For many Caribbean countries, COVID-19 has generated the largest single-year economic contraction on record. While the future remains uncertain, we know that policymakers will continue to be faced with difficult decisions regarding how much to spend to mitigate the effects of the crisis, while also ensuring that fiscal and debt outcomes do not spiral out of control. But perhaps the most interesting question is whether governments can take advantage of this opportunity to rebuild their battered economies in ways that help mitigate vulnerabilities to future shocks, which can also help accelerate growth in years to come. This article focuses on this shock and both the challenges and opportunities that it presents.
The Caribbean region is one of the world’s most crisis-prone, and its citizens are no strangers to the harsh implications of natural disasters. The COVID-19 pandemic represents a new kind of natural disaster. While the pandemic’s human toll has been tragically high, one of its most frightening dimensions is the speed and persistence with which it has affected the region’s economies. In this context, COVID-19 may represent a perfect storm for many Caribbean countries, and one reflection of this has been its impact on GDP growth for 2020 (Figure 1).
Tourism’s Significance for the Caribbean
The impact of this crisis for individual countries has differed depending on the structure of the economy and the degree to which a country relies on sectors that are most affected by COVID-19, particularly tourism and commodities exports. For the former, a colleague and I developed a new index of countries’ dependence on tourism as a means of identifying and quantifying vulnerabilities. This Tourism Dependency Index is calculated using 5-year averages for the contribution of tourism to: (i) total export receipts; (ii) output as a share of real gross domestic product (GDP); and, (iii) employment as a share of total national employment. The range is from zero to 100, with 100 representing total dependence on the sector.
As highlighted in Table 1, many of the 34 countries in Latin America and the Caribbean (LAC), for which data was available, displayed significant dependence on the sector, with nearly a dozen Caribbean countries featuring in the top 20 on a global ranking of 166 countries. In fact, the most tourism-dependent nation in the world based on this measure is Aruba, with other Caribbean nations including Antigua and Barbuda, the Bahamas, St. Lucia, and Dominica rounding out the top 10. To put this in context, tourism in Aruba accounted for an average of about three-quarters of export receipts, and nearly 90 percent of both overall output and employment from 2014 to 2018. While many of the most tourism-dependent countries in the LAC region are from the Caribbean, the sector is still significant for some of the largest countries in the Americas. For example, from 2014 to 2018, tourism accounted for an average of about 16 percent of both economic output and employment in Mexico, and about 10 percent of both GDP and employment for Uruguay, Argentina, and Chile. In Brazil, tourism was responsible for about 8 percent of employment, representing hundreds of thousands of jobs.
Taken together, the Tourism-Dependency Index and the indicators it is based on suggest that countries in the LAC region are likely to suffer more than most in terms of the COVID-19 generated shock. A review of previous shocks to tourism arrivals in the LAC region reveals that an appreciable aggregate decline in flows across the region was only observed once in recent history—i.e., a five percent reduction in tourism flows to the LAC region during the global financial crisis.
In comparison, The United Nations World Tourism Organization’s estimates as of February 2021, suggest that tourism flows to Latin America and the Caribbean fell by about 69 percent in 2020 relative to 2019, making the COVID-19 crisis’ implications for tourism an extreme outlier when compared to historical data.
Policy Responses to the Crisis Across the World
The COVID-19 crisis has forced governments around the world to deploy a broad spectrum of measures, focused primarily on three key objectives: (i) maintaining financial stability, (ii) supporting households through the crisis, and (iii) ensuring that corporates remain in operation and viable—particularly small and medium-sized enterprises. While many of these objectives are mutually reinforcing, achieving them requires careful calibration of a number of policy tools, ranging from broad use of fiscal and monetary policies to stimulate the overall economy, to more targeted actions aimed at specific sectors, households, or corporates.
One of the most crucial categories of intervention relates to fiscal policies. Governments in the Caribbean have responded with targeted expenditures to alleviate the social and economic impacts of the shock, as well as other crucial objectives. One can break down fiscal responses into several categories, including additional spending and tax reductions to households and firms, or liquidity support via equity, loans, or guarantees to corporates. While the use of these measures has been widespread across the globe, financial capacity and concerns over related implications for public debt sustainability have led to significant divergences across countries based on their income levels (Figure 3).
From unprecedented crisis to historic opportunity
As governments and their economies enter the second year of this crisis, the rationale for more active government support for households and corporates is stronger than ever. Policymakers must continue to focus on recovery in 2021 and beyond, and they should also consider opportunities to pivot towards smart stimulus that will help accelerate a return to the pre-pandemic growth path, and reorient economies to enable faster productivity growth, including embracing rapidly-evolving technologies, and focusing on higher value-added sectors. If done right, the post-COVID period could represent a new era with the potential to usher in faster, more inclusive, and increasingly durable growth. A few important areas for government focus are described below.
One area with considerable potential for both near-term stimulus and long-term development impact is public investment. Nowhere is this more true or relevant than for developing and emerging market economies. Standard economic theory and related evidence suggest that the influence of public investment on national output can be quite large, particularly when compared with other forms of public consumption. For example, by increasing an economy’s productive capacity through better roads, airports, or improved water and power infrastructure, public investment increases the marginal product of capital and labor. Over time, that also drives higher levels of private investment, income, and consumption. Importantly, both economic theory and empirical evidence suggest that developing and emerging economies—where the stock of capital is in the direst need of improvement—stand to benefit most.
Caribbean countries are particularly well placed to benefit from increased or accelerated public investment, in part because of the region’s history of underinvestment in infrastructure, especially over the past decade. For example, beginning in 2014, and coinciding with large declines in global commodity prices, levels of public investment in commodity exporters Guyana, Suriname, and Trinidad and Tobago, measured in terms of the general government’s net acquisition of nonfinancial assets relative to GDP, saw single year contractions of over -40 percent, -50 percent, and -75 percent respectively (Figure 4). For The Bahamas and Barbados, whose economies rely heavily on the tourism sector, the global financial crisis and related shocks to external demand also precipitated appreciable decelerations in public investment.
Improving Financial Access
A key pillar of the crisis response must be to ensure that the banking system remains stable. This includes ensuring that corporates and households do not default on loans and that they can continue to access financing to see them through the COVID-induced shock period. Looking forward, this also presents an opportunity to improve financial access, a key deficit that has prevented inclusive growth for decades. In this context, Figure 5 presents findings from recent research, suggesting that while some of the largest Caribbean countries’ firms have reported financing needs in proportions similar to global averages, many of these firms displayed negative firm financing gaps, implying that local credit markets could not fully meet their funding needs.
In this context, Caribbean governments should seize the opportunity presented by this crisis to do more than restore financial access to levels that prevailed before the crisis, including by focusing on the following policies and reform priorities:
- Improving Property Rights and Insolvency Procedures: Ensuring that institutional frameworks in terms of regulation and the judicial system can provide creditors and debtors with greater confidence in terms of property rights and contract enforcement. The process of resolving insolvency would help to accelerate financial development and improve access to credit. These are also areas where several Caribbean countries fall short of international benchmarks.
- Increasing Competition: Regulatory and other reforms aimed at stimulating healthy competition in the banking sector are important for ensuring that credit can be provided at reasonable costs by many firms in the region. If implemented without compromising financial stability or prudential standards, adequate levels of regulation aimed at fostering competition could encourage broader use of credit by individuals and small and medium-sized enterprises, with benefits for all sectors of the economy.
- Promotion of Financial Technology with Adequate Safeguards: Financial technology, or fintech, is a rapidly evolving field that offers considerable promise in terms of its ability to promote financial development and inclusion. New technologies and consumer practices are facilitating the provision of financial services on the part of traditional banks and credit providers, as well as the entry of new models and financing modalities. Fintech can also help overcome key barriers to financial deepening and access, including as it relates to physical access to banking services, documentation requirements, and lowering the costs of finance. Caribbean governments should prioritize providing digital financial services in partnership with the financial industry while ensuring that regulatory and supervisory capacity is sufficient to mitigate compliance or consumer protection risks.
The COVID-19 pandemic has reinforced the importance of telecommunications and digital technology, while also accelerating pre-existing trends towards virtual service delivery and work. Developing countries, including the Caribbean, have long suffered from important gaps in technological infrastructure. These deficits will be even more consequential for growth and social development prospects in the years to come.
There is growing evidence that investments in related areas can both dampen the impact of crises like COVID-19, and more importantly, drive progress towards stronger and more inclusive growth, such as reducing poverty and hunger, improving health and educational outcomes, and reducing inequality. For example, a recent study from the Development Bank for Latin America found that countries with the most developed broadband infrastructure were able to mitigate economic losses from the 2003 SARS epidemic by 75 percent. Other recent research suggests that investment in telecommunications, as well as mobile broadband and fixed data transmission infrastructure and access, can be crucial for progress towards achieving many of the UN Sustainable Development Goals, in addition to other positive implications for development.
As important as these issues were in the past, the COVID-19 crisis is likely to have increased the economic significance of connectivity and digital access to domestic and external markets. Digital markets present new and potentially more lucrative opportunities for countries in the Caribbean, particularly if they can develop well-educated and technologically skilled labor forces, with the infrastructure needed to participate in global digital services markets.
Conclusions and Policy Implications
Caribbean countries are among the most dependent globally on international tourism for output, employment, and export revenues. Even for larger and more diversified economies in the region, tourism supports millions of citizens’ lives in aggregate. While governments can do little to speed up the normalization of tourism from abroad, they can and should implement smart policies and investments aimed at stabilizing the financial sector, protecting the most vulnerable, and ensuring that the corporate sector can resume its contribution once the shock dissipates. These policies and investments should be anchored in actions that also can accelerate inclusive growth. If so, this once-in-a-lifetime crisis may serve as a historic opportunity to transform the Caribbean by addressing legacy deficits, while laying the foundation for the future.
Henry Mooney serves as Economics Advisor with The Inter-American Development Bank (IDB). He previously worked with investment bank Morgan Stanley in London, The International Monetary Fund (IMF), and the World Bank, on dozens of countries in Africa, Asia, Europe, Central Asia, Latin America, and the Caribbean. Henry is a dual Brazilian and Canadian citizen. He undertook his graduate studies at The London School of Economics (LSE), The University of London, and Harvard University