Dickson Igwe. Photo: VINO/File

The greatest issue affecting the Caribbean economy presently is the imminent raising of US base rates with the consequent rise in interests rates in the coming months. Rate rises are the result of solid economic growth in the USA and the quest to keep inflation under control. This rate increase will impact economic growth in the Caribbean region.

China features greatly in the matter of the raising of US interest rates. China has suffered slower economic growth this 2015. This slow growth has been coupled with a three trillion dollar meltdown in its stock exchange, and three currency devaluations. This is impacting all the emerging economies negatively as their economies are tied to China’s.

Investors are putting cash back into US bonds as returns from US securities increase and the dollar strengthens. This takes away investment from the emerging economies. Emerging economies are rightly concerned about a slowing Chinese economy as this reduces China’s investment and economic activities in relation to their own bottom lines.  

China is suffering from an economic paradox. State interference in the economy appears to be stalling a free market driven correction in the value of Chinese businesses and the bursting of a property bubble that could easily send the Chinese economy over the precipice. There is a lot of artificiality in the Chinese capitalist model. Over regulation is not the panacea for a strong economy.

The big question is whether or not China’s economic woes will impact global economic growth. China is the second largest economy and is expected to supersede the US economy as number one in a few years. China is a major market for western businesses. China is also the largest importer of commodities, minerals, and oil. China is a major investor in Africa, Asia, and beyond. A slowing of China’s economy will have global reverberations.

The Feds may delay a base rate rise if the threat of a China driven global economic slowdown appears imminent. That will be ‘good news’ for the Caribbean regional economy. Interest rates in the Caribbean are determined by rates in the USA.

A rise in US interest rates will cost Caribbean consumers and businesses in terms of increases in mortgage rates, loan terms, and credit card rates. A rise in US rates will also affect US consumer spending. That will impact tourism in the Caribbean. 

A rise in US rates will impact economic growth in the Caribbean negatively as it will mean that cash is taken out the pockets of consumers both in the US and in the region in the form of higher repayments on loans. Rate rises put a lid on consumer demand and are anti-inflationary in intent. Rate rises can also be recessionary pummeling consumer demand. The owners of bank stocks are the main beneficiaries of a rates increase. Consumers and borrowers are the ones that suffer the negative effects of a rate rise most.

There are five drivers that are identified by Scott MacDonald, impacting the Caribbean region. Number one is the thaw in US Cuban relations. Two is Puerto Rico’s debt crisis. The third is the decline of Venezuela’s regional influence owing to a precipitous drop in global oil prices.

Four is the growing Chinese presence. And five is the pending rise in US interest rates that will squeeze a number of countries struggling with high debt levels and large fiscal deficits.

Added to the fears of a rise in US interest rates are austerity measures in a number of countries that will make the Caribbean economy worse before it gets better as a result of the pending US rate increase. Austerity has been identified as a key factor in slow economic growth. 

Austerity is driven by investors and creditors who insist on short term returns on their securities and bond instruments over and above any long term returns due to stimulus driven economic growth. Short term returns trump any altruistic consideration for the economic welfare of borrowing states: the Greek Model.

Cuba represents a major challenge for the rest of the Caribbean. Before the Cuban Revolution in 1959, the island state was the major Caribbean destination for US tourists and businesses. The normalisation in relations raises concerns that trade and investment options for the rest of the Caribbean may end up in Cuba: a return to 1959.

To overcome the Cuban factor, Caribbean countries will have to leverage their unique resources optimally. For example, the [British] Virgin Islands must focus on its maritime industry in terms of employment and business opportunity. The VI is a sailing paradise and a veritable maritime laboratory. 

OK. Economic growth in the Caribbean is a fragile affair. Starting in 2013, robust tourism inflows have been triggered by a US economic growth that has in turn been driven by Quantitative Easing and Barack Obama’s brand of economic stimulus. The preceding were the two main economic policy tools for getting the US economy firing on all cylinders, after the Great Recession of 2007-09.

The Caribbean has also been the beneficiary of cheaper oil. Cheaper oil will have a stimulus effect on Caribbean economies by reducing the costs of goods and services tied to energy. The average growth of tourism dependent countries in the Caribbean since 2007 has been 1.5%.

The Caribbean does not have geopolitical significance in Washington D C. Not unless there was a global military confrontation between the various superpowers. Then the Caribbean would become a base for the US Navy’s Southern Atlantic fleet.

China has made long term gains playing a role in local development, and functioning as a counterweight in the region to the US.

China has been actively building cricket stadiums, power plants, and renovating hospitals. In Cuba China has invested in nickel processing and it has drilled for oil off the coast. China is a member of the Caribbean Development Bank.

In the Bahamas China’s export and import bank via a 2.4 billion USD loan is building the Baha Mar Resort courtesy of China Construction America Inc.

China as US counterweight in the region can be seen in the involvement by China in discussions in Nicaragua over a new canal to link the Pacific and Caribbean. This will impact Caribbean economies in ways yet to be determined.

Now, Puerto Rico owes its creditors $72 billion. The relationship between Puerto Rico and the US- Puerto Rico is a territory of the USA- allowed the island to tap the US municipal bond market. Puerto Rican bonds appeared attractive to mutual funds because of Puerto Rico’s ‘special relationship’ to the US, tax benefits from owning Puerto Rican bonds, and Puerto Rico’s position as a Caribbean island.

This was a cash cow for Puerto Rico. However, the country lived above its means for decades based on the idea that funds would continue to flow in from US pensioners. The windfall was mismanaged. The Great Recession of 2007-09 finally put a stop to that largesse.

Puerto Rico’s economic fundamentals have eroded over the years. Changes in the island’s tax code courtesy of the US Congress took away competitive advantages for businesses to locate on the island. Manufacturing has declined. Tourism is struggling. Since 2014, Puerto has struggled with debt. Today Puerto Rico is in a debt crisis as it struggles to pay its bond based debts.  

MacDonald ends his article by stating that the Caribbean faces a challenging period ahead both in terms of economics and geopolitics. “Although much of the Caribbean image is one of rum, pristine beaches, and happy natives, these are real countries struggling with issues of global competitiveness and how to manage relations with larger and more powerful countries.”

The Caribbean remains one of the most beautiful regions in the world. It is also a safe destination for the traveler. Developing its human capital is crucial for the road ahead. That development will only happen through investment in an effective education model and social development.

The Caribbean should also transform itself into a digital economy in order to be globally competitive. The future of global economic growth increasingly sits on the platform of advanced science and digital technology: the Singapore Model.

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