89532 The New Trade Environment and Trade Performance in the Caribbean June 2014 1 This policy note is based on the seven chapters of the Caribbean trade report, “The New Trade Environment and Shared Prosperity in the Caribbean”, prepared by the World Bank for the Caribbean Growth Forum (CGF). This report is the result of collaborative efforts of a large team led by Calvin Zebaze Djiofack (LCSPE), and including Erwin H. R. Tiongson, Massimiliano Cali, Jose Daniel Reyes, Claire Honore Hollweg, Maros Ivanic, Julie Saty Lohi, Mathias Thoenig, Thierry Mayer, Sashana Whyte, Tania Valeria Diaz Bazan, Dominique Njinkeu, Charles Udomsaph, Filipe Sousa, Vanessa Uchiyama, and Liliana Foletti. Peer reviewers were Daniel Lederman, Leader Economist (LCRCE), Souleymane Coulibaly, Lead Economist (AFTP3), Cecilia M. Briceno-Garmendia, Lead Economist(LCSSD), Pavel Isa, Consultant (LCSPE), and Marcelo Olarreaga (University of Geneva). Miriam Beatriz, Patricia Holt, and Sashana Whyte provided invaluable support in all aspects of the production of this report. Additional support and comments were provided by Andrea Gallina (LCSSO), Francisco Galrao de Carneiro (LCSPR-LCC3C), Miguel Eduardo Sanchez Martin (LSPE), and Raju Singh (LCSPR-Haiti). Finally, we would like to thank J. Humberto Lopez (Director, Poverty Reduction and Economic Management, Latin America and the Caribbean Region), Auguste Tano Kouame (Sector Manager, LCSPE), Sophie Sirtaine (Country Director, LCC3C), Francisco Galrao de Carneiro (Lead Economist and Sector Leader, LCSPR-LCC3C), Andrea Gallina (CGF Coordinator) for overall supervision and guidance to the team. The Caribbean Knowledge Series is an occasional series that presents World Bank knowledge in an accessible format. It is meant to assist knowledge sharing across the region and trigger policy dialogue on topics relevant for the Caribbean. This note was prepared to support the participatory policy dialogue in the context of the Caribbean Growth Forum (CGF). The CGF is an initiative facilitated by the Compete Caribbean Program, the Inter-American Development Bank, the World Bank and the Caribbean Development Bank, with the support of the Department for Foreign Affairs, Trade and Development of Canada, the United Kingdom’s Agency for International Development, CARICOM Secretariat, the University of the West Indies, the European Union and Caribbean Export. It aims to facilitate a multi-stakeholder dialogue to identify practical solutions for the growth challenge in the Caribbean. To learn more about the CGF methodology and progress in each Caribbean country visit: http://caribgrowth.competecaribbean.org/ 2 Disclaimer: The findings, interpretations, and conclusions expressed herein are those of the author(s) and do not necessarily reflect the views of the Executive Directors of the International Bank for Reconstruction and Development / The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Visit the entire “Caribbean Knowledge Series” collection at: http://worldbank.org/lac Design & Concept by Room Grupo Creativo | www.room.com.do Cover Photo: Room Grupo Creativo Photo Library 3 The New Trade Environment and Trade Performance in the Caribbean Introduction but also in terms of eventually re-shaping trade Caribbean countries’ small geographical sizes agreements and policies. seem to continue to represent a constraint to trade and prosperity. Firms’ expansion in most While Caribbean economies are specialized in sectors requires the exploitation of economies of tourism and nautical services, and the production scale: they need to produce more, in such a way of agricultural and some light manufacturing that the cost per unit produced is reduced. As the merchandise, there is large heterogeneity in the Caribbean countries are small economies, with level of economic development and diversification limited population and domestic markets, their firms of their economies. In order to group Caribbean are of small and medium sizes and are less likely to countries into relatively homogeneous groups, we exploit the benefits of economies of scale. According divide them into four mutually exclusive groups to the World Bank Enterprises Survey (WBES), 65 according to their most important source of export percent of Caribbean exporting firms are small earnings: (i) Services economies (at least 60 percent firms (5-19 employees), while this category of firms of total exports from services); (ii) light manufacturing represents around 57 percent in Latin America. economies (at least 80 percent of merchandise For these countries, international trade is of great trade in light manufacturing); (iii) agriculture and food importance to efforts to enlarge their markets and products economies (agriculture and food products attain economies of scale. Therefore, promoting as primary source of export earnings); and (iv) natural exports is critical for a credible growth and poverty resources dependent economies (natural resources reduction strategy in the Caribbean countries. as primary source of export earnings). Table 1 shows how the 15 countries included in this study are However, Caribbean countries face a rapidly classified according to these criteria2. changing trade environment, which presents both opportunities and challenges for economies highly dependent on external markets. The features Table 1 : Country Groupings of the new trade environment include: i) redefinition of relations with their main trading partners, including the United States, where Caribbean exports continue to enjoy preferential access under the Caribbean Basin Initiative, and the European Union, through the recently signed Economic Partnership Agreement; ii) the increasing economic influence of the new growth poles1 (Brazil, Russia, India, Indonesia, China Source: LCSPE. and Korea) ; iii) and the redesign of the CARICOM Note: This table presents the allocation of all Caribbean countries under analysis, according to their major source of export earnings. regional trade agreement in order to implement the Caribbean Single Market Economy (CSME) as well as a number of preferential trade agreements within the region. These changes are likely to change the trading structure of the Caribbean countries and, This note analyzes the effect of this emerging through this restructuring, to have implications for trade environment on trade performance in the welfare of these economies. Understanding the Caribbean. More specifically, the following these implications is critical in terms of designing aspects are assessed: i) Caribbean performance in appropriate policy response to the trade changes reaping the opportunities offered by the new trade environment; ii) identification of the main factors 1 The new growth poles are the emerging economies, namely: Brazil, Russia, India, and China (BRIC) and Korea with high economic influences due to their high import and export potentials. These emerging countries with their larger markets represent potential export destinations for other economies. 2 This classification is slightly different from the grouping considered in another World Bank study on growth in the Caribbean region. While this study considers two different categories for food dependents and natural resources dependents, the growth study includes these two categories into a single grouping named “commodities exporters”. 4 determining their performances; iii) discussion of trade agreements options to boost Caribbean trade the role of innovation and access to key services performance. in improving productivity of exporting Caribbean firms; and iv) exploration of regional integration and Caribbean trade performance and the role of the new growth poles Like many small island economies, countries 2007 and 2010-2012, respectively. The curved line is in the Caribbean are exceptionally open to the expected trade openness given each country’s international trade. Many Caribbean countries are per capita GDP (and its square). The band around more open than would be expected, given their per the curve represents a 95% confidence interval. capita income (as income rises, countries tend to The majority of Caribbean countries display a trade trade more, although at a decreasing rate). Figure openness indicator that is larger than what would be 1 and Figure 2 show the correlation between per expected given their stage of development, both in capita income and trade to GDP ratio for a sample of the middle of the last decade and the beginning of countries throughout the world for the periods of 2005- this decade. Figure 1: Openness to Trade Figure 2: Openness to Trade (Merchandise and Services) (Merchandise and Services) (Average 2005-2007) (Average 2010-2012) Source: Author’s computations using data from World Development Indicators (World Bank, 2013c). Note: Services dependent countries are colored in green; light manufacturing countries in 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. The Caribbean’s high degree of integration with only a limited variety of goods in order to achieve the global economy reflects substantial imports. efficient scale, requiring large goods imports to meet The majority of the countries in the Caribbean have diverse demands. At the same time, specialization large trade deficits; only Suriname (with gold and in production of goods encourages the emigration of aluminum exports) and Trinidad and Tobago (oil workers with skills that are not needed domestically. exports) have a sizeable trade surplus compared The average trade deficit for all the island countries in to GDP. Most countries tend to run an even larger the world (including the Caribbean) is 9.7% of GDP. deficit on goods trade, financed in part by a surplus on services trade (all Caribbean countries except Haiti, Belize and Suriname have a surplus on services trade), and in part by remittances and other sources of financing. The pattern of large imports financed by remittances is typical of small island economies. These economies tend to produce 5 Table 2: Trade Balance (% of GDP) (Average 2010-2012) Source: Authors’ computations using data from World Development Indicators (World bank, 2013c). Note: This table presents trade balances as a share of GDP for total, merchandise, and services trade for the average of 2010-2012. It also shows simple and weighted averages across countries within our country groupings, where total trade in the same period of time is used as weights. The large Caribbean trade deficit also reflects American markets does not seem to have produced poor export performance. The Caribbean region the expected results. is facing an increasing “de-globalization” as its share of world exports declined from 0.5% in One reason for stagnating or declining exports 1980 to less than 0.2% in 2012. In spite of enjoying has been the failure to fully exploit the emergence an external trade policy anchored on unilateral of new, dynamic sources of demand in the global preferential access to the European and North economy. The share of Caribbean exports going to American markets (unlike other countries in Latin the new growth poles is lower than expected (see America as well as other developing countries that Table 3). Exports from the Caribbean to the new had similar levels of integration 30 years ago), the growth poles are lower than predicted by a gravity Caribbean’s integration into the world economy has model of trade that reflects various determinants of been much slower3. A policy focused on unilateral bilateral exports, particularly size, income level, and preferential access to the European and North distance4. 3 Under the Lomé and Cotonou agreements, Caribbean countries received unilateral preferential access to the EU for traditional agricultural exports. Similarly, the region has enjoyed 30 years of unilateral preferential access to the United States for certain products under the Caribbean Basin Initiative (CBI) and subsequently through the Caribbean Basin Trade Partnership Act (CBTPA). 4 The gravity model predicts the level of exports between two economies, based on size, income level, distance, whether countries share a common border, whether they share a common language, and whether one was a colony of the other or they were colonies of the same country. The analysis covers bilateral merchandise exports among 213 countries between 2005 and 2011, and tourism receipts (or arrivals) among 194 countries over the same period. Gravity models have been used extensively in the literature on international trade (see literature reviews provided in Anderson & van Wincoop 2003, Feenstra 2004, and Baldwin & Taglioni 2006). 6 Table 3: Benchmarking Caribbean Merchandise Exports to New Growth Poles (Observed Value / Predicted Value in 2011) Source: Authors’ calculations using mirror data from COMTRADE (UN COMTRADE, n.d.). 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. Table 3 above compares the actual and predicted Kitts and Nevis, St. Lucia, Belize, and Haiti, exports values for the share of each country’s merchandise to Brazil from Caribbean countries are smaller than exports to the new growth poles in their total expected; (ii) exports to the new growth poles from merchandise exports. Note that an observation light manufacturing and agricultural-based countries that is larger (smaller) than one indicates that the are generally in line with the model predictions; and observed export relationship is larger (smaller) than (iii) Trinidad and Tobago oil is directed mainly to the what is predicted by the gravity model (larger than old growth poles and to India. While there may be expected trade relationships are colored in green, several reasons that bilateral exports fall below the while the “smaller than expected” are colored in gravity model predictions, these results may indicate red) (see Table 4). There are three key findings from the potential to increase Caribbean merchandise this analysis: (i) with the exception of Bahamas, St. exports to the new growth poles. 7 Table 4: Benchmarking Caribbean Tourism Exports to New Growth Poles Source: Authors’ computations using data from United Nations World Tourism Organization (UNWTO,2012). Analysis based on the gravity model provides dependent on services to Russia Tourism exports mixed results for tourism exports of Caribbean to China from the countries dependent on services countries to the new growth poles. Some (except Dominica) and the Dominican Republic are Caribbean countries export more tourism services, less than expected, but exports to China from the defined as services provided to foreigners, than natural resource dependent countries are greater expected to the new growth poles5, given each than expected. Tourists arriving from Brazil to service country’s economic size, bilateral distance, and the dependent Caribbean countries were also fewer other determinants (Table 4). This is particularly true than expected. In general, the United States and for tourism exports to Russia from the Dominican Europe remain the primary sources of tourism to the Republic and for the exports of Caribbean countries Caribbean. Export dynamism and the structure of production The Caribbean countries’ ability to exploit trade Countries with limited scope in terms of comparative opportunities in the more dynamic markets advantage include Haiti (textiles), Antigua and may be limited by the structure of production Barbuda (vegetables and transportation), 6St. Kitts in the Caribbean. In many (but not all) Caribbean and Nevis (animal and machinery), St. Vincent and countries, merchandise exports are concentrated in Grenadines (vegetables, metals, and transportation), a small number of sectors with relatively low value and Trinidad and Tobago (organic fuels, chemicals, added. This lack of diversification, and high reliance and metals). Moreover, the sectors of animal on goods with minimal processing, tends to limit products, vegetables, minerals, and foodstuffs the potential markets that Caribbean countries can account for 31 of the 65 observations representing reach. To explore this issue, we calculated revealed sectors in which the RCA index is greater than one. comparative advantage indices for the 15 countries While the level of processing differs considerably in the Caribbean region in 16 merchandise sectors. A within sectors, nevertheless these sectors tend to country is estimated to have a comparative advantage require limited processing. As countries that export in a given sector if its index is greater than one (these more sophisticated, higher value added products cells are highlighted in Table 5). This index shows tend to achieve higher growth rates (see Hausmann, whether the share of a product in a country’s trade is Wang, & Rodrick, 2006), many Caribbean countries’ greater than the share of that product in global trade. specialization in these low -value-added sectors may limit their potential growth. 5 Note that the tourism services provided to other countries by the Caribbean countries are considered as the Caribbean’s export to those countries in the current context. 6 Antigua and Bermuda reports a sizeable amount of exports in chapter 89: ships, boats, and floating structures. This chapter refers to the assembly of such devices. 8 Table 5: Comparative Advantage in Merchandise Sectors (2011) Source: Authors’ computations using mirror data from COMTRADE (UN COMTRADE, n.d.). Caribbean service exports may offer greater import growth rate on the horizontal axis, against the potential than merchandise exports. Caribbean export growth rate of each of the Caribbean country countries’ revealed comparative advantage in groups on the vertical axis. The circles are labeled services is also highly concentrated, in the travel according to Balance of Payment (BOP) categories; and communications sectors. Nevertheless, other the size of the circles represents the importance of service sectors are demonstrating more dynamism. the sector in each country’s export basket. Sectors Service sector exports declined with the financial above (below) the line represent a gain (loss) in crisis (by 5.4 percent in countries dependent on world market share. In 2010-11, many Caribbean services) and the subsequent recovery has been countries lost market share in their principle service anemic. However, the crisis depressed global exports, but gained market share in less important service exports in general; to determine how well yet more dynamic export sectors (e.g. construction, Caribbean countries are performing in services insurance, finance, information, royalties and license trade, it is necessary to compare changes in these fees). Nevertheless, these sectors remain a small countries’ services exports with global trends. For share of total Caribbean services exports. various service sectors, Figure 3 plots the world 9 Figure 3: Gains in World Market Share, 2010-2011 Source: Author’s computations using data from UNCTAD (2013). Notes: The line passing through the scatter is a 45-degree line in a graph with equal scales in both axes. Sectors above (below) the line represent a gain (loss) in the world market share. The size of the circles represents the importance of the sector in the countries’ export baskets. The circles are labeled according to sector initials: transport (TRN), travel (TRV), communications (COM), construction (CON), insurance (INS), financial (FIN), computer and information (INF), royalties and license fees (ROY), other business (OBS), personal, cultural, and recreational (PER). The determinants of trade performance: Identifying key impediments to Caribbean trade Disappointing export performance in the High tariff rates raise the cost of imported Caribbean has been driven by poor policies and inputs, thus reducing domestic firms’ ability inadequate infrastructure. Available quantitative to compete against foreign firms operating in indicators that measure the quality of policy and countries with lower tariff levels7. The Caribbean infrastructure include: (i) trade policy, measured by region’s weighted average tariff rate is higher than the level of tariff rates; (ii) trade facilitation, measured all other regions, except South Asia (Table 6). And by the World Bank’s logistics performance index (LPI) while average tariff rates vary substantially across and the cost to export a container; (iii) the efficiency Caribbean countries, two-thirds of these countries and availability of shipping services, measured by impose tariff rates that exceed 11 percent, which is UNCTAD’s liner shipping connectivity index (LSCI); higher than most regions’ average tariff rate. However, (iv) the extent of innovation, measured by investment it is worth noting that while Caribbean average tariffs in research and development (R&D) and the number level estimated at 11.6 percent is significantly higher of patent applications; and (v) the business regulatory than that of the Small Island economies (7.4 percent), environment, proxied by the cost to register property, it is just slightly higher than that of the group of the the cost of starting a business, and the depth of the Successful Small Islands (9.8 percent)8. financial sector. 7 In fact, openness as a ratio of trade to GDP is high in the Caribbean, However, the tariffs (trade policy) as a tool of openness is still high in many Caribbean countries. It is important to note that while countries like Haiti and Jamaica have made tremendous efforts in reducing their tariffs, tariffs remain high in some other Caribbean countries causing the average regional tariff to be high relative to that of other regions. 8 Successful Small Islands are defined in this study as Small Island Economies that gained market share in global trade over the last three decades. 10 Table 6: Regional Average Tariffs of Origin, 2000 to 2010 Sources: Authors’ calculations using TRAINS Caribbean countries’ performances on trade on all LPI components. The Caribbean also performs facilitation have been mixed. The Caribbean below the successful Small Island Economies. This region’s average score on the World Bank’ Logistics suggests that the weak development of trade logistics Performance Index (LPI) was lower than in any other might be a factor explaining trade performances region (Table7).9 All Caribbean countries, except The difference between the Caribbean and this group. Bahamas, perform below the Latin American average Table 7: Cross-Regional Comparison: Average LPI Score (2005-2012) Source: World Bank Logistics Performance Index (World Bank, 2014b). 9 The World Bank’s Logistics Performance Index (LPI) measures the quality of transport and logistics services, based on six core dimensions: customs, infrastructure, international shipments, logistics competence, tracking and tracing, and timeliness. The overall average reflects the average across the six dimensions. For more information about the logistics performance index components see http://data.worldbank.org/data-catalog/logistics-performance-index 11 On line with their weak logistics performances, 2004 to 2011, the average LSCI of the Caribbean Caribbean maritime connectivity is relatively countries remains the lowest of all regions (Table 8). limited compared to other regions as well as when And while performance varies within the region, 9 of compared to other small I island economies. One the 13 Caribbean countries with available data have important indicator of the efficiency of maritime trade, lower scores than the average level in every other and thus the magnitude of transport costs, is the Liner region, including Sub-Saharan Africa. The Bahamas Shipping Connectivity Index (LSCI), which measures was the best Caribbean performer as of 2012, while the development of containerization in a country’s Jamaica had the highest annual average for the maritime transport.10 Despite some improvement in period from 2004 to 2011, reflecting its role as a the most recent data compared to the average from regional hub. Table 8: Average Regional Performances on LSCI Source: World Development Indicator (World Bank, 2014c). Innovation may be limited in the Caribbean. development (R&D), university-industry collaboration Innovation is a key determinant of trade, as it in R&D, availability of scientist and engineers, and enables firms to produce more at lower cost, Patent Cooperation Treaty (PCT) patent applications. achieve economies of scale, and therefore expand Table 9 shows current rankings for individual market share. Overall the Caribbean performance Caribbean economies in selected sub-indexes in innovation is very weak, although there is an from the Global Competitiveness Report. Barbados important degree of heterogeneity across the is the only Caribbean economy among the 50 top region. The 2013–14 Global Competitiveness report countries in terms of innovation. Haiti, Suriname, (GCR) ranks 150 economies in terms of innovation11 Dominican Republic and Trinidad and Tobago were performances, based on 6 criteria: the capacity ranked amongst the lowest countries in the world in for innovation, the quality of scientific research innovation. As expected, results were similar for the institutions, company spending on research and sub-indexes12. 11 Rankings are available for Barbados, Dominican Republic, Guyana, Haiti, Jamaica, Suriname, and Trinidad and Tobago. 12 Similar results were found in the 2013 Global Innovation Index (GII). In terms of performance, only Barbados (48) ranked in the top 50 economies, and the remaining Caribbean countries ranked between positions 78-82 out of the 142 economies measured by the index. The GII includes seven pillars divided into two areas: elements supporting innovative activities (institutions, human capital, infrastructure, market sophistication and business sophistication), and products of innovation (scientific and creative). 12 The poor performance of the Caribbean on to be another key factor explaining the difference innovation is also reflected in the number of between the Caribbean and the successful Small patent applications and the technological content Island Economies. While the share of manufacturing of exports. The number of patent applications in the exports from successful small islands was 15 percent Caribbean by both residents and non-residents has on average between 2005 and 2012, it was only 5 been lower than that of every other region in the world percent in the Caribbean region (Table 10). in recent years (Table 10).13 The innovation seems Table 9: 2013-2014 Global Competitiveness Index – Rankings of selected sub-indexes of Innovation Pillar Source: World Economic Forum (WEF, 2012). Table 10: Regional Averages on Key Indicators of Innovation (2005 to 2012) Source: Authors’ Calculation using World Development Indicator data (World Bank, 2014c). 13 The number of patent applications varies widely across the region, from 2 in Dominica to 107 in Trinidad over the 2000–2011 periods. However, the number of applications per capita is uniformly very low, much lower than in other developing regions. 13 The business environment in the Caribbean has available to the public and private business improved substantially in recent years. However, operators.14 The Caribbean region’s performance important gaps remains in key areas. According is rated more highly in access to electricity, with the to the World Bank’s Doing Business Index, starting lowest number of days required to get electricity, and a business in the Caribbean requires more time, lower costs and number of procedures required to on average, than any other region, and costs more obtain this service compared to some of the other (relative to per capita income) than any other region regions. except Sub-Saharan Africa (Table 11). Registering property in the Caribbean requires more time than The business environment in the Caribbean also in any other region except South Asia, and costs performs significantly below that of successful more (relative to the property’s value) than any other small economies. For all the six doing business region except Sub-Saharan Africa (Table 12). The indicators considered, the Caribbean performs below Caribbean also scores relatively poorly on most the successful small islands. Remarkably, although indicators of the strength of the credit system. For doing business performances in successful small example, the Caribbean has the lowest average islands were better than those of the Caribbean in regional score on the depth of credit information early 2000, the pace of reforms in these countries index (DCII), which measures the rules that affect the has been faster than in Caribbean region (Tables 11, scope, accessibility, and quality of credit information and 12). Table 11: Regional Averages: Starting a Business, Indicators Source: Authors’ calculations using data (World Bank, 2014a). 14 Data are available at the World Bank’s Doing Business project (http://www.doingbusiness.org/). See the definition of this indicator at http://search.worldbank.org/data?qterm=depth%20of%20credit%20information&language=EN 14 Table 12: Regional Averages: Registering a Property, Indicators Source: Authors’ calculations using data (World bank, 2014a). Determinants of exporting firms’ productivity: The role of innovation and access to key services Caribbean exporters are still lagging behind of Latin America. The level of productivity of small other Latin American exporters in terms of economies in other non-Caribbean countries is productivity (Table 13). Although no substantial even lower than Caribbean countries. One possible difference emerges between non-exporters in explanation might be related to economies of scale. Caribbean and Non-Caribbean countries, exporters In large economies, firms, even those considered from other LAC countries are 43% more productive small firms, tend to have higher revenues compared than those of Caribbean countries. However, most to similar firms in small economies. of this difference comes from the large economies Table 13: Labor Productivity Note: Large economies for Caribbean are Dominican Republic, Jamaica and Trinidad and Tobago; while for non-Caribbean countries, they are Argentina, Brazil and Mexico. 15 Exporters in the Caribbean have much lower is associated with a 1.5 percent rise in productivity labor productivity premiums than their regional (Table 11). The impact of TCI on labor productivity competitors. Productivity levels in direct and indirect rises with the size of firms, and is twice the level exporters in Central and South America are 49.6 and for firms located in large economies compared to 20.0 percent higher than levels in non-exporters, those in small economies. Manufacturing firms are compared to a difference of only 13.5 percent in the less affected by the level of technological capability Caribbean. than service sector firms. Similarly, a 10 percent rise in AKSI is associated with a 2 percent increase in Regression analysis shows that both the level of productivity. However, the results for AKSI are not technological capability (as indicated by TCI) and as robust as for TCI (Table 14). The relationship access to key services (as indicated by AKSI) between AKSI and productivity is strongly significant are positively and significantly related to firms’ for firms in the service sector, firms of medium size, labor productivity. A 10 percent increase in TCI and firms located in large economies. Table 14: Labor Productivity versus TCI and AKSI components Note: Robust standard errors in parentheses *** p<0.01, **p<0.05, *p<0.1 Regional integration and trade performances in the Caribbean Contrary to the widespread perception that approach was used to assess the historical impact Caribbean intra-regional integration is limited, of trade agreements on Caribbean exports and to intra-Caribbean trade performed relatively well, evaluate the likely impact of new trade agreements, with the share of intra-regional exports increasing including implementation of a Caribbean single substantially over the last decades. A combination market and deeper integration with other trading. The of a gravity model and a general equilibrium rising share of intra-regional exports in total exports 16 has been driven by the increasing attractiveness of destination market sizes), and rose to 68 times larger Caribbean destinations to Caribbean exporters, and by 2010.15 The increase in intra-regional trade has not by more rapid growth in the Caribbean than in been driven to large extent by energy products from extra-regional trading partners (Figure 4). That is, Trinidad and Tobago, which represented 65 percent the share of intra-regional exports in total Caribbean of intraregional trade in 2008 (ECLAC, 2012). Food exports has risen much faster than the share of products and construction materials are other major Caribbean GDP in world GDP. This intra-regional items traded regionally, representing 12 percent, and attractiveness was already evident in 1985, when 9 percent of total intra-regional trade, respectively in Caribbean intra-regional exports were 40 times larger 2008. than exports outside the region (once we control for Figure 4: Relative Regional Specialization – Accounting for Market Sizes Source: Authors’ construction using COMTRADE data (UN COMTRADE, n.d.). Moreover, the rise of Caribbean intra-regional thus an improvement in the quality and quantity of exports does not reflect geographical proximity, the products of Caribbean firms. As a result, intra- suggesting that CARICOM agreements might be regional exports would be expected to rise, nominal the main driving force behind this performance. GDP to increase, and the price level to fall. While The share of total Caribbean exports going to Caribbean firms would be more competitive on Latin American countries (Guatemala, El Salvador, world markets, their production costs would rise due Nicaragua, Costa Rica and Panama) that as to more intense competition from other Caribbean destination countries are comparable in terms of size firms for labor and materials. Countries that already and geographical location to Caribbean countries direct a large share of their exports to the region (e.g. has remained roughly constant at 1.5 percent. St. Lucia and Barbados) would enjoy the greatest benefit (Table 15). This initial share mostly depends Implementation of a common market would lead on geographical features (e.g. spatial proximity with to a substantial rise in exports in the Caribbean other countries of the Caribbean) and the initial (Figure 5). The decline in trade barriers should lead economic size. to an intensification of competitive pressures, and 15 This measure of regional integration (the GDP-scaled intra-regional export share) remains well below the average of approximately 300 for EU15 and NAFTA, admittedly among the most integrated trade blocs in the world. 17 Figure 5: Common Market – Changes for Insiders Table 15: Implementation of a Common Market Source: Authors’ construction Note: The benchmark year is 2006. Deeper trade integration with North America The benefits for the current members of NAFTA are through entry of Caribbean countries into negligible, as the Caribbean countries are small NAFTA will generate substantial gains larger, economies compared to the North American trading and these gains would be larger than that of the bloc. implementation of a common market. Clearly, the gains to Caribbean exports would be large, given that The impact of Caribbean countries joining the United States is the Caribbean’s major trading MERCOSUR would be also substantial, although partner. Moreover, the agreement also would end smaller than the impact of joining NAFTA. The the preferences that Mexican exporters enjoy in the gains to the Caribbean are about 2.5 times larger US market, compared to Caribbean exporters. The than the gains from implementing a common market. gains for the Caribbean of entry into NAFTA would These gains remain smaller than the impact of joining be six times the size of the gains from implementing a NAFTA, despite the fact that Caribbean exports are Caribbean common market. Here, again, Caribbean more sensitive to growth in MERCOSUR than in countries that already trade intensively with the the NAFTA members, because Caribbean exports NAFTA zone – due to spatial proximity or a large to MERCOSUR are much smaller than Caribbean economic size -- would enjoy the greatest benefit. exports to NAFTA. 18 Potential preferential agreements with emerging of an order of magnitude smaller, with noticeable economies would generate modest gains at exceptions for trade with China. As in other the very best. Compared to gains with alternative simulations, the size of the impact is mostly related to scenarios, the projected impacts are small, often the initial level of trade relations. Conclusion We have seen that the Caribbean countries regional trade was 68 times larger thanks to the face severe challenges in international trade. CARICOM agreement. Our analysis found that the Caribbean trade deficits are high and export implementation of a common market in the context performance has been poor, while their comparative of the CARICOM Single Market and Economy would advantage is largely in sectors with low value added, substantially increase intra-regional trade. and thus perhaps limited growth potential. There is a role for policy to improve Caribbean Caribbean exporters have failed to exploit trade performances, despite the countries’ size sufficiently the opportunities offered by rapid- constraint. Our analysis shows that Caribbean growing markets in some of the large developing countries underperformed relative to the group countries (new growth poles). Although Caribbean of successful small island economies on almost countries are exceptionally open to international all major trade determinants except for tariff level: trade, linkages with the new growth pole countries underperforming areas include trade logistic are low. Of our four country groups, the share of infrastructure, business environment regulatory merchandise exports to, and of tourism arrivals impediments to starting and operating a business, from, the new growth poles is highest for the natural limited innovation, and poor infrastructure. These resources dependent countries. Nevertheless, constraints are important reasons why Caribbean’s these shares are only 6 and 8 percent, respectively. exports to many trading partners, and in particular The shares of the new growth poles in the light the large, rapidly-growing emerging markets (Brazil, manufacturing dependent countries’ merchandise Russia, India, Indonesia, China, and Korea, and exports and tourism arrivals are somewhat less, with South Africa), remain considerably below potential. the Dominican Republic having closer ties than does Improvements in trade-related services and in Haiti. the regulatory environment to bring Caribbean economies closer to the levels of successful small On positive note, the Caribbean countries islands and other developing countries would have been gaining world market share in small significantly enhance exports. Furthermore, the yet dynamic service sectors. The contribution gains from a deepening of the current preferential to Caribbean export growth of the traditional access of Caribbean countries to full membership services sectors of travel and transport, where in the NAFTA bloc would be very large. Along the many Caribbean countries have a comparative same lines, the entry of Caribbean countries into advantage, has declined since 2006. Other smaller MERCOSUR also would bring large economic gains, sectors, such as communications, finance and other although lower compared to NAFTA. The global business services, have made a positive contribution economy offers considerable potential for increasing to growth, in particular for the light manufacturing Caribbean exports. Steps to exploit this potential are and services dependent countries. long overdue. Furthermore, contrary to general perceptions, intra-Caribbean merchandise exports performed relatively well in recent decades. 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