CSME SUCCESS IN TODAY S ECONOMIC ENVIRONMENT

1. CSME SUCCESSIN TODAY�S ECONOMIC ENVIRONMENT Presentation at CILS 2008 Acknowledgement: Amb. Havelock Brewster � An Operation Strategy for Supporting RCI. IMF: Trevor Alleyne & Paul Cashin � The Global Financial Crisis � Implications for the Caribbean 1

2. CSME SUCCESS Outline The �state� of RCI/CSME in the Region Impact of the Financial Crisis Implications for RCI/CSME Adjustments required 2

3. CSME SUCCESS The State of RCI Economic Underperformance Small market size Limited natural resources Under-developed human resources Under-diversified production structures External migration Vulnerability to natural disasters High debt 3 The challenges to regional cooperation and integration must be viewed against the background of the Region�s economic underperformance, the constraints it faces and the opportunities that may be available. In terms of growth of income, employment, productivity, diversification and competitiveness, the Region has performed below average for more than 3 decades � compared with countries of a similar level of development such as Latin America, Asia and Southern European Countries. This situation, together with the economic liberalisation/globalisation accompanying it, has made for a worsening distribution of income within and among CARICOM countries. Much of this long trending underperformance is a consequence of the tight internal and external constraints to growth that the Region faces, and the failure to address them effectively. Prominent among these are: Small market size Limited natural resources Under-developed human resources Un- diversified production structures External migration Vulnerability to natural disasters and external shocks High debt levels The opportunities that are not been effectively realized include: ICT-enabled products and services Higher-end tourism Off-shore education Health services Food /agricultural productsThe challenges to regional cooperation and integration must be viewed against the background of the Region�s economic underperformance, the constraints it faces and the opportunities that may be available. In terms of growth of income, employment, productivity, diversification and competitiveness, the Region has performed below average for more than 3 decades � compared with countries of a similar level of development such as Latin America, Asia and Southern European Countries. This situation, together with the economic liberalisation/globalisation accompanying it, has made for a worsening distribution of income within and among CARICOM countries. Much of this long trending underperformance is a consequence of the tight internal and external constraints to growth that the Region faces, and the failure to address them effectively. Prominent among these are: Small market size Limited natural resources Under-developed human resources Un- diversified production structures External migration Vulnerability to natural disasters and external shocks High debt levels The opportunities that are not been effectively realized include: ICT-enabled products and services Higher-end tourism Off-shore education Health services Food /agricultural products

4. CSME SUCCESS The State of RCI/CSME Implementation Single Market: Far advanced Single Economy � Not much: National sovereignty vs Community governance Lack of popular support Perception of uneven distribution of benefits/costs Ineffective cohesion mechanisms Inefficient decision-making processes Inadequate institutional capacity  4 Economic integration, through the progressive opening of markets combined with common external protection, was expected to be the means of overcoming the basic constraints of small size and limited natural resources. But the results have been disappointing � in terms of the generation of new trade and more diversified patterns of production. This has led to the conclusion that cooperation in areas beyond commerce is a necessary pre-requisite if the benefits of regional integration are to be realized fully. This is the context in which the idea of the CSME was borne. While the creation of a Single Market is far advanced, not much has been accomplished in respect of the Single Economy. The reasons for this are varied and include: The clash between national sovereignty and Community governance; Inadequate popular understanding of the process (hence limited popular support); The perception of very uneven distribution of the benefits and costs of regional integration; Ineffective cohesion mechanisms; The slow and complex process of inter-governmental decision making and legislation, involving 15 Member States; and Inadequate capacity at the Community and States level to transform policy-decisions into action i.e. the implementation problem.Economic integration, through the progressive opening of markets combined with common external protection, was expected to be the means of overcoming the basic constraints of small size and limited natural resources. But the results have been disappointing � in terms of the generation of new trade and more diversified patterns of production. This has led to the conclusion that cooperation in areas beyond commerce is a necessary pre-requisite if the benefits of regional integration are to be realized fully. This is the context in which the idea of the CSME was borne. While the creation of a Single Market is far advanced, not much has been accomplished in respect of the Single Economy. The reasons for this are varied and include: The clash between national sovereignty and Community governance; Inadequate popular understanding of the process (hence limited popular support); The perception of very uneven distribution of the benefits and costs of regional integration; Ineffective cohesion mechanisms; The slow and complex process of inter-governmental decision making and legislation, involving 15 Member States; and Inadequate capacity at the Community and States level to transform policy-decisions into action i.e. the implementation problem.

5. CSME SUCCESS The State of RCI/CSME Implementation Policies and measures needed: Policy Coordination/Harmonisation Institutional, Legal & Regulatory Development Policies for Sectoral Development Market access measures Functional Cooperation 5 The constraints to regional integration constitute very real risks to the success of regional ventures. The design of regional projects should be such that each participating state would reap acceptable benefits; the public goods which create costless, cross-country spill-over or externalities should be promoted; that not all CARICOM members need to participate in any given project; and that the demands on collective decision-making be kept within politically feasible limits. The challenge to RCI may be summarized as putting in place the following key policies and measures: Policy coordination/harmonisation � macro policy, fiscal policy, monetary union etc. Institutional, legal and regulatory development and harmonisation � Harmonisation of laws; CCJ, CDF Policies for sectoral development � Agriculture, forestry & fisheries; air and maritime transport; telecommunications/ICT. Market access measures � capital movement, rights of establishment; free movement of labour. Functional cooperation � HRD; crime and security. With this context the urgent challenges that have to be addressed are: Macroeconomic stability Energy Human resources Air and maritime transport Agriculture/food production & trade Quality, standards and innovation Agri-tourism Cross border investment and Private sector developmentThe constraints to regional integration constitute very real risks to the success of regional ventures. The design of regional projects should be such that each participating state would reap acceptable benefits; the public goods which create costless, cross-country spill-over or externalities should be promoted; that not all CARICOM members need to participate in any given project; and that the demands on collective decision-making be kept within politically feasible limits. The challenge to RCI may be summarized as putting in place the following key policies and measures: Policy coordination/harmonisation � macro policy, fiscal policy, monetary union etc. Institutional, legal and regulatory development and harmonisation � Harmonisation of laws; CCJ, CDF Policies for sectoral development � Agriculture, forestry & fisheries; air and maritime transport; telecommunications/ICT. Market access measures � capital movement, rights of establishment; free movement of labour. Functional cooperation � HRD; crime and security. With this context the urgent challenges that have to be addressed are: Macroeconomic stability Energy Human resources Air and maritime transport Agriculture/food production & trade Quality, standards and innovation Agri-tourism Cross border investment and Private sector development

6. CSME SUCCESS Impact of the Financial Crisis Financial Real Economy 6 The financial crisis is of historic proportions: Recession in the developed economies Financial system frozen due to confidence issues. In perspective: World equity prices have declined by about 50% in 1 year The cost of the crisis approximately 1.4 trillion (around 25% of GDP). The outlook for the US economy and the Region�s major trading partners is negative � declining economic activity. The transmission channels of the crisis will be felt through: The financial system; and The real economy.The financial crisis is of historic proportions: Recession in the developed economies Financial system frozen due to confidence issues. In perspective: World equity prices have declined by about 50% in 1 year The cost of the crisis approximately 1.4 trillion (around 25% of GDP). The outlook for the US economy and the Region�s major trading partners is negative � declining economic activity. The transmission channels of the crisis will be felt through: The financial system; and The real economy.

7. CSME SUCCESS Impact of the Financial Crisis Financial Asset quality Liquidity Credit sequeeze Trade credit lines Other external funding Foreign bank contagion 7 In the financial system the transmission channels of the crisis include: Financial system assets: Likely deterioration in asset quality � foreign investments of commercial banks and non-banks (securities firms, insurance companies, pension funds � for example there is some question as to the availability and cost of re-insurance); Unavailability of liquid assets � liquid assets may be tied up in problem institutions. Global credit squeeze: tighter global borrowing conditions could squeeze domestic liquidity and raise domestic interest rates � however, there is a large amount of excess liquidity in domestic banking systems and private credit growth in the region is financed mainly from domestic deposits. Trade credit lines � withdrawal from Caribbean importers; demand for credit lines from foreign importers of Caribbean exporters; Other external funding- wider sovereign spreads, increased rollover risk � sovereign spreads on internationally traded bonds have risen. Foreign Bank Contagion: Developed country banks usually a source of strength for local finance system but now a source of vulnerability Canadian banking systems thus far avoided crisis � but situation could change rapidly Banks could transmit crisis to local systems. Financial conglomerates are active in the Caribbean suggesting a channel of contagion across the region (Scotia, First Caribbean, RBC, RBTT, Republic, Citi)In the financial system the transmission channels of the crisis include: Financial system assets: Likely deterioration in asset quality � foreign investments of commercial banks and non-banks (securities firms, insurance companies, pension funds � for example there is some question as to the availability and cost of re-insurance); Unavailability of liquid assets � liquid assets may be tied up in problem institutions. Global credit squeeze: tighter global borrowing conditions could squeeze domestic liquidity and raise domestic interest rates � however, there is a large amount of excess liquidity in domestic banking systems and private credit growth in the region is financed mainly from domestic deposits. Trade credit lines � withdrawal from Caribbean importers; demand for credit lines from foreign importers of Caribbean exporters; Other external funding- wider sovereign spreads, increased rollover risk � sovereign spreads on internationally traded bonds have risen. Foreign Bank Contagion: Developed country banks usually a source of strength for local finance system but now a source of vulnerability Canadian banking systems thus far avoided crisis � but situation could change rapidly Banks could transmit crisis to local systems. Financial conglomerates are active in the Caribbean suggesting a channel of contagion across the region (Scotia, First Caribbean, RBC, RBTT, Republic, Citi)

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9. CSME SUCCESS Impact of the Financial Crisis Real Economy Lower tourism receipts Lower remittances Lower FDI and other private capital Lower commodity prices Slower economic growth Balance of payments pressures. 9 Economic slowdown/recession in major trading partners would lead to: Lower tourism receipts � the Caribbean is one of the most tourism dependent regions in the world (Antigua � almost 50%; the Bahamas 38%; Barbados 29%). Lower remittances � many countries in the Region have a high degree of dependence on remittance flows � e.g in % of exports � Jamaica almost 35%; Grenada 30%; Guyana around 16%; SKN 15%. Lower FDI and other financial flows � current account deficits in the region are financed by financial flows which are expected to slow down. Lower commodity prices � past experience has shown that commodity prices may recede � oil, bauxite, food.Economic slowdown/recession in major trading partners would lead to: Lower tourism receipts � the Caribbean is one of the most tourism dependent regions in the world (Antigua � almost 50%; the Bahamas 38%; Barbados 29%). Lower remittances � many countries in the Region have a high degree of dependence on remittance flows � e.g in % of exports � Jamaica almost 35%; Grenada 30%; Guyana around 16%; SKN 15%. Lower FDI and other financial flows � current account deficits in the region are financed by financial flows which are expected to slow down. Lower commodity prices � past experience has shown that commodity prices may recede � oil, bauxite, food.

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13. CSME SUCCESS Implications for RCI/CSME Need for international reserve management Importance of maintaining fiscal discipline Revert to protection Waivers etc for CET Reduction in contributions to regional institutions The need for a regional response: Regulatory environment Liquidity 13 What are the implications of the economic slowdown on CSME/RCI? Clearly the national economies will need to carefully manage international reserves and resist any attempt to remove the fiscal discipline required. The high debt burdens of may of the economies severely constrains the ability to engage in counter-cyclical fiscal spending. Fortunately, the OECS with its one Central Bank (ECCB) may be in a better position to manage the international reserves issue. But if history is anything to go by � recall the 1980s with the energy crisis � there may be a tendency to revert to increased protectionism. There would likely be increased requests for waivers of obligations under such regimes as the CET. Contributions to regional institutions may suffer in a fiscally constrained environment. The unfortunate thing is that deepen the RCI at this time is likely to be to more appropriate response. Again, a look at history may give some guidance. After 9/11 when tourism took a big hit, the region responded by the public and private sectors coming together and establishing a regional tourism promotion programme, which � if I am not mistaken � worked quite well and allowed the countries to come out of the downturn relatively quickly. There is a clear need to devise regional solutions to improve the regulatory environment including cross-border sharing of information. There is also need to prepare for a liquidity crisis in a regional context.What are the implications of the economic slowdown on CSME/RCI? Clearly the national economies will need to carefully manage international reserves and resist any attempt to remove the fiscal discipline required. The high debt burdens of may of the economies severely constrains the ability to engage in counter-cyclical fiscal spending. Fortunately, the OECS with its one Central Bank (ECCB) may be in a better position to manage the international reserves issue. But if history is anything to go by � recall the 1980s with the energy crisis � there may be a tendency to revert to increased protectionism. There would likely be increased requests for waivers of obligations under such regimes as the CET. Contributions to regional institutions may suffer in a fiscally constrained environment. The unfortunate thing is that deepen the RCI at this time is likely to be to more appropriate response. Again, a look at history may give some guidance. After 9/11 when tourism took a big hit, the region responded by the public and private sectors coming together and establishing a regional tourism promotion programme, which � if I am not mistaken � worked quite well and allowed the countries to come out of the downturn relatively quickly. There is a clear need to devise regional solutions to improve the regulatory environment including cross-border sharing of information. There is also need to prepare for a liquidity crisis in a regional context.