Investing for Growth

[dropcap]L[/dropcap]ow levels of investment are holding the Caribbean back from achieving its full economic potential.

 When it comes to public investment, governments across the Caribbean are not getting enough bang for their bucks – and it’s hurting the region’s growth rate.

With forecasted GDP growth of just 1.9 per cent in the coming year, Latin America and the Caribbean is trailing the rest of the world’s economies. Why is the Caribbean falling behind? The Inter-American Development Bank (IDB) suggests two reasons: the region is investing less, and producing less. And the Caribbean doesn’t just invest less than faster-growing regions, it also invests poorly – choosing areas that are rife with inefficiencies and don’t contribute to island economies in any meaningful way.

“Most of the region is back on the growth path,” said IDB Chief Economist José Juan Ruiz. “However, growth is too slow to satisfy the desires of the region’s expanding middle class. The single, biggest challenge is increasing the levels and efficiency of investments to make the region more productive, make growth faster, more stable and shield the region more from external shocks.”

LOW INVESTMENT

Public investment in Caribbean states has been trending downwards for many years, averaging around 5 per cent of GDP since 2001. This can be attributed to a number of factors including dwindling public savings, a lack of good investment opportunities and prohibitive interest rates. Countries with low levels of domestic savings often turn to foreign lenders to cover their investment shortfall, which can start a cycle of indebtedness that leads to one financial crisis after another. Crime, corruption and general bureaucratic inefficiency have also stifled the market and given rise to a system of public spending that’s beset by leakages.

When public investment does occur, it often fails to get the best value for its dollar. This is partly due to a deeper problem in island economies – lack of productivity. The region’s business landscape is dominated by Small- and Medium-sized Enterprises (SMEs) with limited resources and low output. These tiny firms are also more reluctant or unable to embrace new technologies, hampering their ability to scale up and contribute more. The knock-on effect of low productivity is an inefficient economy which, in turn, has a dampening effect on investment.

GETTING CREATIVE  

In his budget address, delivered earlier this month, Prime Minister Chastanet outlined his government’s plans for public expenditure. These included investment in education, agriculture, tourism, sports facilities and local government community projects. The government also intends to invest around $70m in infrastructure over the next four years, focusing on the road network and improving climate resilience. The Hewanorra Airport will also be redeveloped in a phased expansion and the Pointe Seraphine cruise ship terminal will be revamped and modernised.

In total, Saint Lucia’s government has a budget of almost $1.5bn for the coming financial year (19.2 per cent or $284.63m of that is allocated to capital expenditure). Finding the funds for public investment is a longstanding challenge for every Caribbean nation. Covering the investment gap requires striking a delicate balance between looting the public treasury and recouping that revenue through taxes or other punitive measures. Governments have to get creative if they are to funnel money into services and infrastructure in a way that will spur growth, rather than fall through the cracks.

Two sources of revenue that can increase investment without building debt are grants and Public-Private Partnerships (PPPs). The former must be distinguished from loans, which are often offered at high interest rates and can worsen the public debt in the long term. Grants, on the other hand, are a low-risk solution for targeting specific needs. In 2018, Saint Lucia is set to receive $69.69m in loans from institutions and governments around the world. These include the World Bank, the Japan International Cooperation Agency and the United Nations Environmental Programme.

PPPs help the public sector share the risk, and the cost, of infrastructure investment. Countries in Latin America and the Caribbean have been using PPPs since the late 1980s, with varying degrees of success. Saint Lucia formally adopted its own PPP policy framework in 2015. The potential benefits of PPPs are high, with the private sector not only providing funding but also skills and experience. However, if private firms are to be tempted into the public sphere, there needs to be a high level of investor confidence.  According to the IDB, 90 per cent of investors in Latin America and the Caribbean believe institutional weaknesses are a barrier to increasing infrastructure investment. Better planning to avoid waste, cost overruns and delays is necessary, and this can be achieved through more streamlined government.

BECOMING GROWTH-FRIENDLY

Investments funded by the public purse need to be carefully selected, and backed by thoughtful cost-benefit analysis. Where private sector partners are chosen to share the burden, these too must be subjected to a thorough vetting process to ensure they have the appropriate skills, experience and resources.

In boosting investment, policymakers should note that both quantity and quality are important. Increased expenditure would be welcome, but only if it flows into areas that will deliver significant returns. Investment in the right niche can spur productivity – enhancing the development of new technology, products and markets.

At present, the world economy is strengthening with global growth on the rise. Commodity prices are stabilizing and central banks around the world continue to recover from the recession. But no-one knows what’s around the corner. There will always be risk, particularly given the move towards protectionist policies in some parts of the globe.

To hedge against any upheaval, the Caribbean has to look inward, developing policies that focus on increasing both investment and productivity. Ruiz says: “Regardless of developments in the world economy, crafting and implementing the right domestic policies will allow countries to achieve more rapid growth.”