Development Strategy Assessment of the Eastern Caribbean

Executive summary

The project “OECD support to Organisation of Eastern Caribbean States (OECS) strategy implementation” aims at assisting the OECS region in achieving development through the implementation of the regional development strategy. Since its creation in 1981, the OECS has been at the forefront of the process of regional integration between its independent member states. Building on the existence in the region of a single currency (the Eastern Caribbean dollar) the OECS established an economic union in 2010. Its aims include the free movement of capital, labour and goods. Today, the OECS faces the challenge of finding a new model of development that can carry the region towards sustainable, dynamic and inclusive growth, and that can help it to overcome declining growth rates, persistent unemployment, disparities between its members, the fallout from recurrent extreme weather events, and the impact of the COVID‑19 pandemic. To this end, the OECS designed a joint development strategy for its member countries in 2018. This strategy runs from 2019 to 2028, and is organised around three main pillars. The first of these is Generating Economic Growth, the second is Promoting Human and Social Wellbeing, and the third is the Sustainable Use of Natural Endowments. The OECD Development Centre has supported the OECS in setting priorities for the implementation of its strategy, and in building a framework for implementation and monitoring in order to meet the specific goals that the OECS Development Strategy (ODS) sets out to achieve.

A regional strategy scorecard designed by the OECD is at the heart of the joint project with the OECS. This regional scorecard is an interactive online tool, consisting of 40 indicators that run across all three pillars of the ODS (economy, social and environment). It includes concrete targets for individual countries, which have been validated by the OECS member states themselves. The scorecard aims to support the implementation of the ODS by fostering commitment to its ambitions. In particular, it does this through measurable targets, by tracking progress towards these targets, and by holding policy makers accountable for results. It is a tool that allows policy makers to set priorities in implementation, based on measurable results. Furthermore, it provides a platform to compare the performance of different member states, and to exchange information about best practices and successful policies.

In order to support the OECS in setting priorities for the implementation of its strategy, this report aims to identify the main opportunities and constraints for development in the region. It comprises an analysis of the most pressing issues across the three pillars of the ODS, as well as opportunities and constraints when it comes to improving the implementation of policy in the region.

The countries of the OECS have rich natural endowments, and enjoy relatively high levels of GDP per capita, but they have been confronted with an increasing number of challenges in recent decades. The islands of the OECS are of volcanic origin, and they are endowed with considerable geothermal resources, strong solar radiation and high wind speeds. They enjoy relatively high levels of gross domestic product (GDP) per capita, and fall in the upper middle and high-income bands. However, economic growth rates have more than halved between the 1980s and today, and countries in the region have experienced low or negative rates of productivity growth. Furthermore, the islands’ strong reliance on tourism makes OECS countries highly vulnerable to external economic shocks such as the 2008 financial crisis and the recent COVID-19 pandemic. At the same time, the region is experiencing important social challenges, including poverty, inequalities and high rates of unemployment, in particular among young people. Finally, OECS countries are highly vulnerable to natural disasters, most importantly hurricanes, which are becoming more intense and more frequent as a consequence of climate change. Set against this backdrop, however, there is a range of strategic opportunities that have the potential to support OECS countries in tackling these challenges, to foster improvements to productivity, and to spur economic growth.

Investing in renewable energy and strengthening regulation, the business environment and the financial sector would support sustainable growth in the OECS region

Renewable energies represent an opportunity for reducing high energy prices and for making the OECS region more competitive, whilst at the same time reducing emissions of greenhouse gases. The reliance of OECS countries on imported petroleum products for the generation of electricity results in high prices. However, the low and falling prices of renewable energies that are apparent around the world, plus the abundance of renewable resources in OECS countries, signal a multitude of opportunities for electricity generation from renewables. To scale up renewables in the region, OECS countries require strong political will, credible long-term strategies and visions, and realistic targets. Furthermore, there is a need to develop financing strategies and regulation frameworks for the energy sector that are conducive to private investment.

Regional co-operation could improve regulation and policy in the areas of energy and competition, enhancing productivity. At present, none of the OECS member states has a competition law or a competition authority. Furthermore, not all of them have regulatory institutions for the energy sector. Utilities in the region take the form of monopolies in the generation, transmission and distribution of electricity. As a result of these configurations, regulatory frameworks generally do not include provisions for private investment in the electricity sector. Furthermore, the small size of the OECS countries’ individual economies results in a lack of scale for establishing regulatory institutions of this kind at the country level. By generating economies of scale and pooling costs, however, regional co-operation has the potential to establish such regulatory institutions in a more efficient manner. Indeed, a regional energy-sector regulator could facilitate private investment and the development of renewable energies, thereby reducing the region’s high energy costs. In addition, a regional competition framework could enhance the welfare of consumers and foster private investment, and could ultimately promote economic growth. A joint regional framework for the regulation of energy and competition and possibly also telecommunications could lead to further efficiency gains, especially given the small scale of OECS countries. However, a further assessment of the optimal institutional structure and costs and benefits would be required.

Improving the business environment by cutting red tape and reducing business costs is another important priority for helping OECS countries to boost productivity and attract more private investment. In this regard, e-government and the digitalisation of public services constitute an opportunity to reduce the currently extensive levels of bureaucracy in the region, to simplify administrative procedures and to enhance transparency. Furthermore, and as already noted, investment in renewables could cut the cost of electricity generation to a significant degree. Moreover, enhancing labour-market flexibility and aligning public sector wages with productivity growth could reduce labour costs. A regional fast-ferry service, plus improvements to the organisation of existing intra-regional maritime transport, could also improve intra-regional connectivity, while reducing transport costs.

The pandemic has hit the region’s ambitions to reduce public debt, and returning to a sustainable trajectory will be an important objective. Indeed, although government debt in the OECS region had been declining steadily since the early 2000s, it is still an important concern and has risen rapidly in the context of the COVID-19 pandemic. Indeed, a renewed focus on the region’s target to limit government debt to 60% of GDP by 2035 would be an important step towards ensuring the long-term fiscal sustainability of the currency union.

Making the local financial sector fit for supporting innovation and entrepreneurship is key. Most credit in the region is concentrated in mortgages, consumer finance and lending to government. Several of the OECS’s member countries show very high rates of non-performing loans (NPLs), and these both constrain credit and may endanger long-term macroeconomic stability. Strengthening banks, while at the same time ensuring opportunities for more innovation-minded credit, is essential to improve access to finance and credit growth in the region. Furthermore, improvements in financial sector infrastructure, including a regional credit bureau, a modernisation of foreclosure and insolvency regimes, and an overhaul of national development banks, could also improve access to finance and the health of the financial sector in the region.

Building up a greater resilience to natural disasters is essential in order to reduce negative shocks to the region’s performance in terms of growth and productivity, and to advance economic development. The countries of the OECS are highly prone to natural hazards and the cost of natural disasters for the region is high. This is the case both in terms of the loss of human life that these disasters can cause, and also the costs that they can inflict upon the economy. Building up resilience to natural disasters can help to mitigate the costs of natural disasters and to reduce their negative impact. It is, therefore, essential to bolster financial resilience, to build disaster-resilient infrastructure for ex-ante resilience, and to foster ex-post resilience in order to facilitate a speedy recovery. Indeed, the development and implementation of disaster-resilience strategies throughout the region should be a policy priority.

Opportunities for the OECS region lie in boosting value-added in tourism, expanding digital services and promoting the sustainable ocean economy and agriculture

The value-added that is generated through tourism could be boosted by the sale of more local products to the tourism industry, a focus on new tourist segments, and a reduction in business costs. There are opportunities in selling more agricultural and fishery products, but also artwork and other local products, to both cruise ships and the hotel sector. Currently, these rely mainly on imported food. Furthermore, attracting tourism segments other than cruise-ship passengers, which continue to account for a large majority of visitors in the OECS region, would be an important step, notably since stay-over tourists promise higher receipts per arrival. New tourist and traveller segments that could be targeted in the region are distance workers, medical tourism, eco-tourism and educational tourism. The OECS region is relatively expensive compared to other popular tourist destinations outside of the Caribbean. Therefore, reducing business costs could enhance the region’s competitiveness as a tourist destination.

There are also opportunities for the countries of the OECS to pursue diversification in digital services. The demand for digital services has been growing rapidly as a result of the exponential growth of digitalisation and, more recently, in the context of the COVID-19 pandemic. A particular advantage of digital services for OECS countries is their avoidance of transport costs, which are high in the region. Ensuring a strong regulatory framework and competitive pricing for data services will be key factors for promoting digital services. There are also opportunities for regional co-operation in cyber security, data protection and the generation of digital skills.

The sustainable ocean economy offers a range of different opportunities for the OECS region. A regional sustainable ocean economy hub could promote research activities and education in different areas. In particular, marine biotechnologies may offer significant opportunities. Indeed, the potential of this aspect of the sustainable ocean economy remains largely untapped to date. The countries of the OECS could build on their geographical characteristics as small island nations that are surrounded by tropical seas with rich ocean biodiversity. There are also opportunities to expand fisheries and aquaculture in the OECS region, both by modernising the infrastructure associated with these industries, and by increasing the processing of fish. This could allow OECS countries to produce higher-quality fish products, and to sell more local produce to the tourism sector. Aquaculture is seen as a sector with large potential for growth worldwide, and it has already expanded substantially in recent years.

Technological upgrades in agriculture, land reform, and the promotion of farmers’ organisations, could open up new opportunities in food processing and sales to the tourism industry. Irrigation infrastructure, careful harvest-planning, greenhouses, efficient irrigation systems, and agro-processing facilities, could all enhance the productivity of the agricultural sector and the quality of its produce and facilitate agro-processing. This in turn could provide a boost to sales to the tourism sector. Furthermore, the organisation of smallholder farmers into groups or co-operatives, as well as an increase in contract farming, could improve efficiency in the marketing of local produce, and could also provide a boost to exports. Meanwhile, reforming systems of land tenancy and land subdivision could improve access to credit, boost efficiency, and enhance private investment in agriculture. In addition, OECS countries require modern, compulsory land-registration systems and strengthened institutional capacity for the management of land-registration systems in those places where they already exist. Encouraging more young people to become farmers or agro-entrepreneurs could also contribute to revitalising and transforming agricultural sectors in the region.

Closing the skills gap, enhancing the quality of education and improving social protection are essential measures for fostering economic and social development in the OECS region

Boosting human capital and creating more high-quality jobs and opportunities for young people requires closing the skills gap in the OECS region and enhancing the quality of education. The OECS countries are performing well at ensuring access to primary and secondary education, but they face some persistent challenges when it comes to student performance. For their part, private firms in the region face important challenges such as a skills mismatch, a shortage in technical and soft skills due to a limited tertiary education offering, high emigration rates amongst young skilled workers, and some more general cultural issues. A larger and better tertiary, vocational and adult education offering, and better information on the skills that are in demand in the labour market could help to close the skills gap in the region. Overall, boosting students’ performance requires a reduction in the proportion of teachers that do not have formal training, as well as efforts to make the teaching profession more attractive in order to encourage better-performing high-school graduates to become teachers. An additional way to boost performance overall is to better equip students with high-quality foundation skills through primary and secondary education.

The countries of the OECS require better social-protection systems to tackle poverty and inequality. As a result of high unemployment rates and limited economic opportunities, levels of poverty and inequality in the OECS region are higher than in other countries with similar levels of income per capita. In addition to generating more economic opportunities and boosting human capital, establishing better social safety nets across the region would be an important way of reducing poverty and inequalities and this has become even more important in the context of the COVID-19 pandemic. The deployment of comprehensive social-protection systems could also make OECS countries more resilient to natural disasters. Notably, it would be beneficial to establish universal access to healthcare and unemployment insurance schemes. Furthermore, streamlining the multitude of social-assistance programmes which exist, both across the region as a whole and in individual countries, could lead to efficiency gains and cost savings. Expanding and improving access to social protection would also require a strategy for raising sufficient financial resources to finance the improvements.

More effective policy implementation constitutes the backbone to ensure the success of reforms fostering economic and social development in the OECS

Taking advantage of opportunities for development in the OECS requires improving the implementation of policy. Indeed, effective implementation is everything. Without it, any policy, law or regulation remains just a piece of paper, proving nothing but intentions. Implementation is, moreover, the most challenging part of any strategy. In all areas of this report, the implementation of policy, together with frameworks of regulation, come up repeatedly as constraints that the OECS region continues to face. A short-term horizon, a large government apparatus, excessive discretion in decision making, and the limited availability of data, all hinder the effective implementation of policy in the OECS region. The regional strategy scorecard designed by the OECD could render policy implementation in the OECS more effective and could also enhance accountability when it comes to results.