The global economic crisis originated in the US subprime mortgage market and spread to a financial and economic crisis worldwide. The Caribbean has been impacted through declines in tourism, remittances, investment and exports. Unemployment has risen while fiscal deficits and debt have increased. Caribbean countries have responded with expansionary policies to boost employment as well as financing from international institutions. Ongoing challenges include uncertainty about the crisis duration and lagged effects on the region. Strengthening regulation, social programs, exports and integration are priorities moving forward.

1. The Global Economic Crisis and
Caribbean States: Impact and Response*
Andrew S Downes PhD
Professor of Economics and Director
Sir Arthur Lewis Institute of Social and Economic Studies
University of the West Indies, Cave Hill Campus
PO Box 64, Barbados
*Presented at Commonwealth Secretariat Conference on the Global Economic Crisis and Small States,
London, July 6-7, 2009

2. Structure of Presentation
• Nature of the Global Crisis
• Impact of the Crisis on the Caribbean
• Response of the Caribbean
• The Way forward

3. 1 Nature of the Global Crisis
• The proximate roots of the current global
economic crisis lie in the collapse in the USA
housing (sub-prime mortgage) market in 2007
and the subsequent crash of the financial
market. USA went into recession in December
2007.
• Contagion effects to other developed countries’
financial markets resulting in a global financial
crisis in September 2008. Interconnectedness of
large financial institutions internationally—some
considered ‘too big to fail’.

4. • Global financial crisis led to a global economic
crisis as the financial market effects spilled over
into the real sector (i.e., fall in incomes/wealth
and demand for goods/services, decline in
employment—job losses).
• Several other underlying elements to be
considered with the financial/economic crisis –
inefficiencies in the market, lack of
regulation/supervision, market
interconnectedness, greed, etc.

5. • Unlike recent crises which originated in
‘developing countries’ – Asia, Latin America--
this crisis has originated in the world’s largest
economy, USA ,upon which several economies
depend (exports, investment, remittances, etc).
Major contagion or butterfly effects on other
economies.
• Caribbean countries have small open developing
economies, hence the global economic crisis
can be considered as an

6. • ‘external shock’ which has both direct and
indirect effects on Caribbean economies.
• USA and other developed economies upon
which the Caribbean economies depend have
experienced:
– Slow down in output: 3.0% in 2006 to 0.8% in 2008
and expected decline in 2009 to -3.8%
– Increase in unemployment: up to 9.4% in USA, 7.2%
in UK, 8.4% in Canada in 2009 (first quarter)

7. - increase in fiscal deficit to GDP: from -2.4% in 2006
to -4.6% in 2008 for developed countries. Expected
to be -10.4% in 2009.
- decrease in world trade volume: from 9.2% in 2006
to 3.3% in 2008.
- fall off in net capital flows to emerging and
developing economies: from US$202.8b in 2006 to
US$109.3b in 2008, with a further decline to –
US$190.3 in 2009 (i.e., outflow greater than inflow)

8. • Given the dependence of the Caribbean
economies on the advanced economies, it is
expected that the decline in economic activity
would have an adverse effect.
• Unsophisticated nature of Caribbean financial
markets have not resulted in a direct impact from
the financial crisis. Impact has been indirect
through income/wealth effects.

9. 2 Impact of the Crisis on Caribbean
Economies
• The main effects of the global economic crisis on
Caribbean economies would be (and is being)
felt through:
– The fall in export demand (goods and services such
as bauxite, tourism and off-shore finance)
– A decline in remittances from migrant workers
– Reduced foreign direct investment (capital inflows)
– Reduced access to financial credit—changes in credit
rating
– Some depreciation in the exchange rate
– Increased unemployment

10. – Deterioration of the fiscal balance and the balance of
payments
• The severity of the effects depends on the set
of initial conditions, the degree of
interconnectedness and the policy responses
• Caribbean economies are generally regarded as
being vulnerable to external economic shocks
and given the size of this shock, one would
expect significant large and lasting effects
• To date, the impact has been largely moderate
but this may be due to lagged responses.

11. • Decline in Real Output
– IMF estimates indicate a decline in real GDP from an
average growth rate of 5.5% in 2006 to 1.7% in 2008
and an expected rate of -0.9 in 2009 (i.e., English-
speaking Caribbean countries)
– Tourist arrivals have declined in the major tourist
destinations: Bahamas, Barbados, St Lucia. Jamaica
has recorded a slight increase in stay-overs
– There has been a decline in private sector
construction activity

12. • Unemployment
– After a steady decline in unemployment to under 10
percent in the Bahamas, Barbados, Jamaica and T&T
in 2007, unemployment rose in 2008 and is expected
to rise further in 2009
– Barbados: 7.4% in 2007 but 8.1% in 2008, 8.4% in
2009 (1st)
– Bahamas: 7.9% in 2007 but 8.7% in 2008,9.2% in
February 2009 in Grand Bahama
– Belize: 12.1% in 2007 but 8.2% in 2008
– Jamaica: 9.9% in 2007 but 10.3% in 2008
– T&T: 5.6% in 2007 but 4.9% in 2008, forecast to be
8-10% in 2009

13. • Remittances
– Net remittances to Jamaica declined from US$174.1m
in December 2007 to US $161.8m in 2008. The net
remittances for the first quarter of 2009 are much
lower than in 2007 and 2008
• Fiscal Balance
– An increase in the fiscal deficit as a % of GDP
between 2007 and 2008:
• Barbados: 2.5% to 5.9%
• Jamaica: 4.3% to 5.5%
• T&T: 0.5% to 7.7%

14. – But slight declines in other Caribbean states
– Further deterioration expected in 2009 with the use of
countercyclical policy measures
• External Balance
– Increase in external current account deficit as a % of
GDP in almost all the countries between 2007 and
2008. Example:
• Barbados: from 6.9% to 10.4%
• Guyana: from 21.5% to 25.6%
• Jamaica: from 15.9% to 21.9%

15. – Some deterioration in external capital account as a %
of GDP in Barbados, Belize but improvement in
Jamaica, Guyana
– Gross International Reserves at the Central Banks
were still strong in 2008 compared with 2007
– Import cover ratio ranged between 2 months
(Bahamas) and 11 months (T&T)
– Deterioration in the exchange rate in Jamaica from
J$69 for US$1 in 2007 to J$73 for US$1 in 2008
– No major changes in the debt service ratio and the
external debt to GDP ratio over the 2007-8 period

16. – Slight decline in foreign direct investment in the
Bahamas (hotel plant, second homes market), but
slight increases in Jamaica, T&T
• Inflation
– Increase in average inflation rates over the 2007-8
period: range of 2.3% (Belize) to 14% (Guyana) in
2007 and a range of 4.5% (Bahamas) to 22%
(Jamaica) in 2008
– Increases in inflation rate due to increase in oil prices
up to mid-2008

17. • Financial Failure
– Collapse of CL Financial, a conglomerate based in
T&T with interest in insurance, financial services,
manufacturing, etc. Bailout provided by the T&T
government with supporting assistance from the
Government of Barbados
– Collapse of Stanford Group saw a bailout of the Bank
of Antigua by the government

18. • Summary
– Jamaica and the Bahamas have experienced
significant shocks – especially in tourism, bauxite
– Other Caribbean countries have suffered milder
effects to date. They are in a wait-and-see mode
– Credit agencies have downgraded Caribbean
economies although some are still in the investment
grade
– Some policy measures have been put in place
– Greater effects expected in 2009

19. 3 Response of Caribbean States
• Several policy measures have been adopted by
Caribbean states especially in an effort to
reduce the impact of the crisis on
unemployment: fiscal policies,
monetary/financial policies, sectoral policies,
social policies, multilateral financing
• Fiscal policies: expenditure on social programs and
social infrastructure, reduction in taxes to reduce cost
of living, provision of subsidies. Larger counter-
cyclical measures to save jobs

20. • Monetary/Financial Policies: liquidity injections in
national currency (i.e., issue of treasury bills, notes
and debentures); reduction in interest rates (except
Jamaica); regional liquidity support fund in the
OECS to support countries affected by CL Financial
collapse
• Sectoral Policies: initiatives to boost agricultural
production to market tourism; to promote SME; to
boost manufacturing exports; restructuring of the
bauxite industry in Jamaica; increase in housing
construction

21. • Social Policies: increase in minimum wage; provision
of training, establishing unemployment assistance
fund (Bahamas), broadening the scope of special
social programs (PATH in Jamaica), boost in social
welfare; use of National Insurance Fund in Barbados
for training---UI already in Barbados.
• Multilateral Financing: increase in Caribbean
Development Bank assistance (policy-based
loans/grants, economic infrastructure, education and
lines of credit to financial institutions), support from
the EU for Jamaica, Belize, Guyana: IMF funding for St
Vincent ($5.7m), St Kitts ($3.4m) and Grenada ($6.8m)

22. • Summary
Policy response has been expansionary fiscal
and monetary policies to keep employment at
high levels, fiscal support for key sectors,
boosting the social protection system/safety net
and sourcing external funds when appropriate

23. 4 The Way Forward
• Still a high degree of uncertainty on duration and depth
of global recession – small signs of recovery in USA
• Main effects to be felt in 2009 (lagged effect on the
Caribbean states – evidence from business cycle
analysis)
• Adoption of Just-in-Time (JIT) approach to policy making
given uncertainty
• Existence of inertia of confidence with possible
hysteresis effects
• Rethinking of macroeconomics—rise of behavioural
economics

24. • Regional efforts have been suggested by a
Regional Task Force – agricultural expansion,
tourism marketing, monitoring and dialogue –
medium term measures
• Strengthening regulation and supervision at the
national and regional levels )e.g., deposit
insurance schemes)
• Regional approach to IFIs with respect to the
additional funding provided by the G20 to IMF,
World Bank. Also identification of funds in
various agreements which have not been used

25. • Need to manage fiscal deficit (i.e., pull back from high
ratios to GDP), expand exports to deal with external debt
service or possible renegotiation of debt payment
• Need to re-examine graduation criteria from international
financial institutions ( eg World Bank)
• Strengthen social programs to have built-in stabilisers
(e.g., unemployment insurance)
• Monitoring the recovery process to take advantage of
any opportunities
• Strengthening of regional economic integration—
strategic development planning