Economic performance since Independence

by Dr Garth Nicholls

Director of Research, Eastern Caribbean Central Bank

– Special to Searchlight

Introduction

On October 27, 2006,

St Vincent and the Grenadines celebrated 27 years of political Independence. This occasion is an opportune time to assess our progress since becoming fully in charge of economic management and to plan ahead for the next 27 years. In such an analysis it is always easy to make arguments about what policy actions may have resulted in more favourable outcomes, but of course these are after the fact and do not account for the pressures that existed at the time of decision making.

Much progress has been made since 1979, but a long journey remains to be traveled. The period since Independence has changed drastically, trade preferences have diminished, public debt and fiscal imbalances have risen and like the rest of the region, SVG has to grapple with the requirements of the World Trade Organisation and the Caribbean Single Market and Economy. Economic performance during the first 27 years after Independence was to a large extent driven by capital accumulation and a generally favourable external trade environment.{{more}}

Over the next 27 years, however, economic performance is likely to be constrained by our ability to create and use ideas in productive and internationally competitive ways. A new strategy is required to deliver sustained favourable economic outcomes for all Vincentians. This new strategy requires a focus on raising total factor productivity in the economy.

The new policies must focus on building social capability, which can be used to create a flexible economic structure with internationally competitive economic agents, firms and labour. The regional policy authorities in the Organisation of Eastern Caribbean States (OECS) (which includes SVG) have decided to create an economic union with enhanced governance arrangements, as the strategic response to the emerging policy challenges that confront the region.

Context of economic performance

The economy of the

St Vincent and the Grenadines (SVG) is small and highly open. It had a population of just over 106,000 or approximately 18 per cent of the total population of the Eastern Caribbean Currency Union (ECCU) in 2001. In 1979 it had a total population of 96,840 which represented 20.0 per cent of the total ECCU’s population. Gross domestic product (GDP) in 2005 was EC$972 m or 12.1 per cent of the ECCU total. In 1979 its GDP was fourth highest and this represented approximately 12.5 per cent of the ECCU total. In 2005 SVG again had the fourth largest economy in the OECS. The largest economy in the OECS is Antigua and Barbuda (26.5 per cent of the ECCU total GDP) and the smallest economy is Montserrat (1 per cent of the ECCU’s total GDP). The open nature of the economy is manifested in the ratio of imports and exports to GDP which approximates 55 per cent for SVG and 60 per cent for the currency union. Therefore, trade with the rest of the world is a key factor in the economic performance of SVG and the ECCU region generally. In this context, the main foreign exchange earners in the ECCU are tourism services and traditional agricultural exports.

Institutional Structure

SVG is one of the eight thriving parliamentary democracies that comprise the OECS. The OECS region is a zone of stability, with a longstanding EC$/US$ parity, a well developed legal system and political stability. Monetary policy is conducted by the Eastern Caribbean Central Bank in a financial system dominated by commercial banks, along with a number of non-bank financial institutions, in particular insurance companies. The monetary policy pursued is based on a fixed exchange rate regime with a common currency among the member countries of the Currency Union. The financial system and the capital market development programme have been strengthened with the establishment of the Eastern Caribbean Stock Exchange and the Eastern Caribbean Home Mortgage Bank. Monetary policy has kept inflation low despite significant depreciations in the real effective exchange rate. Individual countries are responsible for their fiscal and other macroeconomic policies.

Stylised facts

Per capita growth

SVG’s output more than doubled between 1979 and 2005, in line with regional output growth, outpacing population growth. Life expectancy, education and other indicators of well being also improved in SVG and the ECCU, a fact recognised in the countries’ relative ranking on the United Nations Human Development Index. In 1979 economic growth in SVG was 2.6 per cent compared with the regional average of 2.1 per cent. Economic growth for SVG over the entire period averaged 4.2 per cent per year compared with average growth for the ECCU of 4.1 per cent per annum. Over the same period the SVG population grew marginally by 0.3 per cent per annum. There are three distinct periods of growth within the ECCU, which also broadly characterise the growth experience of SVG. The first sub-period is 1980 to 1983 when growth averaged 3.4 per cent per annum for the ECCU, but 3.8 per cent for SVG. With population growth of 0.9 per cent per annum during this period, GDP per capita rose by 2.9 per cent per annum in SVG.

The second sub-period is the golden growth era of the ECCU, 1984 to 1990, when growth averaged 7.6 per cent per annum for seven years! With population growth during this period of approximately 0.9 per cent per annum, GDP per capita expanded by 5.8 per cent per annum. This result compares favourably with the growth experiment of the Asian tigers. In the final sub-period, 1991 to 2005, growth in the ECCU averaged 2.8 per cent per annum, but 3.3 per cent per annum for SVG. During this sub-period the population of SVG declined on averaged by 0.17 per cent per annum, resulting in an overall increase in the per capita income of 3.5 per cent per annum.

Structural changes

Over the past 27 years there have been large structural changes in the economy of SVG in line with regional economic trends. The countries are moving away from the production of goods, and value added in the economies is being dominated by the production of services. This trend has also been observed in SVG, where the production of physical things represented 29.9 per cent (24 per cent of GDP in the ECCU), but by 2005 it had declined to 15.4 per cent (11.7 per cent of GDP in the ECCU). In other words the production of services now represents approximately 84.6 per cent of GDP in SVG. This is expected to further increase as the agriculture and manufacturing sectors diminish in importance.

In 2005 value added from agriculture represented 9.3 per cent of GDP (5.3 per cent of GDP in the ECCU), or 9.6 percentage points of GDP lower than its ratio in 1979. The diminution in the importance of agriculture started just after independence and by 1991 agriculture represented 18.1 per cent of GDP (11.2 per cent of GDP in the ECCU). Among the other sectors that declined in importance over this period were government services by 5.9 percentage points, real estate and housing (1.6 percentage points), manufacturing (4.9 percentage points, but only by 1.3 percentage points in the ECCU) and other services by 0.7 percentage points. The table shows that the following sectors have grown in importance: construction by 3.4 percentage points, but rose by 4.8 percentage points for the ECCU as a whole; communications by 6.3 percentage points in SVG, but by 8 percentage points to 10.8 per cent of GDP in 2005 for the ECCU as a whole; banking and insurance services rose by 4.6 percentage points, but by 5.2 percentage points to 11.7 per cent in 2005 for the ECCU as a whole; transportation services rose by 1.8 percentage points over the period for the ECCU as a whole, but by 4.6 percentage points for SVG over the same period. Therefore, it can be concluded that the structural changes taking place in SVG are part of wider ECCU economic trends. The rest of the ECCU, however, appears to have transformed at a faster pace than SVG in some sectors.

Prices

The rate of inflation declined sharply in both the ECCU and SVG between 1979 and 2005. Over the period of analysis inflation in SVG averaged 3.9 per cent per annum, marginally lower than the rate observed for the ECCU as a whole. The performance of SVG also compares favourably with the inflation experience of countries within the western hemisphere which have also experienced a marked declaration in average annual inflation over the period of analysis. Inflation was highest in the period 1980 to 1983 at 9.9 per cent slightly higher than the ECCU average of 8.5 per cent per annum. During the sub-period 1984 to 1990 the rate of inflation subsided to average 4.5 per cent per annum in SVG, compared with 5.1 per cent per annum for the region as a whole. In the final sub-period 1990 to 2005 inflation in SVG and the ECCU further declined to approximately 2 per cent per annum and 2.3 per cent per annum respectively.

Unemployment and poverty

Despite this relatively favourable growth and inflation performance of the ECCU generally and SVG in particular, unemployment continues to be a major problem. Based on the 10-year population census of 2001, unemployment ranges from approximately 5 per cent on average in the Leeward Islands (Antigua and Barbuda, Anguilla and St Kitts and Nevis) to between 18 and 25 per cent on average in the Windward Islands (Dominica, Grenada, Saint Lucia and St Vincent and the Grenadines). In SVG in particular, according to the 2001 population census, the unemployment rate was 21.1 per cent, slightly higher than the 19.8 per cent recorded in 1991 and the 18 per cent recorded in 1980. Clearly this unemployment is structural, since the relatively good growth performance has not diminished the number of unemployed persons. This no doubt was exacerbated by the contraction in the agriculture sector, which shed labour with skills inappropriate for the new emerging services sectors generally and the knowledge economy in particular. The golden era of economic growth did not solve the unemployment problem either, as that period also experienced unemployment rates in double digits. The conclusion, therefore, is that unemployment or labour absorption generally is the major problem for the country. However, definitive policy conclusions on the most effective path to solving this problem depend on a clear understanding of the characteristics of the unemployed relative to the available sources of employment. Do jobs or other labour absorption activities exist, but cannot obtain a reliable supply of labour?