Speeches & Transcripts
Time to Move to a More Sustainable Growth Model
September 19, 2013
A very good morning to all, and many thanks for a constructive and promising session yesterday. I welcome the challenge of being the first speaker of the day!!
Between last year’s IMF Forum in Trinidad and Tobago, and the recent regional meeting of the Caribbean Growth Forum, here in the Bahamas, we reached a significant level of convergence on the most pressing tasks for sustainable growth and shared prosperity in the Caribbean. It is clear from yesterday’s discussions that there is a general consensus on the diagnosis and the challenges facing the Caribbean countries.
Now that we know the what, the next step is to move to the how. How can we avoid a reversal of past gains in poverty reduction and shared prosperity - the ultimate objectives of a sustained and inclusive growth agenda? The key questions facing us today are: what are the concrete actions that would be both credible and forceful and that can be clearly targeted to achieve monitorable objectives? Can we commit to an agenda of actions for sustained growth while ensuring a strong safety net to protect the vulnerable during the transition? What would we want to be able to say we have achieved a year from now?
Many visitors say time slows down when you are in the Caribbean. But if time for visitors seems slower, for citizens of the Caribbean it has been moving right along. In the past four decades, many people in the Caribbean have benefitted from the region's economic progress, improving their health, education, and standard of living. While averages tend to mask important dynamics, the Caribbean region’s GDP per capita increased six fold in the thirty years since 1980s. This resulted in significant gains in poverty reduction. We know, for instance that in Jamaica, poverty rates dropped almost 20 percent over two decades, resulting in a growth of the middle class and improvement in the citizens’ quality of life and prospects for the future.
This progress didn’t come easy. It was achieved while the region was experiencing important changes, some quite testing. The Honorable Prime Minister of St. Lucia mentioned how the WTO ruling ending trade preferences for agriculture devastated the livelihoods of hundreds of farmers. This forced the region to look for alternative growth models, and initiated the transition of many Caribbean countries toward more service-oriented economies. The high income levels brought with them a decline in official foreign assistance. Caribbean countries took these changes in their stride and moved on to find newer sources of livelihood and prosperity.
Today’s world brings its own challenges as we have consistently heard in the previous sessions:
As Alejandro Werner and others described yesterday, the tail winds that boosted economic growth in LAC are receding and perhaps turning into head winds. Growth has been sluggish in Europe and, to a lesser extent, in the US. This has resulted in declining demand for goods and services, tourism in particular. In addition, growth in China and other emerging markets is slowing down, thus reducing demand for commodities. While most Caribbean countries are net commodity importers, this may have a bearing on extractive and commodity based economies, such as Trinidad and Tobago.
Sooner or later, when the US Fed begins to tapper QE, we need to get ready for the inevitable adjustment and rebalancing of the portfolios away from developing countries toward the US. If we do not get ready today with strong fundamentals, it will put pressure on exchange rates and international reserves especially for those countries with large current account deficits such as those in the Caribbean.
Already, on a mere statement by the Fed Chairman, yields of sovereign bonds rose by 130 basis points in Belize and 40 basis points in the Dominican Republic.
When QE ends, these adjustments are unlikely to be temporary. Rather, they will reflect a change in the long-term trend. The prospect of increasing cost of financing and declining tail winds, will make a challenging situation even more so. Investors are also likely to become more selective and focus on country fundamentals, rewarding those economies that are successful in implementing credible and sustainable internal reforms.
I submit to you that the time to act is now. We should be mindful not to focus only on short term actions in response to immediate crisis at the expense of the long term shifts that are needed to change fundamentals. We have to do both!
The region’s macroeconomic stability is significantly challenged from the outside. We heard from Professor Gregorio that openness is positive, and has brought benefits to the Caribbean by way of foreign investment, increased trade and access to financial markets. But it has also linked the Caribbean economies to those of the Western world, and more recently to China, making them more vulnerable to global financial and economic turmoil.
The global financial crisis exposed the fragility of the growth model in some Caribbean countries. When the global financial crisis hit five years ago, Caribbean nations lived through a major economic contraction. For instance, Jamaica and the OECS islands experienced contractions of -3.1% and -5.3% respectively in 2009. Only a few countries of the region were able to get by with a moderate slowdown compared to their pre-crisis growth levels.
Declining or negative growth, increasing unemployment and inadequate safety nets reversed some of the hard won social gains as poverty levels increased. [For example, Jamaica poverty level went from 10 percent in 2006 to 18 percent in 2010]. Lack of fiscal space meant that governments were not able to cushion these declines with stimulus programs; and where they did, they did so at the cost of further worsening primary balances and debt.
Today, on average, 40% of the population lives in poverty in Caribbean countries (other than Haiti where the poverty headcount is 79%). I share the concern of the Honorable Prime Minister of the Bahamas: the young people of the Caribbean bear a disproportionate burden of these shortcomings. In Jamaica, for instance, 30% of young adults are unemployed.
Additionally, Caribbean countries are highly exposed to natural and economic shocks. Hurricanes, volcanic eruptions, earthquakes, and tropical storms have caused major disruptions and destroyed infrastructure in many countries. These disasters, coupled with governments’ limited resources to respond to shocks have disproportionately affected the poor and most vulnerable.
Addressing the Region’s Internal Risks and Structural Constraints
I submit to you that the time to act is now. We need to be mindful not to focus only on short term actions in response to immediate crisis at the expense of the long term shifts that are needed to change fundamentals. We have to do both! Caribbean leaders have been clear of the internal challenges that stand in their way – high costs of inputs and productive factors, weak fiscal positions, declining foreign investment, limited access to financial markets, insufficient access and quality of social safety nets, and youth marginalization due to lack of opportunities.
These challenges have translated into a major debt problem for many Caribbean countries as highlighted yesterday. There is little disagreement that the debt problem cannot be addressed by a single policy.
Working with governments and development partners, we identified a Comprehensive Debt Framework, a balanced approach to addressing the high debt burden in a fair way. The contributions of many actors, domestic and foreign and private sector, public institutions, and civil society are needed to succeed.
This framework focuses on four key areas:
- Building a more sustainable growth model
- Improving fiscal balances and public sector management,
- Building resilience to natural disasters, and
- Pursuing debt restructuring and strengthening debt management.
Going back to my opening question: what are the concrete credible actions that countries can take to find a lasting solution to the twin problems of low growth and high debt?
Let me offer some areas for consideration:
First, in the area of building a sustainable growth model, as has been amply discussed, the role of the private sector is critical, given their impact on job creation and in turn increasing access to opportunities for all. The CGF has outlined a detailed set of country specific and regional reforms, improving logistics and connectivity, streamlining customs, tax reform, updating skills and improving access to finance. Countries may want to get to work on this right away dealing with the difficult challenges which will take some time to bear fruit while addressing some of the easier ones to secure quick wins.
Clearly the issues of energy sector reform and infrastructure development will take time. But progress can be made on developing the legal and institutional frameworks for public private partnerships, automating customs processes, and improving air connectivity and a single airspace – areas where solutions are readily available and have been discussed often.
Sustainable growth models will want to create new opportunities for inclusive growth by promoting entrepreneurship, enhancing access to finance, and removing barriers that prevent SMEs to participate in their local economies. One area where this can be done is in the tourism sector, which is a main growth driver of many Caribbean economies.
I often hear that today’s children need to be prepared for jobs that do not even exist. We need to create new opportunities for productive jobs. What can the Caribbean countries do today to prepare their youth for the jobs of tomorrow? Clearly a strong primary and secondary education system is key, though work is needed to improve the quality and link education outcomes to employability.
Second, much has been made of the fiscal consolidation challenge in the Caribbean. I share your concerns about the pace and composition of fiscal consolidation; if not well designed could adversely affect growth prospects and hurt the poor and vulnerable. A strong prioritization framework that carefully evaluates public expenditures, with respect to their contribution to growth and their long term benefits as well as their risks, would go a long way to ensure fiscal consolidation is done in a fair and sustainable way.
This and my next point will be addressed in detail during today’s sessions.
Third, the area of disaster risk mitigation continues to challenge us as the enormous costs of disasters keep reversing gains made on debt sustainability. The World Bank has partnered with countries in the Eastern Caribbean to strengthen infrastructure through a series of projects. (The World Bank currently has US$120 million planned for such investments in Grenada and St Vincent & the Grenadines St. Lucia and Dominica, half in soft loans and grants from the Climate Investment Fund). We have seen early successes in St Lucia for instance, where such infrastructure investments allowed the country to withstand the passage of Hurricane Tomas in 2010.
Let me conclude by reiterating the World Bank Group’s commitment to work with you and our partners to find solutions to these challenges. Prime Minister Kenny Anthony mentioned the Caribbean Catastrophic Risk Insurance Facility (C-CRIF) spearheaded by the World Bank, and how it has changed the landscape for insurance solutions to deal with the impact of natural disasters. Recently, we also changed our procurement practices to adjust to the realities of small states. As the call for a well-articulated growth agenda became louder, the World Bank Group collaborated with the IDB and CDB, and with the support of CIDA, the EU, DfID and other donors, created the Caribbean Growth Forum. After a year of intense dialogue, the CGF has resulted in specific and homegrown action oriented agendas for a number of Caribbean countries. We will be happy to bring our financial and analytical solutions to help you implement these agendas going forward.
Going Past the Diagnostic
I began the speech with the question of whether Caribbean countries can sustain hard won progress and avoid a reversal of past gains in today’s challenging global environment.
The challenges facing us are daunting and time is of the essence. If we are to preserve the gains of the past, secure the future for today’s youth and give a chance to shared prosperity in the Caribbean, we need a coordinated effort to create a virtuous cycle of lower debt and faster economic growth and shift the region’s economic outlook to a more sustainable path.
When we gather again next year in the third Forum will we be able to report on concrete achievements in the four pillars of the comprehensive debt framework? And more importantly, will the people of the region say “finally we have turned the corner and are on a path for shared prosperity?” I surely hope so.
Distinguished Regional leaders, colleagues and friends:
Let's act on a comprehensive sustainable regional growth paradigm... one that puts people and shared prosperity at the center.
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