Report No. 31725-LAC A Time to Choose Caribbean Development in the 21st Century April 7, 2005 Caribbean Country Management Unit Poverty Reduction and Economic Management Unit Latin America and the Caribbean Region Document of the World Bank ABBREVIATIONS General Agreement on Trade inService GDP Gross Domestic Product GNFS Goods and Non-factor Services GNP Gross National Product GPA Government Procurement Agreement GSP Generalized System of Preferences HDI HumanDevelopment Indicators HEARTNTA HumanEmployment and Resource Training/ National Training Agency HIPIC Heavily IndebtedPoor Countries HS High School ICAO InternationalCivil Aviation Organization ICT Information and Communication Technology IDB Inter-AmericanBank IFC InternationalFinancial Corporation IF1 InternationalFinancial Institution 11 OLS Ordinary Least Squares PAHO Pan American Health Organization PAJ Port Authority of Jamaica PBL Problem Based Learning PhD Doctor o f Philosophy PPP Purchasing Power Parity PREM Poverty Reduction and Economic Management PSMP Public Sector Modernization Project R&D Research and Development REER Real Effective Exchange Rate RNM Regional Negotiating Machinery S A R South Asia Region SDT Special and DifferentialTreatment SITC Standard International Trade Classification SME Small and Medium Size Enterprises SPS Sanitary and Phytosanitary Standards SSA Sub-Saharan Africa STEP Small Tourism Enterprise Project TFP Total Factor Productivity TOT Terms-of-Trade TRAINS Trade Analysis and InformationSystem TVET Technical and Vocational EducationTraining UASD Universidad Autonoma de Santo Doming0 UNCTAD UnitedNations Conference on Trade and Development UNDP UnitedNations Development Program UNELCO Union Electrique du Vanuatu UNEP United Nations Environment Program UNESCO UnitedNations Educational, Scientific and Cultural Organization 111 ... USAID UnitedStatesAgency for InternationalDevelopment USMLE UWI Universityofthe West Indies VAT Value AddedTax WDI WorldDevelopmentIndicators WHO WorldHealthOrganization WTO WorldTrade Organization WTTC WorldTravelandTourismCouncil iv TABLE OFCONTENTS FOREWORD ................................................................................................................................................ XI ACKNOWLEDGEMENTS ........................................................................................................................ XI1 EXECUTIVESUMMARY AND POLICY OPTIONS ........................................................................... XIv CHAPTER1 .................................................................................................................................................. 1 GROWTH PERFORMANCEINTHE CARIBBEAN .............................................................................. 1 A. INTRODUCTION ...... ............................................................. B. ECONOMIC GROWTH AND SOCIAL DEVELOPMENT ...................... c. SOURCES OF GROWTH-THEROLEOF SERVICES AND PRODUCT1 D. THE PAYOFFS OF POLICY REF0RM E. ECONOMIC VULNERABILITY AND RESILIENCE ........................................................................................................ 19 F. MEDIUM-TERM GROWTH OUTLOOK ............................................ G. CONCLUSION-OVERALL POLICY DIRECTIONS ............................................................................... 26 CHAPTER 2 ............................................................................................................................................... .28 IMPROVINGGOVERNMENT FINANCESAND EXPENDITURE ................................................... 28 A. INTRODUCTION .......................................................... ................................................................. 28 B. GOVERNMENT EXPENDITURES REVENUES INTHE CARIBBEAN AND ........... C. INTERESTDEBT EXPENDITURES THE AND ISSUE ......................................... D. GOVERNMENT SPENDING ON EDUCAT10N .................................................. ............................... 35 E. GOVERNMENT SPENDING ON HEALTH ......................... ............................................................ 39 F. GOVERNMENT CAPITAL EXPENDITURES ......................................................................... G. CONCLUSION .................................................................................................................. CHAPTER3 ................................................................................................................................................ 44 ATTRACTING PRIVATE INVESTMENT INTHE CARIBBEAN ...................................................... 44 A. INTRODUCTION .......................................................................................................... 44 B. THEINVESTMENT CLIMATE, GROWTH AND POVERTY ..................................................................... 44 C. FOREIGNDIRECT INVESTMENT 46 D. THEFOREIGNINVEST0R'S PERCEPT10NOFTHECARIBBEAN........................................................... TRENDSINTHE CARIBBEAN ............................................................ 50 E. WHATARE THE SOURCESOFINFORMAT~ONFORINVEST~RS?.............................. F. CONCLUDINGREMARKS .................................................................................................................. 62 CHAPTER4 ................................................................................................................................................ 64 THE CHANGINGINTERNATIONAL ENVIRONMENT FOR THE CARIBBEAN ......................... 64 A. INTRODUCTION 64 B. TRADE EXPOSUREAND PATTERNS ..................................................................................... ....................................................................................................64 c. IsTHECARIBBEAN COMPETITIVE? .................................................................................................. 67 D. PROTECTIONINTHE C M C O M-FROMTHE EXTERNALMARKET AND WITHIN C M C O M-AND LIKELY IMPACT OF LIBERALIZATION ................................................................................................ 69 E. D OTRANSPORT COSTS IMPAIR COMPETITIVENESS? .............. ................................. F. REVENUEEFFECTS TARIFFREDUCTION ON CARIBBEAN OF TRIES ........................ G. PREFERENCES- BLESSING MISSED OR OPP~RTUN~TY? ............................... H. AGRICULTURE PREFERENCESHAVEALSO PROPPEDUPMANY INEFFICIENT I. THEWAY FORWARD: LEVERAGING REGIONAL INTEGRATION AND A PRO-ACTIVE VISION FOR COMPETITIVENESS ............................................................................... ......... 88 J. ACTIONSAND IMPLEMENTATION..................................................................................................... 91 CHAPTER5 ................................................................................................................................................ 94 EMERGING OPPORTUNITIESFOR THE CARIBBEAN ................................................................... 94 . V A. INTRODUCTION ................ ............ ........................ ......... ..94 B. ICT SERVICES AND ICT-ENABLED PRODUCTS AND SERVICES ......................................................... 94 C. TOURISM INTHE CARIBBEAN .... .............................................. D. OFFSHORE EDUCATION........................................................... E. HEALTH SERVICES INTHE CARIBBEAN .. ........................................................................... 115 CHAPTER 6 .............................................................................................................................................. 120 IMPROVINGLABORMARKETSTO SUPPORT GROWTHAND EMPLOYMENT ..................120 A. INTRODUCTION ............................................................................ B. CARIBBEAN LABOR DE C. LABOR SUPPLY AND MISMATCH ... D. LABOR LEGISLATION A E. INTRA-REGIONAL AND F. CONCLUSIONS................................................................................................................................ 142 CHAPTER7 ...................................................................................... ....................................................... ........................................................ 144 BUILDING SKILLS FOR KNOWLEDGE-DRIVENGROWTH ,144 A. INTRODUCTION .............................................................................................................................. 144 B. WHY SKILLS ARE ESSENTIALFORCOMPETITIVENESS .. C. MANY CARIBBEANCOUNTRIES ARE FALLING BEHIND INSKILL FORMATION OVER THE LASTTWO DECADES ........................................................................ .................. D. ASSESSINGTHE QUALITY OFEDUCATIONINTHECAR1 ............................ 153 E. THEPOLICY AGENDA........................................................................ F. IMPROVINGQUALITY OF EDUCATION G. INCREASING ACCESS TO TERTIARY EDUCATION THROUGH GREATER PRIVATE INVESTMENTS ....................................................................................................155 159 H. PRODUCINGSKILLSDEMANDED BY EMPLOYERS .......................................................................... 163 I. FACILITATINGTHEDEVELOPMENTOFTECHNOLOGY INTHECARIBBEAN ..................... CHAPTER 8 ............................................................................................................................................. .170 THE PERFORMANCEOF CARIBBEANINFRASTRUCTURE:SIZE AND INSTITUTIONS MATTER ................................................................................................................................................... 170 A. INTRODUCTION .............................................................................................................................. 170 B. LEVELSSERVICESVARY ACROSS OF SECTORS AND COUNTRIES ............. ................................. 170 c. ISSUESPRIVATEFINNANCING.............................................................................. INPUBLICVERSUS 180 D. RECOMMENDATIONS ..................................................................................................................... 182 BIBLIOGRAPHY ..................................................................................................................................... 192 FIGURES FIGURE 1:PER CAPITA INCOMES (PPP) 1975-2002 ........................................................ ......................... X N FIGURE 2: CARIBBEAN TOTAL FACTOR PRODUCTNITY (MEDIAN GROWTH RATES, %) ............................. XVIl FIGURE3: GDPGROWTHAND TOTALDEBT (%GDP), 86 COUNTRIES....................................................... XVIII FIGURE 4: FDITO GDPRATIOS INTHE CARIBBEAN, 1980-2002 ............................................................... XXII FIGURE 5: RATINGS OF THE INVESTMENTCLIMATE INTHE CARIBBEAN ........... FIGURE6: RAW SUGAR PRODUCTIONCOSTS OFACP PRODUCERS............................................................. XXVI FIGURE 7: QUALIFIED TEACHER SALARY INSTATE SCHOOL (ANNUAL $) ................................................... XXX FIGURE8: LOW PASSRATES INCARIBBEANEXAMINATIONS COUNCIL .................................................... XXXIII FIGURE1.1: PERCAPITA GDP GROWTH RATES BY REGION: 1970-2003 ....................................... FIGURE1.2: PERCAPITA INCOME BY REGION ........................................................................................................22 FIGURE1.3: CHANGESINGDPGROWTHAND POVERTY................................................................... FIGURE1.4:CARIBBEAN TOTALFACTOR PRODUCTIVITY ESTIMATES.............................................. FIGURE 1.5: THE CARIBBEAN: RELATIVERANKINGONMACROECONOMIC PEWORMANCE ......................... 12 FIGURE 1.6: STRUCTURAL REFORMSINTHE CARIBBEAN ......................................................................... FIGURE1.7:VULNERABILITY OFCOUNTRIES................................................................................................. FIGURE 1.8: POTENTIALCHANGE INGDP PERCAPITA (%): BUSINESS USUAL VS. POLICY SCENARIOS AS .....20 24 FIGURE2.1:CARIBBEAN: EDUCATIONAL SPENDING/GDP INCOUNTRIES WITH UNDER 1MILLIONPEOPLE.38 FIGURE 2.2: PRIMARY SCHOOL PUPIL TO TEACHER RATIO (PTR) ................................................................. 38 vi FIGURE3.1: INVESTMENTAND GROWTH THE CARIBBEAN, 1990-2003IN 46 FIGURE3.2: FDITO GDPRATIO, 1980-2002 ...................................................................................................... ......,.............................,..47 FIGURE3.3: RATINGS OFTHEINVESTMENTCLIMATEINTHECARIBBEAN..... ...................................... 51 FIGURE3.4: COMPARISONOFTHEIMPORTANCEOFTHEINVESTMENTCLIMA ......,.............................. FIGURE3.5: COMPONENTSOFPOLICYAND LEGAL ENVIRONMENT .................................... ...............52 53 FIGURE3.6: COMPONENTSOFFDIFMEWORK ("AOF FIRMS) .................................................................... 54 FIGURE3.7: COMPONENTSOFMARKET ACCESS OFFIRMS)...................................................... (% FIGURE 3.8: COMPONENTSOF LABOR OF FIRMS) (% ......................... .................................. FIGURE 3.9: COMPONENTSOF ADMINISTRATIVEPROCEDURES(%OF FIRMS) ............................................... FIGURE3.10: COMPONENTSOFTAXATIONAND CUSTOMS................ ................................................. 60 59 FIGURE 3.11: COMPONENTS OF INFRASTRUCTURE ........................... ................................................. 61 FIGURE4.1: MERCHANDISE SERVICE AND EXPORTS OFGNFS)....,,..,, ..,..,., ..,,,....................65 (% FIGURE4.2: CARICOM'SDECLINING MARKET SHARES ........................... ,.,............ ,,, , ............................ FIGURE4.3: SHIPPINGAND INSURANCECOSTS INTHE CARIBBEAN ............................................................... 73 FIGURE4.4: IMPORTSANDCONTAINERUSAGE................................................................ FIGURE4.5: LIBERALIZATIONCHANGEINFISCALBALANCEINCARIBBEANCOUNTR AND FIGURE4.6 EXPORTGROWTH A POST-PREFERENCEWORLD................................................... IN FIGURE4.7: PERCENTAGEOFIMPORTSINTOU.S. RECEIVINGPREFERENCES .................................................. 78 FIGURE4. 8: CHINA APPAREL EXPORTS THEUS................................................................................ TO FIGURE4.9: EXPORTSOFPRODUCTSALREADY LIBERALIZED (1996=100) .............................................. FIGURE 5.1: INTERNETCOSTS AND USERS ......................................... ................................................ ......98 FIGURE5.2 CARIBBEANGROWTH HAS COMEFROMCUBA AND DOMINICAN REPUBLIC.............................. 102 FIGURE5.3: PRICECOMPETITIVENESS,..,......................,.................................................. FIGURE 5.4: INTERNATIONALMEDICAL GRADUATES INTOTHE us,1984-2004............ , FIGURE 5.5: STAGESOF usMEDICAL ............................................................. FIGURE6.1: EMPLOYMENT SHAREBY SECTOR............................................................................................ TRAINING 124 FIGURE6.2: PUBLICEMPLOYMENT OF LABOR (% FORCE) ........................................................................... 124 FIGURE 6.3: EDUCATIONBREAKDOWNOFEMPLOYMENTDOMINICA, IN DOMINICAN REPUBLICAND ST. VINCENTAND THE GRENADINES .................................................................................................................. 124 FIGURE 6.4: RETURNS EDUCATION TO ......................... FIGURE 6.5: COMPARINGMALE AND FEMALE UNEMPLOYMENT ............................................................ ...... ...... ............................. ................132 9 . . *. FIGURE 6.6: COUNTRY COMPOSITIONOF LAC IMMIGRANTS INTHE US,2000 ........................ FIGURE7:1:UNAVAILABILITY OF SKILLSBIGGESTOBSTACLEINGRENADA'S INVESTMENT FALLINGDOWNTO AVERAGEPERFORMERS..................... c FIGURE7.2: RESTINGONLAURELS: FIGURE7.3: REMARKABLEKOREA ANDFINLAND....................................................................................... 150 FIGURE 7.4:QUALITY OFINSTRUCTIONWITHIN THE CARIBBEAN ................................................ (THE PASS RATEOFMATH AND ENGLISH THE AT cxcEXAM).................................................... FIGURE 7.5: RECORDHIGHPUBLICSPENDINGINTHE CARIBBE.................................................................. 157 FIGURE7.6: INSUFFICIENTLEARNINGAMONGYOUNGCARIBBEANMALES: COMPLETION OF SECONDARY EDUCATION .................................................................................................................................................. 158 FIGURE7.7:TERTIARY EDUCATION: HOWINVESTMENT AND ENROLLMENT RELATE ............................. FIGURE7.8: PUBLIC TRAINING PROGRAMS:INSUFFICIENT EMPHASIS ON ENTERPRISE TRAINING INTHE CARIBBEAN .................................................................................................................................................. 164 FIGURE 7.9: NATIONAL INNOVATIONSYSTEMS ........................................................................................... 168 FIGURE8.1: TOTALFIXEDAND MOBILE LINES ............................................................................................ 171 FIGURE8.2: CELLULARSUBSCRIPTIONS ............................................................................................. FIGURE8.3: COSTOFA 3 MINUTE ...................................................................... 172 FIGURE8.4: DIAL-UPAND HIGHSPEEDINTERNET MONTHLY ............................................... PHONECALLTO THE USA COSTS FIGURE8.5: POPULATION WITH ACCESS ELECTRICITY TO .................................................................. FIGURE8.6: AVERAGE END-USER ELECTRICITY PRICES ..................................................................... FIGURE8.7: ELECTRICITYTRANSMISSIONAND DISTRIBUTION LOSSES ....................................................... 175 FIGURE 8.8: PRODUCTIVITY INTHE ELECTRICITYSECTOR .............. ................................................ 175 FIGURE8.9: ACCESS TO IMPROVEDWATER................................................................................................. 176 FIGURE8.10: AIRPORTCHARGESTO AIRLINESAND PASSENGERS............................................................. 178 FIGURE 8.1 1: PORT ...................................................................................................................................... 178 FIGURE8.12: ECONOMY ............................................................................... 179 FIGURE8.13: CRANEPRODUCTNITY........................................................................................................... CLASS AIRFAREFROMMIAMI 179 FIGURE8.14: EMPLOYEEPRODUCTIVITY..................................................................................................... 179 vii FIGURE8.15: INSTITUTIONALCAPACITY AND INFRASTRUCTUREPERFORMANCE........................................ 182 BOXES BOX 1.1: COUNTRY CASE STUDIES ................................................................................................................ 11 BOX1.2:THEFINANCIAL SECTORINTHECARIBBEAN .......................... .............15 Box 1.3: DEFINITION AND RATIONALEOFVARIABLES INFLUENCINGGROWTH........................................... 17 BOX 1.4: THE ENVIRONMENT AND NATURAL DISASTERS .......... Box 1.5: VOLATILITY AND SMALLSTATES-EVIDENCEFORTH Box2.1: PUBLIC SECTOR REFORM:JAMAICA'S EXECUTIVE AGENCY EXPERIMENT ..................................... 29 Box2.2: THE INCENTIVES ISSUE: OFFSETTINGHIGHTAX RATESWITHTAXINCENTIVES ..34 DIFFICULTIES IN BOX 2.3: EDUCATIONAL QUALITY AND CROSS-COUNTRY INSTITUTIONS ...................................................... 39 BOX 3.1. ACHIEVING DIVERSIFICATION .................................. Box3.2: WALKERSWOOD'S RECIPEFORSUCCESS:MADE JAMAICA ........................................................ THROUGH "SELF-DISCOVERY" IN 56 BOX3.3: THEROLE OFTHEDIASPORA ATTRACTINGFDIrNMAURITIUS IN ............................. BOX 3.4: IRELAND- PRIVATE SECTOR INSTITUTIONS INACTION ............................................. BOX 4.1: VAT INGRENADA AND BELIZE ........................................................ Box4.2 : SERVICE EXPORTS GREWWITHOUT PREFERENCES .................................................. BOX 4.3: DISTANCE STILL MATTERS ............................................................................................................. 81 BOX 4.4: SUGAR INTHE CARIBBEAN: ADJUSTING ERODINGPREFERENCES TO .............................................. 83 BOX 4.5: THE CARIBBEAN BANANA INDUSTRY DECLINES, ALONG WITH THE BANANA REGIME .................... 85 BOX 4.6: NON-TRADITIONAL FOODEXPORTSENCOUNTER MORE STRINGENT TRADEPARTNER SPS STANDARDS ............................................................................................................................................ BOX 5.1: DEMYSTIFYING THE CALL CENTERTREND ............................................................................. BOX 5.2: TELEMEDICINE INACTION .............................................................................................................. 97 BOX5.3: ICTOPENINGMARKETS SMES....................................................................... FOR BOX 5.4: PROMOTING KNOWLEDGE EXCHANGE ......................................................................................... BOX 5.5: EMERGINGGROWTHSECTORSINTOURISM ......................................... Box 5.6: ACHIEVING ENVIRONMENTALLY SUSTAIN INTHEOECS SUB-REG BOX 5.7: LESPORT, ST. LUCIA.. ................................................................................................ 116 BOX 6.2: TEMPORARY WORKER PROGRAMS-GAINS WITHOUT PAINS ....................................................... 141 BOX 7.3: EDUCATION SPENDINGINTHE CARIBBEAN NOT COMMENSURATE WITH OUTCOMES ..................... 157 BOX 7.4: DISPARITIES LEARNING OUTCOMESBETWEENSCHOOLS: A TELLING CASE FROM ST. VINCENT IN AND THE GRENADINES ..................................................................................................... BOX 7.5: THE UNIVERSITY OF WEST INDIES: THEPOTENTIAL AND CHALLENGEOF COOP BOX 7.6: GRADUALLYREFORMINGHIGHER EDUCATIONFINANCING:THEAUSTRALIANAND BRITISH REFORMS ...................................................................................................................................................... 162 Box7.7: MEXICAN EXPERIENCESINSUPPORT OF SMES .............................................................................. 165 BOX 7.8: HOW THE BARBADOS COMMUNITY COLLEGE ACCOMMODATES NEEDSFIRMS...............,166 THE OF BOX 7.9: TECHNOLOGY THE CENTERPIECEOF SMJALEEL'SGROWTHSTRATEGY ..................................... BOX 8.1: "FINANCIALBLACKOUTS" INTHE DOMINICAN REPUBLIC'S POWER SECTOR ........... ............169 174 BOX 8.2: VANUATU: A SMALL ISLAND SUCCESS STORY OFINTRODUCINGTHE PRIVATE SEC WATER Box 8.3: THEPORTAUTHORITYOFJAMAICA .............................................................................................. 178 SUPPLY ........................................................................................................................................................ 177 BOX8.4: SANGSTERINTERNATIONALAIRPORT PRlVATIZATION DEVELOPMENT .......................... 180 Box 8.5: ECTEL-REGULATORY COOPERATION.................................................................. PROJECT Box8.6: MAURITIUSPORT .................................................................................................... TABLES TABLE1:CARIBBEAN: GOVERNMENT EXPENDITURES, REVENUES, DEFICITS AND DEBT ............................. XX TABLE2: KEY TRADE RELATED INDICATORS (PERCENT OFGDP)...................................................... TABLE 1.1: STANDARD DEVIATION GDP GROWTH OF ....................................................... 3 TABLE1.2: SECTORALGDPGROWTHRATESAND GDPSHARES (MEDIAN) ..................................................... RATE, 1960-2000 7 TABLE1.3: DEMANDDECOMPOSITION OF GDP GROWTH (%)........................................................................ 9 TABLE1.4: EXPLAINING CHANGES INGROWTHBETWEEN 1980s AND 1990s............................................... 19 TABLEA. VOLATILITY AND PROXIMATE CAUSES: 1981-2003............................................... TABLEB.REGRESSION ANALYSISOFDETERMINANTS OF VOLATILITY ......................................................... 23 TABLE1.5: DETERMINANTS OFCHANGE INGROWTHPER CAPITA UNDER TWO SCENARIOS (MEDIAN, %) ..24 TABLE2.1:CARIBBEAN: GOVERNMENT EXPENDITURES, ...REVENUES, DEFICITS AND DEBT ,. 31 Vlll TABLE2.2: THECARIBBEAN: GOVERNMENT SPENDINGON EDUCATION ANDHEALTH BY COUNTRY ...........36 AND AVERAGES COMPAREDTO LATIN AMERICA AND WORLDWIDE .............................................................. 36 TABLE2.3: THECARIBBEAN:DOCTORS ANDHOSPITAL BEDS ....................................................................... 40 COMPAREDTO LATIN AMERICA, AND ALLCOUNTRIES .................................................................................. 40 TABLE2.4: CARIBBEAN: GOVERNMENTCAPITAL EXPENDITURES~GDP (%), 1995-2002.............................. 42 TABLE3.1: FDIPERFORMANCE ............................................................................... 47 TABLE3.2: EXPORTSTRUCTUREBYTECHNOLOGICALINTENSITY (%OFEXPORTS)....................................... INDEX FORCARIBBEAN 48 TABLE4.1: KEYCARIBBEANTRADERELATED INDICATORS(PERCENT OF GDP) ...................... TABLE3.3: LABOR COSTS (us$ PER HOUR) .................................................................................................. 58 TABLE4.2 COMPOSITIONOFEXPORTSAS A %OFGDP AND GNFS............................................................... 68 TABLE4.3: TARIFF STRUCTUREONALLIMPORTS ............................................ .......................... 70 TABLE5.1: INTERNATIONALTOURISTARRIVALS REGIONOFDESTINAT (%SHARE) ....................... IN2002 BY 102 TABLE5.2: STATISTICSONTHE usMEDICALR P ~ F E s S ~ ~ N (%).................................................................. 109 TABLE 5.3: PASSRATESFORUSMLE ......................................................................................................... TABLE5.4: COMPARISONOFusAND OFFSHORE 112 MEDICAL 113 TABLE5.5: POTENTIALHEALTH HEALTH-RELATED AND TABLE7.1: PRIVATERETURNS EDUCATIONINTHECARIBBEAN........................................................ SERVICESFORTHE CARIBBEAN ..................... SCHOOLS ........................................................ TO TABLE7.2: AVERAGEYEARS OF SCHOOLINGOFTHEADULTPOPULATIONINTHECARIBBEAN ..................148 TABLE7.3: WORLDEDUCATION RANKING (YEARS OF SCHOOLING) ............................................................ 148 TABLE7.4: THECARIBBEAN LOST ITS HEADSTARTINSECONDARY EDUCATIO TABLE7.5: LOWENROLLMENTINTERTIARY .................................. TABLE7.6:RETURNS TO EDUCATIONFORCARIBBEANMIGRANTSTHEus... EDUCATION................................ 152 IN TABLE7.7: HIGHTAX LEVYFORTRAINING....................................................... ANNEXES ANNEX1.1: METHODOLOGY USEDTo OBTAINALTERNATIVE MEASURES ..................................... OF TFP 203 ANNEX 3.1. ALTERNATIVEINVESTMENTLOCATIONS ................................................................................. 219 ANNEX 3.2. JAMAICA'S BUSINESSENVIRONMENT .................................................................................. 221 ANNEX 3.4. FOREIGNINVEST~R........................................................................... PERCEPTIONSURVEY 227 ANNEX 5.1: JAMAICA MUSIC PRODUCTION-JAMAICA SIGNATUREBEATS .................................................. 237 ANNEX 5.2: THE CROSSROADSCENTERINANTIGUA AND BARBUDA ANNEX 5.3: GROWINGDEMANDINCARIBBEANYACHTING SECTOR ...... ........................................... 239 ........................................... 239 ANNEX 6.1: DEFINITIONSOFUNEMPLOYMENT INTHECARIBBEAN ..... ........................................... 241 ANNEX 6.2: TRADEUNIONS INTHE CARIBBEAN ......................................................................................... 242 ANNEX 6.3: REGULATORY ENVIRONMENT MIGRATION FOR ....................................................................... 243 ANNEX 8.1: CARIBBEANINFRASTRUCTURE: GOODPOLICY PRACTICES .......... ANNEXTABLE1.1.CARIBBEAN TOTALFACTOR PRODUCTIVITY (MEDIAN ANNEXTABLE1.2: SOLOWGROWTH ACCOUNTING. TFP CARIBBEANVS LATIN .GROWTH RATES.%) ................205 AMERICA ....................... 207 ANNEXTABLE1.3: TFPl: SIMPLE GROWTH ACCOUNTING. 207 ANNEXTABLE1.4: TFP2: REGRESSIONESTIMATES TFP GROWTH.1981-2000.................................... 1980-2000...................................................... OF 208 ANNEX TABLE1.5: TFP3A: REGRESSIONESTIMATESOF TFP GROWTH ADJUSTED FORBUSINESS CYCLES209 ANNEXTABLE1.6: TFP 3B: REGRESSIONESTIMATESOF TFP GROWTH ADJUSTED FORBUSINESS CYCLES210 ANNEXTABLE1.7: SELECTED SOCIO-ECONOMIC ................................................................... 211 ANNEXTABLE1.8: SELECTEDECONOMIC INDICATORS............................................................................... INDICATORS 213 ANNEXTABLE1.9: PERCAPITA GDPGROWTH .......................................................................................... 214 ANNEX TABLE1.10: MEDIUM-TERM GROWTH PROJECTIONS BY COUNTRY UNDERFIRST SCENARIO ........214 ANNEX TABLE1.11: MEDIUM-TERM GROWTH PROJECTIONSBY COUNTRYUNDERSECONDSCENARIO ....215 ANNEX TABLE2.1: DETERMINANTSPER CAPITA GOVERNMENTEXPENDITUREEDUCATION OF ON ............216 1995-2002 AVERAGES................................................................................................................................. 216 ANNEX TABLE2.2: PUPILTO TEACHER RATIO (PTR) AND SPENDING, POPULATION,AND PER CAPITA INCOME, 1995-2002.. ............................................................................................................................ 217 ANNEX TABLE2.3: ECONOMIES OF SCALE INEXPENDITURE HEALTH ON .................................................... 218 ANNEX TABLE3.1: DISTRIBUTION FIRMSINSAMPLEBY SECTOR.......................................................... OF 228 ANNEX TABLE 3.1: SECTORAL IMPORTANCE ININVESTMENT CLIMATEFACTORS ...................................... 229 ANNEX TABLE4.1: MERCHANDISE EXPORTSA AS ?"o OF TOTALEXPORTS ................................................. 231 ANNEXTABLE4.2: DECADAL AVERAGEEXPORT GROWTH RATES ............................................................ 232 ix ANNEX TABLE4.3: DIRECTIONOF MERCHANDISE EXPORT COUNTRY (2002 UNLESSOTHERWISE BY INDICATED).................................................................................................................................................. 233 ANNEX TABLE 4.4: TARIFF REVENUEBY SITCCATEGORY: AGGREGATE FORALL CARIBBEAN COUNTRIES234 ANNEX TABLE 4.5: INWARD FDITO GDPRATIO: %FIGURES..................................................................... 235 ANNEX TABLE 4.6: LOSS INTARIFFREVENUEAND TARIFFRATESrN2002 ................. ANNEX TABLE6.1: EMPLOYMENT INTHE CARIBBEAN 1991-2001(THOUSANDS) ........................................ 245 ANNEX TABLE6.2: COMPARATIVEANNUAL SALARIES OF SELECTED OCCUPATIONS INTHE CARIBBEAN, 2000/1 (US$) ............................................................................................................................................... 245 ANNEX TABLE6.3: WEEKLY WAGES DATA FOR SELECTED CATEGORIES OF WORKERS INTHE HOTEL INDUSTRY, 2001 (BDs$) .............................................................................................................................. 246 ANNEX TABLE6.4: HOURLY MANUFACTURING (Us$),2002 WAGES .......................... .......246 ANNEX TABLE6.5: REGRESSIONRESULTS OFTHEDETERMINANTS OF LABOR ......247 ANNEXTABLE6.6: UNEMPLOYMENT INTHE CARIBBEAN (%)..................................................................... FORCE 248 ANNEX TABLE6.7: UNEMPLOYMENT PROBITREGRESSIONRESULTS........................................................ 248 ANNEX TABLE6.8: RATIFICATIONOF ILO CONVENTIONS BY CARIBBEAN COUNTRIES ............................... 249 ANNEX TABLE6.9: SELECTED LABORLEGISLATION CARIBBEAN INTHE .............................. ANNEXTABLE 6.10: REGIONALMIGRANT STOCK AND MIGRATION RATES FOR SELECT CARIBBEAN COUNTRIES (1990 AND 1991) ............................................................................................................... ANNEXTABLE8.1:INSTITUTIONALFEATURES INFRASTRUCTURESECTORSINTHECARIBBEAN ............256 OF ANNEX FIGURE 1.1: ADJUSTED TFP (3A) GROWTH(1981-1990 AND 1991-2000)...................................... ANNEX FIGURE3.1:FACTORSRATED AS MAJOR SEVEREOBSTACLES INGRENADA(%FIRMS) OR .............206 224 ANNEX FIGURE3.1: SKILLS COMPOSITION OF SAMPLE FOREIGN FIRMSINCARIBBEAN ..) ....................... 229 ANNEX FIGURE6.1: REAL UNIT LABOR (1996=100) COST .......................................................................... 251 ANNEX FIGURE6.2: COMPARING HOURLY CONSTRUCTIONAND MANUFACTURING WAGES (us$)............251 ANNEX FIGURE6.3: LABOR FORCE AND POPULATIONGROWTH1996-2002 ................................................ 252 X FOREWORD The Caribbean i s at a development crossroads. Decades o f reliance on traditional markets, and on trade preferences, have givenway to a new reality, where traditional agriculture plays a much smaller role in most economies, and where a much harsher and more competitive internationalwind blows. Insuch an environment, business as usual will no longer suffice. Adapting to the demands o f this new world will require a much greater focus on sustaining and improving growth and competitiveness. In many respects, the Caribbean is well positioned for this. Endowed, for the most part, with strong traditions of democratic participation and political stability, favorable locations, excellent climates and an early targeting o f universal primary education, many Caribbean countries already possess a number o f the ingredients necessary to adapt to the challenges o f the 21st century. And yet we know that breaking with the past is never easy. Vested interests will block and parry; and political groups may see insufficient political returns in supporting or driving change. Proper account, too, must be taken o f winners and losers, o f transition costs, and o f bringing inpreviously disadvantaged and excluded groups. All this speaks to the fundamental need to begin a debate among political parties, civil society, the private sector, media and academic groups about the proper directions o f development strategy at both the national and regional levels. It i s our hope that this volume and its companion piece on Growth and Competitiveness in the Organization o f Eastern Caribbean States, will serve as a launching pad for such a debate. The time for such a debate could not be more opportune. While poverty inthe Caribbean has declined in the past, it remains high and many o f the region's impressive social gains are at risk o f eroding. Unemployment, particularly of youth, is a major issue, and there is growing concern about recent increases incrime and violence across the region. Tourism, too, is under increasing pressure from new markets in Cuba and Central America, and the region now has the dubious distinction o f having many o f the most indebted countries in the world. While none o f these challenges i s insurmountable, all require political leadership and strong national support. Deepening the bonds o f regionalism will also require considerable political will, but the pay-offs, we believe, in terms o f economies o f scale and long-term improvements in growth and competitiveness, will be considerable. While this volume focuses primarily on decision makers and publics inthe Caribbean there i s a set o f players who are largely absent from its pages, but whose role i s none the less crucial. For more than three decades, the international donor community has supported Caribbean development. If wrong choices have been made, they have been made by donors together with governments. This volume i s not intended to ascribe blame, but to point to the fundamental need to choose a better path for the future. That choice must also include more country ownership o f development programs, better harmonized and coordinated donor support, and a reduction in the burden donors too often impose on recipient countries. We hope that this volume will provide an opportunity for the international donor community to debate and finally resolve many o f these longstanding issues. This report, and its companion piece on the Organization for Eastern Caribbean States, have been informed by extensive consultations across the Caribbean. W e would like to thank all those who took the time to share their expertise, their insights and their unique brand o f Caribbean hospitality. W e have endeavored to capture the richness o f the input we received, although ultimately the responsibility for the Reports' conclusions remains ours alone. Caroline Anstey Director, Caribbean Country Management Unit The World Bank xi ACKNOWLEDGEMENTS This report was prepared by a team o f Bank staff led by Sanjay Kathuria, and included a core team consisting of Mustapha Rouis, Michael Corlett, James Hanson, Rina H. Oberai, Kevin Tomlinson, Elizabeth Ruppert Bulmer, and Andreas Blom. Key responsibilities for chapters/sections were: GrowtWChapter 1 (Mustapha Rouis); Government/Chapter 2, financial sector (James Hanson); Investment ClimateiChapter 3 (Rina H. Oberai); TradeKhapter 4, Executive Summary (Sanjay Kathuria); Services case studiedchapter 5 (Tourism-Michael Corlett; ICT-On the Frontier Group, Inc.; Education-Camille Nuamah; Health-Logan Brenzel); Labodchapter 6 (Elizabeth Ruppert Bulmer); Skills/Chapter 7 (Andreas Blom); Infrastructure/Chapter 8 (Abhas Jha, James Hanson, Kevin Tomlinson, Castalia and Associates). Michael Corlett provided analytical support for the full report, and helped inmany ways to bring the report to completion. Kevin Tomlinson did a field-based firm case study and provided analytical support for several chapters. Desktop publishingwas done by Anna Musakova, with critical technical and other support from Shunalini Sarkar. Rachel McColgan and Alejandra Viveros were responsible for developing the dissemination strategy. In addition, the team benefited greatly from the collaboration o f its colleagues preparing the companion, sub-regional report on the OECS, notably Camille Nuamah and Theresa Beltramo. The report was prepared under the stewardship o f Caroline Anstey, Country Director; Ernest0 May, Sector Director; Mauricio Carrizosa, Sector Manager; and Antonella Bassani, Lead Economist and Sector Leader. The report draws on the work o f a large, inter-disciplinaryteam both within and outside the Bank. Background papers were written by Mizuho Kida (on growth); Gunnar Eskeland, D. Nikitin, E. Villanger, and I. (CICERO, Norway, on the role o f the state); Xiaolun Sun/FIAS (on FDI Kostad benchmarking through a foreign investor survey, and Grenada investment climate diagnostic); Caroline Freund with Mohammed Amin (on trade); On the Frontier Group, Inc., for infoDev (on ICT-based services); Swedish Development Advisers (on offshore education); DMRussell Consulting and Michael Corlett (on tourism); Logan Brenzel, Elsie L e Franc (UWI, Barbados), Kim Clarke (UWI, Jamaica), Aaditya Mattoo and Randeep Rathindran (on health services); Tom McArdle (HEART, Jamaica, on worker training); Andrew Downes (UWI, Barbados, on labor markets); Elizabeth Thomas-Hope (UWI, Jamaica, on labor migration); Lawrence Nurse (UWI, Barbados, on trade unions); Castalia and Associates (on Caribbean infrastructure); Donald Mitchell (sugar); Steven Jaffee (SPS standards in Jamaica). Thomas Pave Sohnesen provided researchsupport on education. For the labor chapter, the following individuals provided data and helpedwith regression analysis on returns to education: Ralph Henry (Kairi Consultants Limited, Trinidad and Tobago); Edwin St. Catherine (Statistics Dept., Government o f St. Lucia); A.V. Browne (Statistical Service Department, Barbados); Selvon Hazel (Policy Research and DevelopmentInstitute, Tobago); and Theodora Xenogiani (Consultant, currently at OECD). The report has benefited from inputs at different stages o f preparation from various parts o f the World Bank, clients, and development partners. Designated reviewers from the World Bank were Shahrokh Fardoust, Carlos Felipe Jaramillo, and William Maloney. The external reviewers were Gladstone Bonnick, and Paul Mullard (DFID). Additional reviewers for the concept paper o f the report were Clive Harris (World Bank), Donald J. Harris, and Juliet Melville (Caribbean Development Bank). Comments were received from several Bank staff including Caroline Anstey, Guillermo Perry, Mauricio Carrizosa, Antonella Bassani, Cynthia Hobbs, Errol Graham, and Peter Walkenhorst. Support on specific issues was received from Seth Ayers, Lisa Bhansali, Auguste Kouame, and Claudia Sepulveda. From outside the Bank, comments were receivedfrom the IMF (Ratna Sahay, Sanjaya Panth, Goohoon Kwon, Montfort Mlachila, Prachi Misra, and Rafael Romeu), EC (Jan-Peter Mout), Reynold Simons (LO) and Sir George Alleyne (PAHO). The team benefited from frequent discussions with and support o f Aaditya Mattoo (World Bank), Esteban Perez (ECLAC), and Deryck Brown (Caribbean Regional Negotiating Machinery), and xii from discussion with Simon Johnson (MIT/IMF visitor) and Kelvin Dalrymple (CDB). It also received support and help from the Caribbean sector leaders in the World Bank, Charles Feinstein, Chingboon Lee, and Pierre Werbrouck. The World Bank would also like to acknowledge the support o f several institutions. The task team benefited from feedback from a workshop organized by the Caribbean Development Bank, with the participation of all its country economists, to discuss the proposed themes o f the report. A similar workshop was organized by the EUand DFIDwith all development partners based in Barbados. The team would like to thank all the government officials, firms and private sector organizations inthe Caribbean who gave generously o f their time to meet with the team, Finally, the World Bank would like to thank the European Commission and the Government o f the Netherlands for their generous financial support, without which this report would not have been possible. The EC support was given as part o f their trade diagnostic studies program, and the Government o f Netherlands supportedthe FIAS investment diagnostics through its Consultant Trust Fundsprogram. ... Xlll A TIME TO CHOOSE: CARIBBEANDEVELOPMENT INTHE 21STCENTURY EXECUTIVESUMMARY AND POLICY OPTIONS 1. Caribbean countries' face unique development challenges arising from their small size and vulnerability to natural disasters as well as the resulting economic volatility. Also, they continue to confront a changing international environment, with a significant transformation in the production structure of most economies, away from traditional agriculture. 2. Despite these challenges, the Caribbean has continued to see a sustained growth in per capita incomes, with most of them becoming middle income countries and achieving high levels o f human development. These achievements reflect many of the positive endowments that the Caribbean countries have been blessed with, including favorable locations and excellent climates, virtually no hinterlands, the advantage of the English language in most countries (Spanish, French, and Dutch in other cases), an early targeting o f universal primary education, strong traditions o f democratic participation and political stability for most countries, and a significant degree of regional integration despite significant differences in economic and social characteristics. 3. Yet, as the 2lStcentury begins, the abiding impression i s one of under-fulfilled potential and concem for the sustainability of past accomplishments. Figure 1 below tells its own story- the overtaking o f even the Caribbean's highest income countries such as Barbados (and Antigua and Barbuda), by small and comparable countries like Singapore, as well as Ireland and Cyprus, whose economic strategy was centered around achieving international competitiveness Figure 1:Per Capita Incomes(PPP) 1975-2002 30000 25000 20000 15000 10000 5000 4. Formidable challenges lie ahead. While poverty has declined inthe past, it remains high inmany countries, including Haiti, Guyana, the Dominican Republic after its crisis, and several OECS countries. Unemployment, particularly o f youth, i s a major issue; it has severe implications for poverty and the income distribution, as well drug trafficking and addiction. Migration i s of course a double-edged sword, but its large scale serves as a reminder that many educated people lack access to significant economic opportunity. All this means that improving the rate and ' Inthis study, the included countries are the OECS group--Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines, as well as The Bahamas, Belize, Barbados, Dominican Republic, Guyana, Haiti, Jamaica, Suriname, and Trinidad and Tobago. xiv quality o f growth i s crucial, given the linkages between pro-poor growth and poverty reduction and employment. Another challenge i s coping with natural disasters and economic volatility, as the 2004 hurricane season reminded us. Still another challenge i s reducing crime, which i s affecting the larger islands and increasingly the smaller ones; it impacts the social fabric as well as investment and growth, and contributes to increased migration. Meeting these challenges i s complicated by the massive increase inpublic debt inthe last few years-the Caribbean now has the dubious distinction of having many o f the most indebted countries in the world. High debt makes the countries even more susceptible to volatility, increases risks o f macro instability and compromises their growth prospects. 5. Fortunately, the challenges are not insurmountable, and can be dealt with, with the central plank being a focus on sustaining and improving growth and competitiveness. O f course, some o f the issues highlighted above have a two-way causation, meaning they also affect growth, but it i s nevertheless usehl to think of growth as being the main instrument to achieve many of the social goals. Experience across the world shows that growth results inpoverty reduction, and this i s true for the Caribbean as well; also, for some o f the countries for which evidence exists, the elasticity o f employment with respect to output i s positive. Thus, a virtuous circle o f growth could reduce unemployment, poverty, crime, reduce incentives for migration, and create fiscal space for dealing better with disasters. 6. This report seeks to discuss the critical constraints to sustainable, job-creating growth, and to present policy options for the region and country Governments to stimulate such growth. It analyzes growth performance inthe Caribbean over the last four decades, and highlights key determinants o f past and also future growth. Given the recent deterioration in government finances, the report then studies key areas o f govemment expenditure. A discussion o f the climate for private investment follows, which looks at the framework that shapes the risks and retums for private investment. The report then discusses the impact o frecent trade developments on the Caribbean, the future outlook in view o f major ongoing changes in the intemational environment, as well as the opportunities that are likely to emerge, especially in the services sector. It then focuses on some key factors that have been significant indetermining past growth in the Caribbean, including labor market issues; education, skill development and training; and infrastructure. 7. The report suggests a pro-active approach for the region to take on the challenges of a group o f small states facing severe resource constraints, eroding trade preferences, declining productivity, and increasing risk of macro instability. First, it argues that greater integration within the CARICOM region on several fronts will be a critical input into improving competitiveness. Easing up further on labor mobility within the region would improve wage and s k i l l arbitrage; joint investment promotion would make the regionmore attractive for investment; tax harmonizationwould help reduce harmful tax competition; more cooperation inprovision o f services and regulation could help to reduce the high costs o f government. Second, on trade, the report argues that a negotiation of an orderly dismantling o f preferences in return for increased technical and financial support would be inthe region's interest. Third, improving the investment climate and orienting it away from being subsidy-driven, addressing problems o f hightaxes and inefficient customs procedures, as well as specific infrastructure deficiencies, would help improve the quality o f private investment and maintain the high levels o f FDI. Fourth, making the public sector more cost-effective and delivering services more efficiently, through greater reliance on the private sector where feasible, and seeking cost efficiencies through regional cooperation, would be necessary to reduce crowding out by Government o f private sector employment and investment. Fifth, improving the quality and effectiveness o f human resources would enable diversification into knowledge-based activities including services, increase exports, and improve productivity inexisting activities. 8. One of the challenges of doing a regional report i s the issue o f country specificity. During the analysis, it was found that countries were often too heterogeneous to permit easy xv classification into country groupings. Accordingly, some generalized points made in the report for the Caribbean may not be valid for specific countries, even though the individual chapters will try to bringout specificities where possible. 9. The report naturally draws on the extensive research material that already exists in the Caribbean. However, it adds to that body o f research and analysis in each o f the chapters, including the analysis and projections o f growth in a cross-country framework; primary data collection in a foreign investors' perception survey and a diagnostic o f the investment climate in Grenada; new case studies in several services sectors (such as offshore education, health tourism, tourism, temporary labor migration and ICT-enabled services), as well as analysis o f firm success stories; new work on labor markets and skill development; case studies o f sugar, and SPS standards and Jamaica's agricultural exports; and a new analysis o f infrastructure issues, focusing on efficiency and the quality o f institutions. Drawing all these strands together, the report presents a holistic and integrated view o f the critical factors that inhibit improved growth. It i s hoped that the report will catalyze debate amongst the various stakeholders in society, a process that could help identify bottlenecks, create consensus and, as a result, leverage support for the implementation o f reforms. It i s also hoped that the report will serve as a tool to help countries develop their own national plans for development, keeping the regional dimension very much in the forefront. Further analytical work i s needed, inter alia, on migration and its net impact on society, as well as on inequality and social change and its relationship with economic growth. Reasonable past growth, but now slowingdown 10. Between 1961-2002, average per capita GDP growth for a median Caribbean country was 2.8 percent, higher than LatinAmerica inevery decade, but lower than East Asia, especially some of the fast-growing small economies like Singapore and Hong Kong. However, this reasonable growth performance i s cloudedby several factors. 11. First, average growth has been slowing down in each decade since the 1970s. Average rates of per capita GDP growth inthe Caribbean have declined from 4.3 percent inthe 1970s, 2.1 percent inthe 1980s, to 1.7 percent inthe 1990s. Ten Caribbean countries suffered a decline in trend growth after the 1980s, especially the OECS countries o f Antigua and Barbuda, Dominica, St. Lucia and St. Vincent and the Grenadines. The Dominican Republic, Guyana, Suriname and Trinidad and Tobago saw increases in trend growth in the 199Os, having suffered major slowdowns inthe 1980s. 12. Second, the gap between the rich and poor countries within the region has widened over time, with growth performance varying more widely within the Caribbean than within Latin America. Over 1960-2002, the slowest growing countries in the region were Haiti, Jamaica, Guyana and Suriname, also four o f the five poorest interms o f per capita GDP. 13. Third, there has been a sharp decline in productivity gains between the 1980s and the 199Os, irrespective o f methodology employedto measure productivity growth (Figure 2). Infact, after adjustments in the measurement o f total factor productivity (TFP) for short-run cyclical fluctuations, the contribution o f TFP growth to GDP growth in the 1990s becomes negative (TFP3a and TFP3b in Figure 2) for most countries. After cyclical adjustment, only three countries showed a statistically significant and positive TFP growth inthe 1990s-the Dominican Republic, Trinidad and Tobago and Guyana. Inthe 1980s, on the other hand, most estimates show a significant contribution o f productivity gains to growth inthe Caribbean. Inother words, growth infactor inputscontributedmore to economic growth inthe 1990sthan inthe 1980s. This decline in productivity growth in the 1990s i s due to several factors-the lower productivity o f public investments, especially inthe OECS countries, which overinvested after 1997, partly inan attempt to compensate for the decline in private investment; the locking in of investments into traditional, low productivity sectors such as agriculture, in part due to preferences and high tariffs; and the large investments in maturing sectors, namely tourism, where productivity improvements are more difficult to come by, and this applied to most Caribbean countries. xvi Figure 2: Caribbean Total Factor Productivity (Median Growth Rates, %) 4 , Solow-residual Regression Cyclically- Cyclically- (TFP1) estimates adjusted adjusted (TFP2) estimates estimates (TFP3a) (TFP3b) Source: World Bank Staff estimates. 14. Fourth, there has been a build-up o f debt in most Caribbean countries, in many cases to levels that test the limits o f sustainability. Over 1960-2002, five o f the six fastest growing Caribbean countries were from the OECS, but most o f these were also those that saw the sharpest growth slowdowns between the 1980s and 199Os, and, in the most recent period, 1998-2003, OECS countries grew slower than non-OECS countries (Annex Table 1.8). This i s related to the massive increase in debt in the OECS, almost doubling as a percent o f GDP between 1997 and 2003, and driven in turn by increases in capital and current expenditures. Inthe case o f other countries, notably Guyana and Jamaica, debt has been a long-standing issue. While debt has been reduced in Guyana through HIPC-related debt write-offs, Jamaica has decided to maintain very highprimary surpluses (among the highest inthe world) inthe medium-term inorder to stabilize and reduce its debt. Belize has seen an increase in its debt to 100 percent in 2003 (41 percent in 1997), reflecting takeover o f contingent liabilities. The very high debt has placed 7 Caribbean countries amongst the 10 most indebted countries inthe world, and 14 among the top 30. This has hurt growth inthe past and the further buildup o f debt is likely to be even more damaging in the future, as cross-experience shows (Figure 3). Dominica has already experienced a debt crisis, and restructured some o f its debt in2004, but many other countries have debt ratios higher than or close to Dominica's. xvii Figure3: GDP GrowthandTotalDebt (%GDP), 86 countries (Five Yr. Averages, 97-01) 1 0 9 1 y = -02.018x + 4 . 2 8 7 4 R = 0 . 1 2 9 5 G D P G r o w t h 4 5 :: 5 T o t a l D e b t ( % G D P ) 15. Fifth, past growth does not appear to have been driven by a strategic agenda for competitiveness. Rather, the dominant focus has been to try to hold on to special and differential treatment on export and import trade as long as possible, with less attention to the long-run costs of such a strategy including foregone economic opportunities (see below and Chapter 4). 16. The implication i s that if current policies continue, future prospects are more uncertain, for many o f the reasons discussed above, including the slowdown in growth, the decline inTFP, the increasing macro vulnerability, and the lack o f a strategy for global competitiveness. In addition, trade preferences are eroding, and aid flows for the Caribbean declining (from an average 6 percent o f GDP over 1990-97 to around 3 percent over 1998-2002). And one o f the key drivers o f growth inthe past, the sun and sand based tourism industry, has seen a decline in growth and market share. 17. So it cannot be business-as-usual. Growth projections, using a cross-country regression framework, show that the median Caribbean country would, under a `business-as-usual' scenario, see a per capita annual GDP growth o f 2.2 percent over 2001-10, lower than the median growth rate of 2.8 percent over the previous four decades, and only marginally higher than the low growth o f 1.8 percent in the 1990s (Annex Table 1.10). This scenario assumes that structural policy indicators progress at the same rate as inthe previous decade. 18. A `policy' scenario, where each country's structural policy variable is assumed to improve to the 75" percentile o f its distribution in the Latin American and Caribbean region, increases the expected median per capita growth rate to 2.9 percent (Annex Table 1.11). Over half o f the gains inaverage growth come from the reduction ingovernment burden-government consumption to GDP being well above the regional standards-and this is one o f the key themes explored in this report. Expected gains are larger for countries that are currently far behind the top regional standards, including Haiti, Suriname, and Guyana. Haiti gains from improvements in infrastructure and education, Suriname from opening up trade, reducing government consumption, increasing financial depth and improving education, and Guyana from improvements in infiastmcture and reducing government consumption. The OECS countries with a particularly highgovernment burden see major gains from improvements inthis variable. Jamaica's projected 0.8 percent annual per capita growth for 2001-10 i s the lowest for all countries, most o f it arising from a reduction in government consumption, and reflects both the low growth o f the past as well as its already highachievements on most o f the policy variables. xviii 19. Of course, achieving results under the policy scenario would not be easy, and, for countries such as Jamaica, St. Lucia, St. Kitts and Nevis, Trinidad and Tobago, and Dominica, would demand going beyond the standards demanded by the 75* percentile, and also addressing other factors not taken into account inthe framework o f the above projections (such as crime for Jamaica, educational quality for all, and improving the investment climate ingeneral). 20. Actions under the policy scenario and beyond would be necessary to improve productivity and diversify, which are the only paths to sustainable improvement in growth. The decline in productivity has been documented earlier, and would need to be reversed if growth rates are to improve. Moreover, new areas for efficient and profitable investment would also be required, given the declining productivity in existing activities, and would require, among other things, improvement in the investment climate. The examples o f small countries such as Singapore, Cyprus and Ireland show that it i s possible to successfully diversify and move up the production chain to higher value-added products. Indeed, this i s happening already to an extent inthe Caribbean. Offshore education and ICT-enabled activities are areas of potential growth, particularly for English speaking countries. Barbados and, to a lesser extent, Antigua and Barbuda, have gained from offshore business. The Dominican Republic and Trinidad and Tobago have seen some increase in manufacturing activities. Belize has increased exports o f shrimps. And many countries are trying to diversify their tourism products, beyond sun-sand-sea related services. 21. This report takes the results from the cross-country growth analysis as a starting point, and then goes beyond this to analyze in detail some o f the key factors that could enable productivity improvement and diversification. These include an assessment o f government finances and the role o f government, the investment climate, the labor market, education and skills, and infrastructure. Improvinggovernmentfinances andexpenditure 22. With Independence inthe 1960s, most Caribbean countries sought to play a catalytic role in economic development, which, combined with the dominant development thinking of the times, led to an expanded and interventionist role for Government. Several decades and many problems later, the same Governments began, in the 1990s, to shift to a private sector-led, market-baseddevelopment strategy, and to reform their public sectors. 23. However, these intentions were not reflected inoutcomes, with government expenditures, as well as taxes and debt, actually rising significantly since the first half o f the 1990s. Government spending rose for every country for which there i s data, and the average rose from 27 percent o f GDP over 1990-97 to 32 percent o f GDP over 1998-2003, often in an attempt to use expansionary fiscal policy to address exogenous shocks (Table 1). The increased spending owed to rising wage bills (increase in employment, often accompanied by real wage increases), rising capital spending, especially in most o f the OECS countries, and rising interest costs. Revenues rose, but not by as much, and average fiscal deficits in 1998-2003 are about 3 percentage points o f GDP worse than in 1990-97. xix Table 1: Caribbean: GovernmentExpenditures, Revenues,DeficitsandDebt Government Government Overall Total Expenditures Revenues Fiscal Balance Public Debt (%of GDP) (%of GDP) (% Of GDP) (%of GDP) 1990-97 1998-03 1990-97 1998-03 1990-97 1998-03 1997 2003 Antigua and Barbuda n.a. 29 n.a. 21 -5 -8 102 142 Bahamas,The n.a. n.a. 'ma. n.a. -2 -2 46. 48 Barbados 27 37 24 32 -3 -5 62 84 Belize n.a. 32 n.a. 21 -6 -11 41 100 Dominica 35 41 32 32 -3 -8 61 122 Dominican Republic 16 18 14 15 -3 -3 23 56 Grenada 31 37 28 30 -4 -7 42 113 Guyana 38 44 34 38 -4 -6 211 179 Haiti 9 10 5 7 -4 -4 n.a. 44 Jamaica 28 35 28 27 0 -9 103 142 St. Kittsand Nevis 30 43 28 32 -2 -11 86 171 St. Lucia 27 29 26 26 -1 -3 36 69 St. Vincent and the 31 33 30 29 -1 -4 48 73 Grenadines Suriname 36 30 -4 -6 24 44 Trinidad and Tobago - - 28 26 - 28 - 24 0 - - - -2 52 54 CaribbeanAverage 2 7 32* 2v 2 7 -3 -6 67 96 Source: IMF * 11 country average Note: Differences between fiscal balance and revenues minus expenditures reflect rounding. 24. These developments, along with assumption o f government-guaranteed public and private enterprise debt, and the resolution o f financial crises, have generated a surge in public debt inthe Caribbean and this can have a major dampening effect on a private sector-led growth strategy (see Growth section above ). Average Caribbean debt in2003 was 96 percent o f GDP,2 compared with 65 percent o f GDP inthe six Central American countries. 25. Once highgovernment debt sets in, it i s not easy to reduce, since it i s self-reinforcing, on account o f the high interest costs. Debt restructuring i s one option, but this i s an unattractive policy, ifnot prohibited, inCaribbean countries. The other option i s the Jamaica strategy o f high primary surpluses. However, despite Jamaica's very high surpluses, its debt has increased in recent years, as a result o f takeovers o f contingent liabilities, spending related to natural disasters, and fiscal slippages before elections. Nevertheless, increasing primary surpluses, Le., containing non-interest expenditure and maximizing revenues, i s the only permanent solution to the Caribbean debt problem, since a debt problem can easily recur even after a restructuring, as has happened in some H P C countries. Several Caribbean countries have recently gone this route o f improving primary balances surpluses, but need to sustain this over a longperiod. 26. Tax revenues are already significant in most countries. While reducing tax incentives, improving tax administration and taxing the large informal sectors do present some possibilities for revenue gains, these gains are by and large unlikely to be significant in most countries. And attempts to increase primary surpluses by tax rate increases could be counter-productive in the Caribbean, except inthe Dominican Republic, Haiti, Antigua and Barbuda and Belize. In other countries, since tax revenues already represent a significant fraction of GDP, higher tax rates might deter growth. * Simple Average. xx 27. Thus, reducing government expenditure and improving its efficiency is the key to improving the primary surplus, and hence to a sustainable and stable fiscal situation in the Caribbean. Inthis context, an examination o f the key components o f government expenditure can be fruitful. 28. Caribbean governments' education expenditures are high, an average o f almost 5 percent o f GDP over 1995-2002, compared with 4 percent for Latin America and the Caribbean, reflecting high per capita incomes, as well as high average governance indices for voice and accountability in the English speaking Caribbean. Also, in most English speaking countries, teachers represent a powerful voting bloc, which helps to push up their salaries and hence government expenditure. While there may be some scale economies o f classroom size, this appears to be offset by higher non-teaching costs. Reducing education costs without compromising on quality appears to have more certain payoffs in controlling o f teacher salaries, reducing subsidies on tertiary education, and greater reliance on private education (such as the Jamaica voucher scheme). Another possibility o f reducing Government net costs i s to attract more overseas students for education and training, which would help in spreading fixed costs o f expensive laboratory equipment and opening up possibilities o f greater specialization in disciplines, as i s happening in the case o f offshore medical education in Grenada and Dominica (see Chapter 5). 29. Health expenditures, by contrast, are relatively low, averaging 3.2 percent o f GDP over 1995-2002 versus 3.6 percent for Latin America and the Caribbean, and 3.7 percent o f GDP for Central America. There does not seem to be a satisfactory explanation for the lower expenditure on health, versus that for education; private spending on health also appears relatively low. One way to reduce health costs i s to leverage each doctor with a number o f interns, and substitute clinics for relatively expensive doctors and hospital care where feasible, but this has been unsuccessful in the region, partly because o f the building o f hospitals and the development o f a "hospital" mentality in patients. In terms o f reducing net costs further, the most promising avenue appears to lie in exploiting the possibility o f health tourism. While this has already begun, it can be deepened much more, and if done successfully, will enable economies o f scale in health education and healthprovision, and thus have significant positive externalities for the local populations. Within the Caribbean, economies o f scale are already being exploited to an extent, such as inthe cross-border movements o f patients, and in the Eastern Caribbean Pharmaceutical Procurement Services' bulk buying o f drugs, which seems to have reduced costs significantly. Additionally, it may be possible to have regional specialization in the provision o f other health services such as lab testing. A common health insurance program across the Caribbean, with competition in service provision, could help to create market-based solutions to issues o f scale (with the private sector cooperating and competing as necessary) and to reduce overall health costs. 30. Government capital expenditures have varied significantly over time (in Grenada, for example, from 6.5 percent to 20 percent o f GDP in 1995 and 2002) and across countries (from 1.8 percent o f GDP for Trinidad and Tobago to 12.2 percent of GDP for Guyana over 1995-2002). This variation reflects lumpiness o f public investment projects, attempts at counter-cyclicality, fiscal stabilization programs, and reconstruction costs after natural disasters, but also issues o f data comparability across countries. Lumpiness appears to be a particular issue in the smaller countries o f the Caribbean, where some countries appear to have `invested their way into debt'- so requiring even more than usual care and scrutiny incapital expenditure. Inother countries like Jamaica, fiscal stabilization has pared capital expenditure significantly, to the point where it may have begun to have a negative impact on growth. However, Jamaica, like most other countries, does not balk at guaranteeing private or public enterprise debt and incomplete or unsuccessful privatizations have resulted in the frequent takeover o f contingent liabilities, the latest example beingthe re-takeover o f Air Jamaica by the Government inDecember 2004. While privatization in small countries has been particularly challenging, countries should seek to learn from recent xxi experience and avoid past mistakes, failing which pressure for such takeovers will persist, and public sector debt continue to grow. Improvingthe InvestmentClimateto enableEfficientPrivateSectorledGrowthis Critical 31. It is well appreciated that efficient and well-directed private investment is the key to sustained growth. The Government provides the 'investment climate' that shapes the returns and risks associated with investment. A good investment climate will include political and macro stability, a sound regulatory framework and efficient supporting institutions, and an adequate physical and social infrastructure. 32. Inthe Caribbean, overall investment rates have been quite highat about 30 percent of GDP since 1990, with private investment at about 20 percent o f GDP including FDI at about 6 percent o f GDP. In relation to the size o f their economies, OECS countries have attracted significant FDI, especially St. Kitts and Nevis, Grenada, and St. Vincent and the Grenadines (Figure 4), as well as Guyana. Dollar inflows have been high in the largest economies o f Jamaica, the Dominican Republic and Trinidad and Tobago. Interms o f distribution, FDI has been concentrated ina few natural resource-related sectors, especially tourism, mineral extraction and segments within agriculture, indicating that as o f now, the Caribbean possesses only a few competitive sectors. Investment in the Caribbean has been associated with reasonable but declining growth rates, which would point to decliningproductivity, which i s indeed the case. :::I' Figure 4: FDI to GDPRatiosinthe Caribbean, 1980-2002 1980s 1990s 0 2000-2 20.0 15.0 4 ~ 10.0 5 0 0.0 - v) Y + m Source: Intemational Finance Statistics, IMF. 33. The future holds out more challenges, as indicated above. With preferences eroding, traditional industries such as tourism reaching a mature phase, and the environment in general becoming more competitive, private returns to investment will decline, with corresponding reduction in the incentive to invest. Moreover, even though the Caribbean still attracts a disproportionate share o f world FDI, this share has been falling since the 1990s (its FDIto GDP ratio was 3.7 times the world average over 1990-94, but had fallen to 1.9 times over 2000-02). FDIinthe Caribbean may be subjected to even greater pressure given the global decline inFDI and increased global competition for investment. 34. The challenge will thus be to maintainprivate investment rates and even increase them as inEast Asia, for example inSingapore and Hong Kong intheir highgrowth phase, and to make this investment more productive. In addition, falling productivity in traditional areas of investment will require investment diversification. It i s important, therefore, that the investment climate improve in order to respond to these challenges, giving the right signals, encouraging xxii productivity improvement and some investment in non-traditional areas including business and professional services, niche manufacturing and new segments intourism. 35. A 2004 World Bank survey o f 159 firms shows that foreign investors in the Caribbean perceive most components o f the investment climate as very important to their investment decisions, but pay particular attention to infrastructure, labor and the policy and legal environment (Figure 5). The survey also indicates that the performance ratings under infrastructure, policy and legal environment, and taxation and customs, inparticular, do not meet the investors' expectations. Within each category, there are some sub-components which are o f critical or major importance to firms. Some o f these factors include politicaUregime stability, exchange rate stability, laws and regulations, attitude towards FDI, labor productivity, cost and availability of skilled labor, tax rates, telecommunications, power supply, shippingand ports. Figure5: Ratingsof the InvestmentClimate inthe Caribbean Policy & Legal Environmnt FDI Framework Market Access labor Admni!itrative Procedures Tar:ationand Customs Infrastrtcture Qualityof Ufe 4 4 5 Performance Note: Importance rating scale: 3 = moderate importance, 4 = major importance, 5 = critical importance; Performance rating scale: 3 = neutral, 4 = good, 5 = excellent 36. Firms in different businesses, however, attach varying degrees o f importance to the various factors affecting investment climate (Annex Table 3.1). As manufacturing firms tend to be more export-oriented, they are concerned about exchange rate stability and shipping services and ports, but less about access to land or anti-monopoly practices. Services sector firms, on the other hand, because they are more geared towards the local market, tend to focus on political and regime stability and local market size, but less on the availability o funskilled labor. 37. The survey also identified country-specific issues on perceived performance o f the investment climate categories, for five Caribbean countries. Barbados i s considered strong on the policy and legal environment, the FDIframework, and reliable utilities, but, with its hightax rates and weak tax administration, relatively poor on taxation and customs. The Dominican Republic i s perceived positively on account o f its low cost and readily available pool o f skilled and unskilled labor, advanced telecommunications, good and widespread shipping facilities, but negatively for its unreliable electricity supply and exchange rate instability. Grenada i s perceived positively on account o f the availability o f unskilled labor, and a good power supply, but negatively on availability o f technical and managerial skills, hightax rates and import tariffs, and complicated customs clearance procedures. Jamaica's perceived strengths include telecommunications, a network o f airports and seaports, access to skilled and unskilled labor, and weaknesses include low labor productivity, and high costs o f crime. Trinidad and Tobago enjoys macroeconomic stability and abundant power supply, but suffers from high crime (especially targeted to business) and anti-competitive practices arising from a still significant public enterprise sector. xxiii 38. Inorder to help improveproductivity and encourage diversification, specific aspects of the investment climate need to be strengthened, many o f which are analyzed in the report in detail. Some o f the important policy initiatives could include addressing the identified constraints including high corporate income tax rates, inefficient customs clearances, shortages o f skills in some countries (an increasingly important issue for a knowledge-based production structure), low labor productivity, and some aspects o f infrastructure. 39. The added challenge for the Caribbean countries i s dealing with the issue o f small market size, which has only been partially overcome by the very open nature o f these economies. Accelerating trade integration in the CSME will help to increase `domestic' market size, and moving as quickly as possible towards free movement o f labor within the region will ease labor and skills shortages. Single visa and work permits for foreign nationals valid in all Caribbean countries will improve incentives for multi-country investment. Joint promotion by a regional investment promotion center to engage in image-building, provide information and aim to standardize procedures across the region could help attract investment. 40. The focus needs to shift from a subsidy-driven policy to one that provides a conducive investment climate for all potential investors. Inthis context, the region should seek to reduce and eliminate the damaging tax competition between countries that currently prevails, by implementing tax harmonization. In any case, the scope for tax incentives would be constrained by prospective revenuelosses arising frompossible future tariff liberalization. The InternationalEnvironmentpresents Challenges as well as Opportunities 41. Adjusting to the changing international trading environment is perhaps the most fundamental immediate challenge for the Caribbean. Trade preferences are being eroded, tariff revenues are facing the prospect o f decline, and, perhaps most damning o f all, competitiveness i s declining. Reversing the decline in competitiveness will not be easy, and will require tackling, among other things, and in varying degrees in different countries, the fiscal deterioration and associated instability, highand often rising wages, and inadequate skill formation and technology absorption. At the same time, there are also some increasing opportunities, especially inservices, which the Caribbean could exploit if some o f the above challenges are addressed and the investment climate improved. 42. While remaining very open, trade to GDP inthe Caribbean has declined from an average o f 135 percent to 118 percent o f GDP over 1990-2001, with Trinidad and Tobago, Grenada, Haiti and Belize being exceptions to this trend. Much o f the reason for this could be traced to the real appreciation in the currencies over the 1990s, which leads to lower valuation o f imports and exports relative to GDP. Trade patterns have changed somewhat since 1990. Merchandise exports fell from 52 to 45 percent o f total exports o f goods and services between 1990 and 2001, while services rose correspondingly. Owing to CARICOM trade preferences, intra-regional exports rose from 13 to 20 percent o f total exports over the decade o f the 1990s. 43. Several indicators suggest that there has been a decline in competitiveness o f the Caribbean countries since 1990, particularly in goods trade and in the CARICOM group. CARICOM's market share inmerchandise imports o f NAFTA fell from 0.71 percent in 1985 to 0.27 percent in 2000, and EU market share fell as well. Even in tourism, the most dynamic export segment, CARICOM's market share inshare o f international tourist arrivals declined from 0.91 percent in 1990 to 0.69 percent in 2002. The Hispanic Caribbean, the Dominican Republic and Cuba, gained in tourism, partly at CARICOM's expense. Compared to the 1980s, export growth rates o f services as well as goods declined over 1991-2002. The current account deteriorated alarmingly for most countries except for the oil producing Trinidad and Tobago over the period, partly a reflection o f the increased fiscal imbalances as well as the appreciation o f real exchange rates. Infact, for nearly all countries, the REER appreciated inthe 1990s. It started to reverse in 2002, and had reached 1990 levels for most countries by 2003, excepting Jamaica, Haiti and Suriname. The appreciation inthe currencies can be traced to the large capital inflows xxiv on account o f fiscal imbalances and the need to borrow (reflected in the significant increase in debt), rising remittances, continued highFDIto GDP ratios, all o f which more than covered the rising current account deficits. Earlier, inthe first half o f the 1990s, when the fiscal deficits were muchlower, the average REERdidnot appreciate. Table 2: Key Trade Related Indicators (percent of GDP)' 1990 1995 2000 2002* Trade Openness 135.2 131.6 121.5 117.7 CurrentAccount -6.4 -5.4 -9.5 -13.0 FDI (simpleaverage) 4.8 6.1 5.8 5.8 FDI (weightedaverage) 1.9 3.6 5.0 4.8 Total exports (GNFS) 62.1 61.8 54.9 52.1 MerchandiseExports 34.1 31.3 25.6 24.1 Tourism Receipts 22.2 21.0 19.3 17.9 Trade openness: exports plus imports of goods and services expressed as a percentage o f nominal GDP at market prices. ''2002or Simple averages for the 15 Caribbean countries latest year available. Source: W D I and WTO database. 44. Potentialtariff liberalization can have an impact on both revenue as well as production in some countries/products. While average protection levels for domestic production under CARICOM's Common External Tariff are not high, ranging from 7-13 percent, peak tariffs vary from 40-400 percent. Exemptions allow tariffs outside the CET range, and some countries also use taxes and surcharges on imports to bolster revenue/protection, rendering actual tariffs across countries quite variable. With import duties on average forming about 15 percent o f tax revenue inthe Caribbean, calculations show that under anFTAA ledliberalization, the average loss oftax revenue would be about 11 percent (2.4 percent o f GDP). The Bahamas and most OECS countries would be affected significantly, and this would exacerbate the fiscal problems o f St. Kitts and Nevis, Grenada and Dominica, as well as Jamaica and the Dominican Republic. It would also reduce the scope for fiscally-led industrial policy, used extensively by most if not all Caribbean countries. In terms of reduced protection and the resultant impact on domestic production, the hardest hit are likely to be high duty products such as food and live animals, beverages and tobacco, and some manufactures. Anecdotal evidence suggests that non- CARICOM products that are very popular despite highduties on such products include beer. 45. Empirical evidence shows that trade preferences enjoyed by the Caribbean may represent a missed opportunity rather than a blessing. Preferences affect the pattern o f trade but not the overall volume o f trade, and in fact one study shows that over 1976-2000, countries that were dropped from the GSP, a major U S preferential program, performed better than those still in the program. Ingeneral, trade preferences have not delivered because they have diverted investment and limited resources and entrepreneurship into sectors that are not necessarily ultimately competitive; reduced the pace o f trade liberalization in the recipient countries owing to their being left out o f the reciprocity-based system; and limited benefits owing to complicated rules o f origin and unpredictability o f preferences. Thus, Caribbean services exports, which are not dependent on unilateraltrade preferences, have grown at 7.6 percent over 1981-2002, much faster than the 2.8 percent growth o f goods exports, much o f which have enjoyed preferences. Jamaica's apparel industry, fostered by preferences and quotas under the U S Caribbean Basin Initiative, lost out once its relative preferences were eroded with the onset o f NAFTA and the growth o f textile production inthe Dominican Republic, having had low incentives to improve as long as it was growing under preferences. It also suffers from fundamental problems related to xxv crime and violence and its associated costs. Overall, even if the arguments against preferences are ignored, there can be no doubting that the Caribbean has not been able to use the preferences to its advantage, and has not performed well under the various preferential regimes under which it operates. 46. Even more than apparel, sugar and bananas have received generous preferences in the past, but do not even fill existing quotas and now confront declining preferences and unemployment inthe'sectors, a process that has already begun. Most Caribbean producers o f the two products would not be in existence without preferences. Sugar exports and production inthe Caribbean have declined by about half since 1970 owing to rising costs o f production, resulting from rising wages, deteriorating field and factory performance and increasing inefficiencies associated with public sector control and management. Estimated costs o f producing and exporting sugar in Guyana and Belize, the lowest cost producers in the Caribbean, are 50 to 60 percent higher than one o f the higher cost free market exporters (Figure 6). World sugar production costs have fallen by about 40 percent in real terms since 1980, while those in the Caribbean have been rising, and preferential quota prices have also been falling. With pressure on the EUand the US for reform o f their sugar programs, preferential quota prices are expected to fall further, pressuringuncompetitive Caribbean producers. Figure 6: Raw Sugar productioncosts of ACP producers Average of 2000-2002 - I Trinidadnobago. I 0 Madagasca r 5 I, 300- . -{