In the abstract of the study, “Understanding Economic Growth in the Caribbean Region,” IDB staff J. Rodrigo Fuentes, Karl Melgarejo and Valerie Mercer-Blackman wrote that it “shows evidence that the member countries’ small size and their synchronicity with the US business cycle influenced growth performance.” In general, they wrote, the influence of good policies on growth is still evident from the analysis.
“At first sight, all of the economies exhibit high volatility in the growth rate, with some showing periods of slow or negative growth and others exhibiting several spikes in the per capita GDP. Guyana and Trinidad and Tobago have shown a pattern of continuous growth since 1990, while the process for Suriname started in 2000,” they wrote. “Jamaica experienced some positive growth from the mid-1980s until the mid-1990s. Barbados and Bahamas have tended to show a positive trend in growth over the entire period but with large swings in the growth rate.”
Nevertheless, the IDB said, as a result of swings in the growth rate, it is difficult to determine the long-run growth trend. When comparing the per capita GDP of these economies with that of the United States, the IDB said two findings are clear: the low relative growth in the region and the large dispersion in per capita income levels in the region.
“All of the countries except Trinidad and Tobago have lost ground relative to the United States, which means that they have grown at a lower speed than the U.S. economy’s average 2 percent per capita long-run growth rate,” the IDB said. “This finding runs counter to the convergence theory, which states that less developed economies have a higher per capita growth rate than do their more advanced peers. Moreover, there is heterogeneity: The ratio of per capita income is relatively high for The Bahamas, Barbados, and Trinidad and Tobago. Although Jamaica used to have 40 percent of the per capita income of the United States in the early 1960s, today the ratio is closer to that of Guyana and Suriname.”
The three countries with the highest long-run per capita GDP growth rates are Guyana, Suriname, and Trinidad and Tobago, the study said. “These three economies have one important characteristic in common - they are commodity exporters. At the same time, they also have the largest standard deviation of the estimated growth rate, which is consistent with the idea that commodity exporters face more volatile shocks that induce more aggregate volatility,” the IDB said.
The IDB said it proceeded “further with this analysis to consider what would have happened with the growth rate of these economies in the 2001-2010 decade had the policy environment and public debt-to-GDP ratios been better. In other words, the exercise poses the question: What would the average growth rate have been if the value of these variables improved to reach the level of the 90th percentile of the entire sample of countries?”
This approach, the IDB said, measures the effect of better policies on growth. “We decompose the actual versus predicted hypothetical growth into growth attributed to a better policy environment and growth attributed to the effect of a high public debt burden,” the IDB said. The results show that all six economies would have had higher growth rates, as shown in Table 4. Trinidad and Tobago would have had a growth rate 1.4 percentage points higher during the period. Suriname’s growth rate would have been 3.75 percentage points higher, and 2.5 percentage points of that were attributed to the low quality of policy environment. Guyana and Jamaica could have increased their growth rate by more than 2 percentage points had they reduced their public debt-to-GDP ratio to the 90th percentile level. The IDB said table 4 thus corroborates the negative effect of a high public debt on growth, given that improving that factor will make the growth rate higher by 1 percentage point on average over a 10-year period.
So what weighs on Trinidad and Tobago’s GDP? The IDB said, “For Trinidad and Tobago, the co-integrating long-run equation included the real GDP of the United States, the European Union’s real GDP, and oil prices.”
As expected, the IDB said, the oil price has a positive and significant effect on long-run real GDP for Trinidad and Tobago. “A one percent increase in oil prices leads to an increase of 0.04 percentage points in Trinidad and Tobago’s real GDP,” the IDB said. Moreover, the IDB added, the U.S. real GDP has a short-term effect up to approximately 8 years, but then this effect diminishes substantially thereafter (although it does not completely disappear).
The IDB said, “Other variables were also important (e.g., natural gas) but did not have a straightforward co-integrating relationship with GDP. Trinidad and Tobago also manufactures iron and cement, but metal prices were not significant on their own.”