Home' Trinidad and Tobago Guardian : June 15th 2014 Contents JUNE 15 • 2014 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
NEWS | SBG7
needed to maintain the public debt-to-GDP
level at current rates. It also corroborates the
fact that tourism-dependent economies have
less fiscal room to maneuver. In this repre-
sentation, Barbados needs the largest adjust-
ment. Jamaica needs a smaller adjustment;
however, its debt levels are already very high,
the IDB said.
Macroeconomic instability significantly con-
strains Caribbean growth. With high debt-
to-GDP ratios for tourism-dependent
Caribbean countries and negative primary bal-
ances, adequate fiscal space is not available
to effectively make use of countercyclical poli-
cies in the event of an external threat.
Can the Caribbean be ready?
"The short answer is yes," the IDB said.
"But it will be difficult for the Caribbean
economies to effect the relevant changes with-
out a deliberate and explicit push," the Wash-
ington-headquartered multilateral added.
The IDB said efforts need to be made in
establishing macroeconomic policies, building
new trade relationships, and boosting the pri-
"External devaluation can be a good
approach for countries where current account
deficits have been persistent but may not be
appropriate for Caribbean economies because
of natural difficulties increasing demand for
nontradables," the IDB said.
The transmission mechanism for successful
expansionary external devaluations works by
lowering the real exchange rate, which boosts
domestic demand for nontradables and pro-
duction of tradables. If capacity is available,
output will increase, exports would grow, and
the overall economy would grow.
However, in some economies such as those
in the Caribbean, expenditure switching can
prove to be difficult, the IDB said, (citing Wor-
rell, 1986), and so an external devaluation can
backfire by simply depressing real incomes
(citing Krugman and Taylor, 1978).
It can also have a negative effect on balance
sheets of households and businesses by limiting
their ability to borrow, making existing for-
eign-exchange debt more expensive to service
and leading to pressures on the banking sector
as a second-order effect.
Internal devaluation---which aims to lower
labour costs without changing the value of
the exchange rate---can be effective but requires
a certain institutional setup that may be miss-
ing from several Caribbean economies, accord-
ing to the IDB. Because governments do not
have direct control over prices, the mechanism
to conduct internal devaluation normally
includes cutting the government wage bill
with the expectation that private sector wages
will be affected accordingly and eventually
reduce producer prices.
Among the factor cited by the IDB expe-
rience for successful internal devaluations are
open economies with flexible labour markets.
Without the right policy and institutional
setup, the impact on producer prices can be
A fiscal devaluation can also be performed
by implementing a tax reform aimed at reduc-
ing labour costs. The transmission mechanism
works in the same manner as an internal deval-
uation aimed at the wage bill, except that the
source of lower costs is different. Caribbean
tourism countries have made use of tax waivers
to make the tourism sector more competitive.
A modern approach is to reduce payroll taxes
and increase value-added taxes because, with
nominal wages fixed in the short run, this
would reduce the unit labour costs.
Citing the International Monetary Fund,
the IDB economists who authored the quarterly
said "fiscal devaluations can have significant
effects" and should be considered as a policy
tool in the Caribbean.
Deepening trade with new partners around
the world---particularly developing middle-
income countries---could help the Caribbean
economies become less dependent on their
historically significant developed trade partners
such as the United States and Europe, the IDB
The IDB said another IDB paper simulates
an exercise whereby Brazil is assumed to be
the main trading partner for five of the
Caribbean economies over 2008--18. This exer-
cise revealed that Caribbean per capita income
under such a scenario would have increased
by more than US$300 in 2012 and would be
US$600 higher by 2018 relative to the base-
"Boosting the private sector is a good way
to achieve a balanced growth path that can
be sustained over time while reducing the
need to have large fiscal buffers and naturally
create external buffers through increased
exports," the IDB said.
"While the global economy has begun to
pick up, high-impact, low-probability events
could materialise. Two specific risks---unex-
pected increase of interest rates in the United
States and a negative growth shock in China---
can have repercussions for the Caribbean," the
The multilateral added: "The region s
economies are particularly vulnerable to exter-
nal shocks given their history of exchange rate
rigidity. At present, the economies do not have
adequate fiscal or external buffers to sustain
such an impact."
The IDB said that the Caribbean needs
macroeconomic and structural policies that
allow the region to "(a) develop resilience
against such risks and (b) become stronger in
the long run."
The IDB said solutions include improving
the macroeconomic policy frameworks given
the uniqueness of Caribbean countries loca-
tion, endowments, comparative advantages
and smallness; engendering laissez faire eco-
nomic growth; and expanding trading horizons
to find "new neighbours."
Report: Fiscal buffers weak
From Page 6
The IDB said the
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