41k, .... . .. ....... .... ... .... ... 4G ROW I  FIRUM &&, 갇 ·．멩 밌 ㅏ－＼「·： ., 」 ㅈ : 츤’청．사솖，鐫……；1 T 柑 ^& _ , …蠟。 앴“ 견견궁궂컫―■썅톤 … ,\.’『…．→논ㅍ교吟麻닝∼r（· 鞠：밍，: 긷驪 빅뜅궉－’紛緘．써， -‘滋 OF I'S Abstract '3 Acknowledgments 5 Abbreviations and Acronyms 7 Introduction Trade boosts job creation Emerging Trade opportunities To Be Seized The Promise of Inter and Intra Regional Trade Agreements 3 0 Key Policy Recommendations J 1-4 References  Despite, the high openness to trade of Caribbean growth poles and of redesigning regional economies, the Caribbean's share in global trade preferential trade agreements. Using a gravity has fallen. The rapidly changing environment for model, the report benchmarks how economies in Caribbean exports present both opportunities the region have performed and calculates areas and challenges for economies highly dependent of revealed comparative advantage. It examines on external markets. The report examines the the roles that labor productivity, the business potential benefits on the welfare of the Caribbean environment and the investment climate of redefining the relations with the Caribbean's have had in shaping the pattern of trade, and main trading partners, of reaching out to new concludes with a set of policy recommendations. This report is the result of collaborative efforts Velasquez (GMFDR) provided invaluable support of a large team led by Calvin Zebaze Djiofack in all aspects of the production of this report. (GMFDR), and including Erwin H. R. Tiongson William Shaw (Consultant) and David Yuravlivker (GPVDR), Massimiliano Cali (GTCDR), Jose (Consultant) provided invaluable editing support. Daniel Reyes (GTCDR), Claire Honore Holweg Additional support and comments were provided (GTCDR), Maros Ivanic (DECAR), Julie Saty by Raju Singh (Program Leader, LCC8C, Andrea Lohi (GMFDR), Mathias Thoenig (Consultant), Galtina (Coordinator Caribbean Growth Forum Thierry Mayer (Consultant), Sashana Whyte initiative, GGODR), Miguel Eduardo Sanchez (GMFDR), Tania Valeria Diaz Bazan (GPVDR), Martin (GMFDR), and Dominique Njinkeu (GTCDR). Charles Udomsaph (Consultant), Filipe Sousa Finally, we would like to acknowledge the (Consultant), Vanessa Uchiyama (Consultant), invaluable contributions from Cecile Niang and Liliana Foletti (Consultant). Peer reviewers (Program Leader, LCC3C, Francisco Galrao de were Daniel Lederman, Leader Economist Carneiro (Program Leader, LCC3C and Christelte (LCRCE), Souleymane Coulibaly, Program Leader Chapoy (Senior Communications Officer, LCREC) (AFTP3), Pavel Isa, Consultant, and Marcelo for the production of this note. We would also Olarreaga (University of Geneva). Patricia Holt like to thank Mariatisa Motta (Practice Manager, (GMFDb), Miriam Beatriz (GMFDR), and GiseRle GTCDS), Auguste Tano Kouame (Practice ABSTRACT 5 Manager, GMFDR), and Sophie Sirtaine (Country Development of Canada, the United Kingdom's Director, LCC3C), for overall supervision and Agency for International Development, CARICOM guidance to the team. Secretariat, the University of the West Indies, This study is co-financed by the Caribbean the European Union and Caribbean Export. It Growth Forum (CGF) initiative and the Multi- aims to facilitate a multi-stakeholder dialogue Donor Trust Fund for Trade and Development. to identify practical solutions for the growth The CGF is an initiative facilitated by the challenge in the Caribbean. To learn more about Compete Caribbean Program,the Inter-American the CGF methodology and progress in each Development Bank, the World Bank and the Caribbean country visit: http://caribgrowth. Caribbean Development Bank, with the support competecaribbean.org/ of the Department for Foreign Affairs, Trade and c aTRADE MATTERS ie tepCorainibieb fTo tee maorbeao AF Aid for Trade LDCLeast Developed Country Access to Key Services Index LPLogistcs Performance Index Balance of Payments Liner Shipping Connectivity Index Brazil, Russia, India, China and Mercado Com6n del Cono Sur South Africa (Southern Cone Common Market) BraziL, Russia, India, Indonesia, Multi Pihre Arrangement China, and South Korea North American Pree Trade L rCaribbean Community Cy Agreement Caribbean Basin Initiative Organizaton for Economic Co- Operation and Development Caribbean Basin Trade Partnership Act DResearch and Development CG Computable General Equilibrium Revealed Comparative Advantage Caribbean Single Market Regonal Trade Agreement Economy TCTechnology Capabilties Index Doing Business Index TFP Total Pactor Productivity DCi Depth of Credit Information Trade Analysis and Information DC Depth of Credit Information Index Systems EU European Union United Natons Commody Trade GCI Global Competitiveness Index United Nations Conference on Global Competitiveness Report Trade and Development Gross domestic products United Natons Industrial Organza ton Global Education Training Initiative World Bank Enterprise Survey TGlobal Innovation Index World Development Indicators International Organization for -FWorld Economic Porum Toa Standardization World Trade Organization ULane America aNsd the CarCbbean ABBEVIAT!ONS AND ACRONYMS 7 INTRODUCTIO rade is essential for Caribbean Union, through the recently signed Economic countries' development and poverty Partnership Agreement: ii) the increasing reduction. Given their small market economic influence of the new growth poles size, they are dependent on exports to produce (e.g. Brazil, China, Indonesia, Korea, and Russia): manufactured products at efficient scale. And and iii) the redesign of the CARICOM regional giventheirnaturalamenities,theyrelyontourism trade agreement to implement the Caribbean as a major spur to economic activity. Trade in the Single Market Economy (CSME) as well as Caribbean thus makes an essential contribution a number of preferential trade agreements to increasing employment and reducing poverty within the region. These changes are likely to by supporting growth. At the same time, the high redefine the trading structure of the Caribbean dependence on trade also makes Caribbean countries, and through this restructuring to have economies vulnerable to external shocks. For important implications for the welfare of these example, the global financial crisis imposed economies. Understanding such implications is substantial job losses in sectors such as tourism critical to designing appropriate domestic policy that the poor rely on for employment. responses to changes in the trade environment, Caribbean countries face a rapidly but also in terms of eventually re-shaping trade changing environment for their exports, which agreements and policies. presents both opportunities and challenges The new trade dynamics add to old for economies highly dependent on external challenges facing the Caribbean region. markets. In particular, the features of the new Despite fairly respectable economic growth and trade environment include: i) redefinition of the a high level of openness to trade, unemployment relations with main trading partners, including rates remain very high, averaging 10% for the the United States, where Caribbean exports region over 2002-09, and poverty reduction continue to enjoy preferential access under the has been slow. Over the past five years, Caribbean Basin Initiative, and the European unemployment rates have averaged near or 8 TRADE MATTERS aeg tporrtnitieo fi e tte Caarbeeaa Antigua and Barbuda Dominican Republic Bahamas, The Haiti Barbados Agriculture and Food Dependent Dominica Guyana Grenada Belize Jamaica St. Kitts and Nevis Natural Resources Dependent St. Lucia Suriname St. Vincent and the Gr. Trinidad and Tobago Note: This table presents the allocation of all Caribbean countries under analysis, according to their major source of export earnings. above double-digit levels in most countries in the K What is the usefulness of trade in terms of region. Furthermore, progress toward reducing employment and poverty reduction in the poverty has been relatively slow and remains Caribbean? uneven in the region. In the larger Caribbean ii. What has been the Caribbean performances countries, an estimated one-quarter to one- exporting to international market, and third of the population lives below the poverty particularly to emerging dynamic markets line (measured at US$1 /day). The region's three in recent years? most-populous countries (excluding Cuba) have iii. What are the key factors determining the poverty rates of 16.4% (Dominican Republic), performance of Caribbean exporters? 44.1% (Jamaica), and 56% (Haiti). iv. Going forward,what should bethe Caribbean This report-based on recently published strategy in terms of trade agreements in research' from the World Bank-seeks to order to secure further market access for improve the understanding of challenges by their exporters? addressing the following questions: v. What are key recommendations to increase export, and boost opportunities for the poorest through trade? While Caribbean economies are, in general, specialized in tourism and nautical services, as wet as the production of agricu[tural and INTRODUCTION 9 some light manufacturing merchandise, there (i) services economies (at least 60% of total is considerable heterogeneity in the level of exports in services); (ii) Light manufacturing economic development and diversification economies (at least 80% of trade in goods in across their economies. In order to group light manufacturing); (iii) agriculture and food Caribbean countries into relatively homogeneous products economies (agriculture and food groups, we divide them into four mutually products as primary source of export earnings); exclusive groups (see Table 1) according to and (iv) natural resources dependent (natural their most important source of export earnings: resources as primary source of export earnings). 1 0 TRADE MATTERS New Opportunities for the Caribbean rade plays an important role in from the hotel and restaurant sector, one of employment generation in the small, main sources of export revenues for several open economies of the Caribbean. Caribbean countries, are probably understated.' Firms involved in export activities account for Thus export performance contributed to the 34 percent of formal employment in the region, significant increases in employment and in labor slightly above the 32 percent average for other force participation achieved in many Caribbean developing countries covered by the World countries over the course of the last decade. Bank Enterprise Survey2 (WBES: see Figure Exporting not only raises the demand for 1). The share of employment that is directly or labor, but also can generate higher-quality jobs indirectly generated by exports, which excludes than in production for the domestic market. exporting firms' workers who are involved in Exporting firms in developing countries tend production destined for the domestic market, to be more productive and pay higher wages is 17 percent, again slightly above the average than do non-exporters. Caribbean exporters do in other developing countries. Exporting firms not appear to pay significantly higher wages, account for 55 percent of manufacturing or employ significantly more skilled workers, employment in the Caribbean, compared with 51 than in other developing countries. However, percent in other developing countries. The data Caribbean exporters of manufactures employ a for manufacturing are probably more reliable larger share of women than do nonexporters, than for the total, as estimates of exports and this difference is greater than in other developing countries. TRADE BOOSTS JOBCREATION1 70% - U Share exporters 60% - Share exports 50% - 40% - 30% - 20% In all countries with adequate data, the of human capital. In a few cases, however, poorest 40 percent of households have a higher despite having comparable levels of human share of their workers employed in exporting capital workers from the poorest 40 percent of sectors than in non-exporting sectors (Figure households earn significantly [ess than other 2). In Jamaica, for exampLe, about a third of households, for at [east two possible reasons: workers from the poorest 40 percent are First, there is some qualitative evidence to employed in exporting sectors, compared to only suggest that though some workers have similar about a fifth in richer households. Moreover, in numbers of years of education on paper, the every country, poor workers account for a larger quality of education actually received may not share of employment in exporting firms than in be the same. Second, where both the number non-exporting firms. of years and quality education received by While trade is generally beneficial for poor households are comparable, poorer household Caribbean households, they have not benefited seem unab[e to participate fully in productive fully from the employment opportunities activities boosted by scale and network effects. created by trade. Although poor households in Instead many of them work as self-employed, most Caribbean countries have some access own-account workers, often in informal to employment opportunities in the exporting enterprises. sectors, it appears that workers from the poorest White exporting can be beneficial, it can households generally do not earn enough from also make the economy more sensitive to their jobs in exporting sectors. In some cases, international conditions. The global financial differences in earnings and productivity are crisis resulted in a huge drop in global demand, driven by commensurate disparities in levels and many firms involved in export activities 1c2 TRADE MATTERS fr Otporhee fst e Cperrcnan Dominican Republic * Non-exporting sector Exporting sectors 100% 90% 80% 70% 60% 50% 40 % 30% 20% 10% 0% Poorest 2 3 4 5 6 7 8 9 Richest Jamaica * Non-exporting sector Exporting sectors 100% 90% 80% 70% 60 % 50% 40 % 30% 20% 10% 0% Poorest 2 3 4 5 6 7 8 9 Richest Haiti * Non-exporting sector Exporting sectors 100% 90% 80% 70% 60 % 50% 40 % 30% 20% 10% 0% Poorest 2 3 4 5 6 7 8 9 Richest TRADE BOOSTSJOB CREATION 13 suffered substantial losses. In the Caribbean, employment in the Caribbean through exports. however, the growth rate of employment in Before the crisis, Jamaican exporters achieved exporting firms during the crisis was not much more rapid growth in employment significantly different from that of non-exporting than non-exporters, so the rough similarity of firms. While this does not show that the crisis employment growth rates between the two had little impact on the Caribbean (incomes also groups during the crisis may show an adverse were affected by changes in the prices of goods effect. Also, in the most important export sector, and financial sector instability), it is possible that which in the Caribbean is tourism, the growth the trade channel was not as significant as in rate of employment in exporting firms during the other developing countries. Nevertheless, there crisis was lower than in non-exporters. are some indications that the crisis affected 1 4 TRADE MATTERS New Opportunities for the Caribbean ike most small islands, Caribbean curve line is the expected trade openness given economies are relatively open to each country's per-capita GDP (and its square). trade. Countries in the Caribbean are The band around the curve represents a 95% exceptionally open to international trade, with confidence interval. Results indicate that the only one important exception: the Dominican majority of Caribbean countries (identified by Republic. The trade-to-GDP ratio is one of the their 3-digit ISO codes and colored according to most basic indicators of openness to foreign their country grouping) display a trade openness trade and economic integration. By weighting indicator that is larger than what is expected the combined exports and imports of goods and given their stage of development. The high services relative to the size of an economy, the level of insertion into international markets ratio gives an indication of the dependence of has remained stable over the last decade. It is domestic producers on foreign demand and of important to note that the Dominican Republic, domestic consumers and producers on foreign the largest country in terms of population and supply. There is a concave relationship between geographical size, not only under-trades both in trade openness and per capita income; countries terms of merchandise and services but also its tend to trade more as incomes rise, but at a trade openness indicator has been decreasing decreasing rate. Figure 3 and Figure 4 show over time. the location of each country in the world along these two dimensions for the average periods of 2005-2007, and 201a0-2012, respectively.c The EtrRG3N- TRAdE OPPORTUNITIES TO BE SEIZE S 15 150 - o*GY8 o4 o o 0GY o o ogo o oo o. o o o o o ATG o o *LCA 0 HT co o o o o o 100 - o oo00o o o 0 0 o o o o | o RD o | o o 0 - 0 7 0 10 11 L oGD per capito PPP Note: Services dependent countries are colored in green: ight manufacturing countries *n red; natural resources countries in blue; and agriculture and food products countries in orange. The scatter plotters indicate the position of all countries in the World Bank classification of countries along two dimensions: trade openness and GDP per-capita. 150 0 0 2 o __ 0o0oo o wo ooo o o o 5 o a oRo a o o Tooo o oo o o 6 o .o o o 0 000 o o qbo o a g o oo o oo oo oo O o o 0- 6 7 8 9 10 11 Log of GDP per capita (PPP) indicae the ositio of al countiesintAe MATTrd NeBOpotnitcaiesf tiben o o nre ln w i e so s 10-0 0U 0 o ~ o 50 00 oo 0 ODM o10ipo 0 10 0 0oo o o0Bio o 7 8o 01 0099p Op GRDo 1 6 TRAE MATTES teA tToriL GRDT 00 40 - 6 30 - - 10 (20 1960 1970 1980 1990 2000 2010 Year - Caribbean - Developing - Latin Arnerica Countries and Caribbean The Caribbean's high integration with Ide,tesml vrg rd eii o u the giobai economy, however, stems more sapeprofralthilndcuresnte from imports than exports. For the average wrd(nldn h aiba)i .%o D of the period 2010-2012, all services and light Th Caibnreonfcsnraig manufacturing economies had an average trade "egoaiain.TeCrbenssaeo deficit of 16.6% and 25.4% of GDP, respectively. Most countries in the Caribbean have arie services trade surplus-with the exceptions nal ure ecn n21 Fgr ) h of Haiti, Belize, and Suriname. Nonetheless, i de impearage tre decorour only Suriname and Trinidad and Tobago-both speer for ll thnisland countries in natural resources dependent economies- worl(ind ing teai an i. otsde show a substantial surplus in their overall t he region aes increa trade balance. The high level of trade opennessbization T Car ibean'sse of is due to a very large inflow of merchandise worl m erh ni exorss bee de n trade imports, which is common amongst small asd N Aling m3ret int sees to islands, which are usualty dependent on foreign nerly te pece ins2012,(Fig e the supply to maintain their quality of life (largely Caribbean's interation tate w ore nm financed by remittances from abroad). This has e cowo n dependence allows them to devote productive trae blane. he ighlevl o trdepeness Integraio the simpre arg. tAd polict foe our is ue o vey arg iflo o mechndie nileaml peferentoral aesn toutisn the pa trad imprts,whih iscommn aongs smal rad nrthAmin arkbean) dos n%o seemPt islnds whch re sualy epeden onforign he aroduceanh epecte raesls in en suply o minainther qalty f lfe lagel Caie-oastrnation al taibeas peroraneo financed byeremittanestfrom abroad).eThieovernthis period.o factors into key economic sectors and specialize. EMERGING TRADE OPPORTUNITIES TREBE SEIAZED 17 60 30 40 15 20 10 2004 2006 2008 2010 2012 2004 2006 2008 2010 2012 - Heavily serv anpenn - L, M,nl,,tar! g ependent Servicea dependent - Light Manufacturing dependent - Agro and food dependent - Natural Resources dependent - Agr and food dependent - Natural Resources dependent Note: These figures show the evolution of merchandise and services exports as a share of GDP, for each one of our country groups. The contribution of trade to Caribbean that are directed to the new growth poles (large, economies has been declining over recent rapidly growing developing economies) has risen years. Merchandise exports have stagnated or from 2005, yet the levels remain extraordinarily declined (relative to GDP) since 2005 in all of the low.' The share of merchandise exports to the four country groups, with countries dependent new growth poles from Caribbean countries on natural resources suffering the largest fall dependent on natural resources and light (Figure 6). Exports of services have performed manufacturing increased sharply from 2005-12, even worse, falling relative to GDP in all of the but remained below 6 percent (Figure 8). The country groups from the 2005 level (Figure 7). share of tourism receipts from the new growth In countries dependent on light manufactures poles for the resource dependent countries and on natural resources, services exports have also increased sharply, but only to 8 percent by fallen more or less continuously compared to 2010 (Figure 9). In contrast, the share of tourism GDP since 2005, while countries dependent on arrivals from the new growth poles for the services and on agriculture saw a slight decline services dependent economies has remained following the depths of the global financial crisis. insignificant and flat. There is potential for greater integration The share of Caribbean exports of with new growth poles. The Caribbean share of merchandise going to the new growth poles both merchandise exports and tourism services could be much higher. Exports from the Caribbean to the new growth poles are lower than predicted by a gravity model of trade 1n8 TRADE MATTERS poe fprpomCiar fire Cdountr 6 - 5 - / 6- 2 2- 1 - 0 - 2004 2006 2008 2010 2012 2004 2006 2008 2010 - light Manufactring dependent - Agro and food dependent - Heavily services d pendent - Jaraica Nauram a sures dependent - Dominican Repablic - Naturalres r depennt Note: The lines indicate exports to the new growth poles economies as a share of total exports, for merchandise trade (left panel) and tourism arrivals (right panel). The lines represent simple averages across countries in each country group. Services dependent countries are not considered for the merchandise analysis and agro and food dependent countries for the services analysis, because of their extremely low level of exports. Tourism arrivals are presented for the Dominican Republic, Jamaica, the rest of services dependent countries, and the natural resource countries. that reflects various determinants of bilateral expected trade relationships are colored in exports, particularly size, income level, and green, smal[er than expected in red). There are distance.' Table 2 compares the actual and three main results from this analysis: (i) with predicted values for the share of each country's the exception of Bahamas, St. Kitts and Nevis, merchandise exports going to the new growth St. Lucia, Belize, and Haiti, exports to Brazil from poles in total merchandise exports, expressed Caribbean countries are sma[ler than expected: as a ratio. An observation that is larger (smaller) (ii) exports to the new growth poles from light than one indicates that the observed export manufacturing and agricultural-based countries relationship is larger (smaller) than what is are generally in line with the model predictions: predicted by the gravity model (larger than and (iii) Trinidad and Tobago oil is directed mainly to the old growth poles and to India. Whi[e there may be several reasons that bilateral exports fall below the gravity model predictions, these results may indicate the potential to increase Caribbean merchandise exports to the new growth poles. EMERGING TRADE OPPORTUNITIES TO BE SEIZED 1 9 Services Antigua and Barbuda 0.21 9.03 69.08 countries Bahamas, The 12.35 22.96 2.59 Barbados 0.32 1.49 0.41 Dominica 1.06 3.63 . 97 Grenada 21.83 -- Jamaica 0.15 0.17 0.66 0.61 53.50 St. Kitts and Nevis 28.91 1.25 -- 0.92 0.81 St. Lucia 0.65 0.64 39.96 1.08 0.68 0.43 St. Vincent and the 1.65 1.03 0.46 Grenadines Ligth Man. Dominican Republic 0.42 1.05 0.21 0.86 1.87 1.87 Cou. Haiti 1.35 2.35 6.08 4.63 3.42 0.59 Agr. Cou. Belize 38.14 0.62 1.00 0.53 0.59 Guyana 2.83 2.56 1.78 1.18 1.36 Nat. Res. Cou Suriname 22.89 2.54 21.18 2.18 28.40 0.07 Trinidad and Tobago -- 0.06 74.31 01 0101 -- Note: This table shows the observed bilateral export value in 2011 as a ratio of their expected value predicted by the gravity model. The total value of merchandise includes trade in all products. Red (green) cells indicate that the observed value is smaller (larger) than what is predicted by the econometric model. COMTRADE data does not report exports from Trinidad and Tobago to Brazil and Russia; from Grenada to Russia; or from St. Kitts and Nevis to Indonesia. Tourism exports of Caribbean countries Tourism exports to China from the countries to the new growth poles performed relatively dependent on services (except Dominica) and better compared with merchandise trade. the Dominican Republic are less than expected, Some Caribbean countries export more tourism but exports to China from the natural resource services than expected to the new growth poles, dependent countries are greater than expected. given each country's economic size, bilateral Brazil also has fewer tourists arriving from distance, and the other determinants (Table 3). services dependent countries than expected. In This is particularly true for tourism exports to general, the United States and Europe remain Russia from the Dominican Republic and the the primary source of tourism to the Caribbean. Caribbean countries dependent on services. 2 0 TRADE MATTERS New Opportunities for the Caribbean Services Bahamas, The 4.09 0.57 0.88 1.00 1.99 countries Barbados 0.56 0.88 1.04 1.07 2.73 Dominica - 2.00 Grenada 0.59 Jamaica 0.55 0.87 0.48 0.42 1.81 Ligth Man. Dominican 2.14 0.41 0.33 emp ir Cou. RepublicM Nat. Res. Cou Suriname 2.26 5.08 1.48 1.52 Trinidad and 0.57 3.28 1.13 0.50 0.50u n ) bt Tobago Note: This table shows the observed biateral tourism arrivals in 2009/2010 as a ratio of their expected value predicted by the gravity model. Red (green) cells indicate that the observed value is smaller (larger) than what is predicted by the econometric model An empty ceo signifies that no bilateral tourism export information is available for any Caribbean country in the respective group and the corresponding growth poae country. The comparison of the predicted versus the Caribbeanbountries ca reach.eTo xploreithi actual level of tourism revenues given above advange indices re countrie in t pertains only to countries that currently exports nregio in 16 rchaie s o some tourism services to the new growth pole These indes s whether sareof a countries. In addition, many Caribbean countries, hihrlacongdswtmnmlpoesn, including Antigua and Barbuda, Belize, Guyana, ted tolmthepenil arts ht St. Kitts and Nevis, St. Lucia, St. Vincent and the Crbencutiscnrah oepoeti Grenadines, and Haiti, did not have any tourist isu,w caultdrvle copaie arrivals from new growth pole countries in 2009 adntgidcefoth15ouresnte or 2010. The gravity model analysis indicates Caibnreonn16mchdseetr. that there may be important potential for tourism Thsincesow hterhehaefa receipts in these countries from the new growth product in a country's trade is greater than poles, particularly from Brazil and India. the share of that product in global trade.9 Caribbean trade performance is reflected in the inability of the region to diversify its exports toward higher value added products. EMERGING TRADE onPRTgoITIES wi E SEmnE 21 Countries and sectors with relatively high countries' services exports with global trends. revealed comparative advantages include Haiti In 2010-11, many Caribbean countries lost (but only on one product, textiles), Antigua and market share in their principle services exports, Bermuda (vegetables and transportation), St. but gained market share in less important yet Kitts and Nevis (animal and machinery), St. more dynamic export sectors (e.g. construction, Vincent and Grenadines (vegetables, metals, insurance, finance, information, royalties and and transportation), and Trinidad and Tobago license fees). Nevertheless, these sectors (organic fuels, chemicals, and metals). Moreover, remain a small share of total Caribbean services the sectors of animal products, vegetables, exports. minerals, and foodstuffs account for 31 of the The Caribbean countries' ability to exploit 65 observations representing sectors in which trade opportunities may be limited by low the RCA index is greater than one. While the productivityof its firms. According to data from level of processing differs considerably within the World Bank Enterprise Surveys (WBES), sectors, nevertheless these sectors tend to Caribbean exporters have lower productivity require limited processing. As countries that relative to their competitors in the larger LAC export more sophisticated, higher value added economies. Although there is no substantial products tend to achieve higher growth rates, difference between the productivity of non- many Caribbean countries' specialization in exporters in both Caribbean and non-Caribbean these low value added sectors may limit their countries, exporters from other LAC countries potential growth. are 43 percent more productive than exporters Caribbean services exports may offer from Caribbean countries. However, most of this greater potential for the future than difference comes from large economies in Latin merchandise exports. Caribbean countries' America, since the productivity of other small revealed comparative advantage in services regional economies is even lowerthan that of the is also highly concentrated, in the travel and Caribbean countries. One possible explanation communications sectors. Nevertheless, other might be related to economies of scale-firms services sectors are demonstrating more may tend to be larger in large economies. dynamism. Services sector exports declined Caribbean firms tend to be smaller than firms with the financial crisis (by 5.4 percent in in Central and South America-although in some countries dependent on services between 2008 respects, exporting is a more important activity and 2009) and the subsequent recovery has in the Caribbean. Exports also account for a been anemic. However, the crisis depressed larger share of Caribbean exporting firms' total global services exports in general; to determine revenues than in Central and South America, how well Caribbean countries are performing in whether exporting is defined as direct or indirect services trade, we compared changes in these exports. These findings are consistent with the fact that Caribbean domestic markets tend to be smaller than in the rest of the region. Exporting activity in the Caribbean is predominantly in 2t2 TRADE MATTERS ew r e opportnitiee may tbe iamtyeao manufacturing (29 percent of firms are direct regions, except South Asia (Table 4). However, exporters), hotels and restaurants (26 percent), it is worth noting that while Caribbean average and transport, storage and communications tariffs level (estimated at 11.6 percent) is (22 percent), while the incidence of exporting significantly higher than that of the small island in other sectors is much smaller.10 A similar economies (7.4 percent), it is just slightly higher sectoral pattern is seen if indirect exporters are than that of the group of the successfu[ small also considered. is[ands (9.8 percent). Moreover, econometric analysis indicates that trade policy (measured Asesn the% Key, Traden by tariff levels) has had only a marginal impact on trade performance. ndctorsThe Caribbean region's average score on We measured the quality of policy and the World Bank' Logistics Performance Index infrastructure using a set of available (LPI) was lower than in any other region." quantitative indicators, that include: (i) trade All Caribbean countries, except The Bahamas, policy, measured by the level of tariff rates; perform below the Latin American average (ii) trade facilitation, measured by the World on all LPI components. The Caribbean also Bank's logistics performance index (LPI) and performs below the successful small island the cost to export a container; (iii) the efficiency economies (Table 5). This suggests that the and availability of shipping services, measured weak development of trade logistics might be a by UNCTAD's liner shipping connectivity index factor explaining trade performances difference (LSCI); (iv) the extent of innovation, measured by between the Caribbean and this group. investment in research and development (R&D) Caribbean maritime connectivity is and the number of patent applications; and (v) relatively limited compared to other regions, the business regulatory environment (proxied by as well as when compared to other small the cost to register property), the cost of starting island economies. One important indicator a business, and the depth of the financial sector. of the efficiency of maritime trade, and thus The impact of high tariffs should not be the magnitude of transport costs, is the Liner exaggerated. The Caribbean region's weighted Shipping Connectivity Index (LSCI), which average tariff rate is higher than all other measures the development of containerization EMERGING TRADE OPORTUNITIES TO BE SEIZER 23 European Union 4,4 9,4 Europe and Central Asia 6,3 6,2 East Asia 6,5 10,4 North America 7,5 8,8 Middle East and North Africa 10,4 17,7 Sub-Saharan Africa 11,5 9,6 South Asia 13,5 10,9 Latin America 8,8 7,2 Caribbean 11,6 11,9 All Non-Caribbean Islands 7,4 8,6 Successful Non-Caribbean Islands 9,8 10,2 in a country's maritime transport.13 Despite for the period from 2004 to 2011 reflecting its some improvement in the most recent data role as a regional hub (Table 6). compared to the average from 2004 to 201 1, the The Caribbean under-performs on patents, average LSCI of the Caribbean countries remains high-tech exports, and innovation, Innovation is the lowest of all regions. And while performance a key determinant of trade, as it enables firms to varies within the region, 9 of the 13 Caribbean produce more at lower cost, achieve economies countries with available data have lower scores of scale, and therefore expand market share. than the average level in every other region, Overall the Caribbean performance in innovation including Sub-Saharan Africa. The Bahamas is very weak, although there is an important was the best Caribbean performer as of 2012, degree of heterogeneity across the region. The while Jamaica had the highest annual average 2013-14 Global Competitiveness Report (GCR) ranks 150 economies in terms of innovation performances, based on 6 criteria: the capacity for innovation, the quality of scientific research institutions, company spending on research and development (R&D), university-industry collaboration in R&D, availability of scientist and engineers, and Patent Cooperation Treaty 2 4 TRADE MATTERS New Opportunities for the Caribbean - w- O O' 0 0 - CD O' 0 09 7 -, C9 9 -ý c O L CI) C C) - C4 C co t m C> m O O CD 0o Cn -~ ~ c c ~ ~ o C o -z CDi CI) m m C1 CI) cm m ' ' c2 c in c q C c0 O- - -- -- in CD c -4 C in sO inl in - cO O N" -O O OD O~ O' -O m t- - o n O- - - en m~ t ~ CN ~ cm C14 <"'i C14 ci- C"> 0' C) rq o- C) C) o al o CI) L', -P - O O LD O O C9 m CE CNJ C- c q CO o C r- C o 4 ci n COr) O t- -O -O Or CI) m- CI) ~ ' cm C14 C14 rq~ C4 en C'- - ý Om-O - m ,' C' "P cm m m~ rq cm cm "~ C1o C4 C4 CI- 0 o- O- o- 0 r al o o :t c' CO O~ - O-CJ- ~i O ~ -CC CI) CI m c'q cm cm cm cm- rq~ "' m OD - in t-s in -O t- N' C cm 01 CD :t 00 Mn 00' CJ 0- m~ m m c'q C1 C14 C.4 C14 C1 C14 C14 m O o- LD i - t-s -O in eD C< -O in s e- in in in -O - e co o c' es cs c' c'- c"s eN C CN t O n C-, M CM C 0 C CO e- LD o Lo t- OO L- c D O -L -O CI m o 1 rq e q C4 rq rA C14 C) L) in D t- - LO in r0 tn i N in i - in i C cm m. C1 C1 c¯m C1 rA cý .m E L ®, - ® o <- i -i - LO C14 m~ m~ cmJ cmJ cmJ cm C'J q' C1 oý o0 $ rl -: -U2 r O C ruý m C- 1 1 M 1 i r L ) co alO LO CI 0 L ) C m < m q- - c F= -- M -r o LU Z Z U) .6 U) m Q C U N z Tz UNIT (n T B E) E m EMERGING TRADE OPPORTUNITIES TO DSE IZED 25 Agriculture Dependent Belize 2.8 9.99 (7.20) Guyana 4.33 4.06 St. Vincent and the Grenadines 3.9 4.02 St. Lucia 3.93 4.55 Services Dependent St. Kitts and Nevis 4.66 2.67 (10.78) Barbados 5.32 4.82 Bahamas, The 19.04 27.06 Jamaica 23.86 21.57 Natural Resources Suriname 4.23 4.48 Dependent (11.69) Trinidad and Tobago 13.89 18.9 Light Manufacturing Haiti 4.29 5.08 Dependent (14.40) Dominican Republic 18.53 23.72 Dominica 2.32 2.08 Other Countries (2.84) Antigua and Barbuda 2.46 2.41 Grenada 3.53 4.04 Sub-Group average in parentheses. (PCT) patent applications. Table 7 shows current the world in innovation. As expected, results rankings for individual Caribbean economies were similar for the sub-indexes." in selected sub-indexes from the Global Competitiveness Report. Barbados is the only Caribbean economy among the 50 top countries in terms of innovation." Haiti, Suriname, Dominican Republic and Trinidad and Tobago were ranked amongst the lowest countries in 2 6 TRADE MATTERS New Opportunities for the Caribbean Barbados 48 123 100 117 102 48 63 11.3 Dominican 115 113 128 114 108 123 73 0.29 Republic Guyana 57 60 48 87 68 103 76 Haiti 144 140 145 143 141 133 126 Jamaica 83 38 83 31 62 71 126 0.56 Suriname 125 98 126 96 91 125 83 0.67 Trinidad 107 81 45 78 39 63 32 1.42 and Tobago The weak performance of the Caribbean between 2005 and 2012, it was only 5 percent in on innovation is also reflected in the number the Caribbean region. of patent applications and the technological While the business environment in the content of exports. The number of patent Caribbean has improved substantially in applications in the Caribbean by both residents recent years, it has not done so as rapidly and non-residents has been lower than that of as in many other developing countries, and every other region in the world in recent years.16 important gaps remain in key areas. According The level of innovation seems to be another to the World Bank's Doing Business Index (DBI), key factor explaining the difference between starting a business in the Caribbean requires the Caribbean and the successful small island more time, on average, than any other region, economies. While the share of high technology and costs more (relative to per capita income) in total manufacturing exports from successful than any other region except Sub-Saharan Africa small islands was 15 percent on average (Table 8). Registering property in the Caribbean requires more time than in any other region except South Asia, and costs more (relative to the property's value) than any other region except Sub-Saharan Africa. The Caribbean also scores relatively poorly on most indicators of EMERGING TRADE otPhRTegITIES Te E SESaEh 27 North America 1.5 1 4 5 0.6 0.6 Europe and Central 8.31 4.3 28.2 12.9 10.7 10.7 Asia European Union 6.68 5.6 21 13.4 9.2 9.21 East Asia 7.81 7.2 38.1 29.9 33.3 33.3 Sub-Saharan Africa 9.6 7.4 48 28.6 139.7 139.71 South Asia 8.78 7.8 32.6 16.1 46.2 45.54 Middle East and North 9.23 8 25.6 15.4 40 39.96 Africa Latin America 10.74 8.7 45.2 26.6 43.5 43.49 Caribbean 7.8 7.4 78.9 68.4 43.1 22.1 All Small Islands 7.8 7.2 61.8 45.6 49.4 28.6 Non-Caribbean 7.6 6.8 47.6 26.6 45.5 20.2 Successful Islands 7.3 5.3 18.6 6.5 14.1 7.4 the strength of the credit system. For example, to electricity, with the lowest number of days the Caribbean has the lowest average regional required to get electricity, as well as lower costs score on the depth of credit information index and number of procedures required to obtain (DCII), which measures the rules that affect this service compared to most other regions. the scope, accessibility, and quality of credit ThebusinessenvironmentintheCaribbean information available to the public and private also performs significantly below that of business operators." The Caribbean region's successful small economies. For all the six performance is rated more highly in access doing business indicators considered, the Caribbean performs below the successful smayl islands. Remarkably, although doing business performances in successful small islands were better than those of the Caribbean in early 2000, 28 TRADE MATTERS bee tOorheiti fsu ctc s f mi the pace of reforms in these countries has been by TC0 and access to key services (as indicated faster than in Caribbean region. by AKSI) are positively and significantly related Exporting firms are significantly penalized to firms' labor productivity. This suggests that by limited access to key services (electricity, policies that promote technological capability telecommunications and transport services) and improve access to services could boost and a lackluster rate of innovation in labor productivity in the Caribbean. When the region. To analyze the extent to which assessing which aspects of innovation or key innovations and access to services are related services are more effective, results suggest the to firms' productivity with a particular focus following: innovation in production (ranging from on exporting, we constructed two indices: the basic skills such as adoption, operation, and technological capabilities index (TCI: which maintenance, to more advanced knowledge such captures and integrates a variety of objective and as adaptation, improvement, and equipment, subjective information into coherent measures to ultimately the highest and most demanding of a firm's capacity to establish, operate, and technical proficiencies of research, and design) transfer technology), and the access to key are the most efficient; while access to business services index (AKSI: which captures access key services which represents services required to electricity, communications and transport to connect firms to suppliers and clients, services). Both of these indices are based on basically telecommunication services, including responses from the World Bank Enterprise telephones and internet, and transportation Surveys. Regression analysis shows that both have the most impact.'819 the level of technological capability (as indicated EMERGING TRADE OPPORTUNITIES TO BE SEIZED 29 ntra-regional trade has been boosted by the consolidation and completion of the Single steady progress in building institutions Market and the Monetary Union. and improving policies. From the early days The CARICOM agreements have driven a of their independence, Caribbean countries rapid increase in intra-regionat trade. Contrary have pursued regional integration to ease the to the widespread perception that Caribbean constraints that their small size imposes on intra-regional integration is limited, the share of economic development, including a lack of intra-regional exports in total exports increased domestic competition (due to limited economies substantially over the last few decades. The of scale), the limited capacity to adjust to changes rising share of intra-regional in total exports has in the global marketplace, and the limited been driven by the increasing attractiveness of negotiating power of small Caribbean economies Caribbean destinations to Caribbean exporters, vis-a-vis their main trading partners (the United not by more rapid growth in the Caribbean than States, the European Union, and Canada). While in extra-regional trading partners (Figure 10). progress has been slow, important steps have That is, the share of intra-regional exports in total been taken towards defining regional integration Caribbean exports has risen much faster than policies and institutions, beginning with the the share of Caribbean GDP in world GDP This creation of CARICOM in 1973 and followed by intra-regional attractiveness was already large the establishment of the CARICOM Single Market in 1985, when Caribbean intra-regional trade in 2006. This process is planned to reach a was 40 times larger than exports outside the culminating point in 2015, the projected date for region (once we control for destination market 3t0 TRADE MATTERS oe tphor eanieie w fe t e tah t abeab 70 * .12 0.. export share/GDP share 060 .1 . :* export share S1. *.08 o 50 .* 0 0~ . 0- V * f . .06 < 0 - S40 A .04 1990 1995 2000 2005 2010 sizes), and rose to 68 times larger by 201 0.20 exports and the small amount of intra-regional Moreover, the rise of Caribbean intra-regional trade. Slow Caribbean export growth (relative exports does not reflect geographical proximity. to the growth in Caribbean GDP and in global The share of total Caribbean exports going to trade) partly reflects the formation of regional Latin American countries that are not CARICOM trade blocs (principally NAFTA and the European members (Guatemala, El Salvador, Nicaragua, Union) that impaired the competitive position of Costa Rica and Panama), and that as destination Caribbean exporters. And while intra-Caribbean countries are comparable in terms of size and exports are equal to only about 5 percent of GDP, geographical location to Caribbean countries, this is entirely due to the small size of Caribbean has remained roughly constant at 1.5 percent. markets. This suggests that CARICOM agreements The implementation of a common market might be the driving force behind the rise in would lead to a substantial rise in exports in trade within the region. Skepticism over the the Caribbean. The decline in trade barriers benefits from the CARICOM trade agreement should lead to an intensification of competitive has centered on the limited growth in Caribbean pressures, and thus an improvement in the quality and quantity of the products of Caribbean firms. As a result, intra-regional exports would rise, nominal GDP would increase, and the price level would falt. While Caribbean firms would be more competitive on world markets, THE PROMISE OF INEER AND INTRA REGIONAL TRADE AGREEMENTS 31 BLZ 5.54 59.65 8.8 57.58 1.81 58.79 -3.48 BRB 9.34 21.47 15.41 21.92 21.15 64.9 2.11 DOM .23 31.91 .36 31.98 .62 58.49 .21 JAM 1.59 51.13 2.7 52.65 4.99 70.16 2.97 LCA 16.86 49.85 26.1 45.88 7.9 54.82 -7.96 TTO 12.16 35.36 17.04 32.29 3.79 40.11 -8.7 TOTAL CARICOM 5.02 35 7.23 34.01 3.06 44.13 -2.83 Note: The benchmark year is 2006. Col.2-5 report ratios of export over Output. Cot.6- CoL.9 report changes their production costs would rise due to more exporters. The gains for the Caribbean of entry intense competition from other Caribbean into NAFTA would be six times the size of the firms for labor and materials. Countries that gains from implementing a Caribbean common already direct a large share of their exports to market. Here, again, Caribbean countries that the region (e.g., St. Lucia and Barbados) would already trade intensively with the NAFTA zone - enjoy the greatest benefit (Table 9). This initial due to spatial proximity or a large economic size share mostly depends on geographical features -- would enjoy the greatest benefit. The benefits (e.g. spatial proximity with other countries of the for the current members of NAFTA are negligible, Caribbean) and on the initial economic size. as the Caribbean countries are small economies The gains of deeper trade integration with compared to the North American trading bloc. North America or Latin America would exceed The impact of Caribbean countries joining the gains from implementation of a common MERCOSURalsowouldbesubstantial,although market. Clearly, the gains to Caribbean exports smaller than the impact of joining NAFTA. The of joining NAFTA would be large, given that the gains to the Caribbean are about 2.5 times larger United States is the Caribbean's major trading than the gains from implementing a common partner. Moreover, the agreement also would market. These gains remain smaller than the end the preferences that Mexican exporters impact of joining NAFTA, despite the fact that enjoy on the US market, compared to Caribbean Caribbean exports are more sensitive to growth 32 TRADE MATTERS eo aOreoui fsm ae eaconoma in MERCOSUR than in the NAFTA members, integration with the emerging economies because Caribbean exports to MERCOSUR would be small, often of an order of magnitude are much smaller than Caribbean exports to smaller, with the noticeable exception of trade NAFTA. Potential preferential agreements with with China. As in other simulations, the size of emerging economies, however, would generate the impact is mostly related to the initial level of modest gains at the very best. Compared to trade relations. deeper integration with NAFTA, the gains from THE PROMISE OF INTER AND INTRA REGIONAL TRADE AGREEMENTS 3 3 here is considerable potential for economies score poorly compared to other small boosting trade and accelerating growth island economies and many other developing through deepening trade integration countries on key indicators of trade facilitation, with traditional partners and exploring and trade logistics. Efforts across the region, opportunities offered by new growth poles. with in some case the World Bank's support, to Market access-including adoption of the modernize customs administrations and border Caribbean common external tariff and deeper management (e.g. introduction of ASYCUDA, integration with NAFTA and MERCOSUR-would single window projects, trade information portal, have a significant role in increasing trade and implementation of Bali agenda, risk management spurring growth in the region. Deeper trade based inspection at the custom with reliance on integration with North America through entry of non-intrusive means) should be accelerated. In Caribbean countries into NAFTA would generate Dominica, Grenada, St. Kitts and Nevis, St. Lucia, larger gains than that of integration with St. Vincent and the Grenadines, and in Trinidad MERCOSUR or the implementation of a common & Tobago, the World Bank, through the SEMCAR market. However, reducing tariff should not be Program (Supporting Economic Management a priority for Caribbean. Although Caribbean in the Caribbean), is providing analytical and countries trade to new growth poles increased technical assistance support in a wide range of in recent years, linkages with these countries areas related to Customs efficiency, including remain low, suggesting considerable untapped among others, customs pre-ctearance and risk opportunities to expand. management frameworks development and in- Improving trade facilitation environment depth assessments of customs system (policies, and the connectivity would have a major processes and procedures). Recent initiatives to impact on trade in the Caribbean. Caribbean modernize ports infrastructures and regulation 3 w4i TRADE MATTERS New Op th i n te Ca sme cW apeao in Jamaica, the DR, Bahamas, and Haiti, boosted efforts need to be made to enhance the by the race to host the Post Panama Logistics investment climate, inc[uding efforts to improve Hub are welcome, even though the expansion the skills base (including greater investments of port facilities carries some risk, given the in science & technology), improving access to existing excess capacity and the uncertainty infrastructure and finance, and tackling crime. concerning the amount of traffic that will use the Easing supply side constraints through Canal's expanded facilities. innovation enhancement, and improvement of Improving the business environment and access to key services (electricity, transport investment climate would be essential to and telecommunications) would have a major close the productivity and competitiveness impact on the productivity of Caribbean firms. gap with international competitors. The Doing The region needs to step up efforts to increase business indicators show that other Small investments in research and development (R&D), Island Economies are moving at higher pace strengthen scientific research institutions, than Caribbean on the reforms in this area. encourage University-industry collaboration in Business environment reforms, in the context R&D, enhance training of scientist and engineers, of private sector-led growth, are front and and promote Patent Cooperation Treaty (PCT). center in the World Bank's country partnership Efforts to reduce poverty should focus strategies across the Caribbean. In Belize, the on policies that improve the livelihoods of Dominican Republic, Grenada, Jamaica, and the poor, without necessarily discriminating Trinidad and Tobago, for example, the World between production for export or the domestic Bank provides tending and advisory support market. There is an important role for promoting for the implementation of a wide range of quality education to improve human capital, reforms in areas covered by the Doing Business increase productivity and enhance the benefits indicators and beyond, including among others, of participation in export-oriented activities. At construction permitting, tax compliance and the same time, measures to promote links to administration, investment policy and investor value chains among small enterprises and micro protection, secured lending and collateral entrepreneurs would raise the productivity of registry, and insolvency reforms. In addition, poor workers. KEY POLICY RECOMMENDATIONS 35 Baldwin, R. and D. Taglioni (2006). "Gravity World Economic Forum (WEF (2012). for Dummies and Dummies for Gravity Global Competitiveness Index, available Equations." NBER Working Paper No. at http://www.weforum.org! issues! 12516, National Bureau of Economic competitiveness-0/gci2Ol 2-data- Research, Cambridge, MA. platform! Bernard, A., and B. Jensen. 1999. "Exporting Winters, Alan. 2002. "Trade Liberalization and and Productivity." NBER Working Paper Poverty: What are the Links?" The World No. 7135. Economy 25 (9): 1339-67. Dollar, David and Kraay, Aart. 2002. "Growth Winters, Alan, Neil McCulloch, and Andrew is Good for the Poor," Journal of Economic McKay. 2004. "Trade Liberalization and Growth 7 (3): 195-225. Poverty: the Evidence So Far." Journal of ILO and ECLAC. 2012. "The Employment Economic Literatfre 42 (1): 72-115. Situation in Latin America and the World Bank Group. (2012). World Bank Caribbean" ILO Labor Review: Latin Enterprise Surveys (WBES), available at America and the Caribbean. http://www. enterprisesurveys.org/ Ravallion, Martin. 2001. "Growth, Inequality, World Bank. 2013. Gender af work. and Poverty: Looking Beyond Averages." Washington, DC: World Bank. World Bank Policy Research Working World Bank Group (201 4a), Doing Business Paper No. 2558. Washington, DC: World Index, available at http://www. Bank. Bn.doing bus in ess.o rg /reports/glob a - United Nation World Tourism Organization reports/doing-business-2014 (UNWTO). (2012). Compendium of Tourism World Bank Group (201 4b), Logistics Statistics, available at http://statistics. Performance Index, available at http://lpi. unwto.org/content/compendium- tourism-statistics World Bank. 201 5. The New Trade Environment United Nations Conference on Trade And and Opporfunities for fhe Poor in fhe Development (UNCTAD) Statistics. Caribbean. Washington, DC: World Bank. (2013). Liner Shipping Connectivity Index, available at http://unctadstat. unctad.org/TabteViewer/tabeView. aspx?Repoprtld=92 36 TRADE MATTERS teh eOtuie fLr?e Tarhoean  THE*WL B  THE WORLD BANK IBRD - IDA | WORLD BANKGROUP The World Bank 1818 H Street, NW, Washington, DC 20433, USA. www.worldbank.org/lac