Slowly, ever so slowly the Caribbean is coming to recognise that it is far from immune from the global economic crisis. As developed and emerging markets accept that the world is headed for a severe recession with far from easy to predict consequences, governments in some but not all Caribbean nations are starting to realise they need to prepare their electorates for the shocks to come.
In the last week the people of Jamaica, Trinidad, St Lucia, St Kitts and Guyana have received the first indications from heads of government and ministers that all may not be well with the outlook for their economies and that there is a need to prepare for a possibly rapid economic contraction.
Although this belated recognition is welcome, just as important will be the need for well-explained, swift and most probably unpopular action before the full effects are felt. This may not be easy because the oil rich nations on which the region has come to rely for support are certain to experience problems of their own as their income for oil drops to less than US$50 per barrel.
Moreover the response to any tightening of expenditure and changes in taxation will require opposition parties − which would face precisely the same choices, if in government − the trades unions and the private sector to act responsibly.
Some weeks ago I suggested that the consequences of global economic contraction are likely to be severe and that the extent of the economic crisis and its probable effect on the region needed to be better understood. I noted that beyond the obvious, a decline in tourism − the industry that has become the driver of Caribbean growth − it would become increasingly difficult to raise capital; investment would slow; remittances would decline; foreign exchange reserves would diminish; exports would fall; and the private placings and bond issues that governments use to finance shortfalls in recurrent expenditure, would become more expensive, difficult or may even disappear. The consequences of all this I suggested, could be cuts in government expenditure, higher taxation and a rapid deceleration in rates of growth.
The threat of all of these developments and others is now much closer. Despite this, few governments seem to have recognised the scale of the crisis or that if they do not act now, they may find themselves facing an economic crisis at just the moment when other much larger nations are defaulting on sovereign debt and the consequent capacity of the global economic system and its institutions to provide support, becomes limited.
While the International Monetary Fund, because of its prescriptive excesses of the 1970s, is far from popular in the region, recent remarks by Christina Daseking, its Deputy Division Chief in the Western Hemisphere Department in Port of Spain have as much relevance to the rest of the region as they do to energy rich Trinidad and Tobago.
Ms Daseking warned Trinidad that despite its wealth it needed to preserve macro-economic stability in the face of declining oil and gas revenues, high inflation and a deteriorating external environment.
Speaking to the media she noted that there was globally an unusually high degree of uncertainty.
The main policy challenges for governments, she said, would be to “prepare for the possibility of more severe spillovers from the global financial crisis by strengthening the crisis-response framework and developing contingency measures.
“The authorities need to identify and be ready to implement measures in the event of disruptions in the financial system… While inter-bank markets have not experienced noticeable difficulties, recent experience in other countries has shown that high liquidity in the system is no guarantee for a smooth functioning of credit markets, should individual institutions become exposed,” she is reported to have told journalists.
She said that the IMF was encouraging banks to continue monitoring the market situation closely and be ready to respond promptly to signs of problems in the inter-bank or foreign exchange markets and lending behaviour of banks.
Prime Minister Manning subsequently addressed the nation on the global economic crisis. He was blunt. He urged restraint and made clear that business and labour must come together to confront the challenges. He announced cuts in expenditure, making clear that the country’s budget based on an oil price of US$70 per barrel could not be sustained. He called for higher levels of productivity.
Meanwhile, a different kind of warning has come from St Lucia’s Tourism Minister Allen Chastanet that advanced hotel bookings from April 2009 onwards are down by 30 to 50 per cent. He also noted that a signal of what could happen next across the region was the decision by Atlantis Hotel in the Bahamas to lay off 800 employees because of a sharp downturn in bookings, a situation that almost all Caribbean destinations are facing from February onwards.
What these developments point to is a gradual dawning of the potential problems the region will have to face. Unfortunately, they provide little in the way of clues as to how the Caribbean will try to cope if the outcome in 2009 is high rates of unemployment, cuts in public expenditure and stagnating growth across the region.
Caribbean economies are not as exposed to the full force of globalisation as those in the developed world because they have so far only integrated in a limited way. Despite this they are uniquely vulnerable.
In the absence of any real progress with the Caribbean Single Market and Economy they are individually heavily dependent on external economic actors for foreign exchange and for their food and energy.
There is now a real danger that as the developed world goes into recession the Caribbean could be heading for a severe economic contraction with unpredictable social and political consequences.
Previous columns can be found at www.caribbean-council.org
