Transcript Energy Strategy - UWI St. Augustine

On the Economic Growth of the
Caribbean Region: concepts and
features.
Based on work by Rodrigo Fuentes
(Catholic University of Chile), Karl
Melgarejo and joint work with IDB
Caribbean Economics Team
Presentation for the 5th Biennal International
Business and Finance Conference, Port of
Spain, Trinidad
May 2, 2013
Outline: how to approach the problem
• Stylized facts and what we know from the
literature
• Evidence based on four characteristic:
– Small size of the economies
– Lack of diversification (related to small size) and
volatility
– Vulnerable: susceptible to natural disasters
– Highly indebted
• Growth in more recent years, and possible policy
space.
All of the Caribbean countries have small populations—but
differ greatly in terms of per-capita income. Per-capita
income about average relative to larger peers and small
states.
40000
Antigua& Barbuda
35000
GDP per capita (USD)
30000
St. Kitts and Nevis
25000
The Bahamas
T&T
20000
Grenada
St. Lucia
Barbados
Dominica
15000
10000
St. Vincent and the Grenadines
Suriname
Belize
5000
Jamaica
Guyana
0
0
500000
1000000
1500000
2000000
2500000
3000000
Population
3
A fairly diverse crowd for major non-OECS countries
The Caribbean countries are losing ground against the
U.S., and the slowdown is structural in nature
•
OECS/ECCU countries ’ growth has
slowed down in the past 20 years.
•
Commodity exporters (TT,
Suriname, Guyana) doing better in
recent years, but GDP is extremely
volatile.
•
‘Other Caribbean’ (The Bahamas,
Barbados, Belize and Jamaica)
have a structural growth problem,
losing ground for 30 years--even
against the U.S..
•
There is evidence of a productivity
slowdown.
Ratio of ECCU 1
Ratio of other Caribbean 2
Ratio of commodity exporters 3
5
Recent papers on economic growth pertaining
to the Caribbean using a large sample of
countries
• Determinants of growth:
– Loayza, Fajnzylber and Calderon (2005). Structural reforms, external
conditions and stabilization policies are key determinants of growth in
LAC region
• Growth and public debt:
– Calderon and Fuentes (2012). Negative effect of public debt on growth,
but outward oriented policies and good domestic policies ameliorate the
effect.
• Small-country issue:
– Easterly and Kraay (2000): No effect of small size on growth, vulnerability
related to openness, so positive
• Vulnerability:
– Armstrong and Read (2004). Charveriart (2000). Conflicting results, no
clear effect
Recent papers on economic growth using a
large sample of countries (continued)
•
•
Tourism:
– Sequeira and Nunes (2008). Positive effect of tourism on growth
Tourism and other factors:
– Thacker and Acevedo (2010). Growth is positively related with tourism
and negatively with volatility (period 1979-2007). Public debt is
negatively associated with growth and increases volatility.
– Thacker, Acevedo and Pirelli (2012). Country size and the condition of
being island are negatively related to growth. Tourism ameliorates the
effect of small island conditions. TFP explain an important part of growth
in the region
Recent papers using data exclusively from
Caribbean economies
•
Sources of growth
– Peters (2001). Negative impact on growth of inflation, population growth
and government spending. Positive impact on growth of investment,
education, life expectancy, trade liberalization, financial development
and IT.
– Kida (2005). TFP is the main contributor to economic growth.
Macroeconomic environment, quality of institutions and microeconomic
efficiency are key for TFP growth.
– ECLAC (2009). Capital and TFP are the main contributors to growth in
70’ and 80’, and labor in the 90’.
•
Public debt on growth
– Greenidge et al (2012). Negative effect of public debt on growth when
surpassing a threshold of 56%. Nonlinear relationship.
Recent paper using data exclusively from
Caribbean Economies (continued)
•
•
•
Structural transformation
– Hausmann and Klinger (2009). The structural change in the matrix of
production is a determinant for growth. Current production matrix is
“backward” and is unlikely to change to more sophisticated product.
Integration allows a more diversified and sophisticated export matrix.
The study does not include services.
Vulnerability, natural disaster
– Crowards (2000): Natural disasters reduce growth in the second and third
year after the date of the disaster.
Financial crisis, cycle
– Kuoame and Reyes (2011). Caribbean countries experienced a strong
reduction in the growth rate due to the 2009 international crisis. They
tend to amplify the business cycle of the US economy
To find structural breakpoints we estimate the
stochastic process of GDP per capita, which is
an AR(2) with a deterministic trend
But no relationship between breakpoints and
natural disasters: example of Trinidad and Tobago
Trinidad y Tobago (1960 - 2011)
Year
Type
Name
1963
Storm
1974
Storm
1997 Earthquake
2004
Storm
Killed
Flora
Alma
24
2
Ivan
1
Total
Afected
50,000
17
560
Estimated
Damage
(% GDP)
4.4%
0.2%
0.4%
0.0%
Trinidad and Tobago
UDmax=42.78**
Test
Break Dates
Periods
1962 - 1981
Long run growth rate -0.009 (0.037)
; SupF T(2/1)=21.8** ; SupF T(3/2)=21.8** ; SupF T(4/3)=11.6
1981 ; 1989 ; 2009
1982- 1989
1990 - 2009
0.005 (0.000) -0.005 (0.002)
2010 - 2011
-
Notes: In the first row, the first indicator shows the results of the test of no break against one break, while the
second and third inidcators shows the tests of two breaks against one break and three breaks against two
breaks, respectively. Significant at the 5 (**) or 10(*) percent levels. Estandar errors in parenthesis.
Source: Author’s estimation using Bai -Perron (1998, 2001) method and World Bank data
Source: EM-DAT: The OFDA/CRED International Disaster Database
GDP Per Capita
(index 2000=100)
200
150
4
100
2
3
1
50
1960
1965
Source: WDI, The World Bank
1970
1975
1980
1985
year
1990
1995
2000
2005
2010
We decomposed actual from projected growth
into policy and institutional factors for pre-crisis
era:
Change in economic growth for CCB countries
(2001-5 vs. 1991-5)
8.00
6.00
4.00
2.00
0.00
-2.00
-4.00
-6.00
-8.00
Bahamas
Barbados
Transitional convergence
Guyana
Structural factors
Jamaica
Policy Environment
Suriname
Public debt
Actual change
T&T
Small size: how much does it matter for
growth?
•
•
•
•
•
•
Small economies grew equally or more than the rest up to 2000 (Easterly and Kraay)
generally because small economies are more open than large ones and this has a
positive effect on growth.
But recently small economies have not done as well, with microstates (population
below 1 million) doing significantly worse than larger peers.
Economies of scale an issue—but controlling for labor, it goes away (related to
migration?)
Alesina et al (2005) provides a model in which the benefits (i.e. economic growth) of
trade openness and economic integration are larger, the smaller the size of a country.
IMF finds that small countries are affected by the limited economies of scale, as the
public sector has to over-extend itself, financial sectors are somewhat shallow and
finance a large portion of the government. Trade is also more costly, particularly the
more remote.
Still a puzzle about the scale: trade can also be more costly. At what level of ‘size’
does it begin to matter?
The Caribbean (CCB) has continuously lost
ground in the last 30 years relative to other
small economies.
Tourism dependent
Commodities exporters
GDP Per Capita: Caribbean relative to Small Economies
(Index 1971=100)
(Index 1971=100)
40
60
20
60
40
80
100
1971=100
80
120
140
100
GDP Per Capita: Caribbean relative to Small Economies
1970
1980
1990
Year
2000
2010
Real PPP GDP Per Capita Relative Index (CCB/Small Econ.)
Nominal PPP GDP Per Capita Relative Index (CCB/Small Econ.)
Source: PEN World Tables
1970
1980
1990
Year
2000
2010
Real PPP GDP Per Capita Relative Index (CCB/Small Econ.)
Nominal PPP GDP Per Capita Relative Index (CCB/Small Econ.)
Source: PEN World Tables
Not only the observed growth but also the potential that
has been lower than that of other small economies in
the last 30 year. We also found that the volatility of the
potential growth has risen in the last decade.
Caribbean relative to Small Economies
1980
2000
1990
For the last 10 years
Potential Growth
Growth Volatility
Note: CCB countries are excluded from the group of Small Economies
0 .5 1 1.5 2
Growth Volatility
0
-.5
Potent. Growth
.5
1
1.5
(1971-2010)
2010
The exposure to natural disasters decreases with the
size of the economy; i.e. smaller economies have a
higher exposure to natural disasters.
Lack of diversification by trading goods and by trading partner
exacerbate external shocks for open economies (all countries
except Jamaica have de-facto fixed exchange rates).
100%
1.60
Three Main Exports (% Total Exports)
Exports to US, Canada and Europe (% Total Exports)
Trade Openess
90%
1.40
80%
1.20
70%
1.00
60%
0.80
50%
0.60
40%
0.40
30%
20%
0.20
Dominica
Barbados
Grenada
St. Vincent Suriname
and The
Grenadines
Antigua &
Barbuda
St. Lucia Trinidad and
Tobago
Belize
Bahamas
Guyana
Jamaica
St Kitts and
Nevis
17
..and relatively speaking, small economies’
GDP is more volatile.
Many factors help increase the volatility of the GDP in small
economies, and the Caribbean countries also show a high degree of
volatility relatively to the rest of small economies
GDP Growth
(coefficient of variation / 1990-2010)
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
CCB
ROSE
ROW
OECS
Larger incidence of external shocks and
skewed towards negative zone, and smaller
buffers with which to deal with them.
Median shock and its distribution,
average, 1990-2011
External
Shocks
Policy buffer index combines the primary fiscal
balance, public debt, the current account of the
balance of payments net of direct foreign investment,
foreign reserves in months of imports, and the
inflation rate .
…which has led to indebtedness problems.
The smaller, the bigger…. Gross public debt is bigger in
small economies
Gross Public Debt (% GDP) (aver. 90-11)
Small Economies
180.9
130.9
80.9
30.9
-19.1
Source: IMF
10.0
12.0
14.0
16.0
Log (Population)
18.0
20.0
Among the CCB countries 3 out of 6 (50%) are located in the positive growth zone;
while among the Small Econ. 10 out of 17 (59%) are in the positive zone. The
highest level of debt ratio in CCB countries is 140%; while for Small Econ. Is just
99%
Stylized Shape of the Threshold
Effects of Public Debt on Growth
Economic growth
Positive
200.0
Guyana
Barbados
Growth
Zero
Growth0.00
Negative
Growth
-200.0
Suriname
Trinidad &
Tobago
The
Bahamas
-400.0
-600.0
Jamaica
Inverted U debt curve
Caribbean CCB
OECS
Small Econ.
-800.0
-1000.0
0
10
20
30
40
50
60
70
80
90 100 110 120 130 140 150 160 170
Debt to GDP ratio
Source: Greenidge et al. (2012) IMF.
Estimated Loss in Real GDP
Growth (In Percentage Points)
Source: Greenidge et al. (2012) IMF.
• CCB countries have the highest losses!
2
.
I
s
t
h
e
h
i
g
h
l
e
v
e
l
o
f
i
n
Indebtedness has led to large losses,
according to Greenidge and others.
CCB also does worse on competitiveness
relative to small economies
CCB vs. Small Econ.: Competitiveness Indicators
(relative ratios)
Competitiveness (2011-2012) - Overall score
1.00
0.95
Innovation and Sophistication
- 3rd Pilar
0.90
Basic Requeriments - 1st Pilar
0.85
0.80
0.75
Efficiency Enhancers
- 2nd Pilar
0.70
Health & primary edu
CCB
Small Econ.
Source: WEF
Institutions
Infrastructure
Macroeconomic Env.
More recent impacts and effects on policy
options..
24
Long-run output is mostly explained by a few
external variables for the 6 Caribbean
countries.
Explaining the Trend in Real Output: just a few global factors
explain the majority of output movements of Caribbean countries.
Results from Vector-Error Correction Model: Long-run elasticities 1/
US GDP
UK GDP
EU GDP
percentage point permanet change in real GDP
Tourism exporters
Bahamas
0.02
Barbados
0.038
Jamaica
0.007
Commodity exporters
Guyana
Suriname
0.005 *
Trinidad and Tobago
0.04
oil price
gold price
-0.018
-0.02
-0.017
0.003
0.04
0.045
1/ elasticity is defined as the permanent percentage change of the country's real GDP as a result
of a 1 percent change in the variable in each column
* elasticity becomes negative after 9 years
The 2007-08 global recession had a
detrimental effect on growth.
Simulations: CCB Growth Assuming Global Recession had not
happened.
(Actual and IMF pre-recession projections, Index
2004=100)
Caribbean Tourism exporting Countries' Real GDP:
Caribbean Commodity-exporterting Countries' Real
135
170
130
160
125
150
120
140
115
GDP
130
110
120
105
110
100
100
95
90
90
2004
2004
2005
2006
2007
2008
2009
2010
Bahamas
Barbados
Jamaica
Without 2007 crisis (dashed lines)
2011
2005
2006
2007
2008
2009
2010
2011
2012
2012
Guyana
Suriname
Trinidad and Tobago
Without 2007 crisis (dashed lines)
26
Can fiscal policy improve growth performance
in the CCB countries?
• We estimate the following for our countries using annual data:
𝑔𝑡 = 𝛽𝑦𝑡 + 𝜀𝑡
𝑦𝑡 = ∅𝑔𝑡 + 𝜇𝑡
• Where gt and yt are the cyclical components of government
expenses and output. First refers to fiscal stance, second to
expansionary policy.
We found that, with the exception of Barbados, the fiscal multiplier
related to capital expenditures is smaller than that for current
expenditure (0.13 vs. 0.36 in average) and that the fiscal policy is
highly pro-cyclical.
More importantly, investment expenditures react more aggressively
to the output cycle than current expenditures, suggesting that public
investment constitutes a more active policy tool than public
consumption.
27
Period
Bahamas 1990-2011
Jamaica
1990-2011
Suriname 2001-2011
T&T
1990-2011
Barbados 1990-2011
Guyana
2000-2011
Fiscal multiplier (φ)
Fiscal stance (β)
C
0.76
I
0.27
C+I
0.82
C
1.31
I
3.76
C+I
1.21
(0.000)
(0.000)
(0.000)
(0.000)
(0.000)
(0.000)
0.13
0.04
0.13
7.71
17.99
7.73
(0.002)
(0.194)
( 0.031 )
(0.005)
(0.262)
(0.052)
0.15
0.07
0.23
2.95
13.96
3.43
(0.055)
(0.000)
(0.005)
(0.039)
(0.000)
(0.002)
0.41
0.15
0.32
2.37
6.55
3.11
(0.001)
(0.000)
(0.000)
(0.004)
(0.000)
(0.000)
-0.34
0.13
-0.77
-2.90
7.67
-1.25
(0.000)
(0.002)
(0.244)
(0.000)
(0.001)
(0.019)
0.86
-0.10
-0.28
0.96
-4.45
-1.38
(0.024)
(0.017)
(0.039)
(0.005)
(0.018)
(0.040)
Instruments
Trade partners growth, 6 months T-bill yield
Trade partners growth, 6 months T-bill yield
Trade partners growth, 6 months T-bill yield and
first lag of each instrument and dependent var.
Trade partners growth, 6 months T-bill yield and
first lag of each one
Trade partners growth, 6 months T-bill yield
Trade partners growth, 6 months T-bill yield and
first lag of each one
Conclusions
Small economies have not grown as quickly as its larger
peers in the last few years
Lower growth in the Caribbean is only partially explained by
being ‘small and vulnerable’. Its indebtedness and
neighborhood may have played a role.
Few policy buffers and issues with competitiveness are at
the heart of the problem. But even with buffers, multiplier
effect is negligible.
29
Thank you
The Bahamas
The Bahamas (1960 - 2011)
Year
Type
Name
Killed
1992
1999
2004
2007
2011
Storm
Storm
Storm
Storm
Storm
Andrew
Floyd
Frances
Noel
Irene
4
1
2
1
Total
Afected
1,700
8,000
7,000
10,000
Estimated
Damage
(% GDP)
6.7%
7.5%
14.1%
0.5%
The Bahamas
Test
Break Dates
Periods
Long run growth rate
UDmax=18.34** ; SupFT(2/1)=9.54
1976
1962 - 1976
1977 - 2011
-0.028 (0.033)
0.006 (0.003)
Notes: In the first row, the first indicator shows the results of the test of no break against one break, while the
second and third inidcators shows the tests of two breaks against one break and three breaks against two
breaks, respectively. Significant at the 5 (**) or 10(*) percent levels. Estandar errors in parenthesis.
Source: Author’s estimation using Bai -Perron (1998, 2001) method and World Bank data
Source: EM-DAT: The OFDA/CRED International Disaster Database
GDP Per Capita
(index 2000=100)
100
2
3
90
4
5
1
80
70
60
50
1960
1965
Source: WDI, The World Bank
1970
1975
1980
1985
year
1990
1995
2000
2005
2010
Barbados
Barbados (1960 - 2011)
Year
Type
Name
1980
1987
2002
2004
2010
Storm
Storm
Storm
Storm
Storm
Allen
Emily
Lili
Ivan
Thomas
Killed
1
Total
Afected
5,007
230
2,000
880
2,500
Estimated
Damage
(% GDP)
0.1%
5.9%
0.0%
0.2%
Barbados
Test
Break Dates
Periods
Long run growth rate
UDmax=17.18** ; SupFT(2/1)=6.68
1972
1962 - 1972
1973 - 2011
0.060 (0.005)
0.011 (0.001)
Notes: In the first row, the first indicator shows the results of the test of no break against one break, while the
second and third inidcators shows the tests of two breaks against one break and three breaks against two
breaks, respectively. Significant at the 5 (**) or 10(*) percent levels. Estandar errors in parenthesis.
Source: Author’s estimation using Bai -Perron (1998, 2001) method and World Bank data
Source: EM-DAT: The OFDA/CRED International Disaster Database
GDP Per Capita
(index 2000=100)
4
100
5
3
1
2
80
60
40
1960
1965
Source: WDI, The World Bank
1970
1975
1980
1985
year
1990
1995
2000
2005
2010
Guyana
Guyana (1960 - 2011)
Year
Type
1997
2005
2006
2008
2010
Drought
Flood
Flood
Flood
Drought
Name
Killed
34
Total
Afected
607,200
274,774
35,000
100,000
Estimated
Damage
(% GDP)
2.5%
35.4%
11.6%
0.7%
Guyana
Test
UDmax=41.75** ; SupFT(2/1)=30.43** ; SupFT(3/2)=5.55
Break Dates
1975 ; 1991
Periods
1962 - 1975
1976 - 1991
1976 - 2011
Long run growth rate
0.018 (0.003)
-0.020 (0.003)
0.018 (0.005)
Notes: In the first row, the first indicator shows the results of the test of no break against one break, while the
second and third inidcators shows the tests of two breaks against one break and three breaks against two
breaks, respectively. Significant at the 5 (**) or 10(*) percent levels. Estandar errors in parenthesis.
Source: Author’s estimation using Bai -Perron (1998, 2001) method and World Bank data
Source: EM-DAT: The OFDA/CRED International Disaster Database
GDP Per Capita
(index 2000=100)
4
120
3
1
100
5
2
80
60
1960
1965
Source: WDI, The World Bank
1970
1975
1980
1985
year
1990
1995
2000
2005
2010
Jamaica
Jamaica (1960 - 2011)
Year
Type
1979
1986
1988
1991
2004
Flood
Flood
Storm
Flood
Storm
Name
Killed
Total
Afected
Gilbert
40
54
49
15
15
210,000
40,000
810,000
551,340
350,000
Ivan
Estimated
Damage
(% GDP)
3.2%
31.4%
0.7%
5.8%
Jamaica
UDmax=949.3** ; SupF T(2/1)=19.5** ; SupF T(3/2)=23.8** ; SupF T(4/3)=9.2
Test
Break Dates
1974 ; 1987 ; 1995
Periods
1968 - 1974
1975- 1986
1987 - 1995
1996 - 2011
Long run growth rate 0.049 (0.008) -0.018 (0.007) 0.036 (0.008) 0.005 (0.002)
Notes: In the first row, the first indicator shows the results of the test of no break against one break, while the
second and third inidcators shows the tests of two breaks against one break and three breaks against two
breaks, respectively. Significant at the 5 (**) or 10(*) percent levels. Estandar errors in parenthesis.
Source: Author’s estimation using Bai -Perron (1998, 2001) method and World Bank data
Source: EM-DAT: The OFDA/CRED International Disaster Database
GDP Per Capita
(index 2000=100)
110
5
100
4
90
1
3
80
2
70
1960
1965
Source: WDI, The World Bank
1970
1975
1980
1985
year
1990
1995
2000
2005
2010
Suriname
Suriname (1960 - 2011)
Year
Type
1969
2006
2008
Flood
Flood
Flood
Name
Killed
3
2
Total
Afected
4,600
25,000
6,548
Estimated
Damage
(% GDP)
0.0%
Suriname
Test
Break Dates
Periods
Long run growth rate
UDmax=108.12** ; SupFT(2/1)=12.49
1990
1977 - 1990
1991 - 2010
-0.029 (0.004)
0.037 (0.019)
Notes: In the first row, the first indicator shows the results of the test of no break against one break, while the
second and third inidcators shows the tests of two breaks against one break and three breaks against two
breaks, respectively. Significant at the 5 (**) or 10(*) percent levels. Estandar errors in parenthesis.
Source: Author’s estimation using Bai -Perron (1998, 2001) method and World Bank data
Source: EM-DAT: The OFDA/CRED International Disaster Database
GDP Per Capita
(index 2000=100)
160
3
140
2
120
100
80
1975
1980
1985
1990
1995
year
Source: WDI, The World Bank
2000
2005
2010