GOVERNANCE IN THE CARIBBEAN SMALL STATES – EVIDENCE FROM THREE

GLOBAL INDICATORS

 

Lino Briguglio, Carmen Saliba and Melchior Vella

University of Malta

Presentation prepared for the

FORUM ON THE FUTURE OF THE CARIBBEAN

Trinidad and Tobago, 5-7 May, 2015

The paper is organised in seven sections.

1.Objectives of the Study

2.Overview of the thirteen Caribbean Small States (CSS)

3.Brief literature review focussing on matters relating to the theme of the paper.

4.Results obtained from the political, economic and social indicators.

5.Comparison of the governance scores among the CSS while

6.Comparisons of the governance scores between the CSS and the rest of the World.

7.Summary of the main tendencies implications for the CSS.

• 

LAYOUT OF THE PRESENTATION

The presentation assesses the state of governance in thirteen Caribbean Small States (CSS) by comparing these states among themselves and with the rest of the world, utilising three indicators relating to political, economic and social governance.

When compared with the rest of the world the CSS exhibited lower governance scores than the average of their income comparators, particular with regard to economic governance.

OBJECTIVES OF THE STUDY

The three indicators used in this study are:(i)Political governance: the Worldwide Governance Indicators, (ii)Economic governance: the Macroeconomic Stability sub-index of the Economic Resilience Index and (iii)Social governance: the non-income component of the Human Development Index.

The titles of the second and third indices do not directly refer to governance, but they are strongly related to economic and social policy, which are themselves associated with economic and social governance. It should be noted that the economic indicators do not include GDP per capita or economic growth, as these are considered to be outcomes of the policies represented by the indices.

THE INDICATORS USED IN THE STUDY

The thirteen Caribbean Small States (CSS) covered in this study include:

•Five high-income economies (HIE) namely Antigua/Barbuda, Barbados, Bahamas, Saint Kitts/Nevis and Trinidad/Tobago;

•Seven upper-middle-income economics (UMIE), namely Belize, Grenada, Jamaica, St Lucia, St Vincent/Grenadines and Suriname; and

•One lower-middle-income economy, namely Guyana.

BRIEF DESCRIPTION OF THE 13 CSS

The GDP per capita of the CSS in 2013 differed considerably with the Bahamas and Barbados registering the highest and Guyana, Belize, Suriname and Jamaica the lowest per capita income.

The growth patterns also differed among the CSS. The fastest growing countries between 2009 and 2013 were Guyana, Suriname and Belize which have a relatively low GDP per capita, suggesting a negative correlation between these two variables. This matter will be discussed below.

The CSS also differ in their economic structure, with Belize, Guyana, Suriname, and Trinidad andTobago together produce oil/gas, minerals and agricultural goods. The other CSS are mainly service-based economies, highly dependent on tourism and financial services, and highly exposed to external shocks.

MAIN DIFFERENCES AMONG THE CSS

A characteristic of the CSS is their high debt/GDP ratio. Ten of the 13 CSS had a gross debt ratio which was about or exceeded 60%, with Grenada, Jamaica and St Kitts/Nevis topping the list with a debt ratio of about 100% or over as can be seen from Figure 3.  Yet, another characteristic is their negative current account balance. Almost all the CSS registered negative current account balance as an average over the 4 years between 2009 and 2013, as can be seen from Figure 4, which expresses the current account balance as a percentage of GDP. The only exceptions were Suriname and Trinidad and Tobago.

MAIN SIMILARITIES AMONG THE CSS

According to Briguglio (2014), economic vulnerability is associated with four indicators namely trade openness, export concentration, dependence on strategic imports and proneness to natural disasters, the four of which are relatively high in the CSS, as shown in Figure 5, 6, 7 and 8.

These realities render the CSS as highly economically vulnerable, which according to Briguglio (2014) rendered Saint Lucia, Belize, Antigua and Barbuda, Grenada, Dominica, Bahamas, Saint Kitts/Nevis, Jamaica, Barbados and Trinidad/Tobago amongst the most economically vulnerable countries in the world.

MAIN SIMILARITIES AMONG THE CSS

THE CSS: SOME RELEVANT DATAFigure 1: Population (thousands) Figure 2: GDP per Capita (US$)

Figure 3: Gross Debt /GDP (%) Figure 4: Cur Acc Bal/GDP (%) 

MANUFUCTURING IN SLOVENIAFigure 5: Trade Openness (%) Figure 6: Export Concentration (%)

Figure 7: Dependence on 8: Natural disaster proneness (%)Strategic Imports (%)

Strategic imports (%) Figure

In this section, we consider three aspects of the literature, closely related to this study, namely:

The state of governance in the CSS. The literature does not generally draw a good overall picture of governance in the CSS. The references are mostly drawn Acevedo et al. (2013), Brown (2010), Grenade (2012) and Shafik (2013).

Correlation between governance and GDP per capita. The literature generally finds a positive relationship between these good governance and GDP per capita; and

Correlation between good governance and GDP growth. There is considerable debate on this relationship. Rodrik (2008) argues that there are many countries that are growing rapidly despite poor governance to render suspect any general claim to the contrary and governance is generally not a prerequisite for getting growth going.

LITERURE REVIEW

POLITICAL GOVERNANCE

Political governance is measured by the Worldwide Governance Indicators (WGI) which has six dimensions of governance, namely (1) voice and accountability (2) political stability and absence of violence (3) government effectiveness (4) regulatory quality (5) rule of law and (6) control of corruption. A detailed description of the methodology is given in Kaufmann et al. (2010).

This study utilises the 2013 version of the WGI (World Bank, 2014). The data was rescaled using the Max-Min formula so that it takes a value from 0 to 1 and a simple average of all dimensions was computed.

ECONOMIC GOVERNANCE

Economic governance is measured by the macroeconomic stability component of the Economic Resilience Index (STB-ERI), which was developed in Briguglio et al. (2009) and was recently updated in Briguglio (2014). This index contains three sub-indicators, namely inflation (measured by the GDP deflator) , debt and current account imbalances, the latter two measured relative to GDP.

These indicators were chosen because they are considered to be policy induced and thus closely related to economic governance. A detailed description of the method used to construct the STB-ERI is given in Briguglio (2014). The data was sourced from the IMF World Economic Outlook database and the three sub-indices were rescaled Max-Min formula and averaged using equal weights.

SOCIAL GOVERNANCE

Social governance is measured by the non-income components of the Human Development Index (HDI), namely health (measured by life expectancy), education (measured by the average of years of schooling and expected years of schooling). These two components are thought to be policy-induced and closely related to social governance. The data is sourced from UNDP (2014).

The NY-HDI was measured by rescaling the data using the Max-Min formula, and assigning a weight of 50% to the health component and 25% to each of the educational components (the same procedure used by the HDI compilers).

CSS GOVERNANCE SCORES AND RANKINGS

Country 

WGI ERI HDI AVERAGE

Score Rank Score Rank Score Rank Score Rank

Antigua/Barbuda 0.783 6 0.348 8 0.870 3 0.667 3

Bahamas 0.802 5 0.810 2 0.933 2 0.848 2

Barbados 1.000 1 0.701 3 1.000 1 0.900 1

Belize 0.235 11 0.565 5 0.773 5 0.525 8

Dominica 0.746 7 0.464 6 0.769 6 0.660 4

Grenada 0.524 8 0.297 9 0.790 4 0.537 7

Guyana 0.000 13 0.377 7 0.000 13 0.126 13

Jamaica 0.272 10 0.000 13 0.689 7 0.321 12

St Kitts/Nevis 0.815 3 0.037 12 0.601 9 0.484 10

St Lucia 0.839 2 0.064 11 0.660 8 0.521 9

St Vincent/Grenadines 0.802 4 0.231 10 0.584 10 0.539 6

Suriname 0.222 12 0.664 4 0.307 12 0.398 11

Trinidad/Tobago 0.320 9 1.000 1 0.571 11 0.631 5

The sources are: World Bank (2014) for the WGI; Briguglio (2014) for the STB-ERI; UNDP (2014) for the NY-HDI

OVERVIEW OF THE GOVERNANCE SCORES

The previous table shows how the Caribbean Small States fared in terms of the three indicators mentioned above. It can be seen that, taking a simple average of the three indicators, the Bahamas and Barbados received relatively high scores whereas Suriname, Guyana and Jamaica received the lowest scores.

These tendencies also emerge in the individual indicators, although Trinidad/Tobago received low scores in two of the three indicators.

GDP Per Capital and Growth in the CSS

Country GDPPC

2013Grwt10-13

Grwt 03-13

Antigua/Barbuda 13,838 -1.24 1.99Bahamas 23,489 1.08 0.44Barbados 15,373 0.18 1.06Belize 4,602 2.47 3.35Dominica 7,034 0.26 2.57Grenada 7,697 -0.02 1.68Guyana 3,729 4.96 3.30Jamaica 5,134 -0.08 0.51Saint Kitts/Nevis 13,115 -0.69 1.32Saint Lucia 7,801 -0.61 1.77Saint Vincent/Grenadines 6,563 0.45 2.13Suriname 9,240 4.60 4.98Trinidad and Tobago 20,611 0.12 4.18

Source: IMF (2014)

GDP Per Capita and Growth in the CSS

As can be seen from the previous table, two growth indicators were selected one representing the post-crisis years (2010-2013) and the other a longer-term period (2003-2013).

In the case of the growth indicators, it appears that the fastest growth tended to occur in the countries with relatively low GDP per capita, namely Guyana, Suriname and Belize. Conversely, Barbados and Bahamas, which received relatively high governance scores registered relatively low GDP growth rates.

 

This tendency is also applicable globally.

CORRELATIONS BETWEEN GOVERNANCE INDICATORS, GDP PER CAPITA AND GROWTH

The table below shows that there is a tendency for positive correlation between per capita GDP of the 13 CSS and their governance scores.

But the correlation of governance with growth was not positive and tended to be negative.

Variable Correlation with

WGICorrelation

with ERICorrelation

with HDICorrelation with AVG

GDP Per Capita

0.408 n 0.616* 0.281n 0.694*

Real Growth 03-13

-0.603* 0.437n -0.463 n -0.360 n

Real Growth 10-13

-0.679* -0.339 n -0.468 n -0.450 n

CSS SCORES IN A GLOBAL CONTEXT

Category WGISTB-ERI

NY-HDI

AVG

CSS: High-income & Upper-middle-income (average) (excludes Guyana)

0.681 0.449 0.665 0.598

All countries: High-income & Upper-middle-income (average)

0.641 0.580 0.727 0.649

CSS: High-income (average) 0.730 0.520 0.685 0.645

All countries: High-income (average)0.780 0.629 0.809 0.739

CSS: Upper-middle-income (average) 0.646 0.397 0.651 0.565

All Countries: Upper-middle-income (average).

0.500 0.529 0.644 0.558

It can be seen that the high-income (HIE) CSS registered lower scores in the three indicators when compared to the average of their rest-of-the-world income comparators.

GLOBAL COMPARISONS

The previous table also shows that the overall score of the upper-middle-income (UMIE) CSS was almost similar to that of their income comparators. However they registered higher WGI and HDI scores than their global income comparators and a markedly lower score in the STB-ERI.

The CSS, as a group, registered the worst score, in their economic governance. A deeper look at the STB-ERI index shows that the most important source of instability in the CSS is related to debt.

IMPLICATIONS

The indicators presented above, show first and foremost that desirable governance scores, be they political, economic or social, are correlated with GDP per capita. This would seem to suggest that good governance is associated with economic prosperity. This conclusion, also often found in the literature, supports intuitive thinking, given that good governance is likely to mean responsive administration, better institutional set-ups and more efficient utilisation of resources.

However the direction of causality of this connection has been questioned, as indicated in the literature section, given that it is possible that economic development comes first and this enables the country to better afford governance institutions, and not vice-versa. Another possibility is that they are simultaneously determined.

IMPLICATIONS

Thus, with regard to political governance, policies in the CSS that are conducive to accountability, political stability, absence of violence, government effectiveness, regulatory quality, rule of law and control of corruption tend to be associated with economic well-being.

This also applies to CSS policies that lead to macro-economic stability with regard to economic governance and improvements in education and health, with regard to social governance.

IMPLICATIONS

The political and social governance indicators considered in this study do not seem to be positively correlated with economic growth among the thirteen CSS as at the global level – on the contrary there seems to be a negative correlation between these two variables.

In the case of the CSS, Guyana and Suriname, which received relatively low governance scores, are the fastest growing economies among the CSS. Conversely Barbados and The Bahamas, the fastest growing CSS, registered relatively low growth rates. This would seem to contradict a commonly held view that growth and good governance go hand-in-hand.

IMPLICATIONS

One can argue that this is because the relationship between governance and real GDP growth is likely to be between changes (and not levels) in the governance variables, as what matters are improvements in this regard.

The reason for this is that Governance improvements may be easier to achieve from a relatively low starting point. In other words, it may be more difficult to improve governance once a country reaches or almost reaches a peak when compared to a country which has considerable room for improvement – a reality which may be termed as “diminishing marginal good governance”.

IMPLICATIONS

However, good governance is still likely to improve the chances of growth, other things remaining constant. For example if one compares growth in two countries, A and B, with country A better economically governed than country B, everything else remaining equal, including the stage of development, one would expect that country A would register a higher growth rate than country B.

A related argument is that if country A is less developed than country B, its catching-up performance can improve as economic governance improves, in which case improved governance gives rise to an upward shift in steady state conditions of that country. As a matter of fact, some developing countries have converged in their income per capita with the high-income countries, possibly due to improvements in their political, economic and social governance.

IMPLICATIONS

Therefore the result of a negative correlation between GDP growth and governance should not be interpreted as an indication that good governance is undesirable for growth, and that it should not, therefore, be pursued.

On the contrary, the fact that good governance and economic prosperity are correlated, in that the best governed countries tend to enjoy the highest standard of living, can be seen as a sign that well-governed countries do reap benefits in the form of high income per capita, albeit this has occurred over a long period of time. This conclusion, it goes without saying, applies to the CSS, where the most prosperous small states are the best governed economies.

REFERENCES

Acevedo, S., Cebotari, A. and Turner-Jones, T. (2013). Caribbean Small States: Challenges of High Debt and Low Growth.IMF. Available at: https://www.imf.org/external/np/pp/eng/2013/022013b.pdf

Briguglio, L. (2014). “A Vulnerability and Resilience Framework for Small States,” In Bynoe-Lewis, D. Building the Resilience of Small States: A Revised Framework. London Commonwealth Secretariat.

Briguglio, L., Cordina, G., Farrugia, N. and Vella, S. (2009). “Economic Vulnerability and Resilience: Concepts and Measurements,” Oxford Development Studies, Vol. 37(3): 229-247.

Brown, D.R. (2010). “Institutional Development in Small States: Evidence from the Commonwealth Caribbean.” Halduskultuur – Administrative Culture 11 (1), 44-65. Available at: http://www.cpahq.org/cpahq/cpadocs/Institutional%20Development%20Small%20States.pdf

Grenade, W.C (2012). “Governance in the Caribbean: Challenges and Prospects.” In Commonwealth Governance Handbook 2012/13 Available at: http://www.commonwealthgovernance.org/assets/uploads/2012/10/Governance-in-the-Caribbean.pdf

International Monetary Fund (2014). World Economic Outlook Database. Available online at http://www.imf.org/external/pubs/ft/weo/2014/02/weodata/index.aspx .

Kaufman, D., Kraay, A. and Mastruzzi, M. (2014). “The Worldwide Governance Indicators: Methodology and Analytical Issues,” World Bank Policy Research Working Paper #5430. Available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1682130 .

Rodrik, D. (2008) “Thinking About Governance,” in Governance, Growth, and Development Decision-Making, reflections by D. North, D. Acemoglu, F. Fukuyama, and D. Rodrik, The World Bank.

Shafik, N. (2013). Speech at the High-Level Caribbean Forum: “Caribbean Challenges, Growth, and Progress on the Small States Initiative” September 20, 2013. Available at: https://www.imf.org/external/np/speeches/2013/091913a.htm

Solow, R.M. (1956). “A Contribution to the Theory of Economic Growth,” The Quarterly Journal of Economics, 70(1): 65-94.

Sundaram, J. K and Chowdhury, A. (2012). Is Good Governance Good for Development?  Bloomsbury Academic (United Nations Series on Development).

UNDP (2014). Human Development Reports. Available online at: http://hdr.undp.org/en/data

World Bank (2014). Worldwide Governance Indicators. Available on line at: http://info.worldbank.org/governance/wgi/index.aspx#home