual+Report+2018.pdf?MOD=AJPERES. 62 The Bahamas: Financial System Stability Assessment, Washington, DC:IMF, July 2019, https://webcache. googleusercontent.com/search?q=cache:6UlUoRkW2DcJ:https://www.imf.org/~/media/Files/ Publications/CR/2019/1BHSEA2019002.ashx+&cd=1&hl=en&ct=clnk&gl=us.

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63 Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers, FATF, June 2019, www.fatf-gafi.org/publications/fatfrecommendations/documents/guidance-rba-virtual-assets.html. 64 Kristina Russell, ‘US Report Names Bahamas as Money Laundering Jurisdiction’, The Tribune, 3 April 2019, www.tribune242.com/news/2019/apr/03/us-report-names-bahamas-money-laundering-jurisdict/. 65 Roystan Jones Jr., ‘Netherlands Blacklisting “Premature”’, Eyewitness News, 4 January 2019, https:// ewnews.com/netherlands-blacklisting-premature. 66 ‘European Commission Adopts New List of Third Countries with Weak Anti-Money Laundering and Terrorist Financing Regimes’, European Commission, 12 February 2019, https://ec.europa.eu/ commission/presscorner/detail/en/IP_19_781. 67 ‘Caribbean Insurers Rebound after Two Catastrophic Hurricane Seasons’, Best’s Market Segment Report, 14 June 2019, http://www3.ambest.com/bestweekpdfs/sr745011719521afull.pdf. 68 World Economic Outlook Database. 69 ‘BSD “Peg” to USD Explained’, Get Money Smart Bahamas, 31 May 2018, www.getmoneysmartba hamas.com/central-bank/2018/2/7/bsd-pegged-to-usd-explained. 70 2018/19 Budget Communication, Commonwealth of the Bahamas, 30 May 2018, www.thebahamasweekly. com/uploads/20/BudgetCommuniucation1819_-_Final.pdf. 71 Allan Wright and Kari Grenade, The Bahamas Fiscal Responsibility Bill of 2018: Some Observations and Practical Guidance for Implementation Effectiveness, Washington, DC: IDB, June 2018, https:// publications.iadb.org/publications/english/document/The-Bahamas-Fiscal-Responsibility-Bill-2018­ Some-Observations-and-Practical-Guidance-for-Implementation-Effectiveness.pdf. 72 Neil Hartnell, ‘Budget Demand for More Web Shop Taxes’, The Tribune, 28 May 2018, www. tribune242.com/news/2018/may/29/budget-demand-more-web-shop-taxes/. 73 ‘The Bahamas Injects Renewed Energy into Goal of Joining WTO by Next Ministerial Conference’, Geneva, World Trade Organization, 4 April 2019, www.wto.org/english/news_e/news19_e/acc_bhs_ 09apr19_e.htm. 74 ‘Bahamas Extends Hurricane Dorian Tax Relief Initiative, The Gleaner, 24 October 2019, http://jamaica­ gleaner.com/article/caribbean/20191024/bahamas-extends-hurricane-dorian-tax-relief-initiative. 75 Rashad Rolle, ‘Trust Fund to Help Families Rebuild’, The Tribune, 4 November 2019, www. tribune242.com/news/2019/nov/04/trust-fund-help-families-rebuild/. 76 Compton Bourne, Financing for Development Challenges in Caribbean SIDS, Port of Spain, UNDP, 2015, www.undp.org/content/dam/rblac/docs/Research%20and%20Publications/Poverty%20Reduction/ UNDP_RBLAC_Financing_for_Development_ReportCaribbean.pdf. 77 Caitlin Emma, ‘Trump Administration Mulls $4.3b in Foreign Aid Cuts’, Politico, 15 August 2019, www.politico.com/story/2019/08/15/trump-administration-43-billion-foreign-aid-cuts-1666066. 78 ‘What Is Climate Finance and Where Will It Come From? The Guardian, 4 April 2013, www. theguardian.com/environment/2013/apr/04/climate-change-renewableenergy. 79 Neil Hartnell, ‘S&P Gives Bahamas Major Post-Dorian Lift’, The Tribune, 7 October 2019, www. tribune242.com/news/2019/oct/07/sp-gives-bahamas-major-post-dorian-lift/. 80 2019 Fiscal Strategy Report, Nassau, the Commonwealth of the Bahamas, 20 November 2019, www. thebahamasinvestor.com/wordpress/wp-content/uploads/2019/11/communication_to_parliament_for_ 2019_fiscal_strategy_report.pdf. 81 Economy Profile: The Bahamas Doing Business 2020, Washington, DC: World Bank, 2019, http:// documents.worldbank.org/curated/en/596711574746166406/pdf/Doing-Business-2020-Comparing­ Business-Regulation-in-190-Economies-Economy-Profile-of-Bahamas-The.pdf.

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25 The Cayman Islands Scott B. MacDonald

Introduction Located south of Cuba and west of Jamaica, the Cayman Islands are a well-known destination for tourists and people working in the financial industry. Tourism accounts for 70% of the economy, with financial services accounting for most of the rest. Despite the three small islands having sparse natural resources, tourism and finance have provided the Caymans with one of the highest standards of living within the Caribbean as well as in the world. As a self-governing British Overseas Territory, the islands have taken advantage of a high level of political stability, rule of law (ultimately backed by the British government), and desirable location to develop into a major offshore financial hub. Although the islands’ role as an offshore financial centre has often been controversial (particularly in regard to tax evasion), the territory has remained pop­ ular among international financial circles, especially for hedge funds, multinational corporations and mutual funds. The Caymans are made up of three islands, Grand Cayman (the largest and where most people live), Little Cayman and Cayman Brac, an area estimated to be slightly larger than Washington, DC. The population of the territory stands at a little over 64,000. This gives the Cayman Islands the distinction of being the second most populated British Caribbean territory, after Bermuda, but ahead of Anguilla, the British Virgin Islands, Montserrat, and Turks and Caicos Islands. Its per capita income is estimated to be around US $44,000, which puts in the same range as Finland, France and the United Kingdom. The major themes in the development of the Cayman Islands economy are how best to leverage the territory’s comparative advantages, including location and tax-free status under the British Crown. Its small size is obviously a factor, which has forced the islanders to place an emphasis on education and excellent communications. In a world of many rivals for such services as tourism and finance, the Caymans stand out, in large part helped along by improvements in technology, rule of law, political stability and pragmatism of the local popu­ lation. While tourism is a relatively non-controversial industry from a global perspective, the Caymans’ involvement in offshore financial activities and the territory’s role as a tax haven has placed it squarely in gunsights of most advanced economies concerned about tax evasion. While the Cayman Islands authorities are sensitive to this issue and have been forced to provide better

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transparency and disclosure, trends in international tax law and enforcement remain important concerns for the islands.

Economic development from foundation to the twentieth century The Cayman Islands made their first historical reference when they were first sighted by Christopher Columbus in 1503. They functioned as a temporary base for a number of voyagers, often pirates, and formally came under British suzerainty at the Treaty of Madrid in 1670 (along with Jamaica). The islands offered fresh water, turtle meat and wood for ship repairs. Permanent English-speaking settlement did not occur until the 1730s, which included Europeans (mainly from Jamaica) as well as African slaves. The first census of the islands was conducted in 1802, showing a population of 933, with 545 counted as slaves. Slavery was abolished in the Cayman Islands in 1833, at which time the population mix was 950 people of African descent, who had belonged to 116 European families. However, it is important to stress that owing to the rela­ tively small size of the islands, the colony’s economy was not driven by sugar or other planta­ tion crops. The mainstay of the economy throughout much of the colonial period prior to the twentieth century was dominated by a combination of cotton cultivation, food crops, fishing and ship repair. Considering the remoteness of the islands, Cayman society evolved with a greater sense of self-sufficiency than other Caribbean nations, a factor that would drive the track of future of economic development decisions.

Creating a modern economy The modern Cayman Islands economy was created during the period from 1960 to 1980, driven by a combination of external and domestic forces. The significance of this period was captured by Tony Freyer and Andrew P. Morriss, who observed that between 1960 and 1980, the Cayman Islands went from being one of the least developed, both legally and economically, jurisdictions in a poorly developed region to surpassing its former colonial power in GDP per capita terms, and developing a sophisticated body of financial law.1 The factors that helped to develop the Cayman Islands economy included the willingness of the British government to ensure that those territories that remained under its authority were eco­ nomically viable; the attractiveness of offshore financial centres to potential investors despite some of the upheaval initially surrounding the era of decolonization; the entrepreneurial spirit of the Caymanian population; and the improvement of technology which has done much to facilitate business over long distances and different time zones. Decolonization in the British Caribbean started in the 1950s and was brought home by Jamaica’s decision to seek independence in 1962. This was a major event for the Cayman Islands. Although the island group had long been ruled by the British, it was administered out of Kingston, the capital of Jamaica. The Caymans were now forced to consider their options – they could seek independence as a small and underdeveloped country or maintain the colonial link, but with greater local autonomy. As other parts of the British Caribbean (Barbados, Guyana, and Trinidad and Tobago) soon followed Jamaica into statehood, the Caymans opted to remain a British possession or what was to be called a ‘Dependent Territory’ until 2002, at which time the Foreign and Commonwealth Office discontinued that term and the islands become an ‘Overseas Territory’. 355

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While the British government was willing to accept an ongoing relationship with its smaller territories in the Caribbean that were not inclined to seek their nationhood (such as the Cayman Islands, the British Virgin Islands, and Montserrat), the government was also sensitive to the cost of maintaining small and relatively remote outposts. Consequently, the dependencies were encouraged to do more for their own economic development, which in a number of cases encompassed setting up offshore financial services of some type. From the British perspective this was fine, but is was also essential that each of these jurisdictions had a functioning reg­ ulatory regime, backed by the necessary human capital. In a sense, this arrangement carved out a policy space for the civil service in London that had the responsibility of maintaining the Crown’s authority as well as its counterparts in the overseas territories to pursue offshore financial services. Concerns about potential tax evasion that would emerge with the creation of tax havens were not given much consideration. The urgency to try something different on the economic front was made more pressing by global economic changes in the 1950s. In particular, the global shipping industry shifted to large bulk carrier ships, which reduced the number of employment prospects for Caymanians. At the same time, Nicaragua reduced Caymanian access to turtle fisheries, which had long been a source of turtle meat. Against the backdrop of independence movements shaking up the Car­ ibbean, Cayman Islanders looked for new economic strategies, with financial services and tourism looming large. But this also meant radical changes in how the territory operated, in particular the need to be better connected with the outside world. The changes were quick in coming. The UK government gradually, yet consistently, accor­ ded authority to the local population, who proved to be astutely sensitive to the changes going on around their homeland. In 1959 the first written Constitution (which granted the vote to women) was promulgated; in 1965 the Chamber of Commerce was founded, the Caymanian Weekly newspaper was launched, and the Rotary Club of Grand Cayman was chartered; and in 1966 legislation was introduced to promote the banking industry. In the 1970s the push to develop financial services continued. This was facilitated by the implementation of a new Constitution in 1972, which gave the local Legislative Assembly, Executive Council and Gov­ ernor considerable powers in terms of self-government. At the same time, the Cayman Islands gained their own currency, the Cayman dollar, which is still pegged to the US dollar. None of the above would have happened if the Cayman Islanders lacked an entrepreneurial spirit. Although the colony’s economic base was rudimentary up to and through the 1950s, the population was worldly-wise, with many of the islanders serving as sailors and officers throughout the region and the wider world. Moreover, located far from major population centres, the local population had a strong tradition of self-sufficiency, especially the women, many of whom had to manage alone for long periods when their spouses and other family members were at sea. Considering that much of the economy was barter-driven during much of its history, the need to live within one’s means resonated among the population. This was accentuated by the small government budgets and other resources that were available from the British colonial authorities. Another factor pushing toward the creation of the modern Cayman Islands economy was the advancement of technology and transportation, which benefited both finance and tourism. In the case of the former, the development of the telex and long-distance telephone systems in the 1950s and 1960s made it ‘almost as easy to transact business with a bank in a foreign center as with one just across the road’.2 At the same time, efforts to link the Caymans with the wider world began in a meaningful fashion with the development of air and ocean connections as well as air travel. Although the first cruise ship, the Atlantis, visited the islands in 1937, the Second World War interrupted the development of a tourism industry until the 1950s. More was 356

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needed. An important step in this direction was the Cayman government’s decision to subsidize Owen Roberts’ airline (registered as a British company), allowing the airline to operate reg­ ularly by 1950. An important landmark was the construction of Grand Cayman’s first airfield in 1953, which replaced the seaplane service that had operated since the 1940s. These develop­ ments were followed by the launch of Cayman Airlines in 1968, which helped to foster the fledgling tourist sector. Another important development that shaped the modern Cayman Islands economy occurred in 1953. The first commercial bank, Barclays, opened an office in the territory, with a mandate to handle seamens’ remittances. This was regarded as the first official banking link between the Cayman Islands and the global banking system. More banks and other financial institutions were soon to come. By the time Jamaica moved to independence in 1962, the Cayman Islands were undergoing considerable change. The inability of the other British Caribbean countries to create a working regional federation (known as the West Indies Federation) was closely watched, especially as the UK government indicated that joining the Federation was a preferred course of action. How­ ever, many Caymanians were left wondering what guarantee there was that the larger British West Indian countries which were likely to dominate such a federation would care about the small Cayman Islands? In Caymanian eyes, the British had long been tight with funds – would this remain the case under other Caribbean countries which came from a poorer economic base than the UK? Moreover, would the Federation allow the Caymans to establish an offshore financial centre that had partly been developed with the idea of taking advantage of people and institutions looking to evade paying taxes, especially if those taxes were levied by a member of the Federation? Considering the changing Caribbean and global economic landscape, the Cayman Islands opted to continue their links with the UK and to embrace offshore finance, then being implemented at various stages in Bermuda, the Bahamas, the Netherlands Antilles, the Channel Islands and other parts of Europe. This was helped by the discussions concerning wealth taxes in the UK, which created a growing demand for offshore financial products within the sterling areas (as the exchange control area managed by the British and incorporating both colonies and some former colonies was known).3 Indeed, the Caymans’ adoption of offshore finance, with a preference for considerable discretion, matched up well with financial circles in the City of London. As Freyer and Morriss noted: The British side of such transactions was already well developed: British banks and financial firms had more than a century of international operations, with experience to develop techniques only acquired by the inherited aptitudes and many years of experience. The City [London’s financial district] had also developed considerable expertise navigating reg­ ulatory thickets in adapting the 1947 Exchange Control Act’s impact on British multi­ nationals that went well beyond simple avoidance techniques like the ‘hand payments’ [illegal hand-carried deliveries of US dollars in London] used in the late 1940s and early 1950s.4 Essential to the Cayman Islands’ development was the creation of a legal infrastructure. The Caymans’ newly formed Legislative Assembly (which came about with the islands’ split from Jamaica) and the British authorities (who maintained considerable influence through an appointed Executive Council), embarked upon the Companies Law of 1960, which became the foundation for the formation of the offshore financial centre. The significance of this law was explained by the then Registrar, Arthur Hunter, who noted of the new act was. 357

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The significance of this law was explained by the then Registrar, Arthur Hunter, who noted of the new act was basically the same as the relevant sections of the English Company Law [the Companies Act] of 1948 … dealing with public companies, prospectuses and that type of thing, but what really started the ball a-rolling were the bits of legislation offering tax concessions … the idea that we could have a company separate from the individual so that he could shield behind the company name.5 The use of British law as the foundation was to prove a boon for the territory as it made it easier for British companies to take advantage of what was on offer. The linkage between the Companies Act and the Cayman Islands’ economic development was evident as a law was introduced to the Legislative Assembly that suggested a means of paying for a mosquito eradication programme and as an alternative source of employment for Caymanian sailors whose employment prospects were coming under pressure from the restructuring of the global shipping industry. Moreover, the appeal of the bill was meant to be sweetened by the fact that a move into the tax avoidance business was not something that had never been tried before – Switzerland, Liechtenstein and Luxembourg had been in the industry since the 1920s and the Bahamas, Bermuda and the Channel Islands since the 1930s. Last, but hardly least, by using the English Companies Act as a foundation for the Caymanian legislation it was easily understandable by the City of London, still one of the world’s major financial hubs. Indeed, the British government was actively promoting the UK financial services industry as a growth area. As part of the British system, the Cayman Islands benefited from this. An additional plus factor for the Cayman Islands in developing their financial centre in the 1960s was that as US companies expanded overseas, their need for overseas financial services brought more US dollars into the global economy. This, in turn, created a need for new financial products in the Eurodollar market (in London and on continental Europe) as well as forcing US banks into a more expansionary international role. The Caymans would benefit from both of these trends. Another law in the 1960s created two licence and regulatory categories for bank and trust companies, using a similar plan from the Bahamas as a roadmap. Category A was for banks and trust companies operating within the Cayman Islands. As such, they were more tightly regulated than Category B entities, which conducted business solely as offshore entities. Both categories aimed to attract business from the UK, the USA and Europe. They quickly bolstered the rev­ enue base for the Cayman Islands government and helped to expand the foundation of the financial industry. However, over time the Category B entities would put the Caymans under pressure as they required minimal local office representation and supervision, something that would come back to haunt the authorities several years later. While the Cayman Islands moved ahead in the creation of a legal and administrative foun­ dation for offshore finance (and increasingly improved transportation and hotels), the territory also benefited from another external development – the Bahamas’ move to independence. This was because the Bahamian economy was similar to that of the Caymans – it was based on tourism and offshore financial services. Bank secrecy was tight and the Bahamas had attracted investors from around the world, many seeking to avoid paying taxes in their home countries. In the late 1960s and early 1970s Bahamian politics became more nationalistic, pushed along by ‘Bahamianization’, the idea of filling local jobs and positions of authority with the local popu­ lation, mainly from the black majority (as opposed to ceding control to Bay Street Boys who were generally white and represented business interests). When the Commonwealth of the 358

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Bahamas became independent in 1973, investor money moved to the Cayman Islands, which had the attraction of still being under British control.6 Offshore finance in the Cayman Islands continued to expand during the 1970s, with new money coming from Bermuda, which was also being shaken by racial problems. As one more step in the diversification of the economy, the Caymans had added captive insurance company registration and mutual funds registration. Both of these developments reflected the changing nature of the global economy, which became evident as monied interests were actively looking for products and cheaper ways of doing business due to the breakdown of the Bretton Woods system in 1971 (which raised currency risks); the decline of exchange controls (which meant a free flow of capital around the world accelerated by technological advances); and the infusion of petrodollars into the Eurodollar market (which substantially augmented the flow of capital and scope of international finance into all corners of the world). The first development reflected the fact that the old system of more closely regulated currency flows and the importance of the gold standard in the USA was eroding quickly and would soon be gone. The second indicated that many governments were finding that currency controls were actually hurting their own eco­ nomic development over the long term as capital went where it was welcomed, thus benefiting these jurisdictions. The third development was a result of the oil-producing countries’ 1973–74 oil embargo, which greatly increased oil prices and created new wealth coming out of the Middle East and needing somewhere to invest.7 All of this pushed along the creation of new financial products and the volume of global financial transactions increased considerably. Another layer of this was the need for secrecy on the part of certain companies and individuals, especially as the movement of funds was perceived as tax evasion in some government quarters. Throughout all of this, the Cayman Islands (and other jurisdictions such as the Bahamas and Panama) were willing and able to help, not to mention having friends and allies in the world’s major financial centres, such as London’s bankers. But there was a downside to the world of ‘hot money’ (this being capital, sometimes from questionable sources, which is frequently transferred between financial institutions in an attempt to maximize interest or capital gain). The Cayman Islands, like many other jurisdictions offering bank secrecy, became part of the larger world of illicit drug trafficking that originated in Colombia and used Caribbean offshore banking centres for laundering their profits.8 Although the Caymans initially sought to ignore the problem, international pressure mounted for changes to be made to the regulatory regime that demanded greater transparency and disclosure, especially in terms of know your customer programmes. More will be said about this later. Despite concerns about money laundering and tax evasion, the Cayman Islands enjoyed a major leap forward during the 1990s in both finance and tourism. Given that the world econ­ omy was undergoing an extended period of globalization and that it was growing at a strong pace, the Caymans were well positioned. This was the result of the arrival of numerous new customers, many of them from Eastern Europe and Russia as well as from a more prosperous Asia, including the People’s Republic of China. Indeed, the 1990s were seen as a golden age for the Cayman economy. As one publication noted: It was the era of Caymans’ great leap forward, when thousands of immigrants poured through its borders and a generation of Caymanians enjoyed riches their ancestors could not have imagined, let along predicted, a modern-day gold rush built on the pillars of mass-market tourism and financial services.9 As the globalization of the world economy became more pervasive in the late 1990s and the first decade of the twenty-first century up to 2008, the Cayman Islands were well positioned for 359

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an era that promoted the free flow of international capital, the emergence of a global upper class, and the need of citizens in a number of countries (especially those from Russia, China and other politically more controlled societies in the Middle East) to find tax shelters. The Cayman Islands, located in the Caribbean and with a well-developed tourist sector, were regarded as a safe and comfortable place to conduct business. The Caymans also fulfilled the needs of a global corporate system that sought out tax advantages to give them a competitive advantage over other corporations that were foolish enough to remain at home in their advanced economies and pay their taxes. This included many Chinese companies that, as they expanded internationally and considered making stock offerings in Hong Kong (which was what many mainland China com­ panies have tended to do), turned to register in the Caymans. As Investopedia noted in 2019, this was very much the case in the 1990s and early 2000s: The Cayman Islands are one of the most well-known tax havens in the world. Unlike most countries, the Caymans don’t have a corporate tax, making it an ideal place for multi­ national corporations to base subsidiary entities to shield some or all of their incomes from taxation.10 Although there has been considerable umbrage over multinational corporations using offshore tax shelters, especially in the aftermath of the 2008 financial crisis and the Great Recession (which required taxpayer support in countries such as the USA, Ireland and the UK to bail out the financial sector), the practice has continued. It allows large companies to establish an off­ shore subsidiary in the Cayman Islands and direct sales through that subsidiary rather than through the parent company based in its home country, such as the USA. The Cayman Islands’ status as a tax haven was also reinforced by the fact that no direct taxes are imposed on residents. This means that residents in the islands pay no income tax, property tax, capital gains taxes, payroll taxes, or withholding taxes. For those high-net-worth individuals able to afford to live in the Caymans, this has been a strong incentive for residency. At the same time, the local government finances itself through revenue earned from fees related to stay-over tourism and work permits, financial transactions, and import duties. Duty taxes are levied on most goods imported to the islands, at rates in excess of 20%. Despite the controversy surrounding the tax haven issue, the Cayman Islands remain one of the world’s major offshore financial centres and they are likely to stay that way. As a major offshore financial hub, the territory offers a wide range of services, including banking, struc­ tured finance, investment funds, trusts, and company formation and management. As of June 2018 the banking sector had US $934 billion in international assets.11 The significance of the Caymans is also felt in US government debt sales: on a consistent basis the territory is in the top 10 buyers of US Treasury debt; as of September 2019 it held $238.7 billion, just behind Luxembourg and ahead of Switzerland (Japan, China and the UK are the largest holders).12 Rounding out the picture, as of March 2019 the Cayman Islands had 133 banks, 146 trust company licences, 139 licences for company management and corporate service providers, 821 insurance-related licences, and five money services businesses. There are 103,759 com­ panies incorporated or registered in the Cayman Islands and 10,708 licensed/registered mutual funds. Central to the Caymans as a well-respected financial centre is the Cayman Islands Monetary Authority (CIMA). This agency is responsible for the management of the local currency. It regulates and supervises financial services, provides assistance to overseas regulatory authorities and advises the government on the regulation of the financial services industry. Although the Caymans have their critics over the tax evasion issue, CIMA is regarded as one of the most 360

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powerful institutions in the territory for dealing with financial enforcement and has worked hard at maintaining a good reputation with other major regulators around the globe. The Cayman Islands are keenly aware of the need to have well-established rules and reg­ ulations in place to prevent money laundering and the financing of terrorism. After many years of resisting change, the authorities prohibited shell banks, anonymous accounts, and the use of bearer bonds. Meanwhile, the Terrorism (Amendment) Law 2017, which was followed by a revision in 2018, has enhanced the territory’s anti-money laundering/combating the financing of terrorism (AML/CFT) efforts in that property is given a broader definition and terrorist financing is now a predicate offence for money laundering. Furthermore, the Penal Code (2018 revision) codifies tax evasion as a predicate offence. One of the major steps to tighten AML/CFT regulations was the Cayman Islands’ decision to require all financial service providers to collect and maintain beneficial ownership informa­ tion. According to local regulations, the Registrar of Companies stores this information in a centralized platform, which facilitates instantaneous access to beneficial ownership information for law enforcement and other competent authorities.13 This took place after considerable international pressure was brought to bear on the Caymans and other British offshore financial centres. This will be discussed later in the chapter.

The tourist sector Tourism’s role is hard to conceal for anyone visiting the Cayman Islands. Grand Cayman’s landscape is dotted with a profusion of hotels, small shops and service vendors catering to visi­ tors. Moreover, the territory does much to highlight its clear and unpolluted waters. It is also marketed as safe and family-oriented. As Fodor’s Travel noted: Vacationers appreciate the mellow civility of the islands, and Grand Cayman’s exceptional Seven Mile Beach has its share of fans. Divers come to explore the pristine reefs or perhaps to swim with friendly stringrays. Go if you want a safe, family-friendly vacation spot. Don’t go it you’re trying to save money, because there are few real bargains here.14 Indeed, much of the sector is oriented to the high-end of the business, placing an emphasis on luxury hotels, fine dining and other activities. Although the Cayman Islands’ tourist sector is also geared towards handling large cruise ships, the benefits of the high-end traveller are evident in that they arrive by air, stay longer and spend more money. Cruise ship visitors tend to be limited to several hours of shore leave, usually hitting tourist zones around the port facilities designed to accommodate them. Another factor in the Caymans’ attractiveness to high-worth visitors is that they tend to be less sensitive to the ebb and flow of the global economy, in particular arrivals from North America and the UK, home to the majority of tourists to the Cayman Islands. The Cayman Islands’ tourist sector has a solid showing of major hotel chains, including Grand Hyatt, Mandarin Oriental, Marriott, and Wyndham. As of mid-2019 the territory boas­ ted 6,688 rooms, including 351 Airbnb listings. The government had initially expected that this number would increase but its positive outlook was radically reversed due to the outbreak of the coronavirus (COVID-19) pandemic, which shut down global tourism. Tourism has enjoyed strong growth over the past few years. In 2019, according to the gov­ ernment, the Cayman Islands welcomed a record-breaking 2.4 million visitors in 2018 as stayover visitor numbers expanded by 10.7% and cruise ship passengers increased by 11.1%. According to government estimates, there were 1,921,057 cruise ship passengers in that year. 361

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The ability to successfully handle such a large volume of tourists has meant that the govern­ ment has given high priority to infrastructure. In 2019 renovations to the Owen Robert’s International Airport were completed. As the Caymanian government stated: The new 200,000 sq ft facility, designed to handle up to 2.7 million travelers per year, has already received a record-breaking number of arrivals. Amongst these arrivals, the Island welcomed the Prince of Wales and Duchess of Cornwall in March [2019] to officially reopen the terminal.15 The Caymans also have also been active in opening up new airport links in the USA with the aim of more deeply penetrating the northern market. New links over the past few years have included Denver, Baltimore, Houston and Dallas. While the expansion of the tourist sector has received public support, the growth spurt in the late 2010s saw some push-back from residents. Concerns from residents about new hotel pro­ jects have included access to beaches, and the impact on local traffic and the environment. This was the case in the Beach Bay area of Bodden Town in Grand Cayman, where a major development was approved by the authorities, including a re-zoning of the district from resi­ dential to hotel and tourism, which surprised many local inhabitants. While the government has sought to support this development as a way of pushing the benefits of Cayman tourism to the under-served communities in the Eastern Districts, the residents of Beach Bay were not con­ vinced amid concerns that their community could go the way of Seven Mile Beach (the main tourist area which is dominated by hotels).16 The heavy dependence of the Caymans on tourism and its close linkages to the US market tie the Caribbean economy closely with the northern economy. When the US economy is in growth mode, Caymanian tourism has done well. Indeed, following the US recovery from the Great Recession, the US tourist flow has been strong. Looking ahead, one of the major questions will be how the Cayman Island economy should handle the next US downturn.

Political system geared to stability One of the strong points of the Cayman Islands has been a high degree of political stability. Long under British control, the islands gradually achieved self-rule in the late twentieth century. The Cayman Islands have had four Constitutions written by the British Crown since 1959, though there is a history of over 165 years of representative government. Under this arrange­ ment, the islands are a parliamentary democracy with judicial, executive and legislative branches of government. The current Constitution, which is undergoing revision, came into effect on 6 November 2009. The British Crown appoints a governor (who represents the monarchy). The governor has responsibility for foreign affairs, defence, internal security and the police. A deputy governor, who must be Caymanian, assists the governor and heads the civil service. The gov­ ernor leads the cabinet, which includes the premier, six other members appointed by the gov­ ernor, and two non-voting members (the deputy governor and the Attorney-General). The Legislative Assembly consists of 21 members, 19 of whom are elected and two are appointed (ex officio). Elections are held on a regular basis and are regarded as being fair and open by international standards. Elections were held in 1988, 1992, 2000, 2005, 2009, 2013 and 2017. Whoever wins the majority of seats in the Legislative Assembly is called upon by the governor to form a government. In turn, the premier will recommend ministers of his government to the governor, 362

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who approves them. The governor has the authority to prorogue or dissolve the Assembly by proclamation. Caymanian politics is a hybrid mix of political parties and independents. While political parties play a role in the islands’ political system, they do not necessarily represent strong ideo­ logical cleavages in Caymanian society. In many regards, political parties are constructed around strong political personalities. At the same time, the small-scale nature of the Cayman Islands’ voting population (listed at 21,216 as of 1 October 2019 by the Caymanian Elections Office), provides space for independent political actors, who in the post-election environment are free to work with whichever political group is able to form a government. This has translated into loosely formed ‘teams’ of political party members and independents. The major parties in the Cayman Islands in the twenty-first century have been the People’s Progressive Movement (PPM), the Cayman Democratic Party (formerly known as the United Democratic Party) and the Coalition for Cayman. The first two parties, however, have rotated in and out of office. Generally, the main political parties share a broad consensus on the terri­ tory’s economic development and its relationship with the British Crown. There have been differences over the degree of autonomy the Caymans should have vis-à-vis the British gov­ ernment, but there is little sentiment for independence (although it is sometimes used as a threat when local interests clash with those of the UK government). Caymanian politics have occasionally experienced a degree of turmoil, much of it related to offshore finance, which more than once has raised questions over corruption. One of the more challenging scandals to hit the Cayman Islands was Gulf Union Bank, which was closed down in 1997 on the order of the Cayman Island authorities due to fraud and missing money. (The bank also had operations in the Bahamas which were also closed.17) One of the casualties of the Gulf Union Bank affair was veteran Caymanian politician McKeeva Bush, who was then on the Executive Council; now called the cabinet). As the inflow of international business to the Cayman Islands was substantial in the 1990s, many for­ eign institutions sought local representation. Bush, like others, was approached by foreign financial institutions. In Bush’s case it was with the ill-fated Gulf Union Bank, where he served as a non-executive director and had an account. Bush’s position soon became problematic as Gulf Union had serious problems. To Bush’s supporters he was not responsible for the bank’s malpractices, but he became a scapegoat for the political opposition, who forced him to resign from the Executive Council. However, Bush was not finished politically. In the 2009 elections he led the United Democratic Party to victory and became the Cayman Islands’ first premier (under the new Constitution). He served in that role until December 2012, when he lost a vote of confidence in the legislature due to a criminal investigation into his charging large sums to his government credit card at hotels and casinos in Florida, Las Vegas and the Bahamas during his first year in office, as well as allegedly importing explosives without a valid permit. In the aftermath of his ouster, a new government was formed with Bush’s former deputy minister Juliana O’ConnorConnolly becoming premier. Bush remained in politics, continuing to lead his party although has not returned as premier. In the 2017 elections the PPM won the largest bloc of seats and formed a government under the leadership of Premier Alden McLaughlin. Bush was re-elected to his seat. The major political issues in the Cayman Islands continue to circle around how to manage ongoing pressure on the offshore financial sector and the pace of development. In the future, it is likely to turn more towards long-term sustainability with an eye as to how to manage the flow of tourists and climate change. The Cayman Islands are a small territory, and questions are being asked as to how many people can be squeezed into three islands. 363

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Challenges to the economy The Cayman Islands have created a modern, sophisticated economy in the Caribbean, with a standard of living comparable to most European countries. In some respects, it has taken a similar track as Singapore, although its size and population are much smaller than the Asian citystate, nor has it opted to move into manufacturing or technology. Nonetheless, the Caymans have accomplished much with little beyond human capital. The islands, however, face a chal­ lenging future. Three major items loom large: pressure to strip away the remaining opacity in the financial sector and to brake its efforts to help people and institutions of international standing to evade taxes; becoming a pawn in the growing Cold War-type struggle taking place between China and the USA; and climate change.

The financial sector and the end of tax evasion Ugland House has long been the one of the most important symbols of the Cayman Islands’ role in global finance as its location at 121 South Church Street is occupied by the well-known law firm of Maples and Calder and holds the registrations for several hundred thousand entities, including major investment funds, international joint ventures and capital market issuers. In May 2009 US President Barack Obama, during his presidential re-election campaign, ques­ tioned how was it possible for Ugland House to be home to 12,000 companies, alluding to the possibility of illicit activity, in particular tax evasion. He noted that this location was either the biggest building in the world or ‘the largest tax scam in the world’. The US president’s comment about Ugland House underscored the perception that offshore financial centres are places where such practices as money laundering and tax evasion are rife. Indeed, there are many who question the validity of offshore financial centres. Nobel Prize winner economist Joseph Stiglitz has questioned whether the offshore system serves any legit­ imate purpose at all or simply allows the rich and powerful to flout the rules that are followed by everyone else. As he stated: ‘The reality is that they put their money there in order to engage in either tax avoidance, tax evasion, regulatory avoidance, regulatory evasion. There is no reason for the very existence of these offshore paradises.’18 The negative perception of offshore financial secrecy was reinforced by the findings of the Panama Papers in 2016, which were followed by the Paradise Papers in late 2017. Both sets of ‘papers’ were electronic files leaked from major international law firms engaged in offshore finance. In the case of the Panama Papers, it was the firm of Mossack Fonseca, with its headquarters in Panama, and in the case of the Paradise Papers, it was the Bermuda-based Appleby, which had major clients including commodities giant Glencore, Shell, Goldman Sachs and HSBC. Both sets of electronic files were leaked to the International Consortium of Investigative Journalists (ICIJ), which published some of their findings and sparked other investigations around the world. The files and the subsequent reporting offered a close look into the world of secrecy offered by offshore financial centres. As the ICIJ stated of the Paradise Papers: At the center of the revelations is Appleby, one of the world’s biggest offshore law firms, with huge clients including commodities giant Glencore, oil major Shell, Goldman Sachs and HSBC. This isn’t just a story about tax. As we have previously exposed, the secrecy sold in the offshore world enables terrorism, money laundering and sanctions-busting. It allows dirty money into our property markets and banks, and lets scammers rip off honest investors and businesspeople.19 364

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For anyone looking, Appleby had branches in the Cayman Islands as well as the British Virgin Islands, the Isle of Man, Jersey and Guernsey. Moreover, both the Panama Papers and the Paradise Papers revealed that a large group of people and entities, including a number of US universities, Queen Elizabeth II, Apple and the US Secretary of Commerce in the Trump Administration, Wilbur Ross, were using offshore financial centres for money management purposes. While much of the business conducted offshore is considered legal, the idea of using places known for their lack of transparency and disclosure brought public pressure to bear on gov­ ernments in the USA, Canada, Europe and the UK to do something about it. The UK, in particular, came in for criticism considering that tax evasion and money laundering tended to occur in many British Overseas Territories, especially in the wake of the revelations made in the Panama papers and the Paradise Papers. Although the Cayman Islands have not been beset by numerous financial scandals, there have been linkages to the murky world of underground crime and shady doings, especially as they exist in a region that encompasses the heart of the global cocaine industry. According to the US government’s annual International Narcotics Control Strategy Report in 2019, the Cayman Islands’ ‘susceptibility to money laundering is primarily due to foreign criminal activity and may involve fraud, tax evasion, or drug trafficking. The offshore sector may be used to layer or place funds into the Cayman Islands’ financial system’.20 Moreover, the Cayman Islands have been linked to other major financial scandals, something that it shares with the USA, the UK and much of Latin America. Financial crime stories about money laundering and other shady activities linked to the Cayman Islands have included the money laundering problems surrounding FBME (whose holding company was based in the Caymans), tax evasion trouble involving Julius Baer’s Cayman unit, corrupt payments in the FIFA (Fédération Internationale de Football Association) scandal (where dirty money was understood to have been paid through a Cayman Island-based bank), as well as Cayman Secu­ rities and Cayman National Trust’s multimillion-dollar tax crimes case. Indeed, the last case was particularly damaging to the Cayman Islands’ reputation.21 In 2016 two units of the Cayman National Corporation (CNC) Ltd pleaded guilty to US charges as part of a US $6 million settlement into how the financial services firm helped US citizens to avoid paying taxes. The two units, Cayman National Securities Ltd and Cayman National Trust Co Ltd, admitted to conspiring with US taxpayer clients to conceal $130 million in offshore accounts and to avoid paying taxes from 2001 to 2011.22 CNC was originally established in 1972 and its mandate was to become ‘a leading internationally accepted financial services group offering world class products and services to satisfy all of its customers, locally and internationally, enabling it to prosper, provide a competitive return to its shareholders, and a rewarding workplace for its employees’. The company still exists and has not been involved in any new scandals. The Cayman Islands government has strongly denied that it has ever been on the wrong side of the law with respect to money laundering and tax evasion. However, as the world moved towards to an easier acceptance of tax evasion, pressure on the Caribbean jurisdiction came from the UK government as well as from the Organisation for Economic Cooperation and Development (OECD), which coordinated much of the international anti-money laundering regime (rooted in the advanced economy-driven Financial Action Task Force recommenda­ tions). In May 2018 a vote was taken and passed in the UK Parliament that compelled the British government to force the British Overseas Territories to impose public registers, which would be a major blow to secrecy in countries such as the British Virgin Islands, the Turks and Caicos Island, and the Cayman Islands. Indeed, the vote, which was forced through by back­ benchers in Parliament who had been influenced by the Panama Papers and Paradise Papers 365

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affair, took the Conservative government of Prime Minister Theresa May by surprise. It also created considerable tensions between the UK and its Overseas Territories. The premier of the Cayman Islands, Alden McLaughlin, stated that the parliamentary vote was ‘reminiscent of the worst injustices of a bygone era of colonial despotism’.23 To this he added: If the UK feels emboldened by what it has just done and believes it can do it any time it doesn’t like something here or it wants to impose something on us, it is not just the financial services industry at risk but our very existence. Despite the uproar from the Cayman Islands and other British Overseas Territories, pressure also came from the OECD and the European Union (EU), both of which put pressure on the ter­ ritories and other offshore tax havens to provide greater transparency and disclosure. The EU, in fact, was quite content to use the threat of its tax haven blacklist to get the Caymans and others nations to comply with the type of standards it wished to uphold which were geared to making it more difficult to evade the taxman. Indeed, the UK’s Overseas Territories, including the Cayman Islands and the British Virgin Islands, finally concurred to make company information public by the end of 2023. In an October 2019 announcement, the Cayman Islands authorities stated: ‘We advance legislation to introduce public registers of beneficial ownership information when that occurs. While undue focus is often focused on our jurisdiction, we fully appreciate the transparent flow of legitimate capital.’24 While the Cayman Islands have demonstrated a degree of flexibility in dealing with a chan­ ging international tax regime (i.e. what is accepted and what is not in terms of tax evasion), they are keenly aware of how precarious their position is in the global system, especially when major economic players such as the EU and the USA are involved. The real concern is that as the options to cheat on taxes diminish in most of the advanced economies, will there be enough wealthy Chinese, Russian, Latin American and Middle Eastern people to make the difference? Even so, global standards are pushing in the direction of greater disclosure, which will impact the overall flow of capital. For the Caymans, a moot point is that if one strips away the financial sector, the nation becomes just one more tourist-driven economy, which puts it in a crowded arena, especially in the Caribbean. As former Caymanian Governor Thomas Russell noted: ‘The basic problem is that there has never been direct taxation in the Cayman Islands. The outside world is the wolf without the tail trying to persuade a very happy bushy-tailed wolf to be the same.’25 While Russell provided a descriptive view of the Caymans and their commit­ ment to no taxes, thus retaining the islands’ attractiveness, Freyer and Morriss capture the risk to the Cayman economic strategy of financial services: ‘There is no question that the U.K., the EU, and the United States have the power to amputate the tiny Cayman wolf’s bushy tail if they chose to do so.’ This raises major questions for the upcoming decade.

The China factor The other factor that is likely to challenge the Caymanian economy is the rise of China. The challenge comes in two ways: first, it brings into the territory a large inflow of capital, which could be volatile under certain conditions; and second, it is likely to complicate relations with the USA, which during the 2010s became increasingly concerned about the penetration of China in the Caribbean. As Chinese companies spread out into the global economy in the first decades of the twentyfirst century, they entered the Americas with an open chequebook ready to tackle much-needed 366

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yet financially starved infrastructure projects. In this, they became active foreign direct investment players in a wide range of countries, including Antigua and Barbuda, Trinidad and Tobago, and Panama. The Cayman Islands did not require help with its infrastructure, but its financial centre offered a vitally important platform for Chinese companies, many of which preferred to set up offshore business licences outside of China. The significance of the Caymans to China’s economic and financial expansion was noticeable at year-end 2017 in the rising level of companies listed on the Hong Kong Stock Exchange, with close to half being incorporated in Hong Kong (47%).26 Indeed, the Caymans have been active in promoting themselves as a neutral and efficient hub, connecting capital and financing around the world. While Hong Kong and the Cayman Islands share a similar British imperial heritage, their legal systems are close, which has made it easy for Chinese companies to register in the Caymans and then make stock offerings in Hong Kong. As Hong Kong Securities Association chairman Jeffrey Chan Lap-tak stated in 2015: ‘Compared with Hong Kong, Cayman has more tax free and flexible regulations for overseas companies to incorporate here. As such, it is cheaper and easier to carry out restructuring as a Cayman incor­ porated company than those in Hong Kong.’27 Considering the political turmoil in Hong Kong over China’s encroachment on its political liberties in 2019–20, the Caymans look like a safer place for Chinese offshore business. Moreover, state-owned Chinese banks are represented in the Caymans, including the Bank of China and China CITIC Bank. There is a risk of moving closer to China for the Cayman Islands and other Caribbean countries. If the advanced economies, mainly North America and Europe, increasingly apply pressure on the Caymans to strip down their financial services, this could incentivize the islands to make their services more widely available to Chinese companies and banks. No attempt to do this has yet been made, but if the Caymans feel under increased pressure and see few alternatives than offering financial services and tourism, the China card could become more attractive. China already makes use of the Caymans to park cash – that service could grow.

Climate change Another factor that has some bearing on the Cayman Islands economy is climate change. Although the Caymans have largely avoided the massive damage inflicted on other Caribbean and Gulf of Mexico locations over the past decade, the passage in 2004 of the last major hur­ ricane, Ivan, wreaked considerable destruction on the islands. However, issues with climate change relate not only to hurricanes, but also rising sea levels. The islands have enjoyed a tourist boom, which has been accompanied by population growth, all of which could be vulnerable to a major hurricane. According to the ‘Cayman Islands Climate Change Policy’ originally written in 2011, Caribbean ‘jurisdictions are amongst the earliest and worst affected by climate change’, citing ‘their small size, relative isolation, concentration of communities and infrastructure in coastal areas, narrow economic bases, dependence on natural resources, susceptibility to external shocks and limited financial, technical and institutional capacities’.28 Another point of concern is the slowness of the Cayman Islands government to deal with climate change planning. As of 2019 the government had yet to complete its climate change policy, which has been in progress for eight years. As the Cayman News Compass noted in September 2019: A climate change policy formulated in 2011 has been gathering dust in the Ministry of Environment because no minister has ever taken it to Cabinet for consideration. Mean­ while, government policy in general is not taking into account the dramatic impact climate change is going to have on the country.29 367

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The need for a policy on climate change and the risk from flooding (tidal surge and otherwise) is self-evident in that the altitude of the main island of Grand Cayman (which is 22 miles long and 8 miles at its widest) ranges from sea level to 60 feet (18 metres) on the North Side’s Mastic Trail. This topography is similar to those parts of the Bahamas that were badly affected by the massive damage inflicted by hurricanes in 2019, something that the Cayman Islands authorities should carefully consider.

Conclusion The Cayman Islands economy has enjoyed considerable success in the first two decades of the twenty-first century, despite substantial challenges, the latest being the COVID-19 pandemic. Those challenges include making the territory’s tourist sector one of the most competitive in the Caribbean and maintaining the offshore financial centre as one of the world’s major hubs for such services. The former has seen challenges from other parts of the region, such as the opening of Cuba to US citizens (for a period), while the latter has had to contend with a sus­ tained push on the part of advanced economy governments to eliminate secrecy and to diminish the attractiveness of offshore financial centres such as those found in the Caymans by establish­ ing their own onshore facilities. Throughout the developmental process the Caymans have sought to remain competitive and are usually proactive in their approach. Looking to the future, the Caymans will have to consider further ways to maintain their role in the global financial system, including fintech and extending what can be done in back office operations (which remain essential). There is also an urgent need to assess climate change and the longterm sustainability of the territory. The Cayman Islands have faced challenges before – they can do so again in the twenty-first century.

Notes 1 Tony Freyer and Andrew P. Morriss, ‘Creating Cayman as an Offshore Financial Center: Structure and Strategy since 1960’, (Texas A&M School of Law, Texas A&M University, 2013), p. 1298. 2 Paul Einzag, The History of Foreign Exchange (New York: Palgrave Macmillan, 2nd edn, 1970), p. 239. 3 Freyer and Morriss, ‘Creating Cayman as an Offshore Financial Center’, p. 1312. 4 Ibid., p. 1312. 5 Arthur Hunter quoted in Freyer and Morriss, p. 1315. 6 Colin Hughes, Race and Politics in the Bahamas (New York: St. Martin’s Press, 1981), p. 165. 7 Middle Eastern oil money, often referred to as petrodollars, experienced challenges in finding a safe place to invest. Local stock markets and financial services were limited, while geopolitical risks were substantial. The solution of surplus petrodollars was to turn to Western bankers, who brought mainly Arab investment into the advanced economies and eventually used the secrecy of offshore financial centres to conceal the movement of this money as well as to take advantage of the tax free environment. 8 President’s Commission on Organized Crime, Interim Report to the President and the Attorney General, ‘The Cash Connection: Organized Crime, Financial Institutions and Money Laundering’ (Washington, DC, The White House, 1984). 9 ‘The Cayman Islands, New Leadership for New Challenges in the New Decade’, Grand Cayman Magazine, www.grandcaymanmagazine.com/wp-content/uploads/2015/05/NewLeadershipSection_ WEB.pdf. 10 investpedia.com/ask/answer/100215/why-cayman-islands-considered-tax-haven-asp. 11 International Narcotics Control Strategy Report, March 2019, www.state.gov/wp-content/uploads/ 2019/03/INCSR-Vol-INCSR-Vol.-2-pdf.pdf (accessed 16 November 2019). 12 https://ticdata.treasury.gov/Publish/mfh.txt. 13 The UK Sanctions and Anti-Money Laundering Act 2018 requires the Cayman Islands to establish a publicly accessible register of the beneficial ownership of companies registered in its jurisdiction by December 2020.

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14 www.fodors.com/world/caribbean/cayman-islands (accessed 15 November 2019). 15 James Whittaker, ‘Cayman Ready to Welcome Royal Couple’, Cayman Compass, 26 March 2019, www.caymancompass.com/2019/03/26/cayman-ready-to-welcome-royal-couple/. 16 ‘Beach Bay Community in the Dark Over New Hotel’, Cayman News Service, 24 May 2019, https:// caymannewsservice.com/2019/05/beach-bay-community-new-hotel/ (accessed 16 November 2019). 17 Jessica Robertson, ‘Bahamas Government to Liquidate Failed Gulf Union Bank’, AP News, 11 December 1997, https://apnews.com/7e6a7b41c3dd76209f2f5bb2e863b43a. 18 Quoted from Will Fitzgibbon and Dean Starkman, ‘The “Paradise Papers” and the Long Twilight Struggle Against Offshore Secrecy’, ICJI, 27 December 2017, www.icij.org/investigations/paradise­ papers/paradise-papers-long-twilight-struggle-offshore-secrecy/. 19 ‘The Paradise Papers’, ICIJ, www.globalwitness.org/en-gb/campaigns/corruption-and-money-laundering/ paradise-papers/?gclid=CjwKCAiAxMLvBRBNEiwAKhr-nLtAs_XpzON_Xf-hsAeZEm9zuaCw87Xk9c ceSagbTYQ9_aAcFRPA0hoC-I0QAvD_BwE. 20 International Narcotics Control Strategy Report 2019 (Washington, DC: US Department of State, Bureau of International Narcotics and Law Enforcement Affairs), www.state.gov/wp-content/uploads/ 2019/03/INCSR-Vol-INCSR-Vol.-2-pdf.pdf. 21 FBME was one of the more interesting scandals to touch the Caymans. The bank was founded in 1952 in Lebanon, as the Federal Bank of Lebanon SAL, but in 1982 it became the Federal Bank of the Middle East and was now based in Cyprus as a subsidiary of the Federal Bank of Lebanon SAL. In 1986 the Federal Bank of the Middle East changed its country of incorporation to the Cayman Islands and its banking presence in Cyprus was transformed to that of a branch of the Cayman Islands entity. In 2003 the Federal Bank of the Middle East terminated its banking presence in the Cayman Islands and created its parent company and operational headquarters in Tanzania. At the same time, its Cyprus operations became a branch of the Federal Bank of the Middle East, Tanzania. In 2005 the Federal Bank of the Middle East changed its name to FBME Bank. In 2014 the Financial Crimes Enforcement Network accused FBME, which operates primarily in Cyprus, of facilitating financial transactions for multinational organized crime organizations and Hezbollah (a powerful political party in Lebanon and regarded as a terrorist organization by some countries). The bank also had Russian connections and allegedly was used to launder illegal Russian funds. In 2015 the bank lost its licence in Cyprus and in 2017 it was shut down in Tanzania. 22 Nate Raymond, ‘Cayman National Units Admit Helping U.S. Clients Evade Taxes’, Reuters, 9 March 2016, www.reuters.com/article/us-cayman-national-taxevasion-idUSKCN0WB2QW (accessed 8 December 2019). 23 Patrick Wintour, ‘British Overseas Territories in Talks to Keep Tax Haven Secrecy’, The Guardian, 13 June 2018, www.theguardian.com/world/2018/jun/13/british-overseas-territories-in-talks-to-keep­ tax-haven-secrecy. 24 William Schomberg, ‘Cayman Islands Join Global Money-Laundering Crackdown’, Reuters, 9 Octo­ ber 2019, www.reuters.com/article/us-cayman-regulations-shellcompanies/cayman-islands-joins-global­ money-laundering-crackdown-idUSKBN1WO1SX (accessed 16 November 2019). 25 Quoted from Freyer and Morriss, p. 1396. 26 Figure provided in ‘How China Supercharged the Offshore Market in Cayman and British Virgin Islands’, www.walkersglobal.com/images/Publications/Articles/2016/12.2016_Global_Turnaround_ asia.pdf. 27 Enoch Yiu, ‘Hong Kong Still Competitive Despite Li Ka-Shing’s Departure for Cayman Islands’, South China Morning Post, 15 January 2015, www.scmp.com/business/companies/article/1679892/ hong-kong-still-competitive-despite-li-ka-shings-departure-cayman. 28 Ted Stoner, ‘Sea Level, Temperature Rise Threaten Cayman in Just 80 Years’, Cayman Journal, 4 April 2018, www.journal.ky/2018/04/04/sea-level-temperature-rise-threaten-cayman-in-just-80-years/ (accessed 8 December 2019). 29 ‘Climate Policy Gathers Eight Years of Dust’, Cayman News Service, 30 September 2019, https:// caymannewsservice.com/2019/09/climate-policy-gathers-dust/.

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26 Guadeloupe and Martinique in the Caribbean Basin A comparative analysis of models and trajectories Alain Maurin and Patrick Kent Watson

Introduction Over the years it has become customary among politicians and economists to compare living standards in French Overseas Departments (DOMs) with those in neighbouring countries, usually to sing the praises of the DOMs for maintaining their connection to the French nation. Indeed, if we define the Caribbean area by the 20 or so members of the Commonwealth, together with the French Departments of the Americas (FDAs) plus Cuba, Haiti, the Domini­ can Republic and Suriname; the ranking by gross domestic product (GDP) per capita in 2018 shows that Guadeloupe and Martinique are at the top of the group, behind the Bahamas but ahead of Puerto Rico. Thus, the two French Caribbean islands are in the group of the richest countries, with GDP per capita for Guadeloupe and Martinique amounting in that year to US $28,072 and $26,624, respectively, twice the size of the median countries – Saint Lucia and the Dominican Republic – and more than six times the size of the poorest countries. The ranking based on the United Nations (UN) Development Programme’s Human Development Index (HDI) which, apart from income, also takes into consideration health cri­ teria and levels of education, remains largely favourable to the FDAs: Martinique and Guade­ loupe are ahead of most of their Caribbean neighbours, including Barbados, Antigua and Barbuda, the Bahamas, and Trinidad and Tobago. On the basis of such comparisons, most observers qualify the FDAs as ‘lands of prosperity’, compared to the surrounding countries, which are a great deal less developed. On a more global scale, the positioning of the FDAs is just as remarkable. On the basis of gross national product per capita, Martinique and French Guiana are in the group of the 54 highest-income countries, alongside the Bahamas, Canada, the USA, Japan, New Caledonia, Qatar, Monaco, Germany, France and Sweden; while Guadeloupe lies in the upper tier of the 41 middle-income countries, which includes, for example, Barbados, Antigua and Barbuda, Puerto Rico, Trinidad and Tobago, St Kitts (Christopher) and Nevis, Seychelles, Mauritius, Brazil, Gabon, South Africa, Saudi Arabia, Poland and the Czech Republic. In this same

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classification, the other Caribbean countries, excluding Haiti, are positioned in the lower range of this group of middle-income countries, far ahead that of the 62 low-income countries. These basic indicators, however, do not tell the whole story: we must take things at least one step further. As is well known in the economic literature, development is an extraordinarily complex phenomenon as it requires changes in the structure of an economy, including for instance those features regarding the composition of demand, production and jobs, and those concerning external trade structures and capital movements with oversees countries (Chenery 1981). We must keep in mind, in particular, that the quality of life in the FDAs is generated by an income system provided by the state and therefore results from economic mechanisms which are mainly exogenous to the territories of these departments. The ‘satellite’ policymakers in power in the FDAs support the logic by which economic growth is interpreted as an improvement in the material well-being of the population, and go so far as to defend its long-term viability, although the territory contributes very little of its own effort and material resources to such growth. However, the state is increasingly calling into question this viability, taking into account changing economic circumstances. During the past few years there has been a trend for successive central governments to limit and closely monitor their financial undertakings in the regions, which is a sign of this shift in behaviour of the state. Of course, we could argue that this change in attitude is not too troublesome insofar as the perpetuation of the income stream will rely increasingly on wider European rather than strictly French sources. But that is to ignore the fact that the European Union (EU) now has 27 member states, a population of around 360 million inhabitants and is experiencing significant development disparities among its member states. In contrast, living standards in the neighbouring countries are supported by ‘endogenous GDP’, mainly reflecting the wealth and productive activities carried out in their territories. It is true that some of these independent states benefit from external financial and other material assistance, but it is also true that this income does not necessarily lead to the suppression of productive activities in the same proportions as it does in Guadeloupe and Martinique, nor that this amount is disproportionate to the volume of state transfers received. Thus, the structure of income and consumption in independent Caribbean countries is a great deal less dependent on external factors. One example provides ample proof of this point. Imagine for a moment that were Guadeloupe, Barbados, Dominica, Jamaica, and Trinidad and Tobago to be cut off from the rest of the world with no air or maritime connections for a relatively long period, which of these countries would suffer the most? The economies of the overseas departments have already been the subject of numerous stu­ dies and official reports (see, for example, Jarnac 1987; Ripert 1990; Mathieu 1988; Poirine 1995; Fragonard 1999; Mossé 1999; Levratto 2007; Doligé and Vergoz 2014; Lurel 2016). The purpose of this chapter is to advance on the work that has already been carried out and to address specific concerns about the sustainable development of these territories. This will involve a comparison of the economic trajectories of Guadeloupe with those of other selected Caribbean countries. This selection was dictated by the availability of economic data and consideration of the diversity of political systems in place in the Caribbean, which include independent states, free associate states and departments and integral parts of a nation. The rest of this chapter proceeds as follows. In the following section, we attempt an assess­ ment of development models and economic performance in the Caribbean, roughly from the 1960s to the present day. We then look at pertinent global developments from the post­ colonial period up until the beginning of the twenty-first century, followed by a study of comparative data on relative performance and the current situation of the Caribbean countries. 371

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Finally, we suggest strategies to address the challenges of the next few decades, after which the chapter concludes.

Development models and economic performance: an assessment Colonialism, together with its legacies of slavery and indentureship, has left its mark on the Caribbean region. Despite the specific political model chosen (independence, nonindependence, etc.), they were all insular economies where the main resource was land and the labour force, initially imported, had grown up in a tradition of slavery and indentureship.

The assimilation of the French Caribbean territories and the implementation of the system of transfers On 19 March 1946 the French parliament voted in the assimilation law, which transformed the French colonies into overseas departments, to which all laws created by this parliament imme­ diately applied. The new departments officially became European territories with the Rome Treaty in 1957. This entire process of integrating the former colonies into the French nation was reinforced by the Constitutions of 27 October 1946 and 4 October 1958, which expanded political, administrative and institutional structures to the DOMs similarly to other French departments, while recognizing their principle of derogation from ordinary law, due to their special features. In practice, however, this principle, which was supposed to be an exception, gradually became a rule which served as a transmission channel to guide and accelerate the implementation of organs of power of the French model in the DOMs. The way forward was clear: neither the local authorities nor the prefect enjoyed the same level of authority as that of their opposite numbers in France as departmentalization left little room for elected officials to show initiative in drawing up the department’s budget, which was placed directly under the prefect’s supervision. One of the reasons for this put forward by the central government was the urgent need to address the economic situation at the time and the scale of reforms to be implemented for development to facilitate a rapid increase in the living standards of the population. Thus, a practice of differentiation was to be followed and, as far as economic development was concerned, it would involve transfers to the DOMs. This choice of immediate post-war governments appeared as a compromise to satisfy needs in as little time as possible. Nevertheless, the harmonious and overall development of the DOMs was supposed to be on the cards. The state’s desire to step up efforts to do so through a consistent policy was expressed clearly, in particular through the French planning agenda. As early as 1953, a commission in charge of drawing up specific measures for the DOMs was set up by the Ministry of Planning. It explicitly suggested three major objectives: to develop production volumes; to overhaul production methods in order to minimize costs; and to diversify crops, in particular through the introduc­ tion of tea, coffee and tobacco. Next, in the same spirit, the regionalization of the plan estab­ lished by the decree of 31 December 1958 permitted greater consideration of the DOMs’ interests. All of this contributed to an increase in living standards and boosted agricultural development. It was quickly realized that the lead time given to obtain the required results was too short, as the socio-economic disparities among the various former colonial communities were far too great. Because of this and in an effort to achieve social peace in an international context marked by decolonization and the separatist movements in these former colonies, the central 372

Guadeloupe and Martinique in the Caribbean Basin

government was obliged to respond strongly to show its solidarity and to reaffirm its commit­ ment to the overseas populations. The effect of the economic policy now had to become quickly visible. Therefore, the instrument chosen to meet the objectives of the economic policy in the DOMs was direct control over changes in the supply of public transfers. The approach favoured was an increase in public transfers, which in turn would boost investments by public administrations as well as the income of private agents and, as a consequence, the consumption of goods and services. It was envisaged that this would facilitate a rapid increase in gross domestic product (GDP). Social objectives were given priority over the economy. The Fifth National Economic Plan covering the period 1966–70 set itself the following objectives: to accelerate the rate of growth; develop agriculture, tourism and professional training; expand the transportation industries; and balance social progress and economic growth. This was followed by the Sixth Plan (1971–75) that emphasized the need for vocational and professional training, improvements in infra­ structure, and standardization of population phenomena, with the aim of encouraging the opening-up and stimulation of the productive apparatus. In the Seventh Plan (1976–80), it was envisaged that the regional public establishments should initiate development and planning programmes that would not require state approval. For Guadeloupe, these included the diversification of agricultural production and an increase in production volume, the establis­ ment of agro-industries to process this produce, and the consolidation of distribution and commercialization networks. Following the implementation of the new decentralization law of 1982, the DOMs’ elected officials saw their communities benefiting from added planning powers. According to the Ninth Plan covering the period 1984–88, the key priorities were centred around two main themes:





developing productive activities by focusing on the agricultural sector (irrigation, land reform, improving sugar cane production, initiatives in favour of other areas such as wood, farmers’ training, etc.) and including to a lesser extent fishing, aquaculture and tourism, handicrafts and industry; continued efforts in the domain of infrastructure and public facilities.

The two national economic plans which followed also reaffirmed the need to focus efforts to compensate for Guadeloupe’s major structural imbalances resulting from the discrepancy between the population’s living standards and the low levels of wealth produced locally. Accordingly, the initiatives of the 10th Plan for the period 1989–93 were based on four broad guidelines: training, research and the transfer of technology; employment, economic development and cooperation; major infrastructural works and their relationship to the environment; and a joint territorial development programme. Similarly, the third regional development plan for the 1994–99 period set out the goals to consolidate social cohesion and endogenous development compatible with the creation of sustainable employment and safeguarding the environment. With support from the European Union (EU), considerable sums of money were earmarked for financing economic measures. Nonetheless, the results of all of these planning programmes today seem to be very mixed. In summary, Guadeloupe and Martinique have witnessed growth, coupled with distorted development. According to Claude De Miras (1988), the characteristics of the growth policy in the DOMs based on public transfers can be summarized thus: The gradual application of social laws, the massive expansion of the public sector and its economic actions and the accelerated budgeting of the economy, were fundamental to the 373

Alain Maurin and Patrick Kent Watson

success of this economic strategy which was more and more detached from production as a process for creating added value.

Independence of the English-speaking countries and experimentation with different strategies Since independence, the English-speaking countries of the Caribbean have witnessed several phases in their economic evolution. The strategies that were initially chosen had their basis in Third World development models. Thereafter, these countries experienced a number of upheavals and increasingly moved towards the adoption of orthodox strategies due to external pressure exerted by globalization. In 1964 William Demas, who was at the time head of the government planning division for Trinidad and Tobago, stressed that development theory should offer solutions regarding the structural transformations required for self-controlled growth in small economies. In this respect, he stipulated that size is a crucial variable to take into consideration. He argued that the capacity for transformation is dependent on the capacity to generate sufficient national savings, to adapt to existing structures and, in particular, to innovate in response to the needs of the economy. For the Caribbean countries, this problem warrants attention, due to the fact that casting off colonial political dependency did not lead automatically to economic independence. The dis­ cussions about sugar production during the 1960s are adequate proof of this. The sugar industry remains dominant in many countries, and any agricultural diversification and industrialization policy must respect this fact and must also consider its effect on the export sector. McIntyre (1971) remarked that, despite exceptional growth in 1961, the Caribbean countries are con­ sidered a model of economic dependency. They are dependent, he said, on the world market for their production; they import most of their consumer goods requirements; they are con­ nected to the outside world for financial and banking services, for commerce and qualified labour, as well as for the transfer of income and capital. After gaining political independence, the choice of a development strategy gave rise to debate. Supporters of development based on the ‘industrialization by invitation’ model sought conditions that were favourable to foreign investors in order to promote industrialization in the region. Second, the supporters of a more radical school of thought called for the nationalization of the main economic sectors to set up development plans to facilitate an increase in growth and income. Other development concepts were considered, including those that consisted of import substitution, enabling a reduction in external dependency by initiating a step-by-step process, focusing initially on light manufacturing and gradually moving towards heavy industry, in itself implying enormous structural change and sustained growth. The results did not fulfil expectations. Admittedly, sustained growth was observed in the run-up to the first oil crisis, but dependency increased. The industrialization by invitation model favoured capital, and the con­ comitant export of profits, to the detriment of labour. Similarly, nationalization of the main economic sectors limited prospects for oil and bauxite. The crisis that followed the oil price hikes in 1970 and1980 highlighted the vulnerability of small open economies. Some economies experienced a negative rate of growth and required international aid. Overall, however, there was an increase in per capita income. From 1968 a new regionalization strategy was put in place with the creation of the Caribbean Free Trade Association (CARIFTA) and eventually the Caribbean Community (CARICOM). CARIFTA and CARICOM aimed to create a veritable regional block in order to develop intraregional trade exempt from customs duty, while safeguarding it with a common external tariff. With regards to the external environment, agreements with the USA (the Caribbean Basin 374

Guadeloupe and Martinique in the Caribbean Basin

Initiative – CBI), Canada (CARIBCAN), and Europe (the Lomé Convention), allowed them to benefit from preferential markets. CARICOM encountered difficulties in intra-country trade – most countries exported the same products – and some states encountered problems of indebtedness. South-south trade remained marginal and, with regard to north-south trade, the prevailing strategy, especially for North American trade, suffered from the formation of the North American Free Trade Agree­ ment (NAFTA). In 1990 the World Bank considered that the loss for the Caribbean countries, because of NAFTA, was in the range of US $35 to $53 million. Despite the advantages given to some products such as sugar, rum and bananas, Europe was not the Caribbean’s main customer; exports to the EU in 1996 were only 18.8% of all Caribbean exports. Only the seven Organi­ zation of Eastern Caribbean States (OECS) countries (Antigua and Barbuda, Dominica, Gre­ nada, Montserrat, St Kitts and Nevis, St Vincent and the Grenadines, and St Lucia) seem to have truly benefited from privileged trade with Europe. With the international environment changing because of the way in which world trade was now organized, the development strategy had to be modified once more. The World Bank encouraged Caribbean countries to liberalize their economies first by privatizing sectors of the economy, then through international trade and the removal of tariff barriers, and finally by reducing public spending. The Caribbean nations, for their part, continued to develop the possibilities offered by regionalization: the non-English-speaking countries joined CARICOM, thus expanding the intra-Caribbean trade area; the Dominican Republic, Haiti and Cuba all requested membership. At present, the strategy vis-à-vis the exterior tends towards promoting exports. The setting up of free zones was seen as a way to achieve several objectives: the diversification of exports of manufactured products, a way of gaining interna­ tional market share, of mobilizing foreign capital, reducing employment and increasing the level of growth and national income. At the start of the twenty-first century, the World Trade Organization increasingly began to reject the benefits arising from the Lomé Convention.

Global developments from the post-colonial period up until the beginning of the twenty-first century The French Caribbean Since the adoption of the Departmentalization Act of 19 March 1946, Guadeloupe, Martinique, Guyana and Reunion Island have witnessed substantial economic and social developments, which observers have viewed differently; positively overall in the eyes of some, somewhat negative for others. Over the course of seven decades, the policy of integration into the French nation has seen these territories shift from a colonial-type economic organization to today’s societies, which are relatively modern, and are based on mass consumerism and driven by new technologies.

The 1940s to the 1990s: from growth to distorted development In the aftermath of the Second World War, the DOMs found themselves lumbered with the legacy of the plantation economy system, based on the exploitation of a handful of tropical products, destined to be exported to mainland France. Up until the 1950s local production was dominated by agricultural activities which remained poorly diversified. They were ‘controlled’ by a minority of powerful landowners who possessed most of the land. Other economic 375

Alain Maurin and Patrick Kent Watson

activities were in their infancy, (cottage industries, building, services, etc.) and were chiefly to be found in cities where less than 30% of the population lived. At the time, people lived mainly in the countryside. The introduction of health care services quickly brought about a reduction in the mortality rate which, combined with a high fertility rate, had positive effects on natural population surplus. This phenomenon remained stable and led to a phase of ‘demographic boom’, which doubled the populations in each DOM within a period of 40 years. The consequences of this demographic development were multiple. One of the most visible outcomes was the start of the urban exodus. Similarly, a significant increase in the number of job seekers coming onto the labour market was witnessed, so that by the middle of the 1950s there were not enough jobs to meet demand. In 1946 public infrastructure was at the start-up stage. The construction of buildings for a number of enterprises was launched. Schools were over-crowded and under-resourced due to a shortage of teachers. There were few roads. In domestic dwellings, living conditions were marked by the absence of running water and electricity. According to the chronology of the development process, the DOMs were still at the first stage, that of the traditional society (Rostow 1960). But, following in the wake of metropolitan France, albeit at a slower speed, the DOMs nevertheless progressed through the steps to achieve fully fledged economic growth in a relatively short period of time compared to other developing countries. For France, the year 1946 marked the start of the ‘30 Glorious Years’ (les trente glorieuses). Between 1946 and 1973 real incomes in France grew significantly at an average annual rate of 5.9% leading to an extraordinary increase in GDP. Since the oil crisis in 1974, this accumulation of wealth has continued but at a much slower rate averaging approximately 2% annually. For the DOMs, the spin-offs of this development were evident: over the past 50 years, they also witnessed extraordinary growth. However, this did not take place continuously, but in quite distinct phases. The first phase occurred during the Fourth Republic, when the main efforts were directed towards education and sanitation. There was a gradual shift away from the colonial school system – which was only available to a privileged minority – towards equal access for all chil­ dren, as set out in the Constitution of 1946. In the four DOMs, state expenditure facilitated the construction of schools and the massive recruitment of teachers. Similarly, sanitation facilities were improved and very quickly contributed to a decrease in the mortality rate. State expen­ diture also supported the establishment of departmental administrations, which were operational from the early 1950s. During the Fifth Republic the results were even more visible and were especially sub­ stantial in quantitative terms. Infrastructure that improved the domestic living standards became more widespread, and included water and electricity distribution networks in urban areas, health centres, etc. The first signs of modern infrastructure were introduced, such as communications facilities and road and air traffic infrastructure. During the 1960s the ideal of education for all children from the age of six to 16 was achieved. At the same time, higher education became a focus, with the establishment of the first universities. Household living standards improved, as they benefited in particular from the introduction of the principle of global social equality for family allowance as of 1963. In terms of demographics, it was also during this decade that the population increase was highest in Guadeloupe, Martinique and Reunion Island, leading to a shift that demographers describe as a ‘demographic boom’. While the above can provide us with an general snapshot of the economic situation in the DOMs between the end of the Second World War and the end of the 1960s, the figures we have just discussed are insufficient to quantify and to specifically characterize the increase in 376

Guadeloupe and Martinique in the Caribbean Basin

wealth created in terms of GDP. This is now possible thanks to the availability of National Accounts figures for the 1970–94 period. Between 1970 and 1994 the nominal value of GDP was multiplied more than 14-fold in each DOM, while during the same period it increased nine-fold in the mainland as a whole. Thus, in nominal value, the GDP of Guadeloupe, Martinique and Reunion rose from 1,330 million francs, 1,600 million francs and 2,013 million francs to 19,751 million francs, 24,506 million francs and 35,266 million francs, respectively. For Guyana, GDP rose from 575 million francs in 1975 to 8,230 million francs in 1994. Even if they exclude inflation, these figures clearly show the substantial increase in wealth created in the DOMs from the 1970s to the 1990s. While agriculture accounted for the largest percentage of GDP at the start of the depart­ mentalization of Guadeloupe and Martinique, its contribution declined markedly so that today it is a relatively weak sector (less than 5% of GDP) compared with the industrial sector (around 10% of GDP) and a bloated service sector (more than 80% of GDP), whose non-market component plays a pivotal role.. The 1990s witnessed major transformations which announced the arrival of the DOMs in the modern era. Prior to this, there were significant disparities in their territories in comparison with other French departments. Now they each make use of high-performance equipment in fields as varied as health care, education and land use planning. In some sectors, the renewal of this infrastructure lags only slightly behind that of the countries that produce it. In the domain of technology and communication, for example, the set-up of infrastructure for internet connection and mobile telephones took place only a few months behind the mainland. At the social level, average levels of individual disposable income are among the highest in the Caribbean and are comparable with those of some southern European countries such as Italy and Portugal. In 1996 social equality between the DOMs and the mainland became effective following the alignment of the minimum wage and all the social benefits offered by mainland France. Levels of ownership of household appliances did not lag very far behind the national average. For some luxury appliances, such as hi-fi systems and camcorders, the situation in the various DOMs was largely acceptable. They were even surprisingly so when considering car ownership. Indeed, it was not unusual for one family to have several vehicles. Similarly, it was noteworthy that some vehicles of certain cylinder capacities, known for being costly, were available to almost everyone. If we look at the wealth generated from market activities, we can still pinpoint the devel­ opment of certain distinguishing characteristics of overseas department economies. We see that the significance of the primary sector (agriculture, forestry, fishing) fell very sharply in Guadeloupe and Martinique, decreasing from 28.9% and 21.5% of the market added value in 1970 to 8.9% and 6.2% in 1994, respectively. While the primary sector declined, a boom in the tertiary sector was witnessed. Figure 26.1 illustrates the significant disparity between ser­ vices (market-related services, transport and telecommunications, banking, insurance, and property leasing) and trade in the four DOMs. By 1970 their cumulative level was around 50% of GDP. By 1995 it was recorded at more than 70% of GDP in Guadeloupe and in Martinique. The secondary sector (agro-industry, energy, construction, civil engineering and agriculture) remained at a relatively low and stable level until the start of the 1980s. After­ wards there were variations. In the French Caribbean, the so-called productive activities continued to decline due to insufficient investment which could have led to the emergence of new sectors. In contrast, French Guiana is undergoing positive change, directly linked to the success of the space centre. With its untapped natural potential, we can predict a largely optimistic outlook for the years to come. 377

Alain Maurin and Patrick Kent Watson

From the 2000s: the quest for endogenous development and institutional reform From the start of the 1990s to present day, it is clear that the DOMs have continued to be central to ongoing discussions concerning the sluggish nature of their economies, to broaden knowledge about the way their economies work, and to identify solutions on issues of direction and public policy measures that could bring about practical improvements. Macroeconomic indicators continue to develop, with some showing periods of growth but as a whole the figures reflect situations of acute economic imbalance. During the past three dec­ ades, the level of unemployment in Guadeloupe and Martinique has never dropped below the 20% mark. Indeed, while it hovered between 14% and 18.5% between 1970 and 1979, since the 1980s it has fluctuated between 26% and 30%. The minimum levels are almost double that of the worst rates recorded in departments of mainland France. In addition to the disastrous situation within the labour market, there was a downturn in external trade, bringing about coverage rates showing abnormal negative performance, and a chronic deficit. Yet beyond the reading of these two indicators, the most largely shared assess­ ment on the economies of the French Caribbean is that the workings of their economic activity are very strongly driven from the outside; firmly rooted in dependency on mainland France and to weak local production levels, whose value is disproportionate to what it should be in order to finance the volume of household consumption, pay for imports, and finance the income paid to economic actors. The extant literature has proposed theoretical models of the functioning of the economies of the French overseas departments. Poirine (1994) adapted the works of Bertram and Watters (1985) and Bertram (1986) to propose a model explaining the primordial role of public spend­ ing by mainland France in employment creation and stimulating the level of demand and, additionally, in the weakening of the productive sector. Naudet (2006) proposes a formalization of the DOM economy as a ‘greenhouse economy’, and defends the idea of an economy that benefits from a protected environment, with markets characterized by high prices and salaries and an economic circuit generating substantial growth and real wealth creation. Like Poirine, Naudet views favourably the existence of a net fund transfer to ensure the proper functioning of this ‘greenhouse’. Poirine and Reboud (2007) highlight one paradox due to insularity: the response that stems from isolation but, at the same time, the need for openness to ensure improvements in living standards. They also emphasize the fact that escaping this paradox requires specialization in activities which are not affected by distance such as tourism, financial services and exports involving low transportation costs. Borda and Mathouraparsad (2016) also propose a formula of ‘French overseas department syndrome’, which demonstrates that despite public intervention in support of the territories, the impediments to their development seem to be inextricably linked to the behaviour of the economic players. In summary, despite the affluence resulting from fund transfers coming from the central state and also from the EU over the past few decades, the socio-economic performance of these territories currently reflects their distorted development. This dark side of the French Caribbean economies was responsible for the social crisis of 2009 and which returned to French Guiana in 2017 and in the form of the diversification of the gilets jaunes (‘yellow vests’) crisis in the DOMs in 2019. More so than in the past, policymakers in Guadeloupe and Martinique, just like those in the other DOMs, have been charged with enacting a change of course and introducing new response strategies that are capable of yielding satisfactory results. With this objective in mind, the role of institutions was introduced into recent economic literature and also into the political debate surrounding governance of these territories. Maurin (2019) pointed out that the distorted development of each of the French Overseas Territories

378

Guadeloupe and Martinique in the Caribbean Basin

can be attributed to their institutional structure resulting from the dual process which shaped their histories and social construction; first, a period of colonization that lasted from the six­ teenth century up until the twentieth century, and second, departmentalization that took place from 1946 onward. Following 400 years of French presence in their history, they find them­ selves uncomfortably placed with political and economic systems headed by people pursuing clashing interests, leading to a society which has largely been bequeathed the famous burden of French bureaucracy, but which has also been infiltrated by the legacy of colonial rule. Therefore, if Guadeloupe and Martinique are to achieve long-term growth, the introduction of a regulatory framework that can guarantee the necessary reshaping of their economies based on the receipt of transfers seems to be a strategic challenge which calls for sweeping changes, both in terms of economic institutional structure and in political governance.

The independent English-speaking countries The Caribbean region includes countries with very unequal economic endowments. Even though the origins of their economies, and, more broadly, their societies can all be found in an identical system which is that of the plantation economy, they have all experienced, at different points in their histories, a heterogeneity of economic developments as well as different reactions when withstanding external crises. Different major events in economic history can give a good illustration of this point. The first example which springs to mind is that of the oil crises, which were respon­ sible for an era of prosperity for some countries, while they heralded a period of decline for others. The official policies behind these developments were really established at the start of the 1960s, with the advent of independence and, in particular, during the transfer of colonial administration into Caribbean hands. With a view to implementing careful management of the economy, the those in power attempted to improve little by little the administrative infra­ structure, facilitating the preparation of the economic policy and development planning. To this end, secretariats for the budget and economic analysis were set up, economic statistics were gathered, central banks were created, and periodic economic news bulletins were published. During the immediate post-independence period most Caribbean leaders tried to prove their ability to lead their countries down the path of growth. By taking advantage of bilateral trade arrangements with developed nations, Caribbean countries have made significant gains in their agreements with the EU (the Lomé Convention), while the CBI and CARIBCAN have allowed them to benefit from preferential markets. This enabled them to trigger acceptable economic development despite their previous situations and their handicaps. With the excep­ tion of Haiti, the Caribbean countries recorded good levels of growth (see Table 26.1). The process of modernization of the Caribbean economies was set in motion at the end of the 1950s and especially during the 1960s, using different approaches from one country to the next. During the industrialization policy period, the governments implemented a series of incentives to encourage individual initiative, foreign direct investment, the exploitation of nat­ ural resources, and technological changes. In a relatively short time, this policy brought about overall positive results in the areas of public facilities and population income. Public investment enabled the creation of infrastructure which quickly resulted in public services which helped to improve inhabitants’ well-being. At the same time, we witnessed the emergence of a middle class which succeeded in building a network of activities and companies in areas as diverse as health, education, financial services, accounting, insurance, business and the administration of justice. However, by the 1970s the economic policy was called very much into question due to its mixed results. Admittedly, headway had been made, but progress fell short of the high hopes it 379

380

Table 26.1 Growth in real GDP Country

1960–72

1973–83

1980–84

1985–89

1990

1995

2000

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

4.8

8.3

3.01

4.36

6.69

6.41

12.73

9.26

–0.03

–12.11

–7.20

–2.08

3.51

–0.10

4.66

4.03

5.59

3.03

4.93

–1.60

4.38

4.15

3.40

2.52

1.45

–2.32

–4.18

1.54

0.61

3.09

–0.41

–0.15

1.04

–1.69

1.44

2.18

Antigua and Barbuda Bahamas Barbados

6.1

2.0

10

3.3

–3.30

2.02

4.45

3.98

5.67

1.76

0.12

–3.97

0.27

0.66

0.28

0.01

0.02

0.90

2.01

1.00

–0.50

Belize

2.5

3.6

0.7

7.6

11.44

0.64

13.02

2.58

4.58

1.11

3.23

0.67

3.38

2.16

2.94

0.85

3.69

3.43

–0.59

1.44

3.05

–2.95

2.46

5.91

11.20

12.07

7.26

4.12

1.45

2.39

2.80

3.01

2.75

1.05

4.44

0.51

1.78

1.10

Cuba Dominica

1.2

1.3

Grenada

5.6

5.2

5.42

3.03

2.34

0.66

4.66

6.35

7.12

–1.17

0.67

–0.22

–1.06

–0.61

4.39

–2.55

2.52

–9.53

0.53

3.5

5.5

4.01

2.13

4.89

13.27

–3.99

6.12

0.95

–6.61

–0.51

0.76

–1.16

2.35

7.34

6.44

3.74

5.06

4.83

2.9

1.4

4.9

3.0

2.9

2.6

1.1

–4.8

2.7

1.2

0.6

0.1

0.9

2.1

0.3

3.4

1.5

–3.07

5.03

–1.36

–1.95

5.13

7.02

1.98

3.55

4.14

5.20

5.28

5.00

3.85

3.16

3.32

2.92

3.44

3.4

3.6

2.5

4.0

3.3

2.9

4.0

1.9

2.2

–1.9

3.1

Guadeloupe Guyana

1.6

0.0

–4.5

–1.0

French Guiana Jamaica

6.4 3.7

–2.8

0.5

2.3

4.20

2.35

0.88

Martinique

0.89

2.90

1.43

–0.81

–4.34

–1.46

1.73

–0.61

0.50

0.69

0.90

1.38

0.98

1.86

3.2

2.8

0.9

–0.3

–6.5

4.6

1.00

0.00

–0.5

1.14

0.4

–1.1

0.2

1.2

Saint Lucia

2.6

4.7

9.94

1.71

0.03

–0.38

6.27

1.37

5.31

–1.07

0.17

3.52

–0.63

–1.32

3.56

–0.93

3.37

3.82

0.60

Saint Kitts and Nevis

4.3

7.3

4.88

5.38

10.41

9.70

2.92

–0.05

6.49

–3.37

–1.47

1.78

–0.66

5.47

6.06

2.15

2.32

1.17

3.00

5.6

6.9

4.15

7.77

1.64

2.49

7.69

3.34

1.58

–2.10

–3.35

–0.42

1.38

1.83

1.21

1.34

1.98

0.86

2.56

–4.50

0.00

2.10

4.50

5.80

5.10

4.15

3.02

5.16

5.85

2.69

2.93

0.26

–3.41

–5.56

1.69

2.00

1.51

4.66

6.90

6.21

13.21

4.75

3.39

–4.39

3.32

–0.29

1.29

0.98

–0.25

1.52

–5.96

–2.34

0.70

Saint Vincent and the Grenadines

1.0

3.5

Suriname Trinidad and Tobago

2.4

3.6

Source: CDB (2019); World Bank (n.d.).

1.4

–3.7

Guadeloupe and Martinique in the Caribbean Basin

had held out for the Caribbean populations. The promised path to industrial development on the basis of foreign capital was accompanied by a continued rise in unemployment and did not reduce the dependency on the outside world, just as it had been incapable of assisting the domestic private sector to earn a significant portion of economic activity. These economies experienced serious problems right into the 1980s, owing to the effects of the first oil crisis and in a context of political tension throughout the Caribbean. Stagflation and price fluctuations had a negative impact on purchasing power and people’s material well-being. In addition, governments were forced to combat volatile exchange rates and interest rates while being confronted with external finance challenges. There was some hope that revenue from tourism would bail out most Caribbean countries, and indeed it brought about significant for­ eign exchange income and the creation of jobs in some countries. However, tourism receipts remained insufficiently lucrative for local people.

Recent performance and the current situation: comparative data GDP growth rates in the 1990s were relatively weak and sometimes negative for the more developed Caribbean countries such as Barbados, and Trinidad and Tobago. On the other hand, as shown in Table 26.1, overall performance was more satisfactory for small countries, such as those of the OECS. The case of French Guiana deserves to be commented upon separately because its growth has unquestionably been by far the strongest of all the countries since 1991. There are several explanations for this, but two will suffice here. First, it should be emphasized that the Caribbean economies were undermined by a significant number of structural adjustment programmes which weakened the competitive ability of their traditional export activities. Eco­ nomic growth has not been sufficient to absorb an ever-growing labour force. Second, all export activities capable of generating foreign exchange and profit are in decline. Sugar production is in the process of being abolished, while banana production is overly dependent upon climatic vag­ aries and preferential agreements with developed nations, which are increasingly under threat. Mining is losing importance globally: it has unstable profit capacities and cannot even constitute the driver of growth for countries with viable mining sectors. Finally, raw materials no longer represent a guarantee for the future. Indeed, these industries have recorded negative performance and are only orientated towards national and regional markets. Only tourism has demonstrated sustained growth, and some countries have shifted from a more sophisticated kind of tourism, often attracting British tourists, in the first half of the twentieth century, towards mass tourism, stimulated by the proximity of the North American market. To give but one example, Jamaica’s Montego Bay receives more than 800,000 visitors per year. Despite this growth surge in the tourism sector, Caribbean household incomes still did not improve, in particular those of inhabitants of the Dominican Republic, Guyana, Suriname, Jamaica and Cuba. This is probably linked to the decline in public spending and to the gov­ ernments’ added financial requirements to repay debt. The decrease in economic activity has caused some social dislocation in the form of declines in household living standards and an increase in job losses. It also brought about the depreciation of the currency which is much more damaging to small open economies than to large countries, given the small size of their domestic markets. The indicators shown in Table 26.2 clearly show that there are marked differences between the Caribbean countries. First, the 22 countries considered in Table 26.2 are at very unequal levels of per capita GDP. Even if the majority of countries are ranked as middle-income countries by World Bank criteria, they may nevertheless be further categorized. Nine countries (Belize, Cuba, Dominica, Grenada, Guyana, Jamaica, the Dominican Republic, St Vincent and 381

382

Table 26.2 Economic and social indicators of several countries in the Caribbean area in 2018

Country

Official language

Political status

Date of political status

Population

GDP S billions

GDP/capita (in $ US)

HDI world ranking (*)

HDI Caribbean ranking (*)

No. of tourists (000) (**)

Unemployment rate

Antigua and Barbuda Bahamas Barbados Belize Cuba Dominica Grenada Guadeloupe

English

Independent

1981

95,882

1.45

15,125.05

98

6

265.2

11

English English English Spanish English English French

1973 1966 1981 1959 1978 1974 1946

332,634 293,131 385,854 11,116,396 74,027 112,207 390,253

10.72 4.73 1.65 76.40 0.46 1.03 9.74

32,231.22 16,139.63 4,278.83 6,873.05 6,208.72 9,143.88 26,624.8

78 82 141 102 137 104

3 4 16 8 15 9

1481.8 631.5 385.6 3902.9 78.1 135.4 505.0

9.2 9.6 9.4 2.3 12.1 22.9 23

Guyana French Guiana

English French

1966 1946

740,685 268,700

3.12 4.313

4,205.65 17,710

164

17

235.3

12.1 22,4

Haiti

1804

10,788,440

8.23

762.65

207

18

467.1

Jamaica Martinique

French and Créole English French

Independent Independent Independent Independent Independent Independent French department Independent French department Independent

1962 1946

2,812,090 372,594

14.23 9.363

5,060.78 28,072.65

130

12

2181.7 519.3

Montserrat

English

1967

5,179

0.063

12,678

70

2

9.2

Puerto Rico

Spanish

1952

3,294,626

87.55

26,573.69

62

1

3598.7

11.4

Dominican Republic

Spanish

Independent French department British Colony Associated State Independent

1844

10,298,756

82.18

7,979.92

126

11

5959.3

5.8

9.4 18

Country

St Lucia St Kitts and Nevis St Vincent and Grenadines Suriname Trinidad and Tobago

Official language

Political status

Date of political status

GDP S billions

GDP/capita (in $ US)

HDI world ranking (*)

HDI Caribbean ranking (*)

No. of tourists (000) (**)

Unemployment rate

English English

Independent Independent

1979 1980

165,510 53,094

1.55 0.94

9,387.31 17,789.67

123 101

10 7

347.9 109.6

20.9 4.5

English

Independent

1979

101,844

0.76

7,440.27

132

13

78.8

19.8

Dutch English

Independent Independent

1975 1962

597,927 1,215,527

4.63 21.16

7,740.53 17,411.64

134 97

14 5

257.0 408.8

7.6 2.8

Source: World Bank (2020); CARICOM (2020); INSEE (2020). (**) Data for 2016.

Population

383

Alain Maurin and Patrick Kent Watson

the Grenadines, and Suriname) are in the lower end of the category with a GDP per capita of between US $785 and $3,125, while seven belong to the upper segment (Antigua and Barbuda, Barbados, Guadeloupe, Puerto Rico, St Kitts and Nevis, St Lucia, and Trinidad and Tobago) with a GDP per capita of between $3,126 and $9,655. This median group is bordered, to the left, by Haiti which is part of the group of poorest countries (its GDP per capita is less than $785) and to the right, by the group of wealthiest countries, including the Bahamas, Guyana and Martinique (GDP per capita of more than $9,655). Major disparities also exist among the 15 CARICOM states. Guyana occupies almost half of the total land area of all of the countries. Jamaica, with a land area of only 2.63% of the total, boasts more than 40% of the total population, while the seven OECS countries (Antigua and Barbuda, Dominica, Grenada, Montserrat, St Kitts and Nevis, St Vincent and the Grenadines, and St Lucia) with just 8.28% of the total population, occupy less than 1% of the total area of CARICOM. The population of Jamaica is larger than the total population of the three countries with the largest land areas (Guyana, Suriname and Belize). The percentage share of a country’s GDP in the total GDP of CARICOM member coun­ tries does not depend at all on the land area of that country, with the exception of Jamaica. Indeed, the countries’ ranking by GDP size is as follows, in descending order: Trinidad and Tobago, Jamaica, the Bahamas, Barbados, Belize, Guyana, and Montserrat. There is even less correlation between GDP per capita and land area given that smaller countries – Bahamas, Antigua and Barbuda, Barbados and Montserrat – have a larger GDP per capita than do the largest countries, which occupy the lowest positions – Suriname, Guyana and Jamaica. To analyse further the similarities and differences among the countries, it is useful to apply Principal Component Analysis (PCA) techniques which are particularly suited to studying the joint information offered by numerous variables provided about a country’s population. We should also take into account the temporal and spatial facts. In order do this, we have also gathered the available data for 1993, which leads us to examine data for dates at the start and end of the period to select variables listed previously. The non-simultaneous availability of data for all the countries prevents us from drawing up tables for the years prior to 1993 and after 2016. Nevertheless, the period 1993–2016 is quite sufficient for highlighting changes within and among countries. PCA allows us to extract fundamental information that is useful for investigating the proximities between the countries and to identify the sub-sets of variables which best differentiate the countries from one another. From a space of dimension 8, PCA allows us to substitute a similar space of smaller dimension. Retaining the two first axes will account for just over 60% of the initial information, while retaining the first three will account for 75%. The information provided by the first two or three is entirely satisfactory. The pro­ jections of variables and individuals in the two-dimensional space shown in Figure 26.1 and Figure 26.2 offer a significant insight: the positions of the Caribbean countries relative to one another has changed little over the last 20 years. The first lessons are clearly given by the positioning of the variables on axis 1: there is tension between the proportion of the country’s population in the total population of the Caribbean (POPp) and the proportion of GDP in the total GDP of the Caribbean (GDPp), and between GDP per capita (GDPc) and the Human Development Index (HDI). The image displayed by the positioning of the variables and of the countries in the factorial design are consistent with that of the circle of correlation: it reveals that Cuba and the Dominican Republic differ con­ siderably from the other Caribbean countries. Along axis 1, their socio-economic profiles dis­ tinguished by a large population (POPp), a significant GDP volume (GDPp) and a very marked tourism reality (NbTourists) contrast sharply with the profiles of the other countries. To a cer­ tain extent, this axis seems to summarize the ‘size/economic performance’ paradox which we 384

Guadeloupe and Martinique in the Caribbean Basin

Figure 26.1 Circle of correlation and projection of countries in the main factorial design of 1993

Figure 26.2 Circle of correlation and projection of countries in the main factorial design of 2016

described above. If we summarize the assessment of the second axis, it is essentially characterized by the unemployment rate (UNEMP_r) and HDI variables and by Haiti.

Strategies to address the challenges of the next few decades The need for greater growth and endogenous development in Guadeloupe and Martinique: the crisis of institutions Just like the other outermost regions, Guadeloupe and Martinique are expected to continue with their efforts to implement key initiatives in terms of infrastructure, environment, youth 385

Alain Maurin and Patrick Kent Watson

and employee training, social and cultural equilibrium, economic development, urban planning, etc. They will do so within the framework of the current 2017–22 five-year plan and the subsequent 2023–27 plan in France, and within the current European Operational Programme (detailed plans in which the member states set out how money from the European Structural and Investment Funds will be spent during the specified time frame) for the period 2014–20 and for the 2021–27 period, which has yet to be formulated. But more so than in the past, and given the numerous constraints which are increasingly dif­ ficult to overcome (the depletion of public funds, globalization and its threatening impacts, the recurrence of ecological catastrophes and the obvious uncertainty about international security), the French Caribbean countries must look to the future with the will to write a seminal chapter in their contemporary history. They must break with former practices for designing and imple­ menting public policies, adopt a vision for endogenous development and assimilate it as a tool to ensure the success of the land use and social development strategy for 2025–30. A sounder functioning of the economies of Guadeloupe and Martinique involves reforming their institutional apparatus, in the spirit of the work of Acemoglu et al. (2001). Institutional reform may begin with simplification of political governance on the one hand, and the eco­ nomic reform of markets on the other (Maurin 2019). In the case of the former, it is note­ worthy that, today, the local governance apparatus is very complex and comprises two major authorities, six public bodies for inter-municipal cooperation, 32 municipalities and a cluster of satellite bodies with various functions and roles, which are sometimes trivial. Policy imple­ mentation is thus riddled with confusion, which impedes the momentum towards completing projects. In some vital areas of economic activity, such as water management and tourism, political powers are exercised by numerous bodies which have overlapping competences, and which often disregard one another. In the case of the economic reform of markets, the surge of social uprisings which rattled DOM societies during the first quarter of 2009, re-opened debates about the limitations undermining their economies. The origins and developments of the latter can largely be explained by the theory put forward by Acemoglu, Johnson and Robinson (2001, 2012). From the sixteenth century until the end of the nineteenth century, the triangular trade enriched the settlers and their descendants in the plantations. They accumulated wealth and long prevented ‘workers’ from accessing roles of power and from owning property. With the abolition of slavery, it was the former slave owners who were considered victims, obtaining ‘financial reparations’. This institutional legacy, of course, determined the economic trajectory of the former colonies. It is, in fact, indisputable that this compensation enabled the former supporters of slavery to remain in their economic elite position, to the detriment of most former slave families. In the French Caribbean, although departmentalization established inclusive institutions, this alone did not have any major impact on abolishing the privileges of the béké oligarchy. In 2020, 182 years after the promulgation of the decree abolishing slavery, the economies of Martinique, Guadeloupe and French Guyana are still under the overwhelming domination of béké families who retain control over imports and distribution, a proportion of production and the lion’s share of agro-industry, as well as a disproportionate chunk of the commercial apparatus. (Desse 1997; Gay 2009; Branchi 2009). In a report published in September 2009 by the competition authority for mechanisms regarding the importation and distribution of widely consumed pro­ ducts in the DOMs, analyses backed up by figures about price formation channels highlight the lucrative and abusive nature of importer-distributers’ business practices. This report provides evidence that price differentials between the DOMs and mainland France are far from being based merely on the addition of freight costs and customs duties, but are primarily due to hefty 386

Guadeloupe and Martinique in the Caribbean Basin

margins collected by the importer-wholesalers. Although there are institutional rules which are inclusive in nature, the public authorities are incapable of positively transforming (that is, for the benefit of the population) colonial institutional arrangements of an extractive nature, which are perpetuated for the benefit of the minority oligarchy. This perpetuation of the colonial economy system in its current modern form is central to the obstacles that are seriously hampering the economies of Guadeloupe and Martinique. Guadeloupe, just like French Guyana, Martinique and Réunion, are still looking for driving forces in order to redesign their economic model and to move it, in particular, towards the objectives of a fairer society, capable of improving social well-being. In order to reach this goal, the institutions must be consolidated as a prerequisite for better economic performance. The search for a high-quality institutional organization is now vital in order to ‘tear down the bar­ riers’ inherent in inequalities and distorted development in DOM economies. This institutional reform requires the establishment of new mechanisms for combating the monopolies that are hampering private sector growth.

Consolidating development strategies in Caribbean countries: the pressing need to restart CARICOM’s regional integration projects In the Caribbean basin, almost all the countries face major challenges resulting from the dis­ ruption of the balance which has existed up until now. There is rising uncertainty in the EU as well as in the French Caribbean owing to Brexit. The Caribbean countries are, of course, vul­ nerable to environmental and natural disaster risks. For the CARICOM countries, there is a pressing need to improve a system that has, to date, yielded relatively disappointing results and, while support for the idea of an economic union is very widely shared by decision-makers and by the Caribbean people, it is nevertheless true that concrete expressions have been few and far between. The latest step towards deepening and widening the integration movement was the CARICOM Single Market and Economy (CSME) project, which has not advanced very far. The first phase, the CARICOM Single Market (CSM), came into force on 1 January 2006 with Barbados, Belize, Jamaica, Guyana, Suriname and Trinidad and Tobago as its first members. For these six countries, the CSM tore down barriers to trade in goods, services and several categories of work. The second phase of the process aims at implementing the CARICOM single econ­ omy, but has not yielded much. The 18th session of CARICOM’s conference of heads of government, held in St Vincent and the Grenadines on 12–14 February 2007, agreed on a calendar of two stages: the first was to bring about the consolidation of the single market and the second was to achieve a single economy to lead the CSME towards its status as a unified economic zone. It is noteworthy that the second stage included the following initiatives: har­ monizing taxation systems, environmental and regulation incentive programmes; implementing common policies in the areas of agriculture, energy industries, transport, small and mediumsized companies, sustainable tourism and agro-tourism; harmonizing monetary and tax policies and implementing CARICOM’s monetary union. However, little progress has been made since the St Vincent meeting, despite institutional efforts to harmonize and consolidate commercial relations in the region. Craigwell and Maurin (2020) conducted empirical investigations to measure the synchronization of economic cycles, and demonstrated that the integration process had not yet generated sufficient gains to have a positive impact on the economic activities of the partner countries. Indeed, they highlight the asynchronous aspect of the economic cycles between Caribbean countries and, in contrast, their highly synchronized profiles with the cycles of industrialized countries with which they main­ tain intensive trade relations. Craigwell and Maurin argue that the very small share of 387

Alain Maurin and Patrick Kent Watson

intra-Caribbean trade is the cause of this. According to a report published by the UN Economic Commission for Latin America and the Caribbean, ‘In CARICOM, the share of intraregional trade to total trade (imports and exports) is only 14%. The share of intraregional exports to total exports is 18%’ (ECLAC 2009: 17). The Caribbean Community Secretariat (2013) report pro­ vides the same insights: ‘The Region exports small percentages of its total production to intraregional markets, while trade with extra-regional traditional partners – the USA, Canada, the UK, and the rest of the European Union – dominates by far CARICOM’s total trade in goods.’ Despite these hardships, the future of the small Caribbean island nations arguably is depen­ dent upon the completion of the integration process. Over time, these countries could acquire – at a regional level – the infrastructure and institutional means to enable them to attain a level of technical competence and a degree of economic power which they never could have achieved on their own.

The common bases of economic renewal for the French Caribbean departments and the rest of the Caribbean It is widely accepted that Caribbean countries are small, vulnerable economies, but they also possess strengths in a number of fields. It would be as well to revisit the models of development that were implemented during the immediate post-colonial period. Caribbean decision-makers must systematically identify the presence of their endogenous resources and, similarly, they must become more innovative in integrating them culturally, economically, socially and environmentally.

Figure 26.3 An inventory of common endogenous resources for possible use in stimulating local and regional economic development Source: compiled by the authors. 388

Guadeloupe and Martinique in the Caribbean Basin

Three of these ‘fields of resources’ are present in most of the countries, and may be viewed as viable growth sectors, capable of providing different solutions from one country to another. They are the resources related to biodiversity and the green economy, the blue economy, and cultural products. Some recommendations are made for the development and use of these resources.

Biodiversity and the green economy Given the fragility and vulnerability of Caribbean countries, the concept of a green economy seems an obvious mechanism for achieving sustainable economic development. The UN Environmental Programme (2011) defines the green economy as ‘one which results in improved human well-being and social equity, while significantly reducing environmental risks and ecological scarcities’. The development of such an economy calls for the mobilization of initiatives to spur actions which preserve biodiversity. And as new activities emerge, pollution must be minimized and the energy efficiency of natural resources must be maximized. More broadly, the opportunities of sub-sectors in the green economy must now be considered as chal­ lenges to achieve the expansion of the productive apparatus. With support from universities, public-private partnerships and of course, the all-important driver of entrepreneurial involvement, new, very small businesses could start to emerge in this domain.

The blue economy As opposed to previous studies of Caribbean countries, the notion of the blue economy shines a positive light on the potential advantages of smallness and insularity, particularly in maritime resources. In its Europe 2020 strategy the European Commission (2012) stressed that ‘the potential for growth in the maritime economy is an opportunity that Europe, as a maritime continent, needs to seize’. Such an observation applies to the maritime sectors in the Caribbean territories. This sector bundles together the following broad economic fields: ports, ship build­ ing and ship suppliers, offshore oil services, fishing and fish products, state action at sea, research institutes, training organizations, etc. There is already evidence that the processes of capital accumulation specific to this sector have resulted in significant progress in the Caribbean and already enable some countries to boast comparative advantages. The values and potential of the blue economy in these countries should therefore be fully recognized even though, paradoxically, their contributions to GDP remain relatively insignificant.

The cultural and creative economy Cultural products are potentially capable of generating dynamic entrepreneurial activity and of bringing about a process of income generation and wealth accumulation. This view is supported by the European Commission (2010) which, in a green paper entitled ‘Unlocking the potential of cultural and creative industries’, asserts unequivocally that the creative and cultural industries ‘have a largely unexploited potential for the creation of growth and employment’. The music industry offers important new trading opportunities for the Caribbean countries. Therefore it could be beneficial to boost the export of musical productions by the numerous well-known musicians and bands from Jamaica, Trinidad and Tobago, Guadeloupe, Martinique and other Caribbean countries whose musical styles and genres can compete with any of those on the international stage. 389

Alain Maurin and Patrick Kent Watson

The creative and cultural industries may also be linked to urban planning in the Caribbean. Investments should be encouraged in projects aiming to increase the attractiveness of the region’s towns and cities. There are many examples of public policies and projects which have managed to use these industries as a base for economic development, among them the French towns Lens and Metz, which have shifted from being considered places of economic hardship to areas of urban renewal, taking advantage of major cultural facilities, relevant urban develop­ ments and appropriate touristic strategies. By analysing cities such as Sydney, Barcelona, London, New York and Tokyo, the Organisation for Economic Cooperation and Develop­ ment has demonstrated that high-profile cultural projects near the water’s edge have helped to significantly strengthen their regional and international coverage. Caribbean countries looking for new pathways to economic development are being encouraged to launch ambitious projects for the improvement of seafronts and similar loca­ tions. There are many talented designers and practitioners of contemporary architecture in the Caribbean whose skills can help to facilitate the enhancement of the urban and coastal public areas of the islands by focusing on their aesthetic value, their history and their way of life.

Conclusion Over the years, social events and consultation with local populations have presented many opportunities for questioning regional and national decision-makers about the need to draw up a plan for economic and social development in Guadeloupe and Martinique. However, after several decades, little progress has been made. In an economic climate tainted by pessimism and in which the French overseas territories are confronted with an identity which is more and more accepted by populations, has the moment finally come to consider implementing far-reaching reforms in the current institutional organi­ zation and removing the obstacles to growth? In the context of recent and future events at a national level (e.g. the gilet jaunes or ‘yellow vests crisis in mainland France) and at an international level (Brexit, a reduction in European Union assistance, etc.) financial crises loom for the central state’s budget, Guadeloupe and Martinique’s elected leaders anticipating these challenges by building on the idea that ‘governing locally means acting today while remaining mindful of tomorrow’s inevitable changes’. Like many other Caribbean countries, Guadeloupe and Martinique are continuing on the various paths of their multiple institutional identities, France, the Caribbean and Europe. But one extremely logical and important lesson must be drawn from this and that is whichever institutional legal system they choose to adopt, they should put in place decision-making tools with a view to achieving economic, social and environmental progress. Just as for the other countries of the Caribbean basin, it is important for them to escape the limitations assumed in the economic literature, and take account of additional costs associated with distance and the handicaps linked to insularity. It should be highlighted that all the islands are far from lacking in exploitable resources. On the contrary, they possess a variety of riches, scattered among or buried beneath their various heritage sites, also their culture, and the men and women who inhabit these island nations. Contemplating these islands – independent states or dependent territories – from a different perspective means discovering that they are endowed with abundant resources associated with their maritime locations, coastlines and biodiversity, all of which constitute a portfolio of investment projects and opportunities. 390

Guadeloupe and Martinique in the Caribbean Basin

References Acemoglu, D., Johnson, S. and Robinson, J. A. (2001) ‘The Colonial Origins of Comparative Develop­ ment: An Empirical Investigation’, American Economic Review, 91(5): 1369–1401. Banque Mondiale (1999) Rapport sur le développement dans le monde 1998–1999, Paris: Editions ESKA. Bertram, I. G. and Watters, R. F. (1985) ‘The Mirab Economy in South Pacific Microstates’, Pacific Viewpoint, 26(3): 497–513. Bertram, G. (1986) ‘Sustainable Development in Pacific Micro-economies’, World Development, 14(7): 809–822. Borda, P. and Mathouraparsad, S. (2016) Le syndrome domien ou les maux du modèle économique des DOM, Working Papers, July, Pointe-à-Pitre: Centre de recherche en économie et droit du développement insulaire (CREDDI). Branchi, M. (2009) Economie et Politique, No. 654–655, Jan.-Feb. Available atwww.economie-politique. org/. Available at ecopo_2009_01_02_crise_antillaise_vers_la_fin_du_systeme_colonial_departemental_ michel_branchi.pdf. Caribbean Community (CARICOM) (2020) Regional Statistics Caribbean, Georgetown: CARICOM. Available at www.caricomstats.org. Caribbean Community Secretariat (2013) Caribbean Community Regional Aid for Trade Strategy 2013–2015, Georgetown: CARICOM. Caribbean Development Bank (2019) Annual Report 2018, Wildey, St Michael: CDB. Available at www. caribank.org/publications-and-resources/resource-library/annual-reports/cdbs-2018-annual-report. Chenery, H. (1981) Changements des structures et politique de développement, Paris: Économica. Craigwell, R. and Maurin, A. (2020) ‘A Study of Economic Cycles in the CARICOM Free Trade Area: Situation, Challenges and Lessons’, in Patsy Lewis, Terri Ann Gilbert-Roberts and Jessica Byron, (eds) Caribbean Integration: Uncertainty in Time of Global Fragmentation, Kingston: University Press of the West Indies. Demas, W. (1974) The Caribbean Community and the Problems Facing the Community, Kingston: University Press of the West Indies. De Miras, C. (1988) ‘L’économie martiniquaise: croissance ou excroissance?’, Revue Tiers Monde, 24(114): 365–383. Desse, Michel (1997) ‘La récente transformation des acteurs économiques dans les D.O.M.: l’exemple de la Guadeloupe, Martinique et Réunion’, Annales de Géographie, 106(598): 592–611. doi:doi:10.3406/ geo.1997.20821. Available at www.persee.fr/doc/geo_0003-4010_1997_num_106_598_20821. Doligé, Éric and Vergoz, Michel (2014) ‘Les niveaux de vie dans les outre-mer: Un rattrapage en panne?’ Rapport d’information no. 710 (2013–2014), released by the Délégation sénatoriale à l’outre-mer, 9 July, Paris: Assemblé nationale. Available at www.senat.fr/notice-rapport/2013/r13-710-notice.html. Domenach, H. and Guengant, J.-P. (1981) ‘Chômage et sous-emploi dans les DOM’, Economie et Statis­ tiques, 137: 3–23. European Commission (2010) ‘Unlocking the Potential of Cultural and Creative Industries’ (Green Paper), Luxembourg: Publications Office of the European Union. Available at https://op.europa.eu/en/ publication-detail/-/publication/1cb6f484-074b-4913-87b3-344ccf020eef/language-en. European Commission (2012) Rapport sur l’état d’avancement de la politique maritime intégrée de l’UE, Rapport de la Commission au Parlement européen, au Conseil, au Comité Économique et Social européen et au Comité des Régions, Luxembourg: Publications Office of the European Union. Fragonard, B. (ed.) (1999) Les départements d’outre-mer: Un pacte pour l’emploi, rapport au M. le Secrétaire d’Etat à l’Outre-mer, Paris: Ministry of Overseas Territories. Available at www.vie-publique.fr/sites/default/ files/rapport/pdf/994001344.pdf. Gay, J.-P. (2009) ‘L’outre-mer français à la dérive’, Les Cafés Géographiques, Vox geographica, March. Available at http://cafe-geo.net/archives-vox-geographica/. Guengant, J.-P. (1992) ‘Travail et chômage: mythes et réalités,’ Prestations sociales: nécessité ou perversité, Pointe­ à-Pitre: Société des économistes de la Guadeloupe, pp. 83–102. Available at http://umr-developpement­ societes.univ-paris1.fr/menu-haut/membres/chercheurs-enseignants-chercheurs/guengant-jean-pierre/ publications/. Horton, S., Mazumbar, D. and Kanbur, R. (eds) (1994) Labour Market in an Era of Adjustment, Washington, DC: World Bank. Institut national de la statistique et des études économiques (INSEE) (2020) Dossier complet : Department de la Guadeloupe, Paris: INSEE. Available at www.insee.fr/fr/statistiques/2011101?geo=DEP-971.

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Alain Maurin and Patrick Kent Watson Institut national de la statistique et des études économiques (INSEE) (1999) Panorama économique de la Caraïbe, Paris: INSEE. Jarnac, G. (1987) ‘La situation économique et les conditions du développement des départements d’OutreMer’, Avis et Rapports du Conseil Economique et Social, Journal Officiel de la République Française, 23 (31 Dec.). Available at http://bibliotheques.cg971.fr/bdp/faces/details.xhtml?id=p%3A%3Ausmarcdef_ 0000022804&. Levratto, N. (2007) Comprendre les économie d’Outre-mer, Paris: L’Harmattan. Lurel, Victorin (2016) ‘Egalité réelle en Outre-mer’, Rapport au Premier ministre, March, Paris: Assemblé nationale. Available at www.assemblee-nationale.fr/14/rapports/r4064.asp. McIntyre, A. (1971) ‘Some Issues of Trade Policy in the West Indies’, in N. Girvan and O. Jefferson (eds), Readings in the Political Economy of the Caribbean, Kingston: New World Group. Mathieu, J.-L. (1988) Les DOM-TOM, Paris: Presses Universitaires Françaises. Maurin, A. (2019) ‘La Guadeloupe face au défi des réformes institutionnelles: impératifs et nouveaux leviers pour fonder et relancer la croissance économique et le développement sociétal’, special edition, Le développement en question(s), Etudes guadeloupéennes, Paris: l’Harmattan. Maurin, A. and Montauban, J.-G. (eds) (2000) Exclusion, croissance et développement: La Guadeloupe entre défis, incertitudes et espoirs, Paris: Économica. Mathouraparsad, S. (2011) Sur la modélisation et la préparation de la politique économique des régions ultra­ périphériques d’Europe: Le cas des DOM, doctoral thesis, Pointe-à-Pitre: University of the French West Indies. Mossé, E. (1999) Quel développement économique pour les départements d’Outre-Mer?, Rapport au ministre des DOM-TOM, Paris: Ministry of the Overseas. Available at www.vie-publique.fr/rapport/25668-quel­ developpement-economique-pour-les-departements-doutre-mer. Naudet, J.-D. (2006) ‘Outre-mer: Une croissance sous serre?’ La lettre des économistes de l’AFD, 12, p. 2–6. Poirine, B. (1994) ‘Le développement par la rente dans les petites économies insulaires dependants’, Revue économique, 44(6): 1169–1199. Poirine, B. (1995) Les petites économies insulaires: théories et stratégies de développement, Paris: L’Harmattan. Poirine, Bernard and Reboud, Valérie (2007) ‘Eloignement, insularité et compétitivité dans les petites économies d’outre-mer’, working paper no. 52, November, Paris: French Development Agency. Available at http://www.afd.fr. Ripert, J. (1990) L’égalité sociale et le développement économique dans les DOM, Rapport au ministre des DOM-TOM, Paris: La Documentation Française. United Nations Economic Commission for Latin America and the Caribbean (ECLAC) (2009) Caribbean Development Report, vol. 2, Project Documents collection, New York: United Nations. United Nations Environmental Programme (UNEP) (2011) Towards a Green Economy: Pathways to Sus­ tainable Development and Poverty Eradication, Nairobi: UNEP. World Bank (2020) World Development Indicators, Washington, DC: World Bank, https://databank.world bank.org/reports.aspx?source=World-Development-Indicators. World Bank (n.d.) World Development Indicators, Washington, DC: World Bank, https://databank.world bank.org/reports.aspx?source=World-Development-Indicators.

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27 The Dominican Republic Susan Pozo and Antonio María Giraldi

History When Christopher Columbus arrived on the island that he named Española – known today as Hispaniola – it was populated by approximately 400,000 Taíno, descended from migratory waves of native groups from the Orinoco and Amazon river basins more than 4,500 years earlier.1 It did not take long, however, for the native population to be decimated through disease, enslavement and mistreatment from harsh working conditions, particularly in the gold mines, as the colonists strove to extract precious metals in the name of the Spanish Crown.2 The eventual depletion of the gold reserves and the collapse of the industry, along with the demise of the human resources used to mine the precious metal, led to a search for other commodities to take the place of gold. The livestock industry, requiring relatively little investment and human resources, and the sugar plantation industry, necessitating large sums of capital while using forced African labour contended for economic space.3 Both industries faced important challenges, however. The Crown’s monopoly on trade meant that the producers of sugar, hides and salted meat for export had to rely on Spanish ships to retrieve these goods at port. However, a surge in the number of buccaneers and privateers made it difficult for the traders to sail safely on the high seas. The merchants attempted to mitigate these dangers by travelling together for protection, which resulted in higher costs and the need to bypass the smaller and more remote economic centres, including the port of Santo Domingo in Española.4 Plantation output, already limited by transportation inefficiencies, was further constrained by the deaths of enslaved workers and increased competition due to the expansion of sugar output elsewhere in the Americas. The colonial government’s attempt to suppress contraband by forcing livestock ranchers to move their stock from the northern and western frontier regions of the island to the areas around Santo Domingo where the authorities could exert more control, further compromised the via­ bility of their enterprise.5 The policy, referred to as las devastaciones, was unsuccessful for a number of reasons, since the free-roaming livestock were difficult to round up and grazing lands around Santo Domingo were not suited to this type of livestock farming.6 The economic and political interests of the Spanish were further challenged by the English and French who pushed further into the island hinterlands, unconstrained by the depopulation of livestock ranchers on the frontier on account of the devastaciones policy.7 Recognizing the

393

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threats posed by these incursions by the French and English, the Spanish authorities recalled the military from its strategic outpost on Tortuga (an island off the north-western coast of Española) in order to protect the port of Santo Domingo.8 The French took advantage of this weakness in Spanish defences, making permanent inroads into the western end of the island, expelling the English, and laying claim to what would eventually become Haiti. The French developed a lucrative sugar plantation economy through the use of African forced labour. While the Spanish colonial government provided some incentives to promote the industry, sugar did not ultimately take a stronghold on the Dominican economy until much later. Instead, throughout the eighteenth century the economies on either end of the island developed in ways that complemented each other. The French bought European manufactures with the sugar they produced, while trading those manufactures for meat and hides produced at the Spanish end of the island. The Spanish colonialists were thereby able to satisfy their need for manufactured goods (which were not adequately provided by the Spanish trading system) while the French were supplied with steady sources of meat to sustain the growing enslaved popula­ tion used to produce sugar.9 This economic symbiosis took place at the same time that the French and Spanish engaged in manoeuvres at the (not yet firmly established) border with each vying to push further into the other’s territory.10 The Spanish and French economic systems resulted in distinct populations on either side of the island with effects that endure to the present day. The French third of the island, with a population of approximately 450,000 in 1790, comprised overwhelmingly of African slaves,11 while at the Spanish end of the island, an estimated population of 100,000 was more or less evenly divided between whites, African slaves and a freed slave population.12 From 1795 until modern-day nationhood in 1844, the area that was to become the Dominican Republic swit­ ched from Spanish to French colonial status (1795), was declared part of the independent nation of Haiti (1804), became a Spanish colony once again (1809), declared its independence from Spain (1821), was occupied by Haiti (in 1822) in what is recalled as a harsh 22-year rule, and finally earned its second independence (1844) to become the Dominican Republic. In 1905 the US government entered into an agreement with the Dominican Republic to administer its finances in order to allocate the customs duties earned for the repayment of domestic and foreign (including US private) debt.13 Around the same time democratically elected President Cáceres instituted policies that were designed to incentivize foreign investors to help to expand the Dominican Republic’s agricultural sector, particularly sugar.14 But these and other policies caused tensions and rivalries to resurface among potential leaders, and in 1911 Cáceres was assassinated. Continued competition among the caudillos resulted in political instability that prompted the US military occupation of the Dominican Republic in 1914. In 1924 the USA withdrew from the country but left behind Rafael Trujillo as commander of the National Army. Trujillo’s shrewd consolidation of power eventually led to his assuming control of the country and there began a ruthless era of dictatorship and economic tyranny until his assassination in 1961.15 In this chapter, a number of themes emerge that reflect or are related to this early history. These include a mutually beneficial but acrimonious economic interdependence with Haiti, the country’s close political and economic relationship with the USA, openness to trade, informal economic production, inequality, along with inward and outward migration.

Industrial structure and output How is the economy of the Dominican Republic organized today? The legacies of the histor­ ical period are present in a number of dimensions including in its current industrial output and 394

The Dominican Republic

in business ownership practices – predominantly small and large family-owned enterprises. This does not imply that the Dominican Republic’s economic landscape is static. On the contrary, the composition of the industrial sectors, as a share of gross domestic product (GDP),16 has changed significantly over the past 50 years. Two sectors are particularly noteworthy – agri­ culture and services. The share of the agricultural sector accounted for about one-quarter of GDP in 1970, falling to around 5% by 2018 (Figure 27.1). The decrease in the share of agri­ cultural output was countered by an increase in the production of services, notably educa­ tion, transportation, finance and tourism. The share of the service sector increased by about 20 percentage points, up from 41.6% in 1970 to 60.2% in 2018, thereby transforming the Dominican Republic into a service-driven economy. The impressive growth of the service sector is due mainly to an expansion in tourism, educa­ tion and transportation services (Figure 27.2). These changes are the result of important reforms along with deliberate industrial policy adopted over the past few decades. A principle change took place in the 1990s when the Dominican Republic made concerted efforts to become more open vis-à-vis the rest of the world.18 This entailed making major changes in many other aspects of the Dominican economy, including the removal of protectionist tariffs. This required the lifting of tax exemptions on other sectors of the economy in order to compensate for the loss of revenues brought about by tariff reductions. Additional reforms aimed at simplifying the tax collection system and improving overall economic efficiency were also implemented.19 One of the sectors targeted by the industrial policy was tourism. Given the Dominican Republic’s favourable weather, geographic features including coastal beaches amenable to pop­ ular tourism, and proximity to the US and Canadian market, this sector was a natural target for policymakers. Hotels, bars and restaurants accounted for around 10% of the total output of the service industry in 1991, increasing to 15% by 2005. Since then the share of tourism within the service sector has remained relatively stable. Another important reform affecting the service sector took place in 2010, when a number of interest groups joined forces to support Law 66–97, a mandate that established that public spending on education should increase to 16% of total public spending, or 4% of gross national

Figure 27.1 Share of GDP (%) 1970–2018 Source: Central Bank of the Dominican Republic.17 395

Susan Pozo and Antonio María Giraldi

Figure 27.2 Composition of the service sector (%) Source: Central Bank of the Dominican Republic.20

income (GNI).21 Following the general election in 2012, and in the wake of increased social pressure, government officials made an effort to comply with and reach the 4% of GNI man­ date. As a result, the share of education in the composition of the service sector has increased by 50% or almost 3 percentage points, up from 6.1% of public spending in 2010 to 8.9% in 2018. The emphasis on education is warranted given the efforts the government has made to expand tourism and exportable services which require the rise of a labour force with a higher-ordered skill set that specializes in less routine tasks. Such a strategy can help the Dominican Republic to counter an erosion in demand for its manufacturing output which is a result of competition from producers elsewhere in the world. Transportation has also experienced a notable increase in its share of the services industry, rising from less than 10% in the 1990s to around 14% in 2010. Two factors appear to have driven this increase – a better road infrastructure throughout the country and an increase in the population of urban areas, particularly in Santo Domingo. The improved road infrastructure has helped to increase transportation between cities, which in turn has boosted other key sectors of the economy, including tourism. Urbanization, on the other hand, has helped to boost demand for better and more efficient transportation services in the country’s principal cities. The contribution of the industrial sector to GDP has remained fairly stable over the years, shifting only slightly within the range of 25%–30% of GDP since 1970 (Figure 27.1). However, the composition of the sector has changed significantly since 1990 (Figure 27.3) with con­ struction becoming the largest component within the sector and accounting for over 41% of industrial output in 2018, compared with just 14% in 1991. The increase in construction is partly due to the enlargement of urban areas, investment in infrastructure to facilitate mobility in cities, and an increase in investment in the tourism sector. Commensurate with an increase in the share of construction over the past three decades, the share of total manufacturing in industrial output declined from over 80% in 1991 to around 396

The Dominican Republic

Figure 27.3 Composition of industrial production (%) Source: Central Bank of the Dominican Republic.22

50% in 2018. Of interest, however, is that while local manufacturing has declined, the share of manufacturing in special economic zones (SEZ) has remained stable. SEZ in the Dominican Republic were instituted in the 1990s as part of the plan to open up the country to the rest of the world. These zones are intended to attract foreign investment. The investors benefit from tax incentives provided that they agree to export all of the manufactured goods produced in the zone. The investors benefit from the proximity to the US market, as well as from the availability of low-cost labour for production.23 The Dominican Republic has experienced large swings in mining and agriculture throughout its history and the present day is no exception. From 1991 to 2010 the mining component of industrial output declined to less than 2% in 2010. But since then it has increased, rising to 6.4% in 2018 as a consequence of renewed gold and silver mining. The share of agricultural pro­ duction in Dominican GDP has declined significantly over the years, representing almost onequarter of GDP in the 1970s, but decreasing to about 5% in 2018. The decrease in agriculture originates from a change in the country’s growth strategy, which since 1990 has been focusing on the development of the manufacturing and service sectors. Historically, agricultural sector output has been more volatile in comparison with other sec­ tors of the economy. From 1995 to 2018, the average annual rate of growth in agriculture was 3.6%, slightly lower than that of the overall economy (5.7%), while also experiencing more volatility (standard deviation of growth = 4.1), compared with total GDP volatility in output growth (standard deviation of growth = 2.9). Agricultural production volatility has been exacerbated by factors such as seasonality and natural disasters, which are difficult to control. During the period 2008–18 agricultural production grew more rapidly and appears to have become more stable, and recorded an average annual increase of 4.5%. However, services and industrial production have been growing much faster at around 10% annually. This has contributed to the decline in the share of agriculture in total production. Government output as a share of total output declined slightly from 10% in 1970 to 7.4% in 2018. However, given the dramatic increase in economic production, this represents a 397

Susan Pozo and Antonio María Giraldi

Figure 27.4 GDP and agricultural production (annual change, %) Source: Central Bank of the Dominican Republic.24

considerable expansion of the sector. The sector’s expansion may be warranted given the increased complexity of the economy. But how does the government finance its spending? The composition of tax revenues in the Dominican Republic has changed significantly over the past 20 years. In 1999 taxes on external trade represented around one-third of revenues, but this share decreased to just 7% in 2018 (Table 27.1). This decrease was partly due to the various trade and regional agreements, such as the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR) that required the lowering or elimination of tariff rates. Currently, about two-thirds of all tax revenue is earned from two categories: value-added tax (VAT) and a progressive income tax. The Dominican tax code, established by the National Congress in 1992, has not necessarily kept up with the changing structure and needs of the economy and the tax collection system is full of exemptions that significantly limits the tax base.25 In 2018 the two largest categories of government expenditure (each amounting to about 27% of total spending) went towards government employee compensation and transfer payments Table 27.1 Composition of tax revenues

Taxes VAT Selective taxes Fuel Alcoholic beverages and tobacco Others Taxes on external trade Property taxes Other taxes Income taxes Total Source: Ministry of Finance of the Dominican Republic.26

398

% of total taxes 1999

2012

2018

20.6% 22.1% 9.9% 6.1% 6.1% 32.8% 1.4% 1.1% 22.0% 100.0

29.7% 26.6% 13.6% 6.9% 6.1% 7.5% 6.2% 0.4% 29.6% 100.0

35.1% 19.6% 10.3% 6.0% 3.4% 7.1% 4.6% 2.8% 30.7% 100.0

The Dominican Republic

(Figure 27.5). Interest payments and capital expenditures accounted for about 17% and 16% of government expenditure, respectively, followed by spending on goods and services. One important aspect of the composition of government spending is the share devoted to social spending. Since 2013 the government has devoted 4% of GDP annually to the Ministry of Education. In 2018 82.4% of social spending was focused on three categories; education (52%), health (21.8%) and the elderly (9.2%).27 The government of the Dominican Republic experienced constant deficits, averaging 2.4% of GDP during the period 2000–18. This deficit has persisted despite efforts by the government to turn its primary balance from a 4.2% deficit in 2012 to a 1% surplus in 2018 (Figure 27.6). However, an increasing share of interest payments caused the overall balance to remain in def­ icit. Consequently, the government’s debt-to-GDP ratio increased by 10 percentage points, from 27.4% in 2009 to 37.6% in 2018. This puts the government of the Dominican Republic in a position of moderate sustainability, according to International Monetary Fund (IMF) stan­ dards.29 Around two-thirds of this debt is to foreign creditors and the remaining one-third is domestic.

Financial development and capital markets Robust economic growth is associated with economies that have better developed financial systems, perhaps because they speed up the rate of capital accumulation, channel resources to more productive investments, and overcome information inefficiencies.31 Nations with more developed financial systems also seem to be better protected from shocks that would otherwise drive economies into full-blown financial and economic crisis.32 Protection against such shocks via financial development is especially important for a small open economy like the Dominican Republic. But what does it mean to have a more developed financial system? Owing to the

Figure 27.5 Central government expenditure (2018) Source: Ministry of Finance of the Dominican Republic.28

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Susan Pozo and Antonio María Giraldi

Figure 27.6 Central government balance (2000–18) Source: Central Bank of the Dominican Republic.30

complexities of the interaction of an economy with the financial system, single metrics do not adequately inform us as to what it takes to have a robust financial system in place. Nonetheless, there are certain characteristics that we look to in assessing the relative level of development of the system. These characteristics concern financial system depth, access, efficiency and stability.33 Where does the Dominican Republic stand in each of these areas? Financial sector depth refers to the overall size of the financial sector. One simple way to measure size is by tracking domestic credit extended to the private sector by banks as a per­ centage of GDP. We do so using data from 2000 to the present day in Table 27.2. A substantial variation in financial depth is observed over time. Some of this variation is associated with the banking and economic crisis of 2002–03 as seen in the decline of credit from 2000 to 2005. But it is also noteworthy that overall financial depth in the Dominican Republic remains low rela­ tive to other developing economies as well as relative to the world. In 2015 domestic credit extended to the private sector only reached 25% in the Dominican Republic in contrast to the average for developing economics (31.7%) and for the world (44.5%). It is customary to gauge financial system access by comparing the number of bank branches in a country relative to its population. In this regard the Dominican Republic fares very favourably. Furthermore, it is noteworthy that since 2010 there has been substantial improve­ ment in access, with nearly 13 bank branches per 100,000 adults, a value that surpassed the developing economy average in the same year (10.5 per 100,000 adults) and was rapidly approaching the world average (14.1 per 100,000 adults), as shown in Table 27.2. When measured using the lending deposit spread, the Dominican Republic seems to fare less well with respect to financial efficiency. Some improvements in the period 2010–18 are evi­ dent, but the spreads are still considerably higher than those observed even in developing economies. However, while financial system efficiency is low, stability is high. The country currently reports a low incidence of non-performing loans relative to either the overall world 400

Table 27.2 Financial development indicators

Indicator

Dominican Republic 2000

2005

2010

2015

latest

Developing economies

World

2015

2015

Depth Domestic credit to the private sector by banks (% GDP)

28.6

18.9

21.7

24.9

25.9 (2018)

31.7

44.5

12.9

13.0 (2017)

10.5

14.1

8.3

7.8 (2017)

6.6

6.2

1.7

1.6 (2018)

5.3

4.4

74.3

65.4 (2017)

63.9

66

Access Bank branches per 100,000 adults

Not available

10.1

10.4 Efficiency

Lending – deposit spread

9.1

10.2

7.3

5.9

3.1

75.0

71.3

Stability Bank non-performing loans to gross loans (%)

Not available

Other Bank concentration (%)

51.1

Source: data for the Dominican Republic obtained from the Global Financial Development Database.34 Data for the two aggregates (Developing Economies and World) obtained from Financial Development Data Tables.35

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rates or developing economy rates. One troubling aspect of the financial system, however, is bank concentration. The values in Table 27.2 indicate that the assets of the three largest com­ mercial banks, as a share of total commercial banking assets, has tended to be relatively high, hovering at around 75% in the period 2010–18. However, by 2017 bank concentration in the Dominican Republic had fallen to 65%, and was more in line with concentration rates in the rest of the world. In sum, financial development in the Dominican Republic is mixed. In terms of safety, the system seems to be operating fairly well. It is likely that lessons were learned from the 2002–03 banking crisis and the system seems to be on a better footing as indicated by the very low levels of non-performing loans. However, it seems that the Dominican Republic’s financial system has little depth and is less efficient than is the norm. It is noteworthy that the capital markets in the Dominican Republic are also small relative to the country’s standing as an upper middleincome economy. While a very small private debt market exists, there is no equities market. A number of obstacles lead to the lack of development in this area including the sector’s structure which increases the cost of using this type of financing along with its information barriers.36 This suggests that the Dominican Republic is leaving growth opportunities on the table and some attention should be paid to considering how to better orient the capital and financial systems so that they can play larger roles in facilitating continued growth and devel­ opment in the economy.

Monetary policy, economic growth, and inflation In 1947, during the dictatorial regime of Rafael Trujillo, a change in the Constitution was made removing an article that prohibited the creation of money. This led to the inception of the Central Bank of the Dominican Republic, crediting it with monetary and exchange rate regulation of the country. The peso oro became the official medium of exchange, replacing the US dollar.37 Of note is the large portfolio of tasks that the Central Bank has tended to assume with the passage of time. Between 1965 and 1977 the goals and mandates of the insti­ tution were refocused to include tasks to direct the long-term economic development of the economy.38 The Central Bank was charged to work in conjunction with other government and international institutions to facilitate the acquisition of funding for the development of specific sectors of the economy including construction and tourism.39 Following a decade of sound macroeconomic stability during the 1990s, when annual infla­ tion and GDP growth averaged 7.1% and 6.2%, respectively, the country took a turn for the worse on account of a banking crisis stemming from fraud and the failure of three banks, one of which, Banco Intercontinental (Baninter), represented a considerable share of total banking assets.40 The situation led to capital flight, rapid depreciation of the peso against the dollar, high inflation during 2003 (43%) and 2004 (29%), and dollarization (see Figure 27.7). In 2005 the Central Bank reached a stand-by agreement with the IMF, whereby the Central Bank formally adopted monetary aggregate targets for monetary policy. Despite the difficult circumstances for the economy after the banking crisis, the economy recovered relatively quickly, with annual inflation falling to less than two digits in 2005; GDP growth averaged 6.4% from 2005–10 (see Figure 27.8). Furthermore, the international reserves of the Central Bank increased from 600 million pesos in 2004 to over 3,500 million pesos in 2011. In 2012 the Central Bank adopted an inflation target regime for its monetary policy. It was argued that monetary targets were no longer a suitable instrument through which to control inflation, as the relationship between these two had disintegrated over time. Furthermore, several other countries, including many of those in the Caribbean region, had already adopted inflation 402

The Dominican Republic

Figure 27.7 Inflation rate (CPI) % Source: World Bank, World Development Indicators.41

Figure 27.8 Real per capital income growth Source: data used in this plot are from World Development Indicators42 and show the annual percentage growth rate of GDP per capita based on constant local currency.

targeting and had obtained favourable results in terms of reducing inflation and inflation volati­ lity.43 Camacho and Checo found evidence that both inflation volatility and output volatility have decreased since the adoption of the inflation targeting regime in the Dominican Republic.44 403

Susan Pozo and Antonio María Giraldi

Despite the significant challenges experienced by the Dominican Republic over the past few decades, it is remarkable that economic growth has been so robust in the most recent period. Even in comparison to what are considered the powerhouses of the region, the Dominican Republic has performed favourably. The Dominican Republic’s macroeconomic success may be related to fairly good macroeconomic management of the economy. Growth of per capita income is brisk, inflation has been kept in check, the businesses the economy engages in vis-à-vis the rest of the world have been highly successful, thereby permitting the nation to attract foreign investment and earn healthy levels of foreign exchange. However, the dividends of macro­ economic success need to be distributed throughout all sectors of the economy if growth is to be long-standing so that explosive situations do not derail this progress. To this end, we continue with an examination of microeconomic issues that help us to understand how the economy of the Dominican Republic operates below the surface of macroeconomic and financial aggregates.

Human capital The Dominican Republic has made a deliberate decision to diversity its economy, particularly by becoming more services-oriented. However, for any economy to successfully sustain such a transformation, the availability of labour with specific skill sets consistent with services is para­ mount. We provide an overview of the educational infrastructure of the Dominican Republic along with the laws and policies that have been put in place to attain the human resources required for transforming the economy along this dimension. While education coverage in the Dominican Republic is broad, challenges remain with regards to the educational system. Education is available at public expense and attendance is compulsory in the Dominican Republic for a total of 15 years and until children reach the age of 18.45 Nonetheless, there are areas of concern regarding school attendance at all levels. For example, children are expected to attend one year of pre-primary school at the age of five, but 18.2% of children in this age-group do not.46 Non-attendance in the crucial initial years com­ promises the educational trajectory of children, particularly for the more vulnerable populations. Six years of compulsory free primary school is followed by six years of secondary school, also compulsory and provided at public expense. The net enrolment rate at the primary level for 2017 (defined as the number of children in the appropriate age-group enrolled in primary school out of 100) is 92.87%, almost mirroring the rate for Latin America and the Caribbean of 93.65% (see Table 27.3). However, the net enrolment rate falls off at the secondary school Table 27.3 Education statistics for the Dominican Republic, 2017

Country or region

Number of years Compulsory

Dominican Republic Latin America and the Caribbean

Net enrolment

Free

Primary

Secondary

Male and female

Male and female

Male

Female

12

12

92.87

70.27

66.45

74.19

10.45

11.60

93.65

77.36

75.85

78.93

Source: Data are from UNESCO.50 In this table, the number of years of compulsory and free education refer to primary and secondary schooling.

404

The Dominican Republic

level, settling at 70.27%, considerably less than the rate for Latin America and the Caribbean of 77.36%. It is interesting that gender disparity in enrolment rates are much wider in the Dominican Republic. While the gap in favour of female attendance is about 3 percentage points in Latin American and the Caribbean, it is close to 8 percentage points in the Dominican Republic. What might be driving the large gender disparity in the Dominican Republic relative to the overall region? Relative to Latin American and the Caribbean, the Dominican Republic falls short in school attendance, particularly at the secondary level. This shortfall is particularly troubling given that on many counts the Dominican Republic should have the capacity to make substantial progress in investing in human capital given its standing as an upper-middle-income nation.47 Further­ more, there is evidence that measured returns to secondary education are fairly high in the Dominican Republic.48 Why, then, is the school completion rate not higher? One possible explanation is that Dominicans today have misconceptions about returns to education, per­ ceiving them to be lower than they actually are. Evidence of this is supported by Jensen49 who found, using a randomized experiment, that when boys in the eighth grade where provided with factual information about the economic returns for individuals with secondary education in the Dominican Republic, they did go on to complete more schooling relative to boys who had not been given this information. The Dominican Republic has come to recognize the importance of improving the human capital of the nation by working on both the quality of education and coverage of the popu­ lation with access to education. In 1997 a goal was established by the statute – Ley General de Educación, LEY 66–97 – mandating that as of 1999 expenditure on pre-university education by the state was to reach 4% of the country’s GDP or 16% of all public expenditure.51 After 14 years of missing these targets, in 2013 the 4% goal was finally attained.52 Despite reaching this benchmark, controversy persists concerning how and where educational spending takes place. Should the emphasis be on teacher training and compensation, construction of the physical capacity required to accommodate more students, or the provision of meals and books? This debate became more vigorous following the most recent Programme for Interna­ tional Student Assessment (PISA) results which showed that the Dominican Republic is pre­ forming toward the bottom of the pack in its comparative assessment of performance among 15­ year-olds.53 To the disappointment of many observers, the country’s reading and mathematics scores fell relative to the scores earned three years earlier. It is possible that these poor results are due to the rapid integration of more children into the educational system in comparison to earlier periods when secondary education was not emphasized to such an extent and was compulsory only up until the eighth grade.54 This may have limited the pool of test takers in the earlier assessment period to the more apt and affluent members of the population, who may have been exposed to higher-quality and more resource-intensive education. But it is also possible that there is some other systemic failure of the educational system that needs to be addressed. A promising development is the dialogue taking place concerning the challenges that face the country in this regard. In addition to the need to potentially close the gap between perceived and actual returns to education, it may be that credit constraints still play a role in the drop-out rate. Jensen55 found that the positive education response to the information campaign was limited to boys from families that were better off, suggesting that information is not the only barrier and that liquidity constraints are present. That Dominican households receiving remit­ tances from abroad seem to use these funds for the purpose of education56 also suggests that liquidity barriers are present. The bottom line is that despite the law and public financing of education, coverage is not quite universal, particularly at the secondary level. In a survey seeking information as to why 405

Susan Pozo and Antonio María Giraldi

children do not attend school, a number of reasons emerge. Notable among these are bully­ ing, a lack of the necessary documents to register a child for school, a lack of programmes or a lack of trust in programmes to accommodate students with disabilities.57 If all children are to access education, it is imperative that these impediments to attendance should be addressed. The Alerta Joven programme,58 funded by the US Agency for International Development and carried out by ENTRENA, seeks to help at-risk adolescents and youth to avoid poverty pitfalls by connecting them to services that will help to ensure that they develop into pro­ ductive adults. While it is imperative to track investment in children’s human capital through formal edu­ cation in order to encourage and protect the long-term capacity of the economy, of immediate concern are the skill levels of the current stock of adults. In order to understand the current potential of the economy and to assess the areas where returns to physical investment are highest, it is necessary to know the capacity of the current labour stock. Reports that provide information about this, such as the Organisation for Economic Cooperation and Development’s Survey of Adult Skills (PIAAC) are invaluable. However, the Dominican Republic is not cur­ rently being assessed, hence we are left with cruder measures of adult capacity. For example, the Dominican Republic has made great strides in literacy rates. In 1920 only 29% of the popula­ tion was literate, rising to 64% in 1960 and to 92% in 2015.59 But with the Dominican popu­ lation so skewed towards its youth, these values could be pointing to a substantial working-age population that remains illiterate.60

Poverty and inequality Assessing a nation’s standing with respect to poverty and inequality is fraught with challenges and the Dominican Republic is no exception. We attempt to do justice to this topic by con­ sidering a number of different approaches for measuring poverty and inequality. We begin with the commonly used headcount poverty indicator – the proportion of the population that falls below a designated per capita income. But how do we choose the per capita income floor? Do we use the common, convenient, and well-understood ‘a-dollar-a-day’ international extreme poverty line, now inflated to US $1.9 per day?61 Or do we use a country-specific metric that accounts for the nation’s conventions and programmes and is therefore not easily compared across countries? If we limit ourselves to the Dominican Republic since 2000, the country-specific or national definition for extreme poverty provides a somewhat higher assessments of the poverty rate (6.9 per 100 population) relative to the US $1.9 per day poverty measure (1.6 per 100 population) using the latest year available, i.e. 2016 (see Figure 27.8). And, not surprisingly, when a less extreme measure of poverty is used (moderate poverty) the rates are much higher suggesting that about 30% of the population was poor in 2016. While the levels of poverty differ for the three measures, they present similar trends over time. Of note is the jump in poverty regardless of the metric used, shortly after 2002–03, when the Dominican Republic fell victim to a banking crisis.62 Fortunately, since 2004 poverty rates have been falling in the Dominican Republic. However, it is sobering that in 2016 the poverty rate had only just returned to its 2000 level, an indication of the long-standing systemic damage endured by economies that are subject to financial and banking crises. While the Dominican Republic is classified as an upper-middle-income country,64 what can we say about the distribution of income? If we look at the Gini coefficient from 2000 onwards (see Figure 27.10) we see that inequality rose around the time of the 2002–2003 banking crisis. The good news, however, is that declines in inequality did systematically improve thereafter. 406

The Dominican Republic

Figure 27.9 Poverty headcount rates using alternative poverty definitions Source: Socio-Economic Database for Latin America and the Caribbean.63

Figure 27.10 Gini coefficient by per capita income of households Source: Content of inequality_LAC.xls, Socio-Economic Database for Latin America and the Caribbean65

Inequality was substantially lower in 2016 when compared with 2000. Hence, unlike in the case of poverty, it seems that there have been substantial declines in income inequality from 2000 to the present day. The Gini coefficient, however, uses household income measures, which do not necessarily take into consideration non-income access to goods and services. In assessing well-being, it may be preferable to use a measure of consumption in order to more accurately account for resource access. While total consumption measures of inequality are more difficult to obtain, we have other options to assess well-being as we do in Table 27.4 where we display the percentage of 407

Susan Pozo and Antonio María Giraldi Table 27.4 Infrastructure at home

Year

Water Rural

Urban

Hygienic restrooms

Sewerage

Rural

Rural

Urban

Electricity Urban

Rural

Telephone Urban

Rural

Urban

2000

49.4

86.4

21.1

73.6

4.2

35.0

73.8

96.6

13.2

48.1

2016

61.0

86.6

50.6

88.8

4.8

35.9

96.8

99.9

72.0

85.5

Source: Socio-Economic Database for Latin America and the Caribbean.66

the population who have access to infrastructure, at home, that provides better living standards, such as water and sewerage. The information is provided over two time periods and for urban and rural areas separately. The information in Table 27.4 suggests that, particularly in rural areas, the Dominican Republic has made great strides in improving living standards through investment in infra­ structure. While hygienic restrooms were only available to 21% of the rural population in 2000, just 16 years later the coverage was nearly 51%. On the other hand, sewerage coverage is in stubbornly short supply in both urban and rural areas. While the availability of infrastructure across time and across geographies provides a sense of overall investment in improvements in living standards, the averages referred to earlier do not inform us about the distribution by income level. Figure 27.11 and Figure 27.12 display infor­ mation concerning infrastructure by income quintile in the case of two important standards – availability of water and hygienic restrooms. We see that there is considerable inequality in these infrastructures. However, the changes over time are positive in that the lowest income quintiles in the population seem to be gaining access to these infrastructures at a faster rate than the higher-income quintiles. The improvement is especially stark when it comes to hygienic restrooms, with the lowest income quintile seeing nearly a three-fold increase in access while the highest quintile only saw modest improvements. Nonetheless, the lowest quintile still remains far behind the situation observed for the highest income quintile.

Figure 27.11 Percentage of households with water infrastructure by quintile Source: Socio-Economic Database for Latin America and the Caribbean67 (CEDLAS and The World Bank). 408

The Dominican Republic

Figure 27.12 Percentage of households with hygienic sanitation Source: Socio-Economic Database for Latin America and the Caribbean68 (CEDLAS and The World Bank).

Security, transparency and uncertainty In a number of dimensions, the Dominican Republic faces challenges that need to be resolved in order for the country to continue along its impressive recent trajectory of economic growth. One of its potential challenges is security, a recurring theme throughout much of Latin America and the Caribbean. In order to foster long-term investment a climate of security and transpar­ ency needs to be cultivated to facilitate investment and reduce uncertainties concerning the outcomes of these efforts. Spikes in crime, concerns about the institutions that uphold the rule of law, and the strength of property rights, are among the variables that can cause challenges for an economy seeking to obtain the necessary investment to diversify and strengthen its economic base.69 The evidence for the Dominican Republic suggests that the country is moving in the right direction. However, there is room for improvement. Using homicide rates from 1991 and onwards as a gauge of personal security, we see that the Dominican Republic saw spikes in this crime statistic that coincided with the banking crisis of 2002–03. Homicide rates increased by 50% or more relative to the earlier period, starting in the range of 12–14 per 100,000 population, but shooting up to 20–25 for at least a decade (see Figure 27.13). By 2017 the rate had returned to its earlier levels and settled at a rate lower than the average for the Americas, at 17.2 homicides per 100,000 population.70 Nonetheless, scep­ ticism remains concerning the reliability of information concerning security, on the cost of doing business, on the strength of the rule of law, and other variables that are key for the promotion of investment. For an economy that strives to earn foreign exchange though tourism, any sense that there is a lack of transparency and reliable information can be especially damaging. The service sector boom, driven in part by growth in the tourism industry, is highly dependent on trust con­ cerning security and reliability. Unfavourable news concerning security can put a dent in that growth. Perhaps even more concerning is the possibility that unfavourable false information cannot be countered by actual facts due to a general lack of trust. In mid-2019 news organiza­ tions and social media reported on a number of US tourist deaths72 suggesting that they were inter-connected, and that the cause of these deaths was ‘suspicious’. While the government of the Dominican Republic insisted that these were natural deaths and that the rate was not 409

Susan Pozo and Antonio María Giraldi

Figure 27.13 Homicides per 100,000 population Source: UNODOC.71 Data are not available for 2015.

inconsistent with expected mortality rates (a claim that was subsequently corroborated by the US Federal Bureau of Investigation (FBI),73 a decline in air travel and other tourist-related bookings took place.74 While it may be impossible to account or control for all misinformation in news and the interaction of the press with government officials and the information exchanged, this event suggests a particularly troubling point – scepticism concerning govern­ ment reports. According to Transparency International’s methodology for assessing perceptions of corrup­ tion, this scepticism exists more broadly as seen in the Dominican Republic’s Corruption Per­ ceptions Index value of 30 in 2018 (0 being the most corrupt and 100 least corrupt). The Dominican Republic ranked 128th in the world out of 183 surveyed countries,75 suggesting that the Dominican Republic has room for improvement. Scepticism concerning government information might be countered if researchers and others have ready access to government information, confidence in survey methodologies and data collection methods along with access to that information. Where does the Dominican Republic stand with respect to data access? The Open Data Charter,76 adopted by the World Wide Web Foundation,77 has three key principles: data for everyone, the data people need, and data people can easily use. To date, only 22 nations have adopted the Open Data Charter. Nonetheless, the Dominican Republic is one of 115 nations that agreed to be included in the open data bar­ ometer for 2017, a tool used by the the World Wide Web Foundation to assess progress towards meeting the open data principles. The Dominican Republic ranks 50 in this metric. Higher scores were assigned to the USA (4th), Mexico (11th), Chile (26th) and Jamaica (4th0). Lower scores were earned by Costa Rica (71st), Trinidad and Tobago (77th) and Haiti (104th). The Dominican Republic also has opened and operates an Open Data Portal since 2015.78 Nonetheless, while the Dominican Republic provides access to much of its aggregated macroeconomic data, it is more difficult to obtain access to anonymized microeconomic data. The lack of access could be responsible for the dearth of academic studies published in refereed journals focusing on the Dominican Republic. The data in Figure 27.14 was obtained by run­ ning searches on ECON LIT with the following parameters (all referred journal publications 410

The Dominican Republic

Figure 27.14 Quantity of published research on Latin American and Caribbean Nations Source: compiled by the authors using information from the World Bank’s World Development Indicators80 and from search queries run on ECON LIT.81

from 1 January 2017 to 15 December 2019, in all languages with search term X) where each of the Latin American and Caribbean countries were incorporated as the search term. A scatterplot with a fitted line for the number of publications against the population of the country was then produced and this is displayed79 in Figure 27.14. The Dominican Repub­ lic’s data point is identified in the plot and it lies below the fitted line, suggesting that given its population, one might expect more refereed publications that tackle the subject of the Dominican economy. Greater microeconomic database access might help to increase scholarly research about the Dominican Republic and counter perceptions concerning the reliability of government reports. The lack of access to anonymized microeconomic databases by researchers could be con­ tributing to inaccurate perceptions that could hold back economic growth. If researchers cannot obtain data to analyse and publicize facts and findings, it is understandable that the general public is poorly informed as a result. For example, Jensen’s study of the provision of factual information on the returns to investment in education did incentivize Dominican boys to stay in school longer.82 That the general public is relatively uninformed is not surprising since researchers like Jensen suffer from a lack of access. In order to carry out the intervention to test the hypothesis – that the lack of information on returns to education was contributing to the high drop-out rate – Jensen notes that the ‘lack of publicly available microeconomic data on income’ necessitated that the researcher himself conduct a randomized survey to obtain that data to, in turn, run the randomized intervention.83 At the time of writing, only a few databases are publicly available on the website of the Dominican Statistical Agency, Oficina Nacional de Estadisticas.84 Even though these micro-databases are anonymized, most are partitioned with no means of linking a personal record to a household record, thus severely limiting the value of the data for serious economic studies.

Migration It is impossible to obtain a thorough understanding of the Dominican Republic if we omitted discussing migration, a sensitive and controversial topic for a number of reasons. Controversy is evident even in the disparities that exist concerning the number of immigrants that currently reside in the Dominican Republic. According to the World Bank’s Migration Matrix, in 2017 411

Susan Pozo and Antonio María Giraldi

the Dominican Republic was home to about 500,000 immigrants.85 With a population of 10,266,149 in that year, immigrants accounted for about 5% of the population.86 The number of immigrants reported by the Dominican Republic’s ‘Second Survey of Immi­ grants’ in 2017 was 570,933.87 While the survey’s value is relatively close to the World Bank’s estimate, popular accounts of the immigrant population often refer to numbers closer to one million or more.88 When the government of the Dominican Republic first reported the results of the Second Survey of Immigrants,89 the Listin Diario, a widely circulated and respected Dominican daily newspaper, carried the following headline, ‘In the Dominican Republic there are 847,979 immi­ grants, including 277,046 descendants’, implying that descendants of immigrants are immigrants too.90, 91 This points to a discrepancy between the official data and public perception. The discrepancy may be related to issues that surround who has the right to Dominican nationality. From 1929–2009 the Dominican Republic Constitution, under a jus soli regime, granted citizenship to all persons born on Dominican territory with the exception of children of diplomats and migrants in transit. According to the United Nations High Commissioner for Refugees, migrants in transit are generally considered to be individuals who are ‘passing through’ or temporarily residing in an area with the intention of moving on to a final destination92). In the Dominican Republic, Haitian immigrants and their descendants are not typically transiting to another country and many have been residing in the Dominican Republic for generations. Yet the Dominican Republic applies the label ‘migrants in transit’ to Dominican-born children of Haitian descent, thereby denying Dominican citizenship to these children. In 2005, and in response to this practice, grievances were brought forth to the InterAmerican Court of Human Rights (IACHR) by parents of Dominican-born children who were denied nationality. The IACHR ruled in favour of the parents in what became known as the Yean and Bosico v. Dominican Republic decision, finding that the law granted those born on Dominican territory Dominican nationality while stipulating that the Dominican Republic adopt a simple, accessible, and reasonable procedure for such children to acquire Dominican nationality.93 In response to the IACHR ruling, the Dominican Republic amended its Constitution in 2010, in effect including foreigners residing irregularly in the Dominican territory among the so-called migrants in transit. Soon afterwards, Ms Pierre, seeking a Dominican identification card but unble to obtain one, filed suit under the Constitutional Tribunal of the Dominican Republic. In a 2013 ruling (Constitutional Court’s Judgment 168/13), the High Court affirmed what had been widely practiced, interpreting Ms Pierre’s parents to be ‘foreigners in transit’ by way of being undocumented workers, despite Ms Pierre being born in 1984 prior to the adoption of the new Constitution.94 The Central Election Board then officially removed the nationality of Dominicans born to irregular Haitian immigrants if those births took place in 1929 or later.95 The uproar that ensued from these activities eventually resulted in the Law 169–14 for the regularization of individuals born to irregular immigrants prior to 2010. However, continued anti-Haitian sentiment by some government clerks and barriers to securing the requisite docu­ ments have resulted in many Dominican-born descendants of Haitians still unable to secure the official documentation they require in order to enrol in schools, use public services and secure formal employment. In effect, these policies have created a population of stateless and dis­ advantaged individuals.96 While controversy exists concerning the rights to citizenship in the Dominican Republic, there is little doubt that there has been mass migration out of the country (see Table 27.5.) The World Bank’s Bilateral Migration Matrix 2017 suggests that 13% of the Dominican-born population reside outside of the country with more than two-thirds of that total living in the 412

The Dominican Republic Table 27.5 Dominican migrant stock, 2017

Number of Dominican

USA Spain Puerto Rico Haiti Venezuela Switzerland Italy Germany Argentina Rest of world Total

immigrants from

emigrants residing in

26,397 10, 167 12,120 336,729 19,680 2,959 9,622 7,028 3,653 74,346 502,701

1,085,321 163,821 67,415 5,110 14,972 11,572 43,334 11,127 10,406 84,874 1,497,952

Source: Migration Matrix,98 World Bank staff estimates based on UN Population Division, OECD, the Australian Bureau of Statistics, the German Federal Statistical Office, the UK Office of National Statistics, and the US Census Bureau.

USA.97 It is important to consider the consequences of this out-migration. For example, when migration is motivated by and results in people working abroad in order to send money home, both macroeconomic and microeconomic consequences may ensue. The absence of family members and how the household adjusts to such absences can result in a multitude of concerns, while the effects of remittances on the exchange rate or on labour supply may also matter. Large inflows of remittances from workers abroad can cause real exchange rate appreciation with potential consequences for the structure of the economy.99 Generally, these effects are evident in countries with large inflows.100 Figure 27.15 plots inflows of remittances as a per­ centage of GDP for the Dominican Republic and shows steady growth in inflows. Some of that growth, particularly in the earlier years, could be due to better systems to account for

Figure 27.15 Personal remittances received by the Dominican Republic (% GDP) Source: World Development Indicators.101 413

Susan Pozo and Antonio María Giraldi

remittance inflows. Nonetheless, it is evident that the Dominican Republic’s income from remittances is quite large, remaining in the range of 7% to 8% of GDP since 2000, with the exception of 2002 when remittances shot up to 11% of income. This spike was probably due to the banking crisis of 2002–03 which resulted in a contraction of the economy along with a sharp depreciation of the Dominican Republic peso vis-à-vis the US dollar. The sharp increase in remittances at the time was also potentially related to the sometimes countercyclical nature of remittances, with family abroad filling in for resource declines experienced by Dominican Republic resident family members caught up in the contraction. How does the receipt of remittances in the Dominican Republic compare with other countries in the region? Figure 27.16 displays 2017 data for countries in Latin American and the Caribbean. The data clearly show that the Dominican Republic is not as heavily reliant on remittances as many other countries in the region. Haiti’s remittances accounted for 32% of its GDP, with El Salvador at 20%, Honduras at 19%, Guatemala at 11%, Nicaragua at 10% and Dominica at 8.5%. Nonetheless, the persistence of these flows for the Dominican Republic is of note given its status as an upper-middle-income nation. One can also question what the inflow would be if costs for remitting to the Dominican Republic were not so high. The country is noteworthy for the large transaction costs that persist for remitting, potentially related to the structure of the Dominican money transfer industry. Using 2017 data, mean fees assessed for sending US $200 to countries in Latin American and the Caribbean was 5.4%. In contrast, fees for sending $200 to the Dominican Republic was 6.8%, a 26% premium over the average for the area.102 Few countries in the region experience larger transaction costs, with the exception of Guyana and Haiti with fees of 8.5% and 8.1%, respectively.

Figure 27.16 Remittances as a percentage of GDP for Latin American and Caribbean countries, 2017 Source: World Bank Development Indicators.103 414

The Dominican Republic

It is noteworthy that despite the importance of migration to and from the Dominican Republic, there is a scarcity of reliable information on migration. This dearth of information has potentially led to the perpetuation of myths concerning migration involving the Domin­ ican Republic. Exceptions to the lack of information are two national studies on migration, the First Survey of Immigrants (referred to as ENI-2012) and the Second Survey of Immi­ grants (ENI-2017).104 These were attempts to estimate the entire population of immigrants in the Dominican Republic. While these help to account for the location and changes over time in immigrants and descendants of immigrants, the surveys do not collect additional data on the non-immigrants/non-descendants. Hence it is difficult to explore important outcomes such as differential schooling rates or access to employment. The national surveys that do gather information on outcomes, characteristics and conditions for the entire population do not do a good job of identifying immigrants, often neglecting to ask nativity or nationality questions. A couple of smaller surveys, however, have gathered specific information on immigrants, non-immigrants and their characteristics. One is a module for the Latin American Migration Project (LAMP) covering the Dominican Republic in surveys of seven targeted communities105 in 1999–2000 and another is the OECD/CIES-UNIBE survey covering 2,037 households and 54 communities106 during 2014–15. Neither covers the full population and both closely scru­ tinize areas or communities with large populations of migrants. Nonetheless, they do provide us with some information concerning the migrant population of the Dominican Republic with context. The OECD/CIES-UNIBE study reveals that the Dominican Republic is not taking advantage of the potential that is embodied in its population. Instead, vocational training that is intended to improve the formal sector participation of Dominicans within the country seems to be used to increase their employability abroad. At the same time, immigrants have less access to those same vocational training opportunities, thus further reducing their participation and insertion into formal labour markets.

Development strategies If we track GDP growth for the Dominican Republic over approximately the past half century, it is hard to be critical of the country’s overall performance. The Dominican Republic has been successful in maintaining economic growth at a relatively fast pace, averaging real per capita GDP growth equivalent to 3.26%. By contrast, countries in Latin America and the Caribbean experienced a growth rate that averaged 1.37%, less than half the Dominican rate, while for the small Caribbean states the rate was even lower, at 1.135% per annum.107 What might account for these differentials? What could be lifting the Dominican Republic growth rate to such heights? The Dominican Republic’s success may be rooted in a three-pillared approach to growing the economy as described in a study by Pozo et al. 108 The first pillar, diversification of pro­ duction, is certainly evident in the Dominican Republic’s move away from agricultural pro­ duction and towards services. One of the advantages of expanding the service sector could be its malleability. The production of services often requires substantial labour resources. Relative to physical capital, labour can often be more adaptable and repurposed to accommodate changes in the production process and changes in the demand for goods and services. Hence, service sector output, which tends to use significant labour resources, has the potential to build flexibility into the economy, particularly if this labour is performing non-routine tasks that use cognitive and socio-behavioural skills (World Bank 2018). These talents are less likely to be replaced by physical capital and robots which are better suited to performing routine tasks. 415

Susan Pozo and Antonio María Giraldi

The second pillar of the development strategy pursued by the Dominican Republic is to produce within SEZ. The zones operate in parallel fashion to the rest of the economy and are afforded certain protections or advantages relative to the rest of the economy. For example, it may be too expensive to provide reliable and state of the art infrastructure of a particular type across the entire nation. But what if a small section were provided, thereby facilitating the development of an industry or sector of the economy? This strategy is reminiscent of ‘unba­ lanced growth’ theories proposed by Hirschman.109 If resources are limited this might make sense. If a country cannot build everything it needs, then perhaps it is reasonable to choose and invest in certain areas to make them stellar. The concentrating of resources in SEZ may well benefit the Dominican Republic, and help to accelerate growth and development by allocating scarce resources to where returns are highest. The third pillar of the development strategy pursued by the Dominican Republic regards the country’s engagement with the rest of the world. The Dominican Republic has sought to produce an appropriate mix of goods and services exports. Meanwhile, there is considerable inmigration, out-migration and return migration. This tilt of the economy could be producing a number of positive externalities. The competitiveness of the world economy requires that countries remain nimble in the face of competition, while the population and talent diversity that is inherent in a high in-migration economy has been measured to result in higher growth rates110 and higher levels of productivity.111 Growth and productivity gains that are observed in high immigration areas could be the result of increased innovation and creativity that takes place when individuals with different experiences and human capital come together, with the sum resulting in greater than the parts. While this three-pillar approach seems to have served the Dominican Republic well, it is important to note that this approach also has the potential to result in greater inequality. This can arise from policies that protect and shelter certain sectors at the expense of others, potentially shutting out segments of the population from participating in the gains accruing to the economy. The creation of a disaffected population is not in the interest of economies striving to reach their potential. The loss of citizenship status for certain immigrants and their Dominican-born descendant results in a sector of the potential labour force that can never reach its potential for generating output for the economy. How the policymakers and the society at large deal with these problems will ultimately determine the future trajectory of the Dominican Republic.

Notes 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 416

Moya Pons (2010), pp. 17–27. Ibid., p. 33. Ibid., p. 39. Ibid., p. 42. Ibid., p. 48; Paulino (2016), p. 17–18. Moya Pons (2010), p. 48. Paulino (2016), p. 18. Moya Pons (2010), p. 56. Ibid., p. 77. Ibid. According to Metz and the Library of Congress (2001), about 30,000 whites and 27,000 freed slaves were far outnumbered by about 400,000 African slaves. Ibid. Moya Pons (2010), p. 287. Ibid., p. 300. Ibid., p. 357.

The Dominican Republic

16 GDP is measured by the Central Bank of the Dominican Republic as the sum of value added by the different sectors (industrial production, services and agriculture) plus taxes and subsidies, which are excluded from this analysis. 17 https://cdn.bancentral.gov.do/documents/estadisticas/sector-real/documents/pib_origen_2007.xls?v= 1582119652082. 18 Andujar (2005). 19 Ibid. 20 https://cdn.bancentral.gov.do/documents/estadisticas/sector-real/documents/pib_origen_2007.xls?v= 1582119652082. 21 www.educando.edu.do/files/5513/9964/5391/Ley_General_Educacion_66-97.pdf. 22 https://cdn.bancentral.gov.do/documents/estadisticas/sector-real/documents/pib_origen_2007.xls?v= 1582119652082. 23 UNCTAD (2019), p. 148. 24 https://cdn.bancentral.gov.do/documents/estadisticas/sector-real/documents/pib_origen_2007.xls?v= 1582119652082. 25 Daude et al. (2014). 26 www.hacienda.gob.do/wp-content/uploads/2018/11/INGRESOS-FISCALES-2000-2001.xls. 27 www.hacienda.gob.do/wp-content/uploads/2019/01/RESULTADOS-DE-LAS-FINANZAS­ PUBLICAS-2018.pdf. 28 www.hacienda.gob.do/wp-content/uploads/2018/11/INGRESOS-FISCALES-2000-2001.xls. 29 www.imf.org/~/media/Files/Publications/CR/2019/1DOMEA2019001.ashx. 30 https://bancentral.gov.do/a/d/2535-sector-fiscal. 31 Valderama (2003); OECD (2012); World Bank (2017). 32 World Bank (2013). 33 Ibid. 34 World Bank (2017). 35 World Bank (2019). 36 OECD (2012). 37 Franco (2001), p. 287–89. 38 Alvarez (2008) p. 27–34. 39 Ibid., p. 34–35. 40 Moya Pons (2010), p. 474. 41 World Bank, World Development Indicators (1970–2018), https://databank.worldbank.org/reports. aspx?source=world-development-indicators (accessed 9 February 2020). 42 Ibid. 43 Banco Central de la República Dominicana (2011), p. 8–11. 44 Camacho and Checo (2018). 45 It should be noted that about 25% of school-age children attend private schools. 46 UNICEF (2017), p. 12. 47 https://datahelpdesk.worldbank.org/knowledgebase/articles/378834-how-does-the-world-bank­ classify-countries. 48 Jensen (2010). 49 Ibid. 50 United Nations Educational, Scientific and Cultural Organization (UNESCO), http://data.uis. unesco.org/ (accessed 2 February 2020). 51 www.oas.org/juridico/spanish/mesicic2_repdom_sc_anexo_7_sp.pdf. 52 UNICEF (2017). 53 OECD/PISA (2019). 54 In 2010 Dominican law increased compulsory education all through to grade 12 (see http://data.uis. unesco.org/). 55 See Jensen (2010). 56 See Amuedo-Dorantes and Pozo (2010). 57 UNICEF (2017). 58 www.alertajoven.com/en/quienes-somos/que-hacemos. 59 Roser and Ortiz-Ospina (2020). 60 In 2015 29% of the population was aged 14 years or less, while 47% were aged 24 years or less (UNESCO, http://data.uis.unesco.org/)

417

Susan Pozo and Antonio María Giraldi 61 See Ferreira et al. (2015) for a discussion of the changes in metric. 62 See Alsina Nivar (2007) for an overview of the origins of the crisis. 63 Socio-Economic Database for Latin America and the Caribbean (CEDLAS and the World Bank, www.cedlas.econo.unlp.edu.ar/wp/en/estadisticas/sedlac/estadisticas/ accessed 10 December 2019). 64 In 2018 the World Bank classified the Dominican Republic as an upper-middle-income country. See https://datahelpdesk.worldbank.org/knowledgebase/articles/378834-how-does-the-world-bank­ classify-countries. 65 Socio-Economic Database for Latin America and the Caribbean. 66 Ibid. 67 Ibid. 68 Ibid. 69 Haggard et al. (2008). 70 UNDOC (2019). 71 Ibid. 72 e.g. Plante (2019). 73 Torres (2019). 74 Salo (2019). 75 www.transparency.org/cpi2018 (accessed 2 February 2020). 76 https://opendatacharter.net/principles/. 77 World Wide Web Foundation (2017), https://opendatabarometer.org/doc/4thEdition/ODB4thEdition-GlobalReport.pdf. 78 http://datos.gob.do/ 79 The scatterplot does not contain points for Mexico and Brazil because they are outliers in population (with populations of 125 million and 208 million, respectively) and incorporating them on the graph would make it more difficult to visualize the location of the lower population nations. However, the points for Brazil and Mexico do not change the relative positions of the other data because both Brazil and Mexico lie very close to the fitted line. 80 World Bank, World Development Indicators, Population in 2017 (accessed 15 December 2019). 81 Journal of Economic Literature (ECON LIT) query run on 15 December 2019. See www.aeaweb.org/ econlit/. 82 Jensen (2010). 83 Ibid., fn 8. 84 www.one.gob.do/recursos-automatizados/bases-de-datos. 85 The World Bank estimated that there were 502,701 immigrants residing in the Dominican Republic in 2017, the largest group originating from Haiti, with 336,729 immigrants, see www.worldbank.org/ en/topic/migrationremittancesdiasporaissues/brief/migration-remittances-data (accessed 28 December 2019). 86 Estimate of the Dominican Republic population, www.one.gob.do/demograficas/proyeccio nes-de-poblacion (accessed 28 December 2019). 87 See ENI (2018: 48). 88 OECD/CIES-UNIBE (2017). 89 http://economia.gob.do/wp-content/uploads/drive/Publicaciones/Resumen%20ENI-2017.pdf. 90 See www.pressreference.com/Co-Fa/Dominican-Republic.html (accessed 31 December 2019). 91 ‘En RD había 847 mil 979 inmigrantes en 2017; incluidos 277,046 descendientes’, Listin Diario, 16 April 2018), https://listindiario.com/la-republica/2018/04/16/510838/en-rd-habia-847-mil-979­ inmigrantes-en-2017-incluidos-277046-descendientes (accessed 31 December 2019). 92 OHCHR (2016). 93 Hannam (2014). 94 Ibid. 95 OECD/CIES-UNIBE (2017). 96 Otero (2018). 97 www.worldbank.org/en/topic/migrationremittancesdiasporaissues/brief/migration-remittances-data. 98 World Bank, Bilateral Migration Matrix, various years. 99 Amuedo-Dorantes and Pozo (2004); Acosta et al. (2009). 100 Cruz Zuniga (2011). 101 World Bank, World Development Indicators, ‘Personal remittances as a percentage of GDP’ (accessed 1 January 2019).

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102 Computed by the author from the 2017 database on average transaction cost of sending remittances to a specific country (%). World Bank, Remittance Prices Worldwide, http://remittanceprices. worldbank.org (accessed 28 December 2019). 103 World Bank, World Development Indicators. Data are for all countries in the Latin American and Caribbean region for which data are reported by the World Bank (accessed 1 January 2019). 104 ENI (2018). 105 https://lamp.opr.princeton.edu/dominicana/dr-home-en.htm. 106 OECD/CIES-UNIBE (2017). 107 Annual percentage growth rate of GDP per capita based on constant local currency. Aggregates are based on constant 2010 US dollars. Data are from World Development Indicators database (accessed 2 October 2020) and cover the period 1971–2018. 108 Pozo et al. (2013). 109 Hirschman (1958). 110 Boubtane et al. (2016). 111 Kemeny and Cook (2018); Ozgen et al. (2013).

References Acosta, Pablo A., Rae Baerg, Nicole and Mandelman, Federico S. (2009) ‘Financial Development, Remittances, and Real Exchange Rate Appreciation’, Federal Reserve Bank of Atlanta Economic Review, 94: 1–12. Alsina, Nivar, Carla, Gabriela (2007) ‘Dominican Banking Crisis: The First Banking Corporate Govern­ ance Crisis’, Law & Business: Review of the Americas, 13. Alvarez, O. (2008) 60 años de política monetaria 1947–2007, vol. 2, 1966–1981, Santo Domingo: Banco Central de la República Dominicana. Amuedo-Dorantes, Catalina and Pozo, Susan (2004) ‘Workers’ Remittances and the Real Exchange Rate: A Paradox of Gifts’, World Development, 32(8): 1407–1417. doi: http://dx.doi.org.libproxy.library.wm ich.edu/10.1016/j.worlddev.2004.02.004. http://libproxy.library.wmich.edu/login?url=https://search­ proquest-com.libproxy.library.wmich.edu/docview/56206577?accountid=15099. Amuedo-Dorantes, C. and Pozo, S. (2010) ‘Accounting for Remittance and Migration Effects on Chil­ dren’s Schooling’, World Development, 38(12): 1747–1759. Andujar, J. G. (2005) ‘Reformas económicas y negociaciones políticas: Apuntes sobre la experiencia dominicana de los noventa’, Ciencia y Sociedad, 30(1). Banco Central de la República Dominicana (2011) Informe de política monetaria, Santo Domingo: Departa­ mento de programación monetaria y estudios económicos. Boubtane, Ekrame, Dumont, Jean-Christophe and Rault, Christophe (2016) ‘Immigration and Economic Growth in the OECD Countries 1986–2006’, Oxford Economic Papers 68(2): 340–360. Camacho, F. C. and Checo, A. M. (2018) Impacto macroeconómico de una política monetaria con metas de infla­ ción: Concurso anual de economía, Santo Domingo: Biblioteca Juan Pablo Duarte. Cruz Zuniga, Martha (2011) ‘On the Path to Economic Growth, Do Remittances Help? Evidence from Panel VARs’, Developing Economies, 49(2): 171–202. Available at http://libproxy.library.wmich.edu/login? url=https://search-proquest-com.libproxy.library.wmich.edu/docview/880333486?accountid=15099. Daude, C., Gutiérrez, H. and Melguizo, Á. (2014) ‘The Political Economy of Tax Incentives for Investment in the Dominican Republic: “Doctoring the Ball”’, OECD Development Centre Working Papers, No. 322, Paris: OECD Publishing. doi:doi:10.1787/5jz3wkh45kmw-en. Encuesta Nacional de Inmigrantes (ENI) (2018) Segunda Encuesa Nacional de Inmigrantes en la República Dominicana, Santo Domingo: Oficina Nacional de Estadística. Ferreira, Francisco, Mitchell Jolliffe, Dean and Beer Prydz, Espen (2015) ‘The International Poverty Line Has Just Been Raised to $1.90 a Day, but Global Poverty Is Basically Unchanged. How Is That Even Possible?’ Let’s Talk Development, World Bank blogs. Available at https://blogs.worldbank.org/developmenttalk/ international-poverty-line-has-just-been-raised-190-day-global-poverty-basically-unchanged-how-even (accessed 2 January 2020). Franco, F. (2001) Historia Económica y Financiera de la República Dominicana: 1844–1962, vol. CMXXXI, Colección Historia y Sociedad, Santo Domingo: Publicaciones de la Universidad Autónoma de Santo Domingo. Frankema, Ewout and Masé, Aline (2014) ‘An Island Drifting Apart’, Journal of International Development, 26: 128–148. 419

Susan Pozo and Antonio María Giraldi Haggard, Stephan, MacIntyre, Andrew and Tiede, Lydia (2008) ‘The Rule of Law and Economic Development’, Annual Review of Political Science, 11(1):205–234. Hannam, Monique (2014) ‘The Status of Haitian Descendants Born in the Dominican Republic and Measures to Protect Their Right to a Nationality’, Vanderbilt Journal of Transnational Law, 47: 1123–1166. Hirschman, A. O. (1958) The Strategy of Economic Development, New Haven, CT: Yale University Press. Jensen, Robert (2010) ‘Impact of Information on the Returns to Education on the Demand for Schooling in the Dominican Republic’, Quarterly Journal of Economics, 125: 515–548. Kemeny, Thomas and Cooke, Abigail (2018) ‘Spillovers from Immigrant Diversity in Cities’, Journal of Economic Geography, 18(1): 213–245. Listin Diario (2018) ‘En RD había 847 mil 979 inmigrantes en 2017; incluidos 277,046 descendientes’, 16 April. Available at https://listindiario.com/la-republica/2018/04/16/510838/en-rd-habia-847-mil­ 979-inmigrantes-en-2017-incluidos-277046-descendientes (accessed 31 December 2019). Listin Diario (2018) ‘Población extranjera en la RD es el 8,3 %’, 6 June. Available at https://listindiario. com/la-republica/2018/06/06/518272/poblacion-extranjera-en-la-rd-es-el-83-. Metz, Helen Chapin and Library of Congress (2001) Dominican Republic and Haiti: Country Studies, Washington, DC: Federal Research Division/Library of Congress. Available at www.loc.gov/item/ 2001023524/. Moya Pons, Frank (2010) The Dominican Republic: A National History, Princeton, NJ: Markus Wiener Publishers. OECD/CIES-UNIBE (2017) Interrelations between Public Policies, Migration and Development in the Dominican Republic, OECD Development Pathways, Paris: OECD Publishing. Available at http://dx.doi.org/ 10.1787/9789264276826-en. OECD/PISA (2019) 2018: Insights and Interpretations, Paris: OECD Publishing. Available at www.oecd. org/pisa/PISA%202018%20Insights%20and%20Interpretations%20FINAL%20PDF.pdf. Office of the High Commissioner for Human Rights (OHCHR) (2016) Situation of Migrants in Transit, Geneva: OHCHR. Available at www.ohchr.org/Documents/Issues/Migration/StudyMigrants/ OHCHR_2016_Report-migrants-transit_EN.pdf. Organisation for Economic Cooperation and Development (OECD) (2012) Capital Markets in the Domin­ ican Republic: Tapping the Potential for Development, Development Centre Studies, Paris: OECD Publishing. Otero, Eva (2018) Towards a Rights-based Political Culture for the Political Participation of the Dominican Popu­ lation of Haitian Origin, post-project evaluation for the United Nations Democracy Fund. Available at www.un.org/democracyfund/sites/www.un.org.democracyfund/files/dominican_republic_-_udf-14-631­ dom_-_evaluation_report.pdf (accessed 3 January 2019). Ozgen, Ceren, Nijkamp, Peter and Poot, Jacques (2013) ‘The Impact of Cultural Diversity on Firm Innovation: Evidence from Dutch Microdata’, IZA Journal of Migration, 2(18): 1–24. Paulino, Edward (2016) Dividing Hispaniola: The Dominican Republic’s Border Campaign Against Haiti, 1930–1961, Pittsburgh: University of Pittsburgh Press. Plante, Stephie Grob (2019) ‘Tourist Deaths in the Dominican Republic Are Sparking Concern Among Travelers: It’s Not Yet Clear Whether the Deaths of 10 Americans Over the Past Year Are Connected’, Vox, 26 June. Available at www.vox.com/thegoods/2019/6/26/18759843/dominican-republic-tourist­ deaths (accessed 2 February 2020). Pozo, Susan, Sánchez-Fung José R. and Santos-Paulino, Amelia (2013) ‘Economic Development Strategies in the Dominican Republic’, in Augustin Kwasi Fosu (ed.), Achieving Development Success: Strategies and Lessons from the Developing World, Oxford: Oxford University Press, pp. 383–405. Roser, Max and Ortiz-Ospina, Esteban (2020) ‘Literacy’, Available at https://ourworldindata.org/literacy. Salo, Jackie (2019) ‘Dominican Republic Tourism Has Dropped More Than 74%’, New York Post, 26 June. Available athttps://nypost.com/2019/06/26/dominican-republic-tourism-has-dropped-more-than­ 74-percent-study/. Torres, Ella (2019) ‘Tourist deaths in Dominican Republic Were Due to Natural Causes: The FBI’s Findings Were Consistent With What Local Authorities Said’, ABC News, 19 October. Available at https://abcnews.go.com/International/tourist-deaths-dominican-republic-due-natural-fbi/story?id=66390836 (accessed 2 February 2020). United Nations Children’s Fund (UNICEF) (2017) Niños y Niñas Fuera de la Escuela en la República Dominicana, New York: UNICEF and Ministry of Education.

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United Nations Conference on Trade and Development (UNCTAD) (2019) World Investment Report 2019: Special Economic Zones, New York and Geneva: United Nations. United Nations Educational, Scientific and Cultural Organization (UNESCO). Available at http://data.uis. unesco.org/. United Nations Office on Drugs and Crime (UNODC) (2019) Global Study on Homicide 2019, Vienna: UNODC. Valderrama, Diego (2003) ‘Financial Development, Productivity, and Economic Growth’, Federal Reserve Bank of San Francisco, Economic Letter, number 2003–2018, 27 June. Available at https://www.frbsf. org/economic-research/publications/economic-letter/2003/june/financial-development-productivity­ and-economic-growth/. World Bank (n.d.) World Development Indicators, Washington, DC: World Bank. World Bank (various years)Bilateral Migration Matrix, Washington, DC: World Bank. Available at at www. worldbank.org/en/topic/migrationremittancesdiasporaissues/brief/migration-remittances-data. World Bank (2013) The Little Data Book on Financial Development 2013, Washington, DC: International Bank for Reconstruction and Development/World Bank. World Bank (2017) Global Financial Development Database, Washington, DC: World Bank. Available at www.worldbank.org/en/publication/gfdr/gfdr-2016/data/global-financial-development-database (accessed 7 February 2020). World Bank (2018) The Changing Nature of Work in World Development Report 2019: The Changing Nature of Work, October, Washington, DC: World Bank, pp. 17–34. World Bank (2019) Financial Development Data Tables 2017/2018, Washington, DC: World Bank. Avail­ able athttps://openknowledge.worldbank.org/bitstream/handle/10986/28482/211148data.pdf (accessed 2 July 2020). World Wide Web Foundation (2017)Open Data Barometer Global Report, 4th edn, Geneva: World Wide Web Foundation. Available at www.opendatabarometer.org.

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28 The Jamaican economy A Caribbean success story at last? Keith Collister and Robert E. Looney

Introduction Jamaica’s economy reflects many of the Caribbean region’s strengths and weaknesses. The country has limited natural resources, mainly producing bauxite, sugar and coffee, and is an attractive tourist destination. The country also receives financial support from a variety of multilateral institutions such as the International Monetary Fund (IMF), the World Bank, the Inter-American Development Bank (IDB), and the Caribbean Development Bank (CDB), as well as substantial remittances from the highly successful diaspora in the USA, Canada and the UK. Jamaica also possesses a stable two-party democratic framework, and regular elections are held. Since independence from the United Kingdom in 1962, the administration of the country has rotated between the centre-left People’s National Party (PNP) and the centre-right Jamaica Labour Party (JLP) under a Westminster-style parliamentary democracy. Unfortunately, offsetting these advantages are a variety of weaknesses. The economy is poorly diversified. The country suffers from high rates of crime and poverty. It is also highly vulnerable to external shocks such as violent storms, cyclical movements in the economy of its largest trading partner, the USA, and volatile external prices for its key commodity exports. Also inhibiting growth is the country’s very high public debt and debt-servicing obligations. The net effect of these factors is a pattern of long-term decline in economic growth (Figure 28.1) and relative stagnation. IMF data show average annual rates of growth in the gross domestic product (GDP) declining from 2.3% in the 1980s to 1.4% in the 1990s, to 0.9% in the 2000s, and to 0.6% from 2011–19.1 Prior to the global financial crisis in the late 2000s, growth averaged 1.8% during the period 1980–2007. Subsequently, from 2008–19 growth averaged 0.2%. As noted in the Introduction to this volume, Caribbean growth also follows this declining trend. However, Jamaica’s case is extreme, resulting in a widening gap in per capita income between Jamaica and the average for the region (Figure 28.2). As the Economist has noted on many occasions,2 Jamaica should have achieved much better economic performance. The country is home to a vibrant population of well-educated, Eng­ lish-speaking workers. Its natural beauty and proximity to the USA make it an ideal tourist destination. The country’s soil and climate produce the world-famous Blue Mountain coffee3 as

422

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Figure 28.1 Annual percentage rate of GDP growth

Figure 28.2 Jamaica/Caribbean per capita income patterns, 1980–2019 423

Keith Collister and Robert E. Looney

well as a variety of crops for domestic consumption and export. While these advantages have existed to one extent or another in the past, several significant developments raise hope that Jamaica may finally be beginning to live up to its potential. In November 2019 the country successfully completed an economic reform programme supported by the IMF’s Stand-By Arrangement and has positioned itself for a period of sustained growth. However, winning acclaim from the IMF is not the same as achieving lasting economic success. The following sections examine the country’s socio-economic progress thus far and the challenges it must overcome in order to improve its standards of living. First, a discussion of the possible constraints to sustained growth is undertaken as a prelude to evaluating the IMF economic reform programme and the country’s prospects for the future.

Socio-economic development Despite the country’s lacklustre economic performance, Jamaica is still classified as a ‘high human development’ country in the United Nations Development Programme’s 2019 Human Development Index (HDI).4 With a ranking of 96th out of 189 countries, Jamaica is an ‘over­ achiever’ in that its ranking in terms of gross national income per capita is 18 places lower. However, as with growth, the pace of improvement is declining, with the HDI index increas­ ing at an average annual rate of 0.78% per annum from 2000–10, before declining to 0.05% from 2010–18. Around 20% of the country’s population lives below the national poverty line. Jamaica’s relatively high HDI can be attributed, in part, to the country’s success in reducing unemployment with rates falling from 16.3% in 1993 to 11.3% in 2005 and to 7.2% by October 2019. Unfortunately, youth unemployment remains a severe problem with rates of 31.6% in 1993, dropping to 27.9% in 2005, but remaining high at 25.3% in 20195 (Figure 28.3). In the medium term, measures that boost economic growth and reduce youth unemployment should contribute to a decline in the rate of violent crime, but Jamaica’s geographic location as a transshipment point for illegal drugs will mean that crime remains a structural problem. Jamaica ranks 64th out of 167 countries in the Legatum Institute’s Prosperity Index,6 a broader measure of well-being. The index is composed of 12 separate measures of well-being including safety and security, personal freedom, governance, social capital, investment environment, enterprise conditions, market access and infrastructure, economic quality, living conditions, health, education, and the natural environment. Owing to the prevalence of crime and violence, the country scores low in the area of safety and security (118th). Another problem area is social capital, a broad measure of the strength of personal and social relationships, social norms and civic participation. In this the country ranks 85th. In the area of market access and infrastructure, the country ranks 112th, and in the investment environ­ ment it is placed 139th. The country’s strong areas are personal freedom (34th) and health (50th). The country’s progress in socio-economic development has, in part, enabled its population to enjoy standards of living that are somewhat above its level of economic performance. The extent to which this situation is sustainable will depend on the government’s ability to build and maintain a broad-based consensus/partnership focused on clear and realistic economic goals with the country’s stakeholders, as suggested by the discussion of IMF economic reform programmes (see below). The country’s stagnant rates of economic growth and rising unemployment has compelled many well-educated Jamaicans to leave for better prospects in the USA, the United Kingdom, and Canada. In recent years (2016–18), Jamaica received remittances worth around US $3 bil­ lion annually. According to the Bank of Jamaica, in 2018 65.2% of remittances came from the USA, 11.6% from the UK and 10.7% from Canada.7 Remittances have been increasing in importance (Figure 28.4). In 1976 they represented only 3% of GDP. However, by 2000 they 424

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Figure 28.3 Unemployment in Jamaica, 1991–2019

Figure 28.4 Jamaica: remittances as a share of GDP, 1995–2018 425

Keith Collister and Robert E. Looney

had increased to 9.8% of GDP, and by 2018 they accounted for 15.9% of GDP, the third highest level in the Latin American and Caribbean region after Haiti and Honduras. The departure of well-educated persons from Jamaica represents a massive brain drain that will lower not only the country’s productivity but also its entrepreneurship and leadership capacity. IMF analysis shows that the problem is most acute with respect to women. In the USA, 50% of Jamaican-born women have at least a college education. Meanwhile, in Jamaica, only 25% of women have this received this level of education. The same applies to men, albeit to a lesser extent; in this instance 37% of Jamaican-born men living in the USA have a college education, but the rate declines to 21% for men living in Jamaica.8

Patterns of sectorial growth and competitiveness Data from the Statistical Institute of Jamaica for the period 1993–2018 show the decline of several essential sectors.9 During this period manufacturing growth contracted at an average annual rate of 0.3% and construction by 0.1%. On the other hand, there was a positive expansion in many services, with hotels and restaurants increasing at an average annual rate of 3.0%, transportation, storage and communications by 2.9%, and finance and insurance services by 1.7%. Unfortunately, these rates have declined sharply over the past decade, with the rate of expansion falling from 3.5% during 1993–2007 to 2.3% from 2009–18. Growth in transporta­ tion, storage and communications declined by 5.3% in 1993–2007 to –0.5% in 2009–18; in the finance and insurance sector growth declined from 2.4% to 0.7% during the same periods. By 2018 manufacturing accounted for only 9.4% of GDP, down from 15.0% in 1993. Agriculture’s share dropped slightly from 8.6% in 1993 to 8.1% by 2018, while tourism accounted for 34% and various services the remainder. Employment patterns in Jamaica reflect the growing importance of services in the economy with service sector employment increasing from 53.2% of the labour force in 1991 to 64.1% in 2005 and to 67.9% by 2019. The expansion in service sector employment came mainly at the expense of agriculture, whose share of employment dropped from 27.9% in 1991, to 18.1% in 2005, and to 16.4% in 2019. Industrial employment also declined from 19.1% of the labour force in 1991 to 16.4% in 2019. Separately, tourism accounted for 30.8% of employment in 2018. Significantly, tourism accounted for 58.8% of Jamaica’s exports in 2018, up from 35.3% in 1995 (Figure 28.5). Many of manufacturing’s difficulties result from a lack of competitiveness in certain critical areas. The World Economic Forum’s 2019 Global Competitiveness Report ranks Jamaica 80th out of 141 countries.10 The country’s institutions represent a particular area of concern, with the country’s security ranking 131st out of 141 countries. Within this category, the country ranks 135th for organized crime, 140th in homicide rates, and 109th for the reliability of its police services. The country’s public sector performance also scores quite low, at 119th position, with the burden of government regulation high at 89th. There are also shortcomings in the country’s transport infrastructure with the country’s road connectivity ranking 108th. A major problem is associated with utilities with the country ranking 88th for electricity access, 122nd in the quality of its electricity supply, and 100th in exposure to unsafe drinking water. The country’s macro­ economic performance ranks 110th, with debt dynamics at 114th. While the skills of the workforce rank a reasonably respectable 60th, digital skills put the country in 93rd position. For a small country, Jamaica is relatively closed off to international trade, ranking 117th out of 141 countries, with trade tariffs putting the country in 103rd place. Given the contraction of manufacturing over the past few decades, protectionism has no doubt increased the cost of production, rather than providing a protected market for growth. Also hurting manufacturing is 426

Jamaica

Figure 28.5 Jamaica: tourism share of total exports, 1995–2018

the country’s 84th ranking in pay and productivity; it is ranked in 81st place in terms of cooperation in labour-employer relations.11 While the country’s financial system ranks a respectable 50th, several important areas remain problematic. In financing small and medium-sized enterprises, the country ranks 86th, 98th in domestic credit to the private sector, and 107th in venture capital availability. While the banks are generally sound, ranking 50th, they are somewhat vulnerable to shocks with their regulatory capital ratio ranking 110th. The country lags behind other countries in the region in terms of research and development (R&D), ranking 112th overall. Areas of concern are expenditure on R&D as a percentage of GDP (115th), and on research institutions of prominence (101st). In order to address the country’s infrastructure difficulties, in April 2019 Jamaica joined the Belt and Road Initiative (BRI), a global development strategy adopted by the government of the People’s Republic of China.12 Chinese activity to date includes state-run China Harbor Engineering Company’s US $600 million investment in Highway 2000, the country’s major north-south highway.13 Other investments include the purchase in 2016 of Jamaica’s Alpart aluminium refinery by China’s state-run Jinquan Iron and Steel Company. The most con­ troversial of these projects is tolled highway (nicknamed the ‘Beijing highway’) from the Jamaican capital, Kingston, on the south coast to Ocho Rios on the north coast. The project attracted considerable criticism because of its lack of transparency and overly generous terms.14 Without explanation, the Chinese received an unusually high 50-year con­ cession on the highway. The lack of transparency on the awarding of contracts also raised widespread concern over the possibility of corruption on the part of government officials.15 427

Keith Collister and Robert E. Looney

The project also included a series of land deals enabling Chinese companies to construct several luxury hotels on land granted to them around the highway.16 Finally, critics have observed that Jamaicans could have done most of the work on the highway rather than Chinese. In the face of mounting domestic criticism and China’s ongoing battle with the coronavirus (COVID-19) pandemic, a continuation of the BRI in the near future, at least, is problematic. The country’s overall progress in economic freedom is has helped to boost manufacturing. In its 2020 Index of Economic Freedom,17 Heritage House ranks Jamaica 49th and 6th out of 32 countries in the Americas with an overall score well above the regional and world averages. Currently, the most significant factors constraining Jamaica’s economic freedom is its weak performance in improved financial freedom and a lack of government integrity.

Trends in governance Perhaps the biggest constraint to manufacturing growth in particular and to economic expan­ sion in general lies in several areas of governance. In all six of the World Bank’s Governance Indicators,18 Jamaica scores low relative to two former British colonies in the Caribbean – Barbados and the Bahamas. In many of these measures, Jamaica mirrors oil-rich Trinidad and Tobago. Jamaica seriously lags behind these two countries in the World Bank’s first governance measure, voice and accountability (Figure 28.6). However, from around 2010 a downward trend in this area was reversed. Despite a slight retrogression in 2017 and 2018, Jamaica ended up at the 69th percentile, compared to 84th for Barbados and 73rd for the Bahamas. Historically, the measure of the country’s political stability (and absence of violence) (Figure 28.7) has lagged considerably below that of Barbados and the Bahamas, but there has

Figure 28.6 Caribbean governance patterns: voice and accountability, 1996–2018 428

Jamaica

Figure 28.7 Caribbean governance patterns: political stability, absence of violence, 1996–2018

been some improvement since 2010. By 2018, when it stood at the 63rd percentile, Jamaica had passed Trinidad and Tobago at the 55th percentile but was still considerably behind Barbados at the 81st percentile and the Bahamas at the 78th. The World Bank’s measure of government effectiveness gauges the quality of public services, as well as the quality of the civil service and the extent of its independence from political pressures. Also incorporated in this broad concept are the quality of policy formulation and implementation and the credibility of the government’s commitment to such policies. For years, Jamaica lagged behind Barbados and the Bahamas by a considerable margin in this critical component of the growth environment (Figure 28.8). However, since 2014 there has been significant improvement with the country being ranked at the 71st percentile by 2018. This period of improvement allowed Jamaica to pull ahead of Barbados and just slightly behind the Bahamas. Continued progress in this critical area should lay the foundations for improved growth in the years ahead. The World Bank’s measure of regulatory quality captures the state of the business environ­ ment. Specifically, it gauges perceptions of the ability of the government to formulate and implement sound policies and regulations that facilitate and promote private sector develop­ ment. For years, Jamaica scored by far the lowest of the four Caribbean countries in this crucial area, experiencing a gradual decline from 2005–15. However, there has been an improvement over the past few years (Figure 28.9) with Jamaica ending up at the 63rd percentile by 2018. As the other three countries experienced much steeper declines during much of the period after the early 2000s, Jamaica scored higher than the Bahamas and Trinidad and Tobago, and closed the gap with Barbados. 429

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Figure 28.8 Caribbean governance patterns: government effectiveness, 1996–2018

Figure 28.9 Caribbean governance patterns: regulatory quality, 1996–2018

430

Jamaica

A significant weakness remains in the area of the rule of law. Property rights, for instance, are constitutionally guaranteed, but a tedious bureaucratic process makes registration of property difficult. As a result, a large percentage of properties lack a current title, making access to credit difficult for those wishing to start or expand their businesses.19 Although the country has an independent judiciary, the resolution of cases can be take a long time. As a result, Jamaica has consistently lagged (Figure 28.10) behind the other three countries so that on average it was at the 40th percentile during much of the period under consideration. However, while the rule of law has deteriorated considerably in the Bahamas and Barbados, there has been a slight improvement in Jamaica in recent years, with the country nearly reaching the 50th percentile in 2017. Perhaps Jamaica’s most deficient area of governance and the one that has the greatest effect on the economy is corruption. There has been a rising tide of anger among large segments of the Jamaican population who feel that corruption is the primary cause of the country’s high crime and murder rates as well as its slow economic growth. Historically, the country has scored much lower than the other three comparison countries (Figure 28.11). However, some improvement could be seen in 2002, and Jamaica now scores higher than Trinidad and Tobago. Nevertheless, there has been no improvement since 2011 and, in fact, some deterioration so that the country stood at the 50th percentile in 2018. As a basis of comparison, there has been no deterioration in the control of corruption in Barbados and the Bahamas. These countries stand at the 89th and 83rd percentiles, respectively. In order to combat corruption and increase the perception of transparency, in December 2019 the government introduced a series of measures aimed at public sector reform. One measure involves an 18-month US $1.6 million consultation with the global international accounting firm Ernst & Young. Ernst & Young will review public sector compensation and

Figure 28.10 Caribbean governance patterns: rule of law, 1996–2018 431

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Figure 28.11 Caribbean governance patterns, control of corruption, 1996–2018

the hiring process. In recent years the ruling JLP has come under fire for its inappropriately high compensation packages,20 most notably at the state energy firm Petrojam; some officials were hired by questionable means and received packages that were not commensurate with their experience. However, the opposition, the PNP, has also been accused of inefficiency and misspending while in office. According to a poll conducted for the Nationwide radio station in mid-December 2019 (and released in mid-January 2020), 64% of respondents believed that the government, led by the ruling JLP, is corrupt. Of the respondents to the survey 37% said that the Prime Minister, Andrew Holness of the JLP, was the ablest in tackling corruption, compared with just 21% for the PNP leader of the opposition, Peter Phillips. The largest proportion (42%) said that neither of the two men was capable of addressing the issue of corruption.21

Jamaica and the IMF, 1973–2012 In addition to inadequate levels of competitiveness and governance, a significant factor under­ lying Jamaica’s poor growth performance is the toll taken by the country’s seemingly neverending debt and financial crisis. From a relatively low base, there was a sharp increase in debt, mainly external, in the 1970s, under what was then a self-described democratic socialist regime. The build-up of debt eventually led to the near-total collapse of the economy with negative international reserves and the inability to even pay for oil tankers to offload the oil the government had bought to keep the lights on around the country just before the 1980 election. The country’s on-going debt problems led to a series of IMF stabilization and debt resolution programmes.22 Jamaica undertook 12 IMF agreements between 1973 and 1996. Each failed, with the government cutting expenditure and raising taxes until the point was reached whereby 432

Jamaica

further programme compliance was politically impossible. Each time Jamaica failed to meet its goals, the IMF responded by suspending its financial support. However, each programme had unique features that make broad generalizations difficult. Just as Jamaica was exiting an IMF programme in the late 1990s, a domestic financial crisis cost the country over 40% of its GDP and raised the country’s debt-to-GDP ratio to nearly 150%. This latest failure did not go unnoticed by the IMF, which in 2000 ranked Jamaica 11th out of 35 countries in its list of ‘prolonged users’ of the Fund’s scarce resources.23 The IMF went on to conclude that the country still needed to undertake significant tax and public sector reforms. ‘Adjustment fatigue’ finally set in by 1996 with the government designing its own pro­ grammes for improved stability with growth .24 Given the country’s high levels of debt, these by necessity involved pursuing fiscal policies that generated the high primary surpluses needed for debt reduction. However, another crisis soon emerged in 2002 when increases in interest costs made the debt nearly unsustainable. At this time, the increase in debt had been financed mainly in the domestic capital market at high-interest rates. Compounding the problem was a significant increase in election spending. By late 2002 Jamaica again found itself on a debt default precipice. The country lost international capital market access in early 2003, and domestic investors appeared about to go on strike. The crisis did have a positive aspect. It demonstrated to the private sector that its interests would be best served by coordinating efforts through a social partnership along the lines of one established in 1987 in Ireland to avert that country’s debt crisis.25 As was the case in Ireland, this first Jamaican effort was called the Partnership for Progress (PFP).26 The proposed Partnership began in 2003 with the Jamaica Chamber of Commerce, which worked with the main private sector umbrella group, the Private Sector Organization of Jamaica,27 together with strong representation from the domestic financial sector, the major unions, representatives from academia, agriculture and non-governmental organizations such as Jamaicans for Justice. The PFP’s recommendations included support for fiscal stringency.28 The group advocated a balanced budget as a critical part of the economic turnaround. Also of great importance to the group was the creation of a monetary policy committee, as a precursor to an ultimately inde­ pendent central bank, the latter institution being innovated under the auspices of the current Jamaican Minister of Finance, Dr Nigel Clarke. The group also advocated privatization of government-owned enterprises, tax reform, education reform, and crime initiatives along the lines of New York’s crime management system known as COMPSTAT. The PFP initiative was able to create a positive confidence shock in early 2004 (as shown by the subsequent doubling of the Jamaican stock market that year) through persuading international investors that Jamaican society was unified in its view and the government would not default on its debt. The planned social partnership agreement was not signed, however, after a the union movement pulled out at the last minute in August 2005 owing to higher than expected infla­ tion, and its eventual successor, the Partnership for Jamaica, was not signed until 31 July 2013, nearly a decade later. In the meantime, however, successive governments learned that a go-it­ alone strategy was not sustainable. Not only did Jamaica not make progress in correcting the country’s many competitiveness problems noted above, but growth stagnated. From the mid­ 1990s to 2012 the economy grew by less than 1% annually. Poverty worsened, unemployment rose, and the ‘brain drain’ accelerated. Despite austerity, public debt continued to rise from 82.7% of GDP in 1999 to 145.8% by 2012. At that time, 37% of the government’s budget went on servicing the debt. By 2010 the country was forced to negotiate another programme with the IMF. As was the case previously, the loan of US $1.27 billion was quickly off track with Jamaica missing several conditionalities, including the government’s primary surplus target, its wage bill, and the public debt .29 433

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While IMF-type austerity programmes seem a logical way to address excessive national debt build-ups, the analogy with personal finance is increasingly shown to be flawed. Recent research30 at the IMF and examples elsewhere31 has shed light on the limitations of such aus­ terity programmes. Following the cutback in government spending, certain sectors of the economy are likely to contract. The result is a diminished tax base and subsequent decrease in government revenue. The unanticipated increase in the fiscal deficit leads to additional borrowing and hence an increase in the level of in debt. One way to avoid this pattern of austerity and increased debt is to find ways to expand pri­ vate sector activity during a programme – something missing in the IMF’s traditional approach. A broader approach is also needed. In an attempt to achieve better results within the traditional IMF stabilization/debt relief programme, the concept of country ownership is gaining currency. While in actual practice conditions will vary from country to country, the notion of country ownership comprises several essential elements. First, a country-owned programme might involve owning the reform’s components – it is all about designing the right mix of reforms and policies and strengthening them as needed. However, such a programme has to address critical challenges in the country credibly. Otherwise, failure is unavoidable. Second, determining implementation and good commu­ nication with the markets are very important. People should be able to see the government’s commitment, the implementation, and the results. Governments should leave no doubt that the reforms will be implemented. Third, the credibility of the programme and the confidence in markets will improve in time as the government builds up success cases. Some early gains or at least avoiding mistakes at an early stage are essential. Fourth, the programme should be realistic. If it includes unrealistic deadlines for achievement of specific benchmarks and if these deadlines are missed (naturally), the programme can collapse easily. In Jamaica’s case, the example of the PFP and its successor social partnership efforts, combined with the notion of country ownership, represented in 2013 primarily by the Economic Program Oversight Committee (EPOC), played a significant role in the success of the country’s 2013 IMF programme.

The 2013 IMF programme The IMF ended Jamaica’s previous 27-month agreement, signed in 2010, because the govern­ ment failed to meet its targets. However, by 2013 Jamaica was in desperate need of assistance from the IMF. Capital was fleeing the country, and by March the country’s foreign exchange reserves were insufficient to pay for two months’ worth of imports. Jamaica’s then Minister of Finance Peter Phillips went to Washington to plead with the IMF for one last chance. The IMF agreed to lend Jamaica US $958 million over a period of four years, perhaps if only to avoid being accused of applying double standards. The Fund had just extended a lifeline to similarly troubled Greece. When the government signed a new IMF agreement in 2013, the country’s economic reputation was in shambles. Since 1981 it had defaulted on its bonds four times and restructured foreign loans eight times. Public debt at the start of the programme was 147% of GDP, making it one of the most indebted countries in the world. Income from tourism and bauxite, the primary earners of foreign exchange, had plunged in the aftermath of the global financial crisis. Unemployment and crime rates were soaring. At the time of the signing of the agreement, the Jamaican government indicated that it was embarking on an economic programme aimed at significantly boosting the rate of real GDP and per capita income, eliminating the fiscal deficit and substantially reducing the debt burden. 434

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Fiscal austerity would be supported by reforms to improve the business environment, strengthen competitiveness, and attract strategic new investment in tourism, logistics and energy. The IMF programme approved for Jamaica on 1 May 2013 resembled in many ways pro­ grammes that had failed in the past.32 It was an Extended Fund Facility (EFF) programme usually adopted in the case of severe medium-term balance of payments problems stemming from structural weaknesses that require time to address. However, austerity remained the pro­ gramme’s primary tool with significant reductions in public sector capital spending occurring with other ongoing fiscal consolidation efforts. The net effect was intended to reduce the country’s aggregate demand expansion by 2% and thus slow the economy’s growth to between 0% and 1% during the 2014/15 fiscal year. On the fiscal side, the Jamaican government was committed to increasing its primary fiscal surplus from 3.2% of GDP in FY 2011–12 to 7.5% in 2013–14 and lowering the central government wage bill from 11% of GDP in FY 2012–13 to 9% in 2015–16. In many ways, this strategy was similar to the failed stabilization attempts undertaken by the IMF in Greece.33 No doubt, the severity of the programme stemmed, in part, from the failure of the 2010 programme. The Washington-based institutions (the IMF, the World Bank, the IDB) had provided unprecedented financial support for the failed 2010 programme, and by 2013 they had limited scope to provide additional financing. They were also mistrustful of the Jamaican gov­ ernment. After being deeply disappointed with Jamaica’s progress in 2011, the Fund demanded stiff prior conditions: a massive devaluation and a substantial reduction of the public debt, both internal and external. It was the most demanding programme in recent IMF history. Jamaica’s Minister of Finance Peter Phillips noted at the time of the signing that ‘our present predicament will test the maturity and resolve of our democracy,’34 clearly indicating the gov­ ernment’s new approach and attitude towards the Fund’s programmes. With IMF encourage­ ment, the Jamaican government began to be more proactive in assuming ownership of its economic recovery. In part, this shift in the Jamaican government’s involvement came from the realization that the IMF programme might be the country’s last chance to avoid outright default. The con­ sequences of such a development would condemn the country to declining growth for years to come. Perhaps more importantly, the Fund’s programme goals as negotiated were not attain­ able. More had to be done beyond the strict confines of the IMF’s programme. Specifically, ways had to be found to expand the private sector to move the economy out of projected stagnant rates of growth. Home-grown solutions were needed, and several lessons from the past became readily apparent. According to Devon Rowe, the former Financial Secretary in the Jamaican Ministry of Finance, several lessons from the past could help to lift the country from its current predicament.35 First was the need to leverage private sector resources. The government needed to be adequately resourced to meet its plans, and the IMF programme often did not take account of the resources that were available to it. An excellent example of the need to leverage private sector resources was the reform of tax incentives. The government relied on the technical expertise of the international client ser­ vice provider PWC as the IMF wanted action over a particular issue within a year that could not be done with the current technical resources at the Ministry of Finance. A second lesson from the past was the need for better donor coordination. For example, donors tried to implement accrual accounting training before another donor could promote cash accounting training – the opposite of an efficient sequence. Ultimately, Jamaica developed its own public financial management programme. Most importantly, the third key lesson involved local oversight of the reform process. This element was woefully absent in previous programmes. To correct this deficiency, the EPOC 435

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was established in 2013 to monitor the implementation of Jamaica’s economic reform measures under its agreement with the IMF.36 The Committee included 11 individuals from the private and public sectors, the union movement and civil society, and was co-chaired by the then head of a local financial conglomerate, now Governor of the Bank of Jamaica, Richard Byles, and the then head of the Bank of Jamaica, Brian Wynter. They were charged with receiving and assessing information from the government of Jamaica to track the progress of the targets under the IMF’s programme. The EPOC was chiefly responsible for keeping the programme on track with the government consistently meeting its fiscal targets, and in early 2016 the government was able to replace its original EFF programme with a three-year US $1.6 billion Stand-By Agreement (SBA) to build on the EFF’s progress. To the surprise of many observers, the programme was a success. By meeting the ambitious fiscal consolidation targets set under the IMF arrangements, Jamaica managed to reduce its public debt to around 93.5% of GDP by 2019 (Figure 28.12). Growth did not contract as many had feared. Instead, it expanded from –0.5% in 2012, to 0.2% in 2013, to 0.6% in 2014, to 0.9% in 2015, to 1.5% in 2016, to 0.7% in 2017, to 1.6% in 2018, and to 1.1% in 2019. There was also a strong expansion in tourism and a revival of growth and investment in the mining sector. On the external front, the balance on the current account has improved significantly from a deficit of 11.1% of GDP in 2012 to deficits of 9.2% in 2013, 7.5% in 2014, 3.1% in 2015, and 1.4% in 2016. During 2017–19 the deficit stabilized at a manageable average deficit of around 2.5% of GDP (Figure 28.13). Several factors were integral to the programme’s success. With improved stability, direct foreign investment flows increased from 4.2% of GDP in 2013 to 6.6% of GDP in 2018. The government, as part of the programme, introduced several significant monetary and financial

Figure 28.12 Caribbean: patterns of government debt 436

Jamaica

Figure 28.13 Jamaica: trends in fiscal balances

sector reforms, including the adoption of a market-driven exchange rate with minimal inter­ vention from the country’s central bank, the Bank of Jamaica. The Bank adopted a new monetary policy that specifically targeted inflation, and the annual rate of price increase was brought down and stabilized in the 2%–5% range. According to Gerard Johnson, the former Caribbean regional head of the IDB, a number of key reasons can be attributed to the success of the IMF programmes, particularly the critical 2013 programme.37 There are many reasons for the programme’s success, but the main factor appears to have been local design. The IMF did allow some leeway to the local team on the trade-off between the prior conditions (devaluation and reduction); and the fiscal targets. Some development partners urged the government of Jamaica to reduce the debt yet further so that the fiscal targets could be less severe. This action was presented as a matter of social equity. Ultimately, the government was more lenient towards the financial institutions but imposed painful reforms for taxpayers and public sector workers. It is noteworthy that the government itself opted to set the fiscal bar at this high level. The fact that financial institutions were soon reporting record-high profits argues in favour of those who called for more stringent cuts. Another important factor contributing to the programme’s success was local ownership. The government was left with no choice other than to absorb the high political cost of the pro­ gramme. Despite the problems caused by the programme, the leaders of the PNP party remained resolute in their adherence to it. This was, no doubt, the most critical factor in its success. Given their image as the party of the people, the leadership were able to impose dra­ conian reforms where the other party would not have been able to do so. However, it is likely that a large part of their loss in the 2016 general election was due to the privations necessitated by the extreme fiscal effort. 437

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Multilateral development banks played a critical role. While the World Bank, the IDB and the CDB were not instrumental in the financing of the programme, they were pivotal in the technical support that they provided. These institutions had already extended extraordinary financial support for the failed 2010 programme, so they were overextended when the IMF asked them to help to finance the 2013 programme (in fact, their positive foreign exchange flows were needed to finance the IMF negative flows). They were also profoundly mistrustful of the Jamaican government’s commitment to reform. The IDB had provided the greatest amount of support to the earlier programme, so it agreed to match whatever the World Bank did and no more. The World Bank was up against strict limits to its exposure to any single borrower so it could only muster $510 million for the duration of the four-year programme. This amount was actually only a little more than the disbursements it already expected to make from the pre-existing loan programmes. In the final analysis, the IDB surpassed its commitment as it observed Jamaica’s perseverance. However, the World Bank never honoured its commitment. The IDB, however, was the architect of the tax reform section of the IMF agreement, and its implementation by the Jamaican government was essential to meet the fiscal targets. Over-performance was a critical element of the programme’s success, with the government consistently closing each fiscal year with net expenditure results that were about 10% higher than the agreed target. This vigour of fiscal discipline never wavered during the programme and was instrumental in the faster reduction of the stock of debt. Flexibility also played a critical role, and the IMF was wise enough to turn a blind eye to certain aspects of the programme that were either never implemented or were achieved by unexpected means. The international reserve targets were met during the early years by borrowing foreign exchange. The IMF had no choice but to count the borrowed reserves since the Fund was not providing any balance of payments support itself. Similar flexibility was shown concerning the goal of reducing the public sector wage bill to below 9% of GDP. It was never met. Finally, the role of momentum should not be overlooked. The programme succeeded due to a pervasive sense that it was working. The first years were dire. However, by the end of the second year, steadily falling debt released massive amounts of liquidity to the private sector. This development brought interest rates down to record lows and increased access to credit. Simultaneously, the central bank achieved a momentous policy shift from managing the exchange rate to a making a concerted effort to control inflation. The benefits to both the real sector and the poor are evident. Inflation and unemployment have never been so low. At the same time, the fiscal effort was steadily reduced, thereby allowing a significant increase in public expenditure. It is now argued that the flow is now so steady that it already exceeds the capacity of the inefficient public investment system to allocate it. The thaw took place fast enough to enable the Jamaican people see the benefits of their sacrifice, and that has helped to cement fiscal responsibility as a central tenet of whichever party forms the government. Unlike previous efforts, Jamaica is leaving the IMF programme in better shape than when it entered. The main positives include a much lower debt ratio, higher levels of foreign exchange reserves, and a strengthened financial system. Furthermore, the tax base has been widened, and the revenue collection agency reformed. Starting in the early 1990s, Jamaica’s economy became severely imbalanced, with a growing gap between its domestic savings efforts and domestic investment (Figure 28.14). The result was reflected in a chronic and growing current account deficit. However, as a result of austerity programmes, this gap began to close following the international financial crisis, and improvement continued under the IMF programme. 438

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Figure 28.14 Jamaica: savings-investment imbalance, 1980–2019

Prospects While the two IMF programmes were stunning successes that positioned the economy, after decades of stagnation, for a period of gradually accelerating growth, these gains may not survive the current global crisis. While the government’s focus was rightly on the macroeconomic environment, many areas, such as improved governance, especially the control of corruption and the needed diversification of the economy, received scant attention. With limited flexibility in fiscal and monetary policy the economy is in a highly vulnerable state. Most importantly, as a small open economy, growth in Jamaica is highly exposed to the current slowdown in global economic activity that is mainly occurring in the USA. Tourism revenue grew in 2019 by 12% and generated US $3.5 billion, according to official estimates. However, as Jamaica’s major source countries for stopover tourist arrivals (such as the USA and Canada) respond to the COVID-19 pandemic with travel restrictions and advice to their citizens to avoid all non-essential international travel, this will dramatically depress arrivals during 2020. A prolonged recession in the USA will have severe consequences for Jamaica, given that the USA is Jamaica’s largest export destination and source of remittance inflows, which were equivalent to 16.0% of Jamaican GDP in 2018. Moreover, a weaker than expected external environment would be particularly damaging to Jamaican growth, given its limited capacity for fiscal and monetary stimulus. 439

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Jamaica’s capacity to combat the COVID-19 crisis is also limited. In the 2019 Global Health Security Index,38 which assesses countries’ preparedness for epidemics, all countries in the Car­ ibbean scored below the global average, suggesting that the region is particularly vulnerable. The Dominican Republic scored the highest, placing it 91st out of 195 countries. However, Jamaica’s score was 147, suggesting that significant problems lie ahead.

Notes 1 IMF, World Economic Outlook database, October 2019, www.imf.org/external/pubs/ft/weo/2019/ 02/weodata/index.aspx. 2 ‘On Your Marks, Get Set … Oh’, The Economist, 21 July 2012, www.economist.com/the-americas/ 2012/07/21/on-your-marks-get-setoh. 3 ‘Why Jamaica’s Blue Mountain Coffee Is So Good, and Why It Costs More’, Coffee Detective, www. coffeedetective.com/why-blue-mountain-coffee-is-so-good.html. 4 UNDP, Human Development Report 2019 (New York: United Nations, 2019). 5 World Bank, World Development Indicators database, https://info.worldbank.org/governance/wgi/ Home/Documents. 6 Legatum Institute, The Legatum Prosperity Index, 2019 (London: Legatum Institute, 2019), www.prosp erity.com/rankings. 7 Bank of Jamaica, Annual Report, 2019 (Kingston: Bank of Jamaica, 2019), p. 45. 8 ‘Brain Drain in Jamaica More Evident Among Women’, The Gleaner, 31 May 2017. 9 National Accounts (Kingston, Statistical Institute of Jamaica, n.d.), https://statinja.gov.jm/NationalAc counting/nationalaccountsnotes.aspx. 10 World Economic Forum, Global Competitiveness Report, 2019 (Geneva: World Economic Forum, 2019). 11 Ibid. 12 Alexis Monteith, ‘As Jamaica Signs onto China’s Belt and Road Initiative, the US Congress Takes a Closer Look’, Jamaica Observer, 21 April 2019, www.jamaicaobserver.com/sunday-finance/as-jamaica­ signs-onto-china-s-belt-and-road-initiative-the-us-congress-takes-a-closer-look_162704?profile=1056. 13 Sandra Laville, ‘Beijing Highway: $600 Million Road Just the Start of China’s Investments in Car­ ibbean’, The Guardian, 24 December 2015, www.theguardian.com/world/2015/dec/24/beijing­ highway-600m-road-just-the-start-of-chinas-investments-in-caribbean. 14 Romario Scott, ‘Corruption Label Crippling Local Contractors’, The Gleaner, 28 February 2019, http://jamaica-gleaner.com/article/lead-stories/20190228/corruption-label-crippling-local-contractors. 15 ‘Christie Puts New Gov’t on Warning’, Jamaica Observer, 10 January 2012, www.jamaicaobserver.com/ news/Christie-puts-new-gov-t-on-warning_10536680. 16 Laville, ‘Beijing Highway’. 17 Heritage House, Index of Economic Freedom, 2020, www.heritage.org/index/about. 18 World Bank, Governance Indicators, 2019, https://info.worldbank.org/governance/wgi/. 19 Doing Business 2019: Training for Reform – Jamaica (Washington, DC: World Bank, 2019), http:// documents.worldbank.org/curated/en/394171541138539718/Doing-Business-2019-Training-for-ReformJamaica. 20 Leighton Levy, ‘The PNP Lacks Credibility on Corruption’, The Star, 12 July 2019, http://jamaica-star. com/article/commentary/20190712/pnp-lacks-credibility-corruption. 21 ‘Jamaica Slips Four Places in Corruption Index as Scandals Hobble Gov’t’, Loop, 1 April 2020, www. loopjamaica.com/content/jamaica-slips-four-places-corruption-index-scandals-hobble-govt. 22 Robert Looney, ‘Is Jamaica Poised for a Turn-Around?’ Foreign Policy, 12 February 2014, https:// foreignpolicy.com/2014/02/12/is-jamaica-poised-for-a-turn-around/. 23 IMF, Evaluation of Prolonged Use of IMF Resources (Washington, DC: IMF, 2002). 24 Government of Jamaica, National Industrial Policy: A Strategic Plan for Growth and Development (Kingston: Office of the Prime Minister, 25 April 1996). 25 Lucio Baccaro and Marco Simoni, The Irish Social Partnership and the ‘Celtic Tiger’ Phenomenon (Geneva: International Institute for Labour Studies, 2004); Keith Collister, ‘From Celtic Tiger to Carib Tiger: Lessons from Ireland, Private Sector Organisation of Jamaica’, Jamaica Observer, 21 August 2013, www. jamaicaobserver.com/business/Can-the-IMF–IDB-help-Jamaica-become-a-Carib-Tiger_14917964. 26 Keith Collister, ‘Looking for a Better Jamaica’, The Gleaner, 28 August 2005, http://old.jamaica-gleaner. com/gleaner/20050828/lead/lead8.html. 440

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27 A New Social Partnership for Jamaica (Kingston: Caribbean Policy Research Institute, 2009). 28 Keith Collister, IDB Mapping of Public-Private Dialogue in Jamaica: Issues and Options for Jamaica (Washington, DC: IDB, November 2009). 29 ‘IMF Approves $1.27 Billion Loan for Jamaica’, IMF Survey, 4 February 2010, www.imf.org/en/ News/Articles/2015/09/28/04/53/sonew020410a. 30 Oliver Blanchard and Daniel Leigh, Growth Forecast Errors and Fiscal Multipliers, IMF Working Paper (Washington, DC: IMF, January 2013). 31 John Cassidy, ‘U.K. Lesson: Austerity Leads to More Debt, The New Yorker, 7 February 2013, www. newyorker.com/news/john-cassidy/u-k-lesson-austerity-leads-to-more-debt. 32 Jamaica: Request for an Extended Arrangement Under the Extended Fund Facility (Washington, DC: IMF, May 2013). 33 ‘IMF Bailouts: Roads to Stability or Recipes for Disaster?’ DW, 9 April 2018, www.dw.com/en/imf­ bailouts-roads-to-stability-or-recipes-for-disaster/a-45338114. 34 ‘Revise Tax Committee – Phillips’, The Gleaner, 28 May 2012. 35 Devon Rowe, personal communication with the co-author of this chapter, Keith Collister. 36 IMF Staff Completes Review Mission to Jamaica (Washington, DC: IMF, 18 September 2019). 37 Gerard Johnson, personal communication with the co-author of this chapter, Keith Collister. 38 Global Health Security Index, 2019 (Baltimore, MD: Johns Hopkins Center for Health Security, October 2019), www.ghsindex.org/.

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29 The Dutch Caribbean Scott B. MacDonald

Introduction The Dutch Caribbean has travelled a different historical path from much of the surrounding region as its six islands have maintained a close constitutional and economic relationship with the Kingdom of the Netherlands. Under the Dutch Constitution, the islands, with a combined population of less than 1 million people, are today officially either constituent countries (Aruba, Curaçao, and Sint Maarten) or special municipalities (Bonaire, Sint Eustatius, and Saba). In this, their path of political development has been closer to that of the remaining French territories in the Caribbean, Guadeloupe, Martinique and French Guiana which are considered overseas extensions of France with the same rights as departments in the metropole. Although Aruba, Bonaire and Curaçao (sometimes referred as the ABC islands and located north of Venezuela) and Saba, St Eustatius and St Maarten (located in the Lesser Antilles chain) remain part of the Kingdom, they have considerable autonomy over their own affairs. Foreign and military affairs remain under the control of the Netherlands. In the early twenty-first century the economy of the Dutch islands is largely founded upon tourism, although Aruba, Bonaire and Curaçao have maintained ties to the global oil industry. Non-tourist activities exist, but are limited by resources and small market size. All six islands face structural challenges and are sensitive to external shocks, including hurricanes, the ups and downs of the global economy, and geopolitical risk. Indeed, the southern tier of islands have also seen their geopolitical significance increase since the Venezuelan economy underwent a profound downward shift starting in 2014 and continuing through the early 2020s. At the same time, the spread of the coronavirus (COVID-19) from its epicentre in China has raised questions over its likely impact on tourism in 2020. The major challenge facing the Dutch Caribbean is how it defines itself economically and culturally in the upcoming decade. While part of the Netherlands, one of Europe’s most afflu­ ent countries, the islands are less wealthy than their Dutch counterpart in Europe and with far smaller resource bases. At the same time, their economies are very open in terms of their dependency on tourism as the driver of growth and employment. Dutch support functions as an important support mechanism for these six small entities. This has left the political leadership in all of the islands seeking to extract what they can from the Dutch relationship, while doing

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The Dutch Caribbean Table 29.1 The Dutch Caribbean

Name

Political status

Capital

Area

Population

Main economic activity

Aruba

Constituent country

Oranjestad

180 sq km (69 sq miles)

112, 309

Tourism

Bonaire

Special municipality

Kralendijk

294 sq km (114 sq miles)

20,104

Tourism

Curaçao

Constituent country

Willemstad

444 sq km (171 sq miles)

158,665

Tourism

Saba

Special municipality

The Bottom

13 sq km (8.1 sq miles)

1,915

Tourism

St Eustatius

Special municipality

Oranjestad

21 sq km (8.1 sq miles)

3,138

Tourism

St Maarten

Constituent country

Philipsburg

34 sq km (13 sq miles)

41,486

Tourism

Source: compiled by the author based on figures provided by the World Bank and the government of the Netherlands.

what can be done to improve local infrastructure and buffer economic affairs from the some­ times fickle nature of the global economy. One last note to readers before they proceed – the chapter has a greater focus on the economically more significant islands of Aruba, Curaçao, and St Maarten, for which data are more readily available.

A brief history Prior to the arrival of the Europeans, the Dutch islands are thought to have been inhabited by the Arawaks and Caquetio Amerindians, who were generally peaceful and had an economy founded on fishing and trade with their tribal relatives on the South American mainland (modern-day Venezuela). The Arawaks had settled in the islands in the Lesser Antilles, but were under pressure from the more aggressive Caribs. The Europeans arrived in this world in the late fifteenth century, with the Spanish conquistador Alonso de Ojeda being credited with landing in 1499 on Curaçao and possibly Bonaire. Spanish ships explored other parts of the Caribbean, touching upon the other islands that are now Dutch. The Spanish, however, were not deeply interested in what was to become the Dutch Caribbean; their interests quickly gravitated to the gold and silver of the large Mayan, Aztec and Inca empires on the American mainland. The Dutch entered the Caribbean in the late sixteenth century, driven by their push for independence from the Spanish and trade. The struggle against the Spanish was partly to do with religion as most of the Dutch were Protestants and partly over financial issues as the Low Countries (today’s Netherlands and Belgium) were heavily taxed in order to pay for the many wars of the Spanish Hapsburgs. The Dutch Revolt (1568–1648) was to result in Dutch inde­ pendence, but also propelled the entrepreneurial Dutch into the broader Atlantic and Indian Oceans. This was accompanied by the foundation of the Dutch West Indian and Dutch East Indian companies, one destined to be a force in the Caribbean and the other as far afield as modern-day Indonesia. The Dutch conquest of north-east Brazil in the early decades of the seventeenth century was a substantial push for the development of trade in the Caribbean islands. As historian Cornelis Ch. Goslinga noted: 443

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Once the Dutch felt themselves and their property securely entrenched behind these bul­ warks, a busy traffic developed between the new colony and the recent settlement in Pernambuco. [Brazil] Dutch ships, after unloading their wares off Brazilian shores, were more than anxious to drop anchor off the islands and fill their holds with a valuable cargo of wood and Caribbean salt, the latter far superior in quality to the Brazilian.1 Curaçao, in particular, benefited from the role of being the regional hub from which the Dutch navy operated in carrying out operations against Dutch foes, especially the Spanish. Key to the significance of Curaçao in Dutch imperial schemes was the founding of Willemstad in 1634. It soon became the major Dutch urban centre in its Caribbean possessions and a centre for the trafficking in African slaves. As with the southern Caribbean islands, Dutch settlement in the Lesser Antilles came from the exploitation of the salt pans, the cultivation of tobacco, and commercial relations with English and French colonists. Dutch forces visited St Maarten a number of times in the early seventeenth century, but the island was not occupied until 1631. Although there were French settlers already on the island, they were able to reach some type of accommodation for peace. The island was soon home to a booming salt trade, which increased its settlement as well as its significance to Holland. Although the Spanish were briefly able to regain control of St Maarten, both the Dutch and the French returned and held the island, which they still do today; each metropolitan power governing a different side of the island. As for St Eustatius, it was settled by the Dutch around 1636, when two ships carrying colo­ nists bound for St Croix discovered an English colony already in place on that island and pro­ ceeded on to the island, which was deserted. The Dutch quickly rebuilt a French fort which had been abandoned and settled in. In 1640 the colonialists spread to neighbouring Saba. Although the islands would change hands many times over the course of the seventeenth and eighteenth centuries, in 1814, at the end of the Napoleonic Wars, the Dutch finally secured control over their six islands and Suriname (Dutch Guiana) on the north-east coast of South America. Suriname’s position as a plantation economy boosted the development of the Dutch islands, which were used as transshipment points for the trade in African slaves. Significantly, in 1863 slavery was abolished in Aruba, Bonaire, Curaçao, St Maarten, St Eustatius, and Saba.2 In the following decades the geopolitical and economic significance of the Dutch Caribbean faded, with the islands’ livelihoods guided by meeting local needs and trading with the surrounding region. The Dutch Caribbean’s economic importance revived with the development of the oil industry in nearby Venezuela. In the early twentieth century, Dutch-British Shell became involved in the exploration and exploitation of oil from the Maracaibo Lake region, still one of the world’s major oilfields. However, Venezuela lacked political stability, its port facilities were inadequate, and the climate was malarial. This left the major oil companies in a quandary as to where to refine the Venezuelan crude oil. The solution was Curaçao, which had excellent port facilities, was close to Venezuela, benefited from considerable political stability under the Dutch, and had a healthier climate. With an eye to global communications at the time, location was another advantage for Curaçao. As Dutch historian Cornelis Ch. Golsinga noted: The distance from Willemstad to Maracaibo was little more than 200 miles. From Curaçao transportation to the most important buyers of refined oil, Europe and the United States, was no problem: Curaçao was 800 miles closer to Europe than Houston, also under con­ sideration, and 200 miles closer to New York. In those days the Panama Canal was 444

The Dutch Caribbean

completed, further promising to turn Curaçao into a relay station for many ships as well as a port of international dimensions.3 The old business mantra of ‘location, location, location’ clearly fit for Curaçao. While Curaçao had a number of comparative advantages to become a key link in the global oil trade in the early twentieth century, there were challenges. An adequate supply of water was a problem. Any growth in population and water use would demand better infrastructure and new sources of water. At the same time, the island lacked the skilled labour to handle refinery and shipping operations. Those workers would have to be imported. While there were plenty of skilled workers elsewhere in the Caribbean, the influx of a population of newcomers raised questions about the island’s social stability and it decidedly broadened the population’s diversity. Curaçao’s role in the budding world of oil production was realized in 1914 when a Shell agent arrived on Curaçao to investigate the possibilities of a refinery for Venezuelan crude. This was followed in 1915 by Shell’s purchase of three plantations on the island that were needed to establish the company’s new facilities. The First World War delayed construction, but the organizational structure took a major step forward with the creation of a local Shell branch, the Curaçao Oil Company Ltd (the headquarters of which were in The Hague). In 1959 the company’s name became Shell Curaçao Ltd with headquarters in Willemstad. Aruba also became more integrated into the global oil industry in the early twentieth cen­ tury. The island had long been an economic backwater. However, in 1924 Aruba was selected for the development of a second refinery for Venezuelan oil. This time it was the British Equatorial Oil Company that was looking for a suitable place for its operations. Like Curaçao, Aruba offered political stability, a mild climate and was well-situated in terms of international shipping lanes. Moreover, the best locations were already taken in Aruba’s sister island. The British company soon formed the Lago Oil and Transport Company Ltd and the first shipments of Venezuelan crude arrived in 1927. A second oil company, the Arend Oil Company, was another of Shell’s offshoots. Similarly to Curaçao, the arrival of the oil industry injected considerable wealth and change into Aruba. The oil industry brought considerable other changes with it, including in the political realm. The Dutch remained firmly in control, though they accorded some degree of autonomy to the local administration. This took place against a backdrop of the development of trade unions during the 1930s. Another major change came in 1940 when the Netherlands was invaded and occupied by Nazi Germany. The Dutch government-in-exile, operating out of London, United Kingdom, throughout the conflict, allowed the islands to first be garrisoned by British troops, and then US forces on Aruba and Curaçao in February 1942. While guarding the refi­ neries, that were needed for the war effort against Germany and Italy, the USA began operating Douglas A-20 Havocs from Hato Field on Curaçao and Dakota Field on Aruba. Their primary mission was to protect the refineries and Allied shipping from German and Italian U-boats. The Dutch islands were to play an important role in the Second World War, being the scene of the first offensive against Caribbean refineries by German U-boats. In February 1942 German U-boats launched simultaneous attacks and sank three tankers between Lake Maracaibo and Aruba. At the same time, another U-boat entered Willemstad harbour and torpedoed three oil tankers, sinking one ship. Yet another U-boat entered San Nicolas harbour on Aruba and tor­ pedoed three more oil tankers. An effort was made to shell the Aruba refinery, but it failed. In response, US aircraft attacked the U-boats, but to little effect. This early attack sparked more forces being sent to defend Aruba, Bonaire and Curaçao. Indeed, the US base on Bonaire, ‘Tanki Maraka’, was the location of one of the first radar installations in the Caribbean.4 445

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Other German attacks on Curaçao occurred, but local Dutch and American forces successfully fought off German efforts. The oil industry remained a significant factor in the economies of Aruba and Curaçao from the end of the Second World War through the 1980s. During the 1970s the local oil industry diversified into transshipment and oil storage. The former resulted in the construction of terminals to handle the increasingly large size of tankers, which complicated their direct delivery to US destinations. In the 1980s Curaçao stood out in this business as the terminal at Bullenbaai, one of the world’s largest, was a global force. In the post-1980s the Dutch Caribbean’s place in the global oil industry declined as the forces of supply and demand came into play. This was mirrored by the construction of large offshore terminals in the Gulf of Mexico and on the US eastern seaboard (which removed the need to stop in Aruba and Curaçao), an extended drop in oil prices and the lowering of Venezuelan oil output.5 Venezuela’s state-owned oil company, PDVSA, assisted in the upgrading of refinery operations, but that relationship was complicated by the implosion of that country’s economy and its strained relationship with the USA. The US-Venezuelan breakdown in relations was due to Venezuela’s descent into authoritarian rule, first under the charismatic Hugo Chávez and then his successor Nicolás Maduro; the stunning mismanagement of the economy by its socialist government; the massive outflow of refugees (over 4 million people by early 2020); Maduro’s dependence on the People’s Republic of China, the Russian Federation and Cuba to remain in power; and an ongoing stream of anti-US rhetoric. Considering that the main flow of oil came from Venezuela, trouble in that country meant trouble for Aruba and Curaçao. In Aruba, the ripple effects from global oil trends (downward pressure on prices beginning in the 1980s) resulted in the closure of Exxon’s refinery (which was then the world’s largest). Although efforts were made to revive the business under Coastal Oil and then El Paso (which bought the former company in 2001), the refinery sputtered to an end in 2012. Discussions with CITGO (the US subsidiary of PDVSA) led to a 2016 agreement on the reactivation of the refinery. A natural gas pipeline between Aruba and Venezuela was also under discussion. Hopes for the revival of the oil sector, however, were overshadowed by the growing political isolation of the Venezuelan regime and US, European and Latin American diplomatic and economic pressure, leaving a large question mark over the future of the oil sector of both Aruba and Curaçao. Equally important is that PDVSA in the late 2010s struggled to produce, refine and export crude oil, a situation compounded by a lack of cash and US sanctions.6 The geopolitical dimension was underscored in 2018 when the US oil company, Con­ ocoPhillips won an international arbitration case against Venezuela. In 2007 President Chávez ordered the expropriation of the US oil company’s assets in Venezuela, which led to an arbi­ tration case being filed at the International Chamber of Commerce (ICC). The outcome of the case in 2018 was that PDVSA owed ConocoPhillips US $204 billion. Considering that PDVSA was not keen on making such a payment, ConocoPhillips sought to confiscate the Venezuelan company’s assets in Aruba and Curaçao. This led to major concerns on both islands, but local courts decided that such an action was illegal and ConocoPhillips was forced to back off. Although PDVSA leases a refinery in Curaçao (which employs 1,000 people), business opportunities in this sector remain uncertain, largely due to the geopolitics surrounding Vene­ zuela. Indeed, the Curaçao government actively searched for another company to assume con­ trol of the refinery. A Chinese company was under consideration, but a deal failed to emerge as did positive outcomes from talks with other companies. In December 2019 it was announced that Curaçao’s state-run refinery company, Refineria di Korsou (RdK) had signed an agreement with industrial commodities conglomerate Klesch Group to operate the island’s 335,000-barrel­ per-day (b/d) Isla refinery and storage facilities. This was good news for Curaçao as PDVSA had 446

The Dutch Caribbean

barely operated the refinery over the past two years and its contract as operator of the refinery expired at the end of 2019. The Klesch Group is based in Geneva, Switzerland, and has interests in metals, mining and other traditional ‘heavy’ industries. It is expected to upgrade the Curaçao refinery’s infra­ structure, which had declined due to a lack of funding. As a Standard & Poor’s report (December 2019) noted: The Curaçao refinery has a capacity to process 335,000 b/d, but in practice this volume is not possible because of infrastructure limits. The maximum throughput is estimated between 270,000–290,000 b/d, depending on the type of crude. In 2017 and 2018, the refinery was impacted by failures in its industrial services functions, by a fire that occurred in the CD-3 distillation unit and by the lack of crude availability.7 The Flesch Group will also have to deal with pressure from environmental groups as well as the World Bank. Indeed, the World Bank has asserted that the Isla complex is a major source of pollution that causes health problems and that Curaçao has one of the highest per capita carbon emissions rates in the world.8 One last issue facing what is left of the oil industry in the Dutch Caribbean is the potential development of Guyana and Suriname as major oil producers. Although neither of these countries is located close to them, there is a connection between the Dutch islands and Sur­ iname that dates back to colonial times. The issue of refineries for Guyanese and Surinamese crude could have some advantages for Aruba and Curaçao, but that is a longer term develop­ ment and is contingent upon a number of factors, such as logistics, the role Trinidad and Tobago plays in regional refining, and geopolitical risk from Venezuela.

The political evolution of the Dutch Caribbean Political development in the Dutch Caribbean has been, with a few exceptions, a peaceful experience, largely within a well-accepted constitutional framework. A brief overview is as follows: since 1945 the members of the federation of the Netherlands Antilles – Aruba, Bonaire, Curaçao, Saba, St Eustatius and St Maarten – have been autonomous in their inter­ nal affairs, with foreign policy and defence being the responsibility of the Dutch government. This was formalized by the Charter of the Kingdom of the Netherlands, which provided a framework between the Dutch Caribbean and its European metropole. The Arubans, how­ ever, were unhappy with the situation as they believed that the federation was dominated by the larger population of Curaçao. The Aruban politician, Betico Croes, proposed a different arrangement in 1972 under which Aruba would leave the federation. It would become a separate country in a Dutch Commonwealth that would include the Netherlands, Suriname (then Dutch Guiana) and the Netherlands Antilles (Curaçao and the remaining smaller islands). The Aruban policy was referred to as status aparte. In 1977 a referendum was held in Aruba, with an overwhelming majority favouring leaving the federation. After negotiations with the Netherlands and the drafting of a new constitution, Aruba officially left the Neth­ erlands Antilles on 1 January 1986. Sadly, Croes did not live to see Aruba’s attainment of status aparte, tragically dying of injuries from an automobile accident before the official separation. Outside of the politics within the Dutch Caribbean, Curaçao underwent a major political event in 1969, when labour negotiations broke down between Wescar, a building contractor employed mainly by Shell, and the Federation of Curaçao Workers.9 The result of this was the 447

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May Riots or the Curaçao Uprising, as it has been called by some people. This was a social movement that emerged from the end of prosperity related to the oil industry, rising unem­ ployment, frustration among black Curaçaoans with what they felt was racism and discrimina­ tion, and the infusion of radical (as with Black Power) and socialist ideas.10 The riots left two people dead and much of Willemstad in ruins. But the real upheaval came with the fall of the local Netherlands Antilles government and its replacement by many of the strike leaders in the next election. An official investigation blamed economic issues, racial tensions and police mis­ conduct. Additionally, the Dutch government took measures to provide local government with greater authority. In a sense, Curaçao’s black population gained ground in their political expression and in the management of their island. The Dutch Caribbean’s political affairs underwent another change in 2010 when the Neth­ erlands Antilles was dismantled as an entity within the Kingdom of the Netherlands. Under a new arrangement, Curaçao and St Maarten acquired a semi-autonomous status within the Kingdom. The other islands, Bonaire, St Eustatius and Saba (known as the BES islands) became municipalities of the Netherlands. As explained by the government of Bonaire’s website, The relationship’s legal form will be that each island has the status of public body within the meaning of article 134 of the Dutch Constitution. In broad terms, their position is now like that of Dutch municipalities, with adjustments for their small size, their distance from the Netherlands and their geographic situation in the Caribbean region.11 In practical terms this means that every resident of the three islands who has Dutch nationality now has the right to vote in elections to the Dutch Parliament and the European Parliament. There has been little sentiment in any of the Dutch Caribbean islands to leave the Kingdom of the Netherlands, something that was underscored with the challenging experience of the other Dutch colony in the region, Suriname. In contrast to Suriname, which has undergone military interventions, strongman rule and civil conflicts, the Dutch Caribbean islands have enjoyed a peaceful string of elections that are held on a regular basis. Political violence is not a factor in any of the islands and political stability has been a key factor in allowing each island to develop competitive tourist sectors.

The structure of the economy in the twenty-first century While oil has cast a long shadow over the development of Aruba and Curaçao, the largest component of the Dutch Caribbean economy, tourism, has been critical to the rest of the region. And as oil has declined it has become core to the economic health of Aruba and Cur­ açao. The foundations for the tourist industry were laid in the 1930s when KLM, the Dutch national airline, designated Curaçao as a stop-over on its transcontinental flights and a system was established to link the Dutch islands with other Caribbean islands as well as the mainland coast. The jet age, however, reduced the need for stop-overs, a development which hurt Cur­ açao. However, the tourist potential of Curaçao remained an attractive option for the region’s economic development, especially as the oil industry was shifting in a number of ways, including automation, which reduced the number of workers. With this in mind, KLM sought to remain competitive in the region by creating ALM Antillean Airlines. The importance of tourism throughout the Dutch Caribbean gradually expanded during the 1960s and 1970s. Despite labour disturbances in Curaçao in the 1960s (related to the oil industry and social tensions), tourism was regarded as an important sector in diversifying the region’s economic base. Aruba and St Maarten were to emerge as particularly well-known 448

The Dutch Caribbean Table 29.2 Aruba, Curaçao and St Maarten real GDP growth rates (%)

Aruba Curaçao St Maarten

2015

2016

2017

2018

2019F

2020F

–0.4 0.3 0.5

0.5 –1.0 0.4

2.3 –1.7 –4.8

1.2 –2.0 –8.5

0.7 0.2 2.1

–3.0 –3.0 –5.0

Source: www.imf.org/en/Publications/CR/Issues/2019/06/03/Kingdom-of-the-Netherlands-Aruba-2019-Article-IV-Consultation­ Discussions-Press-Release-and-46958; www.imf.org/en/Publications/CR/Issues/2019/01/25/Kingdom-of-the-Netherlands-Curaao­ and-Sint-Maarten-2018-Article-IV-Consultation-Press-46543.

tourist destinations (Aruba in the 1980s due to the decline of the oil industry). Most of their tourist flow came from North America and the Netherlands, although some tourist flow came from Latin America for Aruba and Curaçao.

Aruba Aruba’s economy is heavily dependent on tourism which has long helped it to maintain one of the highest standards of living in the Caribbean. Its economy has a pegged exchange rate to the US dollar. Its currency is the Aruban florin although US dollars are readily accepted. According to the International Monetary Fund (IMF), Aruba is one of the most tourism-dependent countries in the world, with about 87 % of the economy depending directly or indirectly with that sector. The World Travel and Tourism Council puts the number even higher, noting that tourism accounted for 98.3% of Aruba’s output and a little over 99% of total employment on the island. Indeed, as one observer noted: ‘The sandy white beaches are a major attraction, along with the reefs offering good diving, and liberal casino laws.’12 Considering Aruba’s dependence on tourism and, to a much lesser extent, on oil, the islandeconomy is strongly dependent on exogenous forces, which since 2014 have included the downturn in commodity prices (which hurt Venezuela) and questions over the strength of the global economy. In 2015 the economy contracted, but in 2016 there was a modest pick-up in growth, which continued throughout 2020. Key to this has been strong economic expansion in the USA, one of the island’s main source of tourist arrivals (accounting for almost 70% of stayover tourism). Indeed, while declines in tourism from Venezuela hurt, they were compensated for and then some by the USA. As with Curaçao and Bonaire, the issue of Venezuela cannot be overlooked. The steep downturn in the Latin American country’s economy and the flood of refugees (as of early 2020 the number was around 4.6 million), has left risks for the Aruban economy skewed to the downside for the medium term. Indeed, the IMF Article IV report of 2019 noted: ‘A deepen­ ing crisis in Venezuela that leads to large immigrant and refugee inflows would put pressure on Aruba’s infrastructure, labor markets and tourism’.13 Aruba managed to do much to diversify both suppliers and tourist markets. The IMF also noted that Aruba needs to continue along the path of economic reform, with a view to achieving better fiscal policy and debt reduction. Aruba’s central government debt stood at around 84% in 2019. That came from the IMF’s Article IV 2019 report, well before concerns were raised about the impact of COVID-19 on tourism, in particular, cruise ships. The Fund also mentioned the need to broaden Aruba’s appeal to tourists beyond the USA. Looking ahead, the Aruban economy may find the global economic environment more chal­ lenging if consumers change patterns due to the COVID-19 pandemic in 2020 and opt for tourist pastimes that do not include cruise ships. 449

Scott B. MacDonald Table 29.3 Aruba, Curaçao and St Maarten central government debt/GDP (%)

Aruba Curaçao St Maarten

2015

2016

2017

2018

2019F

81.3 44.2 36.3

84.4 45.5 34.0

86.7 50.4 34.3

84.5 48.9 43.6

83.8 48.4 45.8

2020F 82.5 48.1 46.6

Source: www.imf.org/en/Publications/CR/Issues/2019/06/03/Kingdom-of-the-Netherlands-Aruba-2019-Article-IV-Consultation­ Discussions-Press-Release-and-46958; www.imf.org/en/Publications/CR/Issues/2019/01/25/Kingdom-of-the-Netherlands-Curaao­ and-Sint-Maarten-2018-Article-IV-Consultation-Press-46543.

Bonaire Bonaire’s economy is tourist-driven. The island boasts several resorts, including those run by local, European and US interests (such as Marriott International). Tourism is by far the biggest employer and accounts, directly or indirectly, for more than half of the island’s economic output. Diving is a major attraction and Bonaire prides itself on sustainable tourism. In 2017 Bonaire registered 128,500 tourists arriving by air, with most coming from the Netherlands and the USA. During the same year cruise ship visitors numbered 407,300 passengers, a substantial increase over previous years. Bonaire lacks any major manufacturing, with the exception of salt production. Salt pans cover 10% of Bonaire’s surface, producing 441,000 tons (400,000 metric tons) per year. The Akzo Nobel Salt Company moved onto the island in 1963, and produced nearly 500,000 tons of salt at its solar processing centre (here the salt is harvested and washed before being dried by the sun) at Pekelmeer, located at the southern tip of the island. This is the only spot today where salt is commercially produced. In 1997 the US agri-business, Cargill, bought Akzo Nobel Salt, thus acquiring the Bonaire operation. According to Cargill, Bonaire salt crystals are in high demand as they are long, dense and heavy. As the company’s website notes: Because the crystals are as big as a fist, they can be transformed into several grades to meet different customer needs. The salt produced on the island is used in multiple ways, including home water softeners, dyes for the textile industry and processing in the petroleum industry.14 One-third of the salt is exported to customers in the Caribbean, one-third goes to North America, and the rest ends up in Europe and Africa. Bonaire also has an oil transshipment business, which is located on the northern part of the island. This was established in 1975 under the auspices of the Bonaire Petroleum Corporation (BOPEC). The plant does not refine petroleum, but is a transfer centre, offloading petroleum from large tankers onto smaller ones. The BOPEC transshipment facility was long used for Venezuelan crude, servicing the needs of the South American country’s state-owned oil com­ pany, PDVSA. This became an issue in 2018 when the US company, ConocoPhillips, began seizing PDVSA assets in the Caribbean as payment for a US $2 billion arbitration award. This was because the arbitration panel at the ICC ordered PDVSA to repay the US company.15 Bonaire’s balance of trade is chronically in deficit due to the limited resources of the island and the need for goods to sustain the tourist trade and day-to-day living. Major imports include machinery and transport equipment, food and manufactured goods. In 2019 Bonaire’s working population (aged 15 to 74 years) comprised just over 15,000 people, with 70% employment. Among the workforce, male participation is 72%, compared to 68% of women. Bonaire’s unemployment rate was about 7%. 450

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Curaçao Curaçao’s economy is founded on oil (refining and bunkering), tourism, logistics and interna­ tional financial services. It has one of the Caribbean’s most developed infrastructures and the highest standard of living. According to the World Bank, in 2018 gross domestic product (GDP) per capita in Curaçao was US $19,567. The main urban centre, Willemstad, is also an excellent natural harbour. Moreover, the port hosts a free trade zone and a dry dock. Curaçao’s economy is highly open and dependent on external drivers, which include the health of the US and Dutch economies for tourism, international oil prices and any other factors that impact tourism. Its balance of trade is usually in deficit due to its dependence on imports for food and other key inputs to maintain the tourist sector. Oil has long been part of Curaçao’s economy, but its significance has declined (as discussed earlier). Offshore finance was once seen as a major alternative for Curaçao (and, to a lesser extent, for the other Dutch islands). The development of the oil industry on this island also created the need for accountants, lawyers and other professionals. The German occupation of the Netherlands was a key catalyst in the development of Curaçao as an offshore financial centre as it forced Dutch multinationals to shift their legal domain to Curaçao. This provided an opportunity for Anton Smeets, a Dutch entrepreneur, to establish the Curaçao International Trust Company (CITCO) in 1939 with the goal of helping Dutch nationals to expatriate their wealth to a safe haven. In the aftermath of the war, Smeets sensed an opportunity and urged the local government to create a special low-tax regime with rates of 2.4%–3.0 % for foreign companies legally resident in Curaçao, but not physically conducting business there. This was the beginning of Curaçao’s offshore financial centre business. Curaçao’s offshore financial activities gained ground for four reasons.16 First, the Dutch connection provided for a stable and relatively peaceful place to do business. Second, its loca­ tion also meant that Dutch and other national companies operated under Dutch law, which was highly regarded and free of any potential local prejudices. Third, the Netherlands’ post-war tax treaty with the USA allowed for a routine extension to Dutch overseas territories, which made Curaçao attractive for US firms. A fourth and very compelling reason was the development of the Eurodollar market, which took off in the 1960s. As one observer of the Antillean offshore financial industry, Andrew Morris, explained: In the 1960s the combination of social spending and Vietnam war financing strained U.S. capital markets. The Treasury pressed U.S. multinationals to raise funds outside the United States to finance their foreign operations, encouraging firms to tap into the growing market of dollars deposited in non-U.S. banks. Rising U.S. interest rates in the 1960s led companies to seek Eurobond issues to fund their domestic operations as well.17 This was complicated by a 30% ‘withholding tax’ the USA imposed on interest payments to foreigners. The way around this was a US-Antillean tax treaty that exempted interest payments to Antillean entities. Under this arrangement a US company with a subsidiary in the Antilles could then sell Eurobonds in the London market (the main hub for such activity) and relend the money to its US parent. Interest payments to the subsidiary by the parent companywould be exempt from the tax under the treaty, and the Antilles imposed no tax on the subsidiary’s payments to the third country bondholder. Curaçao’s success with the Eurobond market was to prove to be its downfall. The problem was that as word spread that the Dutch Caribbean was the place to go for offshore financing, the US Treasury Department became aware that the tax treaty with the Netherlands Antilles (mainly Curaçao) was intended to be just for US corporations, but other countries had been 451

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able to make use of it to their advantage. It was felt in Washington that the Dutch island was ‘abusing’ the treaty. As Morris points out: Most important, Treasury found many [countries’] … citizens could avoid the 30 percent withholding tax simply by routing their U.S. investments through the Antilles. By under­ mining Treasury’s biggest carrot, the Antilles treaty hampered efforts to persuade countries to sign on to information-sharing agreements with the United States.18 Negotiations between Curaçao and the USA were opened, but failed to reach a compromise. In July 1987 the US cancelled the tax treaty. The loss of the tax treaty was significant for Curaçao as it constituted a major blow to the island’s finances. This facilitated fiscal tightness and indirectly left the islands less better off in terms of income generation, more dependent on Dutch subsidiaries, and probably helped to increase emigration. Although a financial sector survived in Curaçao (as well as in Aruba), it failed to regain its significance. In large part, Curaçao failed to adapt to a changing international financial system in which there was a push for greater transparency and disclosure, which demanded the creation of new products and services. While other offshore financial centres, such as the Cayman Islands, Bermuda and Singapore, picked up new financial services, Curaçao remained wedded to an old idea. The financial sector in Aruba, Curaçao and other Dutch islands is very different in the twenty-first century to what it was in the 1980s. Curaçao has made efforts to regain ground in offshore financing by providing new finan­ cial incentives to set up shop on the island and opening a stock exchange. The Dutch Car­ ibbean Securities Exchange (DCSX) is an international electronic exchange based in Curaçao, established for the listing and trading of bonds, equities and funds. In November 2019 the DCSX was given an overall rating of ‘largely compliant’ from the Global Forum on Transparency and Exchange of Information for Tax Purposes, which uses the Organisation for Economic Co-operation and Development’s global standard, which includes the bene­ ficial ownership of all legal entities. This was an important development as there had earlier been concerns about the overall integrity of Curaçao as an offshore financial centre. This led to the island being added to the European Union (EU) ‘greylist’ of tax havens in December 2017; it was given two years to deal with issues raised by being put on such a list. Moreover, concerns were articulated about Curaçao being used as a transshipment location for Vene­ zuelan gold to Switzerland and parts of the Middle East. According to the US government in March 2019, Curaçao’s prominent position as a regional financial center is declining, but it is still con­ sidered a transshipment point for drugs and gold from South America. Money laundering occurs through the sale of illegal narcotics, unlicensed money lenders, online gaming, and the transfer of gold from South America.19 Curaçao and other parts of the Dutch Caribbean (namely Aruba and St Maarten) are sensitive to these charges and the authorities have worked to improve their reputations. The other major sector that has expanded is tourism. Over the past decade, the sector has benefited from major investment projects, including several large hotel complexes, a ‘mega pier’ at Willemstad harbour, and a new terminal at the Hato International Airport.20 At the same time, Curaçao has sought to take advantage of its relationships with the EU and the USA. Because of the Netherlands, Curaçao is considered to be part of the Overseas Countries and

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Territories of the EU, which means that products originating on the island have preferential access to the trade bloc and are exempt from import duties. As part of Curaçao’s diversification measures, Curaçao has also sought to develop its com­ munications infrastructure. According to one source, the island has state-of-the-art information and communications technology connectivity with the rest of the world, including a Tier 4 data centre.21 The Curaçao government has indicated that it believes in advancing the embrace of the digital economy and that transforming the government along these lines is a priority. The combination of the government’s efforts to diversify the island’s economic base, located at the crossroads of the Caribbean, South America and North America, with access to Europe, has led to a renewed push to regain ground in international finance. This has been a challenging experience. Deregulation measures were introduced in the 1990s and a number of offshore banks were attracted to the island (though not in the same volume as in the 1950s through 1970s). Offshore finance struggled in the aftermath of the 2008 global financial crisis. Addi­ tionally, there have been several financial scandals involving companies operating in Curaçao. One of the most well-known cases involved the Dutch bank ING, which in 2018 agreed to pay €775 million in penalties for compliance failures that allowed companies to launder money (including a Curaçao lingerie company that laundered €150 million).22 According to local press reports, the company was owned by the Grynstein family, which did sell lingerie, owned a pair of Swatch stores, and ran a money exchange office of Western Union in Curaçao.

Saba Saba is one of the smallest units in the Dutch Caribbean and as such it has limited resources and virtually no manufacturing. Tourism is important (with 8,400 arrivals by air and 12,100 by sea in 2017), while the island benefits from the presence of a US institution of higher learning, the Saba University School of Medicine. The school was founded in 1992 to provide an interna­ tional alternative to US and Canadian medical schools. It is regarded as a successful enterprise, providing badly needed employment opportunities. The school is one of the few international medical schools approved by the licensing boards of New York, Florida and California. While the significance of Saba University should not be overstated, it demonstrates that the island has taken advantage of what it has to offer, a safe place to study (with low crime rates) and a functioning infrastructure. Saba’s workforce is slightly under 2,000 people. Employment for the island stands a little over 60%. Official unemployment hovers at around 3%. Saba has the highest standard of living in the Dutch Caribbean, benefiting from the Saba University, tourism and Dutch social benefits. It is also the smallest Dutch territorial unit in the Caribbean, which probably makes what is allocated to the population go that much further. Along the same lines, Saba has the lowest income inequality in the Dutch Caribbean.

St Eustatius Like most of the Dutch Caribbean, the economy of St Eustatius is dominated by tourism. In 2017 there were 10,500 tourists arriving by air. There is very little manufacturing and most goods need to be imported. The island’s labour force sits at 2,400, with 67% of men being employed and 66% of women. The largest employer on the island is the government, but the addition of the NuStar storage terminal (which was bought by Prostar Capital in 2019 for US $250 million) has helped to boost employment. Other major sectors for employment are transportation, information and communication, and education. 453

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St Maarten St Maarten’s economy is dominated by tourism, a development that started in earnest in the 1950s. It is important to understand that St Maarten is small, making up half of one island (the other part is French), and covering an area that is equivalent to one-fifth of the size of the US capital, Washington, DC. As such, it has a population of a little over 42,000 people. Tourism accounts for close to four-fifths of the workforce, with the remainder employed by the gov­ ernment, a small agriculture industry and fishing. The island also boasts a container facility in its harbour, which is used by regional feeders to supply the smaller islands surrounding St Maarten. Considering the importance of tourism, most local needs are met by imports, which means that the trade balance is in deficit on an ongoing basis. The standard of living is one of the highest in the Caribbean as well as within the Dutch islands. Tourism in St Maarten is con­ structed around beautiful beaches and well-known luxury hotels. Its ambiance is helped by a high level of public security. The harbour is well known for its cruise terminal, one of the largest in the Caribbean. As a major tourist destination Sint Maarten is an open economy and as such is vulnerable to external shocks in the form of hurricanes. Hurricanes Irma and Maria hit the island hard in 2017, resulting in extensive damage and bringing cruise ship visits to a halt. Prior to the passage of the hurricanes, economic growth had been slow (barely above an average annual rate of 1% from 2013–16).23 In 2017 the economy contracted by 4.8% and by 8.5% in 2018 as the island was taken out of the tourist circuit and the focus was on reconstruction. As St Maarten reopened, economic growth has been slow but steady, hovering at around 2.0%. Like the other Dutch islands, St Maarten remains sensitive to international developments ranging from recession and the spread of COVID-19 to hurricanes. This has an impact on the island economy in terms of employment, but also finance. Since the highly destructive hurri­ canes in 2017, public debt has gone up from 34% of GDP in 2016 to 43.6% in 2018. Further setbacks, either in terms of a downturn in economic activity in 2020 and 2021 related to a global economic slowdown or more deadly hurricanes, could put St Maarten’s debt under pressure. The 2020s could be a challenging decade for this tourist-based economy, especially if globalization is further clipped by natural disasters, Mother Nature in the form of diseases, and rising geopolitical tensions.

The changing geopolitical environment The geopolitical landscape in the Caribbean has changed from being one that fully benefited from a broad embrace of globalization and the acceleration of communications between coun­ tries. If nothing else, the Dutch Caribbean economy is based on open borders, the free flow of people and capital. Since 2008 that dynamic has changed. The rise of China, the US response to it, the emergence of a new Cold War-like situation in the Caribbean (with Cuba, Venezuela and Nicaragua playing a central role), and the challenge of dealing with transnational diseases play hard against the Dutch Caribbean. While these islands have demonstrated a high degree of entrepreneurial spirit in tapping what resources are available, big challenges loom ahead. For Aruba, Bonaire and Curaçao, what happens in Venezuela is of major importance. Venezuela is the largest neighbouring economy, functioning as a major source of food and oil and, in good times, tourists. Although these links still survive, they have been vastly reduced. Considering the traditional interdependent economic relationship between the ABC islands and the South American country, the recovery of Venezuela remains high on the list of what will drive those Dutch island economies. That will be a factor that sits out on the horizon. 454

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Another geopolitical factor is the role of the Dutch. If the global economy heads into a recession, it will hit the Netherlands hard as it is an open economy and is heavily dependent on trade. This raises questions as to how much extra assistance the Dutch will be willing to provide to their Caribbean islands. This is not an issue of the Netherlands being stingy, but one of potential fiscal pressures, which are dependent on how deep a downturn can be when it comes. The last issue is the role of China. China has made a concerted effort to increase its economic profile in the Caribbean. It has opened a consulate in Willemstad to promote exchange and cooperation between China and the Dutch Caribbean. Although there appear to have been no major investments in the Dutch Caribbean, as in Jamaica, Trinidad and Tobago, and Cuba, the Chinese have pushed for cooperation between China’s and Curaçao’s TV stations, hosted cul­ tural exchanges, and volunteered Chinese teachers to the Curaçao Inter-Continental University of the Caribbean.24 China has made a point of developing deeper relations in the Dutch Caribbean, something that Washington now watches very closely. It will be interesting to see if the spread of COVID-19 out of China will do any damage to Beijing’s penetration into the Caribbean and the Dutch islands in particular.

Conclusion The Dutch Caribbean has a long history in the Americas, playing a role in the development of commerce in the region (sadly including the slave trade), international finance and the global oil industry. Like the Netherlands, the Dutch islands have maintained significant external expo­ sures. In a sense, the international system is their bread and butter business. In times of extended globalization this has served the islands well. In times when the world has moved to less trade and cross-border investment and movement of people, the Dutch islands have been severely challenged. The 2020s are likely to be another testing period for the Dutch Caribbean.

Notes 1 Cornelis Ch. Goslinga, A Short History of the Netherlands Antilles and Surinam (The Hague: Martinus Nijhoff, 1979), p. 29. 2 In 1807 Britain banned the importation of African slaves in its colonies and established a network of treaties allowing the British to detain the slave ships of other nations. However, it was not until 1834 that slavery was abolished throughout the British Empire. The French colonies followed in 1848, and the USA in 1865, after the end of the Civil War. The Dutch were among the last to end slavery. 3 Goslinga, A Short History of the Netherlands Antilles and Surinam, p. 141. 4 https://cw.usconsulate.gov/our-relationship/policy-history/current-issues/. 5 Charles Arthur, ‘Economy (Curaçao)’, in South America, Central America and the Caribbean (Abingdon: Routledge), in print and online at www.europaworld.com(accessed 4 March 2020). 6 Marianna Parrage and Nivedita Bhattacharjee, ‘ConocoPhillips and Venezuela’s PDVSA Reach $2 Billion Settlement’, Reuters, 20 August 2018, www.reuters.com/article/us-conocophillips-pdvsa/ conocophillips-and-venezuelas-pdvsa-reach-2-billion-settlement-idUSKCN1L517X (accessed 8 March 2020). 7 ‘RdK-Klesch Group Deal Ends PDVSA Control of Curacao Refinery’, S&P Global, www.spglobal. com/platts/en/market-insights/latest-news/oil/122619-rdk-klesch-group-deal-ends-pdvsa-control-of­ curacao-refinery. 8 World Bank CO2 emissions (metric tons per capita), https://data.worldbank.org/indicator/EN.ATM. CO2E.PC. 9 Albert Gastmann, Historical Dictionary of the French and Netherlands Antilles (Metuchen, NJ and London: Scarecrow Press, 1978), p. 129. 10 For a more detailed discussion of the May 1969 Movement see William A. Anderson and Russell R. Dynes, Social Movements, Violence and Change: The May Movement in Curacao (Columbus: Ohio State University, 1975). 455

Scott B. MacDonald 11 www.tourismbonaire.com/bonaire-history-culture. 12 ‘Economy (Aruba)’, in South America, Central America and the Caribbean (Abingdon: Routledge), in print and online at www.europaworld.com (accessed 4 March 2020). 13 IMF, Kingdom of the Netherlands: Aruba, 2019 Article IV Consultation Discussions, Press Release and Staff Report (Washington, DC: IMF, June 2019), p. 3. 14 www.cargill.com/story/making-salt-in-paradise. 15 Marianna Parrage and Mircely Guanipa, ‘Venezuela Dodges Oil Assets Seizures with Export Transfers at Sea’, Reuters, 7 August 2018, www.reuters.com/article/us-venezuela-oil-exports/venezuela-dodges­ oil-asset-seizures-with-export-transfers-at-sea-idUSKBN1KS22B. 16 Andrew Morris, ‘The Rise and Fall of Curacao’s Offshore Finance Sector’, Foundation for Economic Education, 23 September, 2009, https://fee.org/articles/the-rise-and-fall-of-curaaos-offshore-financial­ sector/. 17 Ibid. 18 Ibid. 19 US Department of State, Bureau of International Narcotics and Law Enforcement Affairs, International Narcotics Control Strategy report, March 2019, www.state.gov/wp-content/uploads/2019/03/ INCSR-Vol-INCSR-Vol.-2-pdf.pdf. 20 Arthur, ‘Economy (Curaçao)’. 21 Central Intelligence Agency, World Factbook, www.cia.gov/library/publications/the-world-factbook/ geos/cc.html (accessed 8 March 2020). 22 ‘Money Laundering in Curaçao Via ING Accounts’, Curacao Chronicle, 5 September 2018, https://cura caochronicle.com/local/money-laundering-in-curacao-via-ing-accounts/ (accessed 8 March 2020). 23 IMF, Kingdom of the Netherlands: Curaçao and Sint Maarten, 2018 Article IV Consultative Discus­ sions (Washington, DC: IMF, January 2019), www.imf.org/en/Publications/CR/Issues/2019/01/25/ Kingdom-of-the-Netherlands-Curaao-and-Sint-Maarten-2018-Article-IV-Consultation-Press-46543. 24 ‘Chinese Consul Is Positive About the Future Relations Between China and Curacao’, Curacao Chronicle, 28 August 2018, https://curacaochronicle.com/politics/chinese-consul-is-positive-about­ the-future-relations-between-china-and-curacao/ (accessed 8 March 2020).

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30 Epilogue1 Robert E. Looney

Several common themes run through the chapters in this volume. The Caribbean is a region that has suffered from various disasters in recent years ranging from hurricanes to earthquakes and the destructive effects on crops and water availability stemming from the impact of climate change.2 Furthermore, the region is highly dependent on several lines of economic activity, especially tourism, that make their economies highly vulnerable to changing external fortunes over which they have no control.3 These two elements left most of the region extremely ill-prepared to combat the effects of the coronavirus (COVID-19) pandemic. Recent disasters have left most of the countries highly indebted,4 often with poor and declining credit ratings, thus limiting their borrowing capacity and their ability to mobilize resources to combat the pandemic. The sharp drop in tourism stemming from the pandemic will undoubtedly toss most of the countries into severe recession with even fewer resources at their disposal. The first cases of COVID-19 in the Caribbean were reported in early March, and within several weeks most countries in the region had outbreaks.5 Despite their broad similarities, the Caribbean economies have had diverse COVID-19 experiences, with some countries faring reasonably well so far, while others appear to be struggling against incredible odds. The initial governmental responses varied, with some countries such as Antigua and Barbuda opting for minor responses. At the other extreme, in the Bahamas all schools were immediately closed, and certain foreign visitors banned from entering the country.6 Antigua and Barbuda reversed its initial approach and introduced a lockdown for non-essential workers and closed its international airport. Anguilla also announced home confinement for all non-essential workers, Belize7 and Dominica8 declared states of emergency, and Grenada9 activated its Quarantine Act. Trinidad and Tobago adopted a similar approach and recently extended its stay-at-home order.10 A more extreme action occurred in Suriname,11 where the National Assembly con­ trolled by the Nationale Democratische Partij (NDP) granted the president, Desiré (Dési) Delano Bouterse (also of the NDP), indefinite state of emergency powers to combat the pandemic. However, all members of the opposition voted against the law. Before the border was closed in late March, all Cubans returning from abroad were forced to spend two weeks in quarantine in isolation centres.12 However, after three cases were announced in March (allegedly brought into the country by tourists from Italy), the government acted 457

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quickly to close the border and contain the local spread.13 Doctors, nurses and medical students have been tasked with tracing the source of contamination and attempting to prevent the virus from spreading. As of 25 May 2020 there were 1,947 cases or 172 cases per million people. At least 82 deaths had occurred. The country’s COVID-19 (logarithmic) curve began flattening on 27 March when the number of cases reached 80.14 In sharp contrast to Cuba, Jamaica has never been under formal and complete lockdown, having preferred to adopt an on-and-off approach to pandemic management (lifting and tightening restrictions on a case-by-case basis). However, as of 11 May 2020 even the few stringent containment measures and social distancing protocols in effect, including curfews, international travel bans, school closures, and restrictions to business and public gatherings, had started to be relaxed progressively.15 However, the government’s on-and-off approach also means that a tightening of restrictions may be necessary as policymakers continue to grapple with the balance between preventing an economic collapse and controlling the spread of the pandemic. As of 25 May 2020 Jamaica had 552 cases of COVID-19 or 192 cases per million people. There were nine deaths. The country’s COVID-19 (logarithmic) curve began flattening on 3 May at 463 cases.16 The government of the Dominican Republic took drastic action to mitigate the spread of COVID-19 by bringing economic activity to a halt, including the implementation of a coun­ trywide curfew, and school, border and business closures. The government also banned inter­ national air travel on 19 March 2020, bringing tourism to a temporary halt. However, compliance has been a problem with both businesses and individuals.17 The government detained over 5,000 individuals during the first three days of the original curfew, while many businessmen openly opposed the closures. Much of the country’s response has taken place at the local level.18 On 13 April 2020 the Dominican Republic Central Election Board announced that it had postponed the 2020 general election, scheduled to take place on 17 May, to 5 July, due to the COVID-19 emergency.19 As might be expected, the country’s response to COVID-19 has become a key campaign issue, with both candidates donating campaign funds and securing imports of thousands of testing kits and protective health supplies. As of 22 May 2020 the Dominican Republic had 15,073 cases, by far the highest number in the Caribbean, at 1,454 cases per million people. At least 460 deaths had also occurred. The COVID-19 (logarithmic) curve began flattening on 1 April at 1,284 cases.20 COVID-19 was transmitted to Haiti by Haitian workers in the Dominican Republic fleeing the pandemic there. Haiti, on 5 April 2020, reported its first COVID-19 death. In the ill-pre­ pared country,21 stringent quarantine measures imposed to limit contagion are being routinely flouted, and Haiti’s health care system is among the most underfunded and understaffed in the Americas. Widespread infection threatens to inflict a high death toll. As of 25 March 2020 Haiti had 958 cases of COVID-19 or 85 per million population. There were 27 deaths. The country’s COVID-19 (logarithmic) curve appeared to flatten on 29 March at 15, but then accelerated on 6 May at 101.22 At the time of writing, there are no signs of another flattening. However, with minimal testing, the medical community has raised concerns that actual infection rates may be far higher than official figures suggest. Of the countries examined in some detail here, Cuba is the clear winner, but one might argue it was, by far, best prepared to deal with the pandemic. While Haiti’s numbers appear relatively acceptable now, the situation is likely to deteriorate regardless of government action. Perhaps the principal lessons come from the Dominican Republic and Jamaica, in that both countries have taken a more relaxed approach toward restrictions (Jamaica) and compliance (Dominican Republic). Given that tourism will not return anytime soon, it appears that the 458

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intelligent strategy is for countries to take their economic losses upfront and gain control of the virus, before attempting to return to anything resembling normalcy. For most Caribbean countries, the post-COVID-19 world will bear little resemblance to the past, at least for the next few years. Given the limited assistance that is likely to be provided by the USA and the European Union,23 organizations such as the Caribbean Community (CAR­ ICOM) will need to play a vital role in coordinating recovery and providing information and advice on the means of restoring stability and developing new areas of commerce.24 Monterey, California, USA June 2020

Notes 1 An earlier version of this chapter appeared as ‘The Caribbean, Uniquely Vulnerable to COVID-19, May Take Years to Recover’, World Politics Review, 11 June 2020, www.worldpoliticsreview.com/ articles/28832/as-covid-19-wreaks-havoc-on-tourism-caribbean-faces-long-path-to-recovery. 2 Robert Looney, ‘The Caribbean Shifts to a Regional Approach in Adjusting to Climate Change’, World Politics Review, 12 December 2019, www.worldpoliticsreview.com/articles/28408/in-adapting­ to-climate-change-caribbean-shifts-to-a-regional-approach. 3 ‘IMF Doc Confirms Caribbean Countries Vulnerable to External Shocks’, The Gleaner, 1 December 2019, http://jamaica-gleaner.com/article/caribbean/20191201/imf-doc-confirms-caribbean-countries­ vulnerable-external-shocks. 4 Caribbean Small States: Challenges of High Growth and Debt (Washington, DC: International Monetary Fund, 20 February 2013), www.imf.org/external/np/pp/eng/2013/022013b.pdf. 5 ‘Caribbean Countries and Territories Report Imported Cases of COVID-19’, WorldAware, 11 May 2020, www.worldaware.com/caribbean-countries-and-territories-report-imported-cases-covid-19. 6 Dillon De Shong, ‘Bahamas Closes Public Schools and Expands COVID-19 Travel Restrictions’, Loop, 16 March 2020, www.loopslu.com/content/bahamas-closes-public-schools-and-expands-covid-19­ travel-restrictions-5. 7 ‘Belize State of Emergency: Official Statement of Prime Minister’, eTurboNews, 24 April 2020, www. eturbonews.com/570995/belize-state-of-emergency-official-statement-of-prime-minister/. 8 ‘Parliament to Meet Over Coronavirus State of Emergency’, Dominica Vibes, 2 April 2020, www.dom inicavibes.dm/news-263735/. 9 Linda Straker, ‘Quarantine Activated to Force Compliance’, Now Grenada, 1 April 2020, www.now grenada.com/2020/04/quarantine-act-activated-to-force-compliance/. 10 ‘COVID-19 Regulations Updated to Clarify Quarantine Powers’ Loop, 18 April 2020, www.looptt. com/content/covid-19-regulations-updated-clarify-quarantine-powers. 11 Harmen Boerboom and Anatoly Kurmanaev, ‘Economic Crisis Prompts a Showdown, and a Shut­ down, in Suriname’, New York Times, 25 March 2020, www.nytimes.com/2020/03/25/world/ americas/suriname-economic-crisis.html. 12 ‘Cubans Returning Home in Quarantine Over Coronavirus Concerns’ VOA News, 31 March 2020, www.voanews.com/science-health/coronavirus-outbreak/cubans-returning-home-quarantine-over­ coronavirus-concerns. 13 Cuba Suspends Arrival of International Flights to Stop Coronavirus’, Reuters, 31 March 2020, www. reuters.com/article/us-health-coronavirus-cuba-borders/cuba-suspends-arrival-of-international-flights­ to-stop-coronavirus-idUSKBN21J41K. 14 Worldometer, 25 May 2020, www.worldometers.info/coronavirus/country/cuba/ 15 ‘Jamaica Set to Relax Restrictions on Churches and Bars amid COVID-10 Outbreak’, VOA News, 12 May 2020, www.voanews.com/covid-19-pandemic/jamaica-set-relax-restrictions-churches-and­ bars-amid-covid-19-outbreak. 16 Worldometer, 25 May 2020, www.worldometers.info/coronavirus/country/jamaica/. 17 ‘People Violate Curfew, Hide When the Police Arrive, Then Reassemble When Police Leave’, Dominican Today, 13 April 2020, https://dominicantoday.com/dr/covid-19/2020/04/13/video-people­ violate-curfew-hide-when-the-police-arrive-then-reassemble-when-police-leave/.

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Robert E. Looney 18 Elliott Davis, ‘The Dominican Republic Responds to COVID-19 Locally’, U.S. News and World Report, 5 May 2020, www.usnews.com/news/best-countries/articles/2020-05-05/the-dominican-republic­ responds-to-the-coronavirus-with-local-efforts. 19 ‘People Violate Curfew, Hide When the Police Arrive, Then Reassemble When Police Leave’. 20 Worldometer, 25 May 2020, www.worldometers.info/coronavirus/country/dominican-republic/. 21 Jason Beaubien, ‘COVID-19 Cases Double in Ill-Prepared Haiti’, NPR, 8 May 2020, www.npr.org/ sections/goatsandsoda/2020/05/08/853052522/haitian-doctor-says-this-is-the-worst-epidemic-hes-faced. 22 Worldometer, 25 May 2020, www.worldometers.info/coronavirus/country/haiti/. 23 Barbara Fick, ‘The Impact of COVID-19 in Latin America and the Caribbean’, Foreign Policy Research Institute, 10 April 2020, www.fpri.org/article/2020/04/the-impact-of-covid-19-in-latin-america-and-the­ caribbean/. 24 ‘COVID-19: Updates from the Caribbean Public Health Agency (CARPHA)’, CARICOM, https:// today.caricom.org/tag/covid-19/.

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Index

Page numbers in italics and bold indicate Figures and Tables, respectively. Abaco 27 Abbad y Lasierra, Iñigo 223 ABC islands see Dutch Caribbean Adams, John Quincy 223 adaptation agreements 151 AES Corporation 46, 47–48, 52 African, Caribbean and Pacific (ACP) group of countries 182, 183, 311 Agenor model 165–166 Alcoa 322, 324–325, 329 Alerta Joven programme 406 Aluminum Company of America see Alcoa Amerindians 324, 443 Anguilla: COVID-19 pandemic response 457; hurricane damages 141–142; reconstruction 142–143; tourism economy 141–142 Anguilla United Front (AUF) 142 Antigua: COVID-19 pandemic response 457; hurricane damages 143–144; Hurricane Irma 24; tourism dependency 71, 73 Appleby 364–365 Arawaks 443 Arcaya, Pedro Manuel 173 Arend Oil Company 445 Aristide, Jean Bertrand 243 Aruba: central government debt 450; COVID-19 pandemic and 449; GDP growth 449; immigrant and refugee inflows 449; natural gas pipeline 446; oil industry 445, 446; tourism dependency 71, 73, 449; tourism development 65; tourism promotion strategy 64 Ashcroft, Michael 284 Baha Mar development 344–345 Baha Mar Development Company 344 Bahamas: agriculture sector 345–346; budget forecasts 349; climate 21; commercial fishing 346; COVID-19 pandemic response 457; crime and violence 343; declining economic growth 6–7; demographics 340–341; economic freedom ratings 343; economic

growth 338, 339–340; employment 340, 345; financial and insurance sector 347; financial services industry 347–348; fiscal deficits 349; fiscal situation 348–349; foreign exchange inflows 71; Free National Movement 150; Free National Movement government 348; GDP per capita 24; gender-based inequalities 341; governance 342; Grand Bahama Shipyard 347; Hawksbill Creek Agreement 347; homicide costs 120; Hurricane Dorian 338–339; hurricane damages 149–150; Hurricane Dorian 27, 349; independence, move to 358; institutional constraints on growth 342–343; joint ventures 344; labour participation rates 340; manufacturing 346–347; money laundering 338; natural disasters 346; population 340; post-hurricane reconstruction 349–350; poverty 341–342; real estate sector 347; rule of law 342; socio-economic development 341–342; tourism 73, 149–150, 338, 343–344, 345; Trump administration and 349; unemployment levels 340–341; utilities 347; value-added tax (VAT) 349 Bahamas Petroleum Company (BPC) 347 balloon effect 118 Banks, Victor 142 Barbados: adjustment strategy 168–169; capital expenditures 317–318; capital inflows 168; China’s Belt and Road Initiative 198; daily foreign exchange reserves 167; development indicators 312–314; domestic currency 321; educational opportunities 313–314; education system 321; electric vehicles 29; European tourists 71, 74; evolution of 6; exchange rate peg 17, 166–168; exchange rate stabilization 17; expenditure corrections 310, 310; external debt 99; fiscal balance 309; fiscal flexibility index 103; fiscal incentives 320; fiscal policies 308–310; foreign exchange earning activities 311–312; foreign exchange reserves 306, 306; 461

Index GDP per capita 313; government savings 317; government’s economic contribution 316; government expenditures 314–315, 315; government policies 314–319; government revenue, expenditures and balance 308; government’s economic development policy 319–320; growth, investment and productivity 305; growth vs investment 306–308, 307; hotel capacity 312; Human Development Index 314; income tax system 316; international business and financial services (IBFS) 312, 318–320; LNG regasification 47–48; macroeconomic growth 305–306; manufacturing 312; material betterment prospects 320; private investment declines 168; productivity growth 307–308; public sector performance 320; public sector ratings 315; quality of life 312; real GDP 311; real growth rates 305; remittances 320; renewable energies 42, 320; select taxes to revenue 317; sugar industry 311; tax policies 316; tourism 311–312; tourism dependency 71; UK market dependence 186; victimization costs 120 Barbados Slave Code 128 Barbuda: collective land ownership 143; COVID-19 pandemic response 457; hurricane damages 143–144; Hurricane Irma 24; tourism dependency 71, 73; tourism economy 143 Barclays 357 béké oligarchy 386–387 Belize: Caribbean Basin Initiative (CBI) 277; distribution 278–280; education levels 280, 283; employment opportunities 280–283; exchange rate stabilization 284–285; extreme poverty 279–280; fiscal policies 286; forestry exports 277–278; GDP expenditure shares 277; GDP growth 286; GDP per head 277, 278; gendered nature of sectoral jobs 282; Gini coefficient 280, 287n17; immigration to 281; income inequalities and 280; independence of 276; joining international institutions 276; labour market in 281–282; Lomé Convention 277; macroeconomic policy 283–286; macroeconomic stability 5–6; monetary stability 284–285; outmigration 281, 283; poverty and distribution as percentage of population 279; Preferential Trade Agreements 276–277; public debt 286; public revenue 285; public spending 285–286; remittances 277; service sector 281; tax concessions 285; tourism dependency 71; tourism market share 74; tourism promotion strategy 64; trading arrangements 276–277; UK market dependence 186–187; unemployment levels 282, 282 Belize Bank 285 BES islands 448 see also Dutch Caribbean 465

462

Betancourt, Rómulo 172, 173, 174 bilateral diplomacy 190 biodiversity 389 Bishop, Maurice 89 Blanchard, Oliver 169 blue economy 389 Blue Economy Caribbean project 331 Bolívar, Simon 172 Bolivarian Joint Criminal Enterprise 177 Bolivarian Revolution 171, 175–176 Bonaire 59, 322, 445, 450 see also Dutch Caribbean 465 Bonaire Petroleum Corporation (BOPEC) 450 Bouterse, Desiré (Desi) 326, 334, 335 Branson, Richard 30 Brazil 212–213 Bretton Woods system 359 Brexit 186–187 British Caribbean 83, 354, 355, 357 see also Barbados, Cayman Islands, Guyana, Trinidad and Tobago 462 British Equatorial Oil Company 445 British India 324 British Overseas Territories 90 British Petroleum Trininad and Tobago (bpTT) 273 British Virgin Islands: anti-tax avoidance 144; hurricane damages 144 Browne, Gaston 143, 189 Brunswijk, Ronnie 326 Burkina Faso 193, 195 Bush, George H.W. 243–244 Bush, McKeeva 363 Byles, Richard 436 Cabello, Diosdado 176 Caldera, Rafael 174 Cancún, Mexico 65 Caribbean Basin Initiative (CBI) 277 Caribbean Basin Initiative/Economic Recovery Act (CBERA) 184, 185–186, 188 Caribbean Basin Security Initiative 122 Caribbean Basin Trade Partnership Act (CBTPA) 185 Caribbean Catastrophe Risk Insurance Facility 147, 152, 346 Caribbean Center for Renewable Energy and Energy Efficiency 93 Caribbean Climate-Smart Accelerator 30 Caribbean Community (CARICOM): challenges of 93; coordinated regional approach strategy 89–90; creation of 374; Crime and Security Strategy 122; crime statistics 111–113; debt-to-GDP ratio 87; difficulties in intra-country trade 375; financial resources dependence 92; foreign affairs and 89; functional activities 88–89; GDP per capita 81,

Index

82; goods-based exporting economies 86; hurricanes’ impact on 87; intra-regional imports 87; intraregional trade 388; member states 53n2; Office of Trade Negotiations 85; origins 83; population and area 81, 82; population disparities 384; primary rationales of 291; public debt-to-GDP 100; recession and 87–88; regional economies as challenge to 85–86; regional integration 83–85, 387–388; renewable energy goals 43; renewable energy investments 93; Single Market and Economy (CSME) project 387–388; successes of 91–93; Sustainable Energy Roadmap and Strategy 43–44; Trump administration and 89; US sowing seeds of discord with 189 Caribbean Development Bank (CDB): GeoSmart initiative 50; Sustainable Energy Facility (SEF) 49–50 Caribbean economies see indebted Caribbean economies Caribbean Energy Security Initiative (CESI) 44 Caribbean Free Trade Association (CARIFTA) 83, 374 Caribbean governance patterns: corruption 431–432, 432; government effectiveness 429, 430; political stability, absence of violence 429; regulatory quality 429, 430; rule of law 431, 431; voice and accountability 428 Caribbean region: COVID-19 pandemic and 457–459; culture 14, 39, 40, 59–60; economic and social indicators 382–383; energy characteristics 40–42; geopolitical landscape 454–455; government debt 436; gross domestic product 22; slogan 21; unequal per capita GDP 381–384; see also Dutch Caribbean 465, EU-Caribbean relationship, French Caribbean, US-Caribbean relationship Caribbean Stock Exchange 27–28 Caribbean Tourism Dependent’ (CTD) countries 338 Caribbean Tourism Organization (CTO): members 60; visitor experiences 59–60 CARIFORUM EPA 185 CARIFORUM-UK EPA 186–187 Cartel de Los Soles 177–178 Castro, Copriano 173 Castro, Fidel 250, 251, 252, 259 Castro, Raúl 250, 253–255, 256 Cayman Democratic Party 363 Cayman Islands: air travel and 356–357; benefitting from Bahamas’ independence 358–359; China and 366–367; climate change 367–368; colonial period 355; Companies Law of 1960 357–358; cruise tourism 361; as Dependent Territory 355–356; drug trafficking 359; economic challenges 7, 364; foreign exchange inflows 74; geography of 354; legal

infrastructure 357–358; link to wider world 356–357; money laundering 359; offshore financial hub 354, 357–359; as Overseas Territory 355–356; per capita income 354; political stability 362–363; remittances 357; tax evasion 359, 364–366; as tax haven 360; Terrorism (Amendment) Law 2017 361; tourism 354, 361–362; Treaty of Madrid 355 Cayman Islands Monetary Authority (CIMA) 360–361 Cayman National Corporation (CNC) 365 Cayman National Securities Ltd 365 Cayman National Trust Co Ltd 365 CBI programmes 90 CELAC-EU bi-regional relationship 212 Central Bank of Barbados 166 Central Bank of Suriname 325, 331, 332 Central Bank of the Dominican Republic 402 Chastanet, Ileun 153, 339 chattel slavery 128 Chávez Frías, Hugo 171, 174–176, 178, 259 China: Belt and Road Initiative 32, 45, 193, 197–198, 427; Burkina Faso and 193, 195; Caribbean foreign direct investments 193; Caribbean imports/exports and 198; Cayman Islands and 366–367; CO2 emissions 31; Confucius Institutes 198–199; Costa Rica and 196; Cuba and 197; development aid from 197; diplomatic links with Caribbean 194; Dominican Republic and 195; Dutch Caribbean and 455; El Salvador and 195; ethnic friction 199–200; foreign direct investments 199; Guyana and 197; Haiti and 195; Jamaica and 427–428; Panama and 195–196; perceived predatory economic practises of 196; reconstruction contributions 194; Trump administration and 4, 196; United States and 196; visibility of development aid 198; Xi Jinping 194, 197 China Construction America 344 China Harbor Engineering Company 427 China Investment Corporation 199 Chow Tai Fook Enterprise Ltd 344 CITGO 446 Citizens Control 177 Citizenship by Investment Programmes (CIPs) 126, 130, 134 Clarke, Nigel 433 CL Financial (CLF) 135 climate: El Niño phenomenon 25; weather vs 21–22 climate change: accelerate programme 30; agriculture and 152; Cayman Islands economy and 367–368; drought risk 25; energy security and 42; global warming impact 24–25; hurricane intensity and 27–28; impact of 241;

463

Index migration and 32–33; Paris Climate Agreement 24–25; poor communities and 34; prejudice in 22; rainfall patterns 25; Sargassum seaweed and 26; sea level rise 31, 140; vulnerable states of 23–24, 339; see also Paris Climate Agreement 469 climate refugees 32–33 CO2 emissions 30–32 Coalition for Cayman 363 cocaine superhighway 177 COFINA bonds 228–229 Colbert, Jean-Baptiste 323–324 Colombian cartels 177 colonialism 3, 108, 372 colonialization 108 Colonial Life Insurance Company (CLICO) 135 Columbus, Christopher 393 Commonwealth Sugar Agreement (CSA) 311 Communist Party of Cuba (PCC) 250 Community of Latin American and the Caribbean States (CELAC) 205, 210–212 competitiveness: cultural income 14; innovations 14–15; investments 12–14; public services 15; small and medium-sized enterprises (SMEs) 15–16; tourism 66–70 ConocoPhillips 446, 450 Convergence Démocratique 243 cooperative ventures 254 corruption 134–135, 177–178, 246 see also white-collar crime 472 Costa Rica: China and 196; Chinese FDI flows 199; electricity generation 19n2 Cotonou Agreement 183, 185, 346 Council for Mutual Economic Assistance (COMECON) system 252 COVID-19 pandemic 1, 146, 330, 335, 361, 368, 428, 439–440, 442, 449, 454–458 creative economy 389–390 Creole community 326 Crespo, Joaquín 173 crime and violence: Bahamas 343; business environment impact 121; categories of 109; challenges of 121–122; colonialism and 108; consequences of 118–119; cost/benefits of 109; direct cost of 119–120; drug trafficking 113–118, 116–117; effects on development 119; gang-related activities and 110–111; historical role of 108–109; homicide rates 110, 111, 111, 112; income inequalities and 110; law enforcement corruption 122; patterns/trends in 110–113; police expenditures 120; prison administration costs 120; prison population rates 113, 114–115; social costs of 120–121; typologies 109; victimization costs 120 criminal deportation 118 criminal justice systems 122–123

464

Crisis Group 176–177 Croes, Betico 447 cruise tourism 26, 92, 143–147, 152–153, 278, 286, 319–320, 449–450 Cuba: adult literacy 251; agricultural production 259; average expenditure per visitor 74; B&B system 261; Castro, Raúl reforms 253–255; central planning legacy 252–253; child mortality rate 251; China and 197; climate 21; cooperative ventures 254; COVID-19 pandemic and 457–458; economic sanctions 249; education system 262; energy system 259–260; foreign direct investments 255–256; foreign exchange inflows 71; GDP growth 250; gender/racial equality 252; GNI per capita 253; hotel-based casinos 260–261; hotel capacity 74; industrial production 252; international tourism 250, 260–261, 260; investing in human capital 251; investment projects 255; joint ventures 255; labour export 258–259; land-lease farms 254–255; maternal mortality 251; merchandise trade 257–258, 257, 258; national per capita GDP 253; remittances 258–259; renewable energies 29, 259–260; revolution in 249; small-scale private enterprises 254; socialist model 249; social justice 251–252; Soviet Union subsidies 249–250; stagnating economy 5; state control model 249–250; state-owned enterprises 261; trading partners 256–257; Trump administration and 197, 262; Venezuela’s hostility to 174; ZED Mariel special development zone 256, 262 cultural economy 389–390 cultural income 14–15 Curaçao: central government debt 450; communications infrastructure 453; Eurobond market success 451–452; European tourists 71; GDP growth 449; May Riots 447–448; offshore financial activities 451–452; oil production 445, 446–447, 451; as regional hub 444; tourism 448, 452–453 Curaçao International Trust Company (CITCO) 451 Curaçao Uprising 447–448 debt see external debt, indebted Caribbean economies, public debt debt overhang 103 debt restructuring 101, 103–105 debt-to-GDP ratios 103, 105–106 debt-trap diplomacy 196 Demas, William 83, 84, 374 deportations 118 development aid: China’s contribution to 197–198; Costa Rica 196; Dominican

Index

Republic 195; Dutch government and 329; Suriname 329 Díaz-Canel, Miguel 250 Dieterich, Heinz 178–179 diplomatic regionalism 209, 210–212, 214 domestic financing 99 domestic savings 13 Dominica: CBI programmes 146; Chinese immigrants and 200; climate refugees 33; debt-to-GDP ratio 146; economic recovery 146–147; foreign exchange inflows 74; geothermal energy 49; hurricane damages 145–147; non-performing loans 147; renewable energy targets 22; renewable sources 30; tourism dependency 71 Dominican Republic: agriculture sector 397, 398; Alerta Joven programme 406; central government expenditures 399; central government balance 400; China and 195, 199; climate 21; Corruption Perceptions Index (CPI) 410; COVID-19 pandemic and 458; devastaciones policy 393; development strategies 415–416; educational infrastructure of 404–406; education statistics for 404; education system 395–396; electricity consumption 55n38; engaging with the world 416; financial development 399–402, 401; financial efficiency 400–402; GDP share 395; gender disparity 405; Gini coefficient 242, 406, 407; government deficits 399; government output as share of total output 397–398; Haiti and 245; history 393–394; homicide rates 409, 410; human capital through formal education 404–406; hygienic sanitation 409; industrial production 397; industrial structure 394–399; inequality 407–408; inflation rates 403; inflation targeting regime 403; livestock industry 393; living standards in 407–408; manufacturing 396–397; migration 411–415, 413; mining 397; monetary policy 402–404; natural gas exploration 45–46; per capita income 403; poverty 406–408, 407; production diversification 415; Programme for International Student Assessment (PISA) 405; public spending 395–396; real per capita income 7; regularization of foreigners’ plan 245; remittances 405, 413–414, 413, 414; renewable energy investments 51; renewable energy systems 29; school attendance 405; security 409–411; service sector 395, 415; service sector composition 396; special economic zones 397, 416; sugar plantation industry 393; tax revenues 398; tourism 71, 395; transportation sector 396; UK market dependence 186; water infrastructure 408 Dominican Republic-Central America Free Trade Agreement (CAFTA-DR) 249, 398

drug trafficking 113–118, 116–117, 359 Dutch Caribbean: challenges of 442–443; China and 455; constituent countries of 442; COVID-19 pandemic and 442, 455; economic importance of 444; geopolitical landscape 454–455; history 443–447; oil industry 444–447; political evolution of 447–448; Saba 444, 453; in Second World War 445–446; special municipalities 442; St Eustatius 444, 453; St Maarten 147, 444, 449, 450, 454; tourism 448–449; see also Aruba, Curaçao, French Caribbean, Saba, St Maarten, Suriname Dutch Caribbean Securities Exchange (DCSX) 452 Dutch East Indies 324 Dutch government-in-exile 445 Dutch islands 445 Dutch Revolt 443 Duvalier, Jean-Claude 240 East Indians 324 Economic Commission for Latin America and the Caribbean (ECLAC) 68–69, 91 economic growth: competitiveness as key to 12–16; debt-to-GDP ratio influencing 103; investments as driver for 12–13; policy focus 11; in small open economies 12–13; see also public debt 469 economic integration, challenges of 85–88 Economic Program Oversight Committee (EPOC) 434, 435–436 Economist, The 176 electricity tariffs 41, 48 electric vehicles (EVs) 29 El Niño phenomenon 25 El Salvador: China and 195; Trump administration and 195 empirical autocracy and oligarchy 174 endogenous GDP 371 Energy and Climate Partnership of the Americas (ECPA) 44 energy security: bilateral/multilateral stakeholders 44; definitions of 39–40; external support for 53; extreme weather and 41; fiscal incentives 51–52; institutional development progress 42–45; International Energy Agency 40; lessons learned 51–53; regional cooperation 52–53; regional leadership 43–44; solar energy 50–51; strategy 53; technology improvements 44; wind turbines 50–51; see also renewable energies 470 Enron 131 Erly Rice 240 Erskine Sandiford administration 17 Española 393 EU-Caribbean relationship: Brexit and 186–187; Cotonou Agreement 183, 185; diminished

465

Index privilege 4; free trade agreements 206; Lomé Convention 183, 184–185; New International Economic Order 183; overseas development assistance 187; post-colonial period 183; sugar exports 187; Yaoundé Convention of 1963 183 Europe, as tourism source market 71 European Operational Programme 386 European Union: Financial Action Task Force (FATF) 144; members’ development disparities 371; tax havens ‘greylist’ 452; see also EU-Caribbean relationship 465 exchange rate peg 17, 166–168 exchange rates: depreciating 170; fixed 161; flexible 18–19, 161; impeding economic growth 3; inflation control and 16–17; as principal source of inflation 11 exchange rate stabilization 12–13, 270, 272, 274, 284–285 Export-Import Bank of China 344 Extended Fund Facility programme 98, 435–438 external debt: Barbados 99; Belize 286; description of 98; domestic financing vs 99; Grenada 101; Jamaica 99; Suriname 330; Trinidad and Tobago 266, 274 extreme poverty 279–280, 406 Exxon Mobil 294, 299, 300 Faller, Craig 194 Farah, Douglas 177 Fauntroy, Walter 243–244 FBME Bank 365, 369n21 Federal Bank of the Middle East (FBME) 365, 369n21 Federal Deposit Insurance Corporation 228 female homicide rates 110 Financial Action Task Force (FATF) 91, 132, 133, 144, 347–348 Finer, S.E. 174 fiscal flexibility indices 103, 104 fixed exchange rates 161 Flesch Group 447 flexible exchange rates 161 floating storage and regasification units (FSRUs) 44, 47 food insecurity, in Haiti 5, 238 foreign direct investments: advantages of 256; Cuba 255–256; Trinidad and Tobago 266 foreign exchange: China investments 199; demand for 164–165; economic growth and 12; growth in supply of 3–4; inflows 71, 72; tourism 72; tourism and 71 foreign finance, investments and 13 France, economic growth 376 Free Trade Area of the Americas (FTAA) 185, 190 free zones 195, 286, 375

466

French Caribbean: adopting Departmentalization Act of 1946 375; assimilation of 372–374; béké oligarchy 386–387; colonial economy system 387; economic renewal for 388–389; Fifth Republic 376; Fourth Republic 376; from growth to distorted development 375–377; institutional reform of 7; mortality rates 376; public infrastructure 376; sanitation facilities 376; see also Caribbean region 463, Dutch Caribbean 465 French Guiana 381 French Overseas Departments (DOMs): external trade 378; GDP growth 380, 381; as greenhouse economy 378; growth policy characteristics 373–374; industrialization policy period 379; institutional reform of 378–379; living standards in 370; market activities wealth generated 377; national economic plans 373; post-independence period 379; public investment infrastructure 379–381; quality of life 371; sugar industry 374; transfers to 372–373; unemployment levels 378; see also French Caribbean 466, Guadeloupe and Mar­ tinique 467 French overseas department syndrome 378 fuel oil 47 Gallegos, Rómulo 173 gambling and gaming 273–274 gang violence 110–111 García Padilla, Alejandro 221, 234 geothermal energy: Dominica example 49; Lesser Antilles reservoirs 40; multilateral assistance 49–50; as potential baseload fuel 53; regional approach 48–50; see also renewable energies 470 Geothermal Resource Development Act 49 global financial crisis 99, 106, 186, 267–268, 274, 339–340, 345, 453 global recession 7, 87, 305–306, 309, 317, 319 global warming 24–25 see also climate change 463 Golden Rule 13, 19n1 Gómez, Juan Vicente 173 Gonsalves, Ralph 189 Goslinga, Cornelis Ch. 443–445 government borrowing 13 governments, Caribbean: budget management 13; expenditures financing 12–13; growth-inducing strategies 16 Grand Bahamas see Bahamas Great Hurricane of 1780 27 Green Climate Fund 50 green economy 389 Grenada: collapse of the revolution 89; COVID-19 pandemic response 457; debt restructuring 101; fiscal rules management committee (FROC) 105; tourism dependency 71, 73

Index

Grenadines: SEF funding 50; tourism dependency 71 gross domestic product (GDP): average annual rate 1; tourism’s contribution to 22 Group of 184 243 Group of Lima 211 Guadeloupe 74 Guadeloupe and Martinique: economic reforms 386; GDP growth 377; institutional reform of 386; need for greater growth 385–387; nominal value of GDP 377; see also French Caribbean 466, French Overseas Departments (DOMs) 466 Guaidó, Juan 188–189 Guatemala 196 Guianas Basins 297 Guiana Shield 331 Gulf Union Bank 363 Guyana: baseline scenario 294–295; China and 197; economic performance measurements 293–294; existential risks 299; foreign trade and investments agreements 291; GDP annual % change 291, 294, 295; GDP growth 302, 377; government spending priorities 300–301, 301; government take from petroleum earnings 295–296, 296; macroeconomic indicators 292, 292; medium-term macroeconomic projections 293; Natural Resource Fund 300–301; non-oil GDP annual growth 294; oil and gas development 295–301; oil and gas’ macroeconomic impact 292–295; petroleum discovery 289–290; petroleum geology 297; petroleum reserves 6, 28, 296–297, 297; Production Sharing Agreement 295–296; socio-economic indicators 290; Sovereign Wealth Funds 301; USGS assessments 297–298; Venezuela’s territorial claim 299 Guyana-Suriname Basin 297, 298 Guzmán Blanco, Antonio 173 Haiti: agricultural production 237; agriculture sector 239; assembly industry 238; China and 195; civil society groups 243; colonialism and 236–237; Convergence Démocratique 243; corruption 246; COVID-19 pandemic and 458; development strategy 238–239; Dominican Republic and 245; economic elite 242–244; economic indicators 238; economic mobility 243; economic structure 237–238; electricity access 41; food insecurity 238; food insecurity in 5; future political stability 246; GDP by economic sector 237; GDP decline 244–245; Gini coefficient 242–243; gross domestic product 237; Group of 184 243; history 394; Hurricane Matthew 242; independence of 236; inequality measures 242;

natural disasters 241–242; oil dependency 245; personal remittances 244–245, 244; remittances 244–245, 244; rice imports 240–241; rural-urban cleavage 242–243; social unrest 236; Temporary Protected Status (TPS) 244; tourism potential 60–62; Trump’s views of 188; UK market dependence 186; wages 240 Hall, Charles Martin 324 Hausman, Ricardo 176 Hawksbill Creek Agreement 347 Heavily Indebted Poor Countries (HIPC) 99–100 Heritage and Stabilization Fund 269 Héroult, Paul T. 324 Hezbollah 175–176 Hindustanis 324, 326 Hispaniola 393 Hoefte, Rosemarjin 332 Holness, Andrew 194, 432 homicide rates 110, 111, 111, 112, 118 Honduras 196 household incomes 222, 381, 407 Human Development Index: Bahamas 341; Barbados 304, 314; Cuba 251; description of 86; Guadeloupe and Martinique 370, 384; Guyana 290; Haiti 242; Jamaica 424 Hunter, Arthur 358 hurricanes/hurricane damages: aid fatigue from 151; Anguilla 141–142; Antigua 143–144; Barbuda 143–144; British Virgin Islands 144; damage costs 140; debt-to-GDP ratio rises after 28; Dominica 145–147; frequency of 27; impact on CARICOM economies 87; intensity of 27–28; St Maarten 147; tourism impacts 26; Turks and Caicos Islands 144–145; see also natural disasters 469 hydropower 28–29, 40 illegal drug trafficking 113–118, 116–117 IMF financial programming model: adjusting demand to foreign currency supply 164; description of 162–166; impact of devaluation 164; standard model and modification 163 Immerwahl, Daniel 224 immigration 281 import substitution industrialization (ISI) 274 indebted Caribbean economies: characteristics of 100–102; evolution of 98–100; see also public debt 469 Industrial Development Corporation (IDC) 264 industrialization by invitation model 225, 264, 374 inflation 11, 16–17 innovations, support for 14–15 integration movement 83–85 Inter-American Court of Human Rights (IACHR) 412

467

Index Inter-American Development Bank (IDB): Bahamas and 150, 339, 342, 349; Belize and 276; energy projects and 44–45, 47–50; geothermal energy 48–49; Haiti and 101; Jamaica and 437, 438; on persistent indebtedness 100; renewable energies and 47–48; Suriname and 328, 330, 333 Intergovernmental Panel on Climate Change (IPCC) 24 Interim Revenue Stabilization Fund 269 International Consortium of Investigative Journalists (ICI) 364 International Energy Agency (IEA) 40 International Monetary Fund (IMF): Caribbean Tourism Dependent’ (CTD) countries 338; debt-to-GDP ratio reports 28; economic advice and analysis by 11; Extended Fund Facility programme 98, 435–438; Jamaica and 432–438; loan assistance from 133, 283; national debt and 98–99; Partnership for Progress (PFP) initiative 433; see also IMF financial programming model 467 investments: economic growth and 12–13; foreign finance and 13–14; joint ventures 255; loopholes and 136; as share of GDP 339; see also foreign direct investments 466 Jamaica: accommodation expansion 64; adjustment fatigue 433; agriculture sector 23; China and 427–428; China’s Belt and Road Initiative 198; Chinese FDI flows 199; climate 21; Confucius Institutes 198–199; corruption 431–432; COVID-19 crisis 439–440; COVID-19 pandemic and 458; debt reduction 432–438; debt relief 100; debt restructuring 432–433; drug trafficking 113; economic strengths 422; economic weaknesses 422; electricity consumption 55n38; electric vehicles 29; employment patterns 426; external debt 99; financial system 427; fiscal balances 436, 437; fiscal flexibility index 103; foreign exchange inflows 71; GDP growth 423; governance trends 428–432; as high human development country 424; independence of 355; infrastructure 427; International Monetary Fund and 432–438; joining Belt and Road Initiative 427; manufacturing 426–427; natural gas exploration 46–47; outmigration 424–426; Partnership for Progress (PFP) initiative 433; per capita income 423; political stability 428–429; public sector performance 426; remittances 422, 424–426, 425, 439; renewable energy investments 51; renewable energy targets 22; rule of law 431; savingsinvestment imbalance 438, 439; sectorial growth patterns 426–428; security 424; socio-economic development 424–426; stock

468

market shocks 27–28; tourism dependency 23, 73; tourism revenues 439; tourism share of total exports 427; UK market dependence 186; unemployment levels 425; United States and 439; University of West Indies (UWI) 198–199; youth unemployment 424 Jamaica Debt Exchange 101 Jamaica Public Service Company (JPS) 46–47 Javanese 324 Johnson, Gerard 437 joint ventures 135, 255, 261, 322, 344, 364 Jones, Bart 179 King, Leroy 132 Klesch Group 447 Kossoff, Stephen 187 labour force adaptation 15–16 Lago Oil and Transport Company Ltd 445 land-lease farms 254–255 Lap-tak, Jeffrey Chan 367 Latin American and the Caribbean Community (CELAC) 4 Latin American Migration Project (LAMP) 415 Lesser Antilles: Dutch settlement in 444; geothermal reservoirs 40; hurricanes and 27 Lewis, Arthur 83, 274 liquefied natural gas (LNG): Dominican Republic approach 45–46; floating storage and regasification units for 44; infrastructure 46; Jamaican approach 46–47; market expansion 52; opportunities in 45; as substitution for fuel oil 47; Trinidad and Tobago 40 livestock industry 393 LNG see liquefied natural gas (LNG) Lomé Convention 183, 184–185, 277 López Contreras, Eléazar 173 Mackenzie, Wood 296 Maduro, Nicolás 179 Maduro Moros, Nicolás 171, 176, 446 male homicide rates 110 Martelly, Michel 243 Martinique see French Caribbean, French Overseas Departments (DOMs), Guadeloupe and Martinique May, Theresa 142, 366 McLaughlin, Alden 366 MDC/LDC (more developed/less developed) divide 84–85, 87 Medina Angarita, Isaias 173 Mexico 210, 212 see also Cancún, Mexico 462 Middle Eastern oil money 368n7 migration: of Afro-Cubans 252; in Belize 281; brain drain and 119; of climate refugees 32, 152; cyclical nature of 33; to Dominican Republic 236; Dominican Republic 394,

Index

411–415; in Haiti 239; natural disasters and outward 24, 141; outmigration 233, 281, 283; Puerto Rico and 223, 226, 229; Venezuela and 45 Moïse, Jovenel 240 monetary policies 165 money laundering 131, 273–274, 338, 359 Monserrat 62 Morgenthau, Robert 175–176 Morris, Andrew 451 Morse, Richard 172 Mottley, Mia 31, 309–310 Multilateral Debt Relief (MDRI) initiatives 99–100 Mundell-Fleming fixed exchange rates 161, 162 music industry 389 Myrdal, Gunnar 179 National Petroleum Company 265 natural disasters: adaptation agreements 151; aid fatigue from 151; annual losses 140; cost of 28; extreme weather and 41; food shortages and 241; migration and 32–33, 152; risk reduction 346; Trump administration and 151; see also hurricanes/hurricane damages 467 natural gas see liquefied natural gas (LNG) Netherlands 451 see also Dutch Caribbean 464 Netherlands Antilles federation 447 New Fortress Energy (NFE) 46–47 New International Economic Order (NIEO) 183 New World Group (NWG) 83–84 North American Free Trade Agreement (NAFTA) 287n8, 375 NuStar storage terminal 453 Obama, Barack 364 Ochoa, Arnaldo 178 O’Connor-Connolly, Juliana 363 offshore financial centres (OFCs) 90–91 offshore industry 130–131 oil dependency 40–41 oil shocks 98, 183, 226, 265 Ojeda, Alonso de 443 Open Data Charter 410 open economies: objective function 169; targeting exchange rates 161–162 open regionalism 185, 206–207 O’Reilly, Marshall Alejandro 223 Organisation of Eastern Caribbean States (OECS): debt implications 102–103; external debt 99; fiscal discipline 98; high indebtedness of 105; launching trade policy unit 90; member states 81; privileged European trade 375; as service-based economy 86; Switzerland delegation 85 Organization of American States (OAS) 184, 210–211, 244, 276

orthodox policy suite 19, 19n3 outmigration 281, 283 Pact of Punto Fijo 171 Palacio, Raimundo 173 Panama: China and 195–196; Chinese FDI flows 199; tourism dependency 71 Panama Papers 364–365 Paradise Papers 364–365 Paris Agreement 349 Paris Climate Agreement 24–25, 42, 151 see also climate change 463 Paris Club 99 Parris, Leroy 135 Partido Socialista Unido de Venezuela (PSUV) 175 Parti Haïtien Tèt Kale (PHTK) 243 Partnership for Progress (PFP) initiative 433 PDVSA 446–447, 450 People’s Progressive Movement (PPM) 363 Pérez, Carlos Andrés 174 Pérez Jiménez, Marco 171, 173–174 Petkoff, Teodoro 179 petrodollars 368n7 Phillips, Peter 432, 434 Pompeo, Mike 89 Ponzi scheme 132–134 post-hegemonic regionalism 208, 210, 214 post-liberal regionalism 207–208, 212–214 presidential diplomacy 208–209 Price, George 279 price stabilization see stabilization policies Principal Component Analysis (PCA) techniques 384–385, 385 prison administration: population rates 113, 114–115; public spending on 120, 121 Programme for International Student Assessment (PISA) 405 pro tempore presidency (PTP) mechanism 209, 211 public debt: accumulation of 101–102; consequences of sustained 102; crowding out domestic investment 102; liquidity risk 102–103; as percentage of GDP 99; reduction in 103–105; relief efforts 99–100; restructuring 101, 103–105 Public Investment Companies (PICs) 287n27 public services 15 Puerto Rico: bankruptcy protection 234; challenges to American dominance 224–225; climate refugees 33; COFINA bonds 228–229; debt restructuring 231; disaster funding 231–232, 234; Economic Activity Index 230, 230; economic decline 148; economic modernization 223; economic relationship with USA 5; establishing civil government 223–224; Federal Oversight and Management

469

Index Board 148; household income 222; hurricane damages 148–149; Hurricane María devastates 230; industrialization strategy 225–226; integrated in American economy 221; labour force participation rate 233; labour laws 233; minimum wage 233; New Deal programme 224–225; outmigration 225; pharmaceutical manufacturing 226; population decline 233; poverty rates 148; public debt 221, 229; public pension system 229; real estate shock 228; real GNI per capita 222; real GNP 227, 228; reconstruction 231–232; repatriated income 226; Resident Commissioner 224; resilience to extreme weather 51; Spanish legacy 223–224; tax advantages 226–227; underutilized labour 225; USA’s acquisition of 223–224 Puerto Rico Emergency Relief Administration 224–225 Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) 229–230 purchasing power parities (PPPs) 253, 264, 314 Pye, Lucien 172 Qatar 31, 185, 370 Ramautarsing, Winston 329 Ravenhill, John 183 reconstruction, inadequate funds for 3 regional economic integration 334, 388 Regional Food and Nutrition Security Policy (RFNSP) 152, 346 regional integration 83–84, 88–91, 205–207, 212, 334, 387–388 regions and regionalism: cooperation vs integration 205; defined 204–205; diplomatic 209, 210–212, 214; emerging types of 207; as governance strategy 207; ideological convergence 208–209; importance of 204; institutionalization 213–214; leadership 208–210; models 204; post-hegemonic 208, 210, 214; post-liberal 207–208, 212–214; types of 204–205 remittances: Barbados 320; Belize 277; Cayman Islands 357; Cuba 258–259; Dominican Republic 405, 413–414, 413, 414; Haiti 244–245, 244; Jamaica 422, 424–426, 425, 439; as percentage of GDP 414; personal 244, 413 renewable energies: accelerating Caribbean growth 14; Barbados 320; Caribbean targets 43; CARICOM investment in 93; challenges 48; consumer-based projects/installations 29; Cuban 259–260; electric vehicles 29; geothermal energy 40, 48–50; hydropower 28–29; independent power producers licensing 48; Inter-American Development Bank (IDB)

470

45; investments 51, 52; Paris Climate Agreement 42; regional integration 52–53; wind farms 25, 29; see also energy security 463, liquefied natural gas (LNG) 468 Reunion Island 375, 376 see also French Overseas Departments (DOMs) 466 Rio Group 210 Romero, Anthony 262 Rome Treaty of 1957 372 Rowe, Devon 435 Rowley, Keith 189 Ruíz, Briceño 204, 208 Russell, Thomas 366 Rystad Energy 296 Saba 444, 453 San Ciriaco Hurricane 27 Sargassum seaweed 26 Schlesinger, Arthur, Jr. 174 sea level rise 31, 140 Sherritt International 259 small and medium-sized enterprises (SMEs): labour force adaptation and 15–16; support for 12 small open economies see open economies small open financially integrated economies (SOFIEs) 161–162, 165, 167, 169–170 small-scale trading 199 Smeets, Anton 451 solar energy 50–51 sovereign credit ratings 41–42 Soviet Union 249–250 Staatsoile 331 stabilization policies 16–17 Stanford, Robert Allen 132–134 St Eustatius 444, 453 Stiglitz, Joseph 364 St Kitts and Nevis: Chinese immigrants and 200; tourism dependency 71, 73 St Lucia: renewable energies 42; tourism dependency 71, 73; UK market dependence 186 St Maarten 147, 444, 449, 450, 454 structural adjustments 5, 99, 240, 245, 266, 327, 381 St Vincent: foreign exchange inflows 74; SEF funding 50; tourism dependency 71 sugar industry 187, 311–312, 314, 318, 374, 393 Suriname: aluminum production 324–325; bauxite development 324; brain drain 333–334; CBvS scandal 332–333; Chinese immigrants and 200, 328; Chinese loans 328; commodity boom years 327–328; COVID-19 pandemic response 457; creating stronger institutional framework 332–333; debt-to-GDP ratio 328–329; Dutch arrival 323–324; Dutch control of 444; economic

Index

boom 328; economic diversification 330–331; economic recovery 329–330; ethnic mix 323; extractive activities 6; financial sector 333; foreign policy challenges 334; independence of 325–327; infrastructure 331–332; Interior War 326–327; macroeconomic indicators 330; military coup 326; offshore oilfields 322; oil production 331; as plantation colony 323–325; post-independence period 322; private sector development 332; public sector debt 333; regional economic integration 334; rice production 330; Saving and Stabilization Fund 333; state-dominated economy 327–328; structural adjustment programme 327; sustainable forestry 331; Treaty of Breda 323; Venezuela and 334; as Willoughbyland 323 Sustainable Energy Facility (SEF) 49–50 Sustainable Energy Roadmap and Strategy (C-SERMS) 43–44 sustainable policies, core elements of 1 sustainable tourism 262 Sutherland, Edwin 127 Taíno 393 Taiwan: countries maintaining diplomatic ties with 193; development aid from 197; Guatemala and 196; Honduras and 196; trade with Burkina Faso 193 tax evasion 131, 359 telecommunications technologies 131 Total E&P Activités Pétrolières 300 tourism: arrivals by source market 67; average expenditure per visitor 61, 70, 70, 72–73; B&B systems 261; boutique counties 60–62; capacity utilization 73, 261; communications technology challenges 75; competitiveness 66–70; COVID-19 pandemic and 458–459; dependency on US tourists 70–71; economic importance of 71; foreign direct investments and 152; foreign exchange inflows 71, 72–75, 72; Great Recession affects on 26; growth of 64–66; hotel-based casinos 260–261; hurricanes’ impact on 26; international 66, 250, 260–261; largest players 60; length of stay by destination 62; length of stay by source market 62; market diversification 70–71; market share 67, 68; market share vs prices for 68–69, 69; occupation levels 64; occupation rates 64, 65; peer-to-peer online marketing services 75; percentage share of arrivals 61; price adjustments 2; as private enterprise 2; room accommodation expansion 64; room accommodations 62–64; room capacity 63; source countries of visitors 76–77; as source of foreign currency 72–73; sustainable 262; sustained growth 381; value-added destinations 60; violence and 119

trade: CARICOM’s regional approach 89–90; intra-regional 87–88; open regionalism strategy 206–207 trade liberalization 206 transport sector 29 Treaty of Breda 323 Treaty of Madrid 355 Treaty of Punto Fijo 174 Trinidad and Tobago: adjustment programme 266; Carnival 60; Central Bank intervention 271–272; China’s Belt and Road Initiative 197–198; climate 21; climate refugees 33; COVID-19 pandemic response 457; cultural income 14; currency substitution 272; debt restructuring 101–102; development plans 264–265; economic growth 266–267; economic history 264–267; economic outlook 273–274; economic prosperity 23; employment opportunities 265; energy sector 267; exchange rate policies 270–273; financial liberalization policy 271–273; financial repression 270; fiscal flexibility index 103; fiscal policies 269; foreign direct investments 266, 266, 274; gambling and gaming 273–274; GDP growth 268; Heritage and Stabilization Fund 269; industrialization by invitation model 264; inflation 268, 268; Interim Revenue Stabilization Fund 269; liquefied natural gas supplies 40; macroeconomic structure 267–269; money laundering 273–274; natural gas exploration 265, 267; non-oil sector 268; oil and natural gas 5, 23; oil production 28; oil shock revenue windfall 265; public debt 269, 274; renewable energy targets 22–23; tax reform programme 269; total debt and fiscal balance 270; tourism dependency 71; unemployment levels 268, 268; victimization costs 120 Trinidad Carnival 60 Troubled Asset Relief Program 228 Trujillo, Rafael 402 Trump, Donald 148, 188–189 Trump administration: Bahamas and 349; Caribbean Community and 89; CBERA and 185; China and 4, 196; Cuba and 197, 256–257, 262; El Salvador and 195; natural disasters and 151; United Nations and 188; Venezuela and 334 Tullow Oil 300 Turks and Caicos Islands: hurricane damages 144–145; tourism economy 145 twenty-first century socialism 178–179 Ugland House 364 UN Environmental Programme 389 Union of South American Nations (UNASUR) 4, 205, 209–210, 212–214

471

Index United Arab Emirates (UAE) 42–43, 44, 51 United Nations, Trump administration and 188 United Nations Development Program (UNDP) 143 United Nations Human Development Index see Human Development Index United Socialist Party of Venezuela 175 United States (USA): Caribbean Energy Security Initiative 44; China and 196; CO2 emissions 31; Federal Oversight and Management Board 148, 231, 232; incorporated vs unincorporated terri­ tories 224; Insular Cases 224; Jamaica and 439; New Deal programme 224–225; oil depen­ dency 174; petro-diplomacy 174; Puerto Rico acquisition (See Puerto Rico); Supreme Court 224; see also US-Caribbean relationship 472 University of West Indies (UWI) 198–199 urban cooperatives 254 US Agency for International Development (USAID) 238–240 US-Antillean tax treaty 451 US-Caribbean relationship: Caribbean Basin Initiative/Economic Recovery Act 184; Caribbean Basin Trade Partnership Act (CBTPA) 185; diminished privilege 4; free trade agreements 206–207; FTAA initiative 185; geopolitical significance 45; Harmonized Tariff Schedule 184; Special Access Programme 184; tourism 65, 73; Trump effect 188–189 US Virgin Islands: hurricane damages 149; outmigration 149 Vallenilla Lanz, Laureano 173 value-added tax (VAT) 316, 349, 398 Venetiaan, Ronald 326–327 Venezuela: Bolivarian Revolution 171, 175–176; CARICOM and 89; Chávez Frías, Hugo 171; corruption 177–178; drug trafficking 177–178; Generation of 28 173; historical antecedents 172–175; hostility to Cuba 174; Maduro Moros, Nicolás 171; military sources of income 176–178; military’s role in society 173–174; monetary assistance from 4; natural gas pipeline 446; New National Ideal 174; oil dependency 41; oil exploration 173; Pact of

472

Punto Fijo 171; Pérez Jiménez, Marco 171; rise of the proletariat 173; territorial claim on Guyana 299; Treaty of Punto Fijo 174; Trump administration and 334; Trump and 188–189; twenty-first century socialism 178–179; US oil company’s assets in 446; US oil dependence 174 Verba, Sidney 172 violence see crime and violence weather: climate vs 21–22; energy security and 41; extremes in 22, 50–51; see also climate change, hurricanes/hurricane damages Weiss, Antonio 229–230 West Indies Federation (WIF) 83 white-collar crime: in-built class biases 128; Colonial Life Insurance Company (CLICO) 135; corruption and 134–135; definition of 127–129; Enron 131; examples of 131–136; genesis of the term 127–128; global interconnectivity and 130; in government agencies 128–129; loopholes and 136; offshoring 130–131; Ponzi scheme 132–134; power dynamics of 129–130; small states’ vulnerability to 133; tax evasion as 131; types of 127 Wijdenbosch, Jules 327 Willoughbyland 323 wind energy 50–51 wind farms 25, 29 World Bank 49, 239, 243, 438 see also Caribbean governance patterns World Food Programme (WFP) 241 World Health Organization 110 World Travel and Tourism Council 25, 449 World Wide Web Foundation 410 Wynter, Brian 436 Xi Jinping 194, 197 Yaoundé Convention of 1963 183 Yates, Caitlyn 177 Ybarra, T.R. 172–173 ZED Mariel special development zones 256 Ziccardi, Saltalamacchia 210–211