Development Strategy Assessment of the Eastern Caribbean

Report

OECD Development Pathways

7 October 2022

2. Generating economic growth

Abstract

This chapter discusses key opportunities and constraints falling into the first pillar of the OECS Development Strategy: generating economic growth. Economic opportunities for OECS countries include increasing value-added in the tourism industry; developing sectors that are closely linked to tourism, such as agriculture, fisheries and the so-called orange, or creative, economy; as well as making headway in digital services, facilitated by a reform of the telecommunications sector. Furthermore, cutting red tape, reducing business costs, and establishing a regional competition framework could foster more private investment and boost productivity in region. Supporting the macroeconomic environment by reducing government debt and non-performing loans, is important for stability and strong economic growth in the region.

Economic opportunities for OECS countries include increasing value-added in the tourism industry; developing sectors that are closely linked to tourism, such as agriculture, fisheries, and the so-called orange, or creative, economy; and making headway in digital services. At present, tourism is the dominant economic engine of the OECS region. The region could further boost value-added in tourism by sourcing more supplies from the local economy, including agricultural, culinary, and artistic products, as well as by developing new tourism segments. Sourcing more agriculture and fishery products locally calls for technological upgrades and the development of farmers’ organisations. It also requires progress with land reform to improve access to credit and enhance private investment in agriculture. There is also a great deal of potential for the further development of aquaculture and other sea products in the OECS region. Another opportunity, meanwhile, lies in expanding digital services in the region. This requires reform to the OECS countries’ telecommunication sectors, which currently present tendencies towards a duopolistic structure throughout the entire region. Furthermore, opportunities for regional integration exist in cyber security and the generation of digital skills.

Cutting red tape, reducing business costs and establishing a regional competition framework could foster more private investment and boost productivity. Red tape and high business costs are important obstacles for private companies in OECS member states. In this regard, more e-government constitutes an opportunity to reduce bureaucracy in the region. Moreover, scaling up the renewable energy industry could reduce high energy costs. Furthermore, reducing business taxes would reduce costs for private businesses, and could simultaneously raise tax revenues by stimulating economic activity and private investment. In addition, limiting wage growth in the public sector could improve the alignment of wages with productivity growth. Meanwhile, a regional fast-ferry service, and a better organisation of existing intra-regional maritime transport links, could help both to improve intra-regional connectivity and to reduce transport costs. A regional competition framework could, moreover, enhance consumer welfare and foster economic growth and productivity improvements in the OECS region. Setting up such an authority at the regional level would allow OECS countries to take advantage of economies of scale, and to pool costs.

Supporting the macroeconomic environment by reducing government debt and non-performing loans, would be important for economic growth and stability in the region. Doing this will require the region to meet its goal of bringing government debt down to 60% of GDP or lower by 2035. In addition, reducing NPLs is an essential step in improving access to finance and boosting credit growth in the region. Furthermore, strengthening banking supervision in the OECS region would be another important step towards preventing future surges in NPLs. Meanwhile, improving infrastructure in the financial sector and reforming national development banks constitute further ways in which the region could improve its access to finance and the health of its financial sector. Table 2.1 represents seven major opportunities for the region when it comes to generating economic growth.

1. Develop higher value-added tourism segments

2. Digitalisation: Develop e-government to reduce red tape and reform the regulatory framework of the telecommunications sector

3. Establish a regional competition framework

4. Enhance regional collaboration on regulation

5. Reform land ownership, and establish modern, compulsory land-registration systems

6. Modernise and upgrade the support infrastructure for the agricultural and fishing sectors

7. Prudent public expenditure for debt consolidation

2.1. Tourism value-added could be boosted through sourcing more from the local economy and developing new tourism segments

Tourism is the dominant economic engine of the OECS. As agriculture has declined across the region in recent decades, services and tourism have become the largest contributor to output. The share of tourism receipts as a percentage of exports in the member states is among the highest in the world, with the OECS average in 2019 standing at 57% - well above the Caribbean Community’s (CARICOM) average value of 43.6% (Figure 2.1 – Panel A). Much of the region’s employment also relies on tourism, ranging from 35% in Dominica, the lowest level, to almost 90% in Antigua and Barbuda (Figure 2.1 – Panel B). This makes the OECS region highly susceptible to global changes in the demand for tourism, as highlighted by the COVID-19 pandemic. Although tourism is likely to remain at the heart of the OECS member states’ economies, there are several opportunities available to the member states that will allow them to make the most of tourism while also reducing their dependence on a small set of services.

Figure 2.1. Most of the OECS countries are highly dependent on tourism for both revenue and employment

Building up resilience to natural disasters has a key role to play in protecting the tourism sector. Indeed, the tourism industry is highly exposed to natural disasters, and hurricanes and floods are frequent in the region, often destroying infrastructure such as hotels, restaurants and transport routes, on which tourism relies (IMF, 2017[4]). This restricts the ability of tourists to access the countries of the OECS, and reduces their interest in so doing, thus lowering economic output in the countries of the region, and suppressing employment. As part of protecting the sector, developing more resilient infrastructure to stabilise flows of tourism and minimise economic costs in the wake of natural disasters would be another important step.

It is possible to re-orient tourism in the OECS to improve its levels of value-added, but without straining the islands’ limited resources. Most of the member states already have high levels of annual tourist arrivals (Figure 2.1 – Panel C). If arrivals continue to increase, this can lead to losses of natural habitat, increases in pollution, and disruption to local communities (OECD, 2020[5]). To protect natural resources, improving existing services is a more desirable approach to increasing tourism receipts than simply targeting more visitors. In this connection and given that the value-added levels in tourism are noticeably lower in OECS countries than in similar economies elsewhere in the region, there is scope to increase the relative value-added for each tourist arrival (Figure 2.2). Indeed, it is possible to leverage the already well-developed service sector to increase receipts from each visitor, specifically by meeting the demands of cruise-ship passengers, attracting new tourist segments, and building consistent hospitality experiences through certifications and training programmes.

Figure 2.2. Tourism receipts per arrival in the OECS are lower than in similar economies

2.1.1. Value-added can be boosted through the sale of local products to hotels and cruise-ship passengers

As already noted, value-added per tourist arrival in the OECS region could be increased through the sale of more local products to hotels and on cruise ships. At present, hotels and other tourist establishments in the OECS region import a large part of their food consumption, and cruise ships buy only very few products locally. Cruise-ship tourists represent a large share of arrivals to the islands, accounting for close to 70% of arrivals on average in the region in 2019 (Figure 2.3). There are opportunities to generate more value-added from both hotels and the cruise-ship industry in the OECS region by selling agricultural, fishery-related, and agro-food products to cruise ships and hotels. Moreover, hotels and cruise ships would benefit by being able to serve fresher produce, as well as from reduced shipping fees, in the case of hotels. The income of local farmers would also receive a boost. In Fiji, it was estimated that providing locally grown fresh produce on cruises provided the strongest potential return on investment from the perspective of a benefit-to-cost ratio, with positive effects extending to farmers and communities (IFC, 2019[6]). While there are opportunities to sell more local produce to hotels in the medium term, this may be a solution to focus on more in the longer term when it comes to cruise ships, due to restrictions related to cruise lines’ food-quality standards.

On cruise ships it is possible, in the short to medium term, both to encourage the sale of local art and to promote performances by local artists. Notably, surveys completed by cruise passengers after visiting Fiji showed that handicrafts, clothing, tours and excursions, plus food and beverages, presented the strongest opportunities to expand upon when it comes to cruise tourism (IFC, 2019[6]). In particular, the OECS could leverage its already well-developed creative sector and orange economy (see section 2.2). Moreover, opportunities exist not only to develop new artistic and creative offers, but also to provide passengers with better information about the offers of such products that already exist at their destination.

Furthermore, surveys and studies could be conducted to make sure that cruise passengers’ tastes and preferences are being catered to properly. This would allow the OECS member states to better ascertain the spending opportunities that are currently being missed from cruise-ship passengers, and to tailor their offerings and products accordingly. Some studies have already been conducted on the economic impact of cruise passengers in the CARICOM region, with the participation of the tourism councils of several OECS member states. These studies could be expanded to include questions on what products are most interesting to visitors, in a similar manner to the assessment conducted in Fiji (IFC, 2019[6]). Upon this basis, a cost-benefit analysis could then be performed to decide which areas are the most cost-effective to focus on.

Figure 2.3. Cruise passengers make up the majority of the visitors to the OECS region

2.1.2. New tourist segments can be leveraged to attract visitors for longer stays

Long-stay visitors are a profitable segment of tourism that should be encouraged. At present, cruise‑ship passengers make up the largest portion of visitors to the member states (Figure 2.3). These short-term tourists provide economic benefits usually only in localised pockets in and around the port in which they dock. Longer-term tourists, on the other hand, constitute a market segment that has the potential to disperse tourist expenditures more widely around an island, and to increase overall spending. One study conducted in Madeira, a Portuguese island, highlighted that a decline in tourists’ average length of stay led to a loss of EUR 124 per tourist per day, amounting to EUR 148.8 million lost per year (Almeida, Machado and Xu, 2021[7]). Long-stay visitors also cause less stress on the transport infrastructure capacity and tend to participate in more culture sharing (Gossling, Scott and Hall, 2018[8]). There are several opportunities for the OECS member states to generate interest in long-stay tourism in the region, by exploring new segments in the tourism market.

Educational tourism constitutes another opportunity for the OECS region to attract more long-stay tourism. Educational tourism can be defined as any type of tourism where the traveller’s primary or secondary objection is learning. This type of tourism has been growing worldwide, with the number of students studying abroad increasing every year (Tomasi, Paviotti and Cavicchi, 2020[9]). Indeed, it is already present in some of the member states, such as Grenada, and St. Kitts and Nevis and to a lesser extent St. Lucia, which attract international students to offshore medical and veterinary universities (Berridge, 2021[10]). These offshore universities make important economic contributions: Education accounts for 27.6% of GDP in Grenada and 12.7% of GDP in St. Kitts and Nevis (2020) (ECCB, 2022[1]). In addition, the international students who come to live on the islands make an important contribution to the economy through local consumption, particularly by spending money on accommodation and similar services over an extended period. Given that the natural beauty of the islands and the lifestyle outside of the educational context already serve as selling points, improving educational offerings should be the focus of efforts to increase educational tourism. This can be done through research into trends in labour-market demands, as well as by building up competitiveness vis-à-vis similar international universities by improving the overall quality of the programmes. There is also the possibility of developing a hub for research in the sustainable ocean economy, which could attract more students.

Meanwhile, medical or healthcare tourism is also on the rise globally, and it presents opportunities for growth in the OECS. Medical tourism is defined by the World Travel and Tourism Council (WTTC) as the products and services bought by people who travel abroad primarily for medical and health-related reasons. International spending on medical-tourism services of this kind has been increasing at an average annual growth rate of 9% since the early 2000s (WTTC, 2019[11]). At present, medical tourism is still limited in the OECS region, but several member states already play host to well-reputed offshore medical universities that cater to international students and have brought in valuable skills and funding from abroad. Countries in the OECS could leverage these universities through possible collaborations to expand medical tourism. Furthermore, OECS countries’ geographic location in the tropics and their agreeable climatic conditions, including warm weather and access to beaches and the ocean, offer a natural advantage for rehabilitation, recovery and convalescence treatment. To develop the sector further, it would be necessary to ensure that all the OECS member states are able to partake in the benefits generated by the industry. One possibility would be for the member states to specialise in different niche medical services instead of competing between themselves, which may cause inefficiencies (Adams et al., 2014[12]). Regional co‑ordination can assess where the relative advantages lie for each country across the several possible sectors that are common to medical tourism overall, such as cosmetic, dental and elective surgeries, in addition to rehabilitation, recovery and convalescence treatments.

Nature tourism, or eco-tourism, is another key opportunity for the OECS member states, given the nature that is already abundantly present. Eco-tourism is defined as “responsible travel to natural areas that conserves the environment, sustains the well-being of the local people, and involves interpretation and education”. It has been identified as a growing segment of tourism as demand for low-impact or environmentally friendly tourism products has increased in recent years (WTTC, 2022[13]). This provides a unique opportunity for the OECS member states to advance sustainable practices, while also attracting a new segment of tourism. In Fiji, nature-based tourism that followed the development of protected areas led to an increase in local income by a multiple of USD 1.83 and created an estimated 8 304 new jobs. This change was brought about by increasing the number of protected areas, enhancing the capacity of the protected areas’ managers, and developing concession policies to promote tourism in protected areas (World Bank, 2021[14]). Dominica has already begun developing this sector, which was highlighted in an analysis of the top five most frequent words from the country’s tourism portal, which included “eco”, “nature” and “rainforest”.

Meanwhile, a range of other miscellaneous opportunities to extend stays or spread expenditures around regionally have also been identified. One such upcoming project in the OECS is the Tourism Blue Economy initiative, which focuses on marine and coastal tourism. Much of the region’s tourism is dependent on this kind of tourism already, which means that building up tourism in a sustainable fashion is important and that there is scope to create linkages with other areas of the ocean economy. Another opportunity stems from the still-limited current connectivity between OECS member states. Flights between islands do exist but they are infrequent, and there are few passenger ferry connections between the islands. By contrast, a regional fast-ferry service would permit visitors to island-hop, thus allowing them to visit several islands over the course of a single visit. By encouraging more intra-regional tourism, there is potential for such an initiative to increase overall tourism expenditure and expenditure per visitor, while also contributing to regional integration. Wellness and cultural tourism have been gaining in importance as a segment of tourism, heralding another area of opportunity for OECS countries. Finally, it could be possible to build on ventures in nature tourism and the orange economy in order to develop additional kinds of tourism services.

2.1.3. Tourism markets should be expanded to build resilience to shocks in source markets

There is scope to expand tourism markets, which are concentrated in North America. Indeed, 66.2% of stay-over visitors in the Eastern Caribbean Currency Union (ECCU) originate from the United States of America, 19.2% from the United Kingdom, 5.7% from the Caribbean, 3.1% from Canada, and only 5.7% from other countries (Figure 2.4). International flight connections reflect this fact, with direct flights primarily available from North America and the Caribbean (Figure 2.5). This strong concentration in North America leaves the OECS vulnerable to changes in their source market (IMF, 2017[4]). Furthermore, direct flights to the OECS countries are limited, and are less common than direct air links to other CARICOM states, when excluding larger countries such as the Bahamas and Jamaica. Tourism relies on frequent and convenient transportation in order to bring tourists in and out of the country, and this is a cause for concern in the OECS due to limited connectivity. Increasing the number of direct flights that are available would facilitate travel from European countries and new destinations such as South America, opening up the tourist market to new segments and attracting more tourists. The CARICOM Multilateral Air Services Agreement (MASA) could improve air transport within the CARICOM and between CARICOM member states and other countries, once it has been ratified and implemented by all CARICOM member states. The MASA aims to establish a single market for air transport services within the CARICOM; promote the adoption of uniform standards for air transport services, licensing and certification of aviation personnel in the CARICOM; and ensure that international air transport services in the CARICOM are undertaken by financially viable and technically qualified air carriers (CARICOM, 2022[15]).

Figure 2.4. Stay-over tourists originate mainly from North America

Reducing costs in the region could facilitate the diversification of tourist source markets. Indeed, the OECS region is currently more expensive for tourists compared to other popular tourist destinations. These relatively higher costs have affected the region’s competitiveness, particularly compared to countries outside of the Caribbean that can offer tourism at a much lower price point, and it has led to a loss in the region’s market share of global tourism (IMF, 2017[4]). The high costs could pose challenges when it comes to attracting tourists from new markets outside of the wealthy one in North America, whose proximity to the region provides an advantage. Cost reductions could come from several sources. These include leveraging abundant renewable-energy opportunities in the region to reduce the cost of energy, and improving transportation networks. They also include reforms to reduce labour costs, or moves to reduce business taxes. By pursuing one or several of these avenues, the member states of the OECS may be able to reduce costs in order to become more accessible to Latin America or other Caribbean countries as vacation destinations.

Figure 2.5. Passenger-flight connectivity is low, with a concentration of international flights in North America and the Caribbean

2.1.4. Training programmes and certifications could help to strengthen the quality of services

Developing hospitality training and certification programmes can standardise experiences across sectors, improving employment outcomes and quality of service in the tourism sector. Studies show that the key factors cited as a barrier to the inclusion of the local population in services catering to the tourism sector are the quality of the offering that they can provide, and the overall abilities of the population when it comes to hospitality (World Bank, 2008[18]). In 2010, the OECS created the Network of Excellence in Tourism and Hospitality Training and Education (NETHTE), which in turn developed the Eastern Caribbean Institute of Tourism (ECIT). The ECIT has locations in nine countries in the OECS region, each focusing on a specialised area of tourism or hospitality. In order to encourage more participation in these training programmes, courses could be offered as part of adult learning programmes, or with reduced or subsidised payment plans. This would target the portion of the population that has not yet been able to participate in the services industry.

2.2. OECS countries’ large tourism sectors open up opportunities to further expand the orange economy in the region

The orange economy presents an opportunity for the OECS member states to strengthen their economies without encountering high barriers to entry. The orange economy, also known as the creative economy, relates to all sectors whose goods and services are based on the creation of intellectual property. This includes, but is not limited to, design and visual arts, cultural heritage, new media, and software. Given that such goods are often non-physical and service-based, they do not require large amounts of land in order to be developed and transport costs remain negligible. OECS countries’ large tourism sectors open up multiple opportunities for the sale of art products. Because of the labour-intensive nature of producing creative goods, growing this sector could indeed help to relieve high unemployment rates in the region (CARICOM, 2022[19]). Finally, the OECS countries can draw upon their rich cultural heritage to encourage and develop creative goods, facilitating the development of the sector.

Creative industries are already an important sector with strong links to the tourism industry, but there is still room for them to expand further. In 2019, cultural exports made up 6.5% of all exports from the OECS on average, much higher than the CARICOM average of 0.5% (Figure 2.6). This makes the region quite advanced when it comes to promoting this sector. That is due most importantly to the strong linkages between the orange economy and the tourism sector. All Eastern Caribbean countries have carnival traditions, and many organise music festivals that attract a significant number of tourists. These festivals contribute to the local economy through increased consumption and employment, and can be used as an advertising tool for the country to attract new and repeat visitors alike (Rivera, Hara and Kock, 2008[20]). Furthermore, many of the OECS countries have already established niches within the creative economy, such as pottery and ceramics in Antigua and Barbuda, crafts relating to spices in Grenada, and “learn a craft” tours in St. Lucia (Noel and Charles, 2012[21]). However, there is a significant degree of variation across the region in terms of relative value-added. With more than 10% of total exports constituting a cultural export in 2019, St. Lucia has the most developed creative sector in the region. This stands in contrast to St. Vincent and the Grenadines and Montserrat, which both have almost no cultural exports. This level of variation opens the door to intra-regional information sharing about how to build up the sector, as well as heralding opportunities for further development.

Figure 2.6. The creative economy is already important in some OECS countries, but there is scope for region-wide expansion

The main opportunity for developing the creative economy lies in leveraging linkages with the tourism sector, in order to develop revenue streams and boost profitability for creators. There are, in fact, many opportunities to build upon linkages between tourism and the orange economy. Firstly, and as already noted, there is scope to sell artwork and hold live performances of local artists on cruise ships. In turn, this could increase the overall level of value-added per arrival in the region. Furthermore, there is potential for the region to attract more tourists by curating creative events such as music or art festivals, carnivals, and similar happenings. This could give local artists the chance to display their work to larger audiences and to build interest in their projects, bolstering the orange economy while also benefiting the region through increased expenditures. Finally, and given the growing demand for cultural tourism, the development of local art and music that reflects the history and culture of the OECS countries can be supported by establishing local art museums and other points of cultural interest. This could encourage artists by supporting their work, while also developing a new segment of tourism.

The film and fashion industries are a promising segment of the orange economy, and there is scope to expand it in the OECS. Of late, there has in fact already been some promising growth in cinema, as several movies were produced in St. Kitts and Nevis during the COVID-19 pandemic. Appropriate incentives could encourage the production of more movies in other OECS countries. Similarly, the OECS can incentivise fashion shoots and shows. Popular luxury brands have been diversifying the locations for their shows to locations such as Oahu in Hawaii and other novel destinations (Prestige, 2020[23]). These shows often include locally cast models in their photoshoots, along with local culture and businesses (Mabille, 2022[24]). This then contributes to local economies through increased consumption of local goods like accommodation and restaurants, as well as by providing employment opportunities. It is possible, moreover, for the OECS to attract further opportunities by developing complementary industries, such as production premises, studios, and grip and lighting companies which are required by the film industry.

Direct assistance to the creative sector via support programmes can help to push the orange economy forward. One example of such assistance comes from Colombia, which has offered cash rebates on production costs for companies filming in the country. This increased the number of feature films filmed in Colombia from five in 2013 to 41 in 2016 (OECD, 2019[25]). Such programmes have also already shown promising results in St. Kitts and Nevis, which adopted a similar cash rebate programme that partially refunds film-related spending if it takes place in the local economy. Soon after this policy was announced, the country garnered a deal with MSR media, a boutique film and television production company, to produce five films in the country (SKNIS, 2021[26]). Furthermore, direct support to small and medium-sized enterprises (SMEs), particularly those involved in creative activities, could also help to develop the sector. This could include loans with favourable rates or government subsides, as well as taking advantage of the EU-funded Creative Caribbean project, which provides support to the creative sector through grants and other initiatives (CARICOM, 2022[19]).

2.3. Investment in technology and efficiency-enhancing reforms could revitalise agricultural and fishing sectors in the OECS region and facilitate import substitution

There is scope to increase production from agriculture and fisheries in the OECS region in order to meet local demand, both from the general tourism sector and through sales to cruise ships. At present, however, the spillovers and linkages between tourism and local agriculture and fisheries remain relatively small. Indeed, local agri-businesses and farmers have not been able to develop many linkages with the tourism sector. As things stand, the tourism sector accounts for approximately 20% of food imports in the OECS region, and it sources only 32% of its total demand for food locally. The food-retail and wholesale sector tends, on the small OECS islands, to be highly concentrated in the hands of a few large players, and relies mainly on food imports. Local agricultural production is, meanwhile, generally sold directly to hotels and restaurants, and on the open market (World Bank, 2008[18]).

In particular, there are opportunities for agriculture and fisheries in the markets for fresh fruits and vegetables and fish and seafood. As thing stand, the tourism sector already sources more than 60% of fish, fruit, vegetables and eggs locally. Moreover, fruit and vegetables, meat, fish and alcoholic and non-alcoholic beverages account for a relatively high share of hotels’ expenditure. Fresh fruits and vegetables can compete with imports through just-in-time delivery, since they are highly perishable, and value-added is given to freshness. Other benefits of fresh fruit and vegetables are their ability to grow in most OECS countries, and their suitability for production on small farms, which dominate the region’s agricultural sectors. While there is significant local production of tropical fruits and vegetables in the OECS region, there is still considerable scope to replace imports with local production (Figure 2.7). Local supply of fish and seafood could be increased by expanding local processing.

Local production of more meat and dairy products faces a number of different challenges. At present, less than 20% of meat, dairy products and canned food is sourced locally by the tourism sector. When it comes to increasing this share, the challenges include a lack of adequate processing facilities to meet quality standards. Another hurdle is the substantial amount of investment that is required to establish such facilities. Further challenges include the low price of imported milk that stems from subsidies in industrialised countries, the relative unsuitability of the topography of many OECS islands for beef livestock farming due to steep slopes and limited land availability, and the high cost of imported animal feed. In the past, efforts in the OECS and the wider Caribbean to produce animal feed locally have been hampered by cheaper imports of corn feed. Elsewhere in the industry, however, there may be some potential to expand local pork production, since pigs eat a wider variety of feed, and this can more easily be produced locally (World Bank, 2008[18]; Jansen, Stern and Weiss, 2015[27]). In St. Lucia, the success of setting quotas to support local poultry has been limited so far. In order to support local chicken production and reduce imports, St. Lucia established a quota requiring importers to purchase 20% of poultry locally. In practice, however, hotels only buy local poultry to satisfy the quota and then resell it, thus leaving overall local demand for chicken largely unchanged (Government of Saint Lucia, 2013[28]).

In the short and medium term, there are more opportunities to increase sales of local agricultural products to hotels than to cruise ships. In addition to the freshness of the produce, the advantages for hotels of sourcing food locally are the cost savings in terms of transport costs and import duties. By contrast, cruise ships generally purchase most of their food supplies in Miami, and do not have to pay transport costs and import duties. At the same time, cruise ships have more stringent requirements in terms of food quality, quantities, safety, packaging and delivery than hotels in the OECS region. Improving the quality of local agricultural and fishery products to meet cruise ships’ standards in the OECS region would be much more challenging than meeting the standards of hotels and retail stores (Jansen, Stern and Weiss, 2015[27]).

Figure 2.7. There are opportunities for import substitution for fresh fruit and vegetables and other food products

2.3.1. Agriculture is in decline in most OECS countries

Agricultural production in the OECS region has been decreasing over the past three decades. At the same time, agricultural and food imports have been increasing, fuelled in part by the rise of the tourism sector in parallel to the decline in agriculture (Figure 2.8). Historically, OECS economies relied heavily on exports of bananas and sugar cane that were facilitated by preferential trade agreements with the European Union (EU). However, these preferential trade agreements came to an end when agricultural products formally became part of the General Agreement on Tariffs and Trade (GATT) at the end of the Uruguay round of multilateral trade negotiations in 1994. In addition, alternative employment options that turned out to be more attractive, in particular in tourism, encouraged an increasing number of young people to move out of agriculture and into other sectors such as tourism, or indeed to seek employment abroad. Meanwhile, the farming population has been ageing. Moreover, the frequency of natural disasters in the OECS region, such as hurricanes, is another factor that has contributed to the decline of agriculture, as is the small size of domestic markets. Likewise, high production costs, notably for labour, land, frequently-imported inputs, and utilities, have also contributed to the decline, as has difficult and expensive inter-island transport, which limits the potential for exports. Further factors that have contributed to the decline of agriculture include a lack of adequate irrigation systems, scarce water resources in some islands, and a lack of technological upgrades. They also include difficulties in accessing finance, limited financial capacity, the limited availability of land, the small size of farms, competing uses of land, and complex systems of land tenure.

Meanwhile, the importance of the agricultural sector varies between the different economies of OECS. For example, Dominica and, to a lesser extent, Grenada and St. Vincent and the Grenadines still have relatively large agricultural sectors (Figure 2.9) (World Bank, 2008[18]; Jansen, Stern and Weiss, 2015[27]). Bananas still remain an important agricultural export product in several countries, most importantly in St. Lucia, where they make up 11.2% of total exports (UN, 2022[30]).

Figure 2.8. There has been a decrease in agricultural exports and an increase in imports over the past three decades

At present, the agricultural sector in OECS countries consists mainly of smallholder farmers, and levels of productivity are relatively low. Indeed, the majority of farmers in the OECS region own or let very small, sub-economic parcels of land, and operate as part-time farmers at the subsistence level (Toppin-Allahar, 2013[31]). Furthermore, farmers often lack the inputs, equipment, infrastructure and farm management skills that they would require to become more efficient and reliable suppliers. Farms are generally not managed as businesses, and few young people are interested in a career in farming. While agriculture is not an important contributor to GDP in most countries in the region, it is an important contributor to employment, especially in rural areas, and it is an important source of income for the poor (Jansen, Stern and Weiss, 2015[27]).

Figure 2.9. The contributions of agriculture and fishing to GDP remain moderate in the OECS region, except for agriculture in Dominica

2.3.2. Technological upgrades and farmers’ organisations could open up new opportunities in food processing and sales to the tourism industry

The main barriers for the tourism sector in sourcing more agricultural products locally are the lack of uniformity and the limited quality of local products, plus a lack of timely and continuous delivery. At present, hotels and retailers often import agricultural products such as tropical fruits and vegetables because local smallholder farmers often do not manage to maintain the quality and uniformity of production, and the regularity of supply, that most hotels and other tourism establishments require. Production tends to vary by season and a continuous supply over time cannot always be guaranteed. Agricultural production tends to be much higher in the wet season than during the dry season (from December to May) in the OECS region, due to a lack of adequate irrigation infrastructure (Jansen, Stern and Weiss, 2015[27]). Moreover, OECS countries lack appropriate laboratories and the other quality control infrastructure that is required to meet international product standards for the tourism sector.

However, technological upgrades could enhance the productivity of the agricultural sector. In particular, irrigation infrastructure and careful harvest planning could facilitate continuous production across the seasons. Investment in improved production technologies, such as greenhouses and efficient irrigation systems, could further facilitate the production of a greater diversity of more uniform, higher-quality products. Meanwhile, the development of more drought- and flood-resistant crops could also render the agricultural sector more resilient to natural disasters such as hurricanes, which pose a major challenge for agriculture in the OECS region. Technological solutions could possibly also reduce soil erosion and water shortages, both of which represent further challenges in some OECS countries. There may also be an opportunity to produce animal feed for livestock farming locally, even though this has been challenging in the past (World Bank, 2008[18]).

In addition, regional co-operation to set up laboratory infrastructure for quality control, and for crop research to develop more drought- and flood-resistant crops, could enhance efficiency. Some countries such as St. Kitts and Nevis are already in the process of setting up the required laboratory infrastructure and training employees. Still, a collaborative regional approach could generate economies of scale.

Farmers in the OECS region lack organisation, and the marketing and sales of local agricultural products continue to be inefficient. At present, farmers in the region are not well organised, and few of them are members of producer or marketing organisations. Those producer organisations that do exist face numerous challenges, such as an unstable membership and a lack of financing. Moreover, fresh local produce is generally marketed by individual farmers themselves, and the marketing system and the transportation of agricultural produce to clients is rudimentary and inefficient. Individual farmers tend to liaise directly with hotels and other potential buyers, and to organise transport individually. Due to this inefficient marketing process, and since farmers often produce the same products at the same time, food losses are high (Jansen, Stern and Weiss, 2015[27]).

The organisation of smallholder farmers into groups or co-operatives, and contract farming, could improve efficiency in the marketing of local produce, and may facilitate exports. Such groups or co‑operatives could facilitate the distribution and sale of agricultural produce. In the process, they could also generate economies of scale and cost savings, and they may open up new opportunities for exports. Under a contract-farming model led by the private sector, off-takers would purchase and market agricultural products from smallholder farmers, whilst providing their suppliers with additional services such as input supply, financing, and technical advice, resulting in economies of scale. Smallholder farmers would produce according to a plan agreed upon with the off-taker or aggregator (World Bank, 2008[18]) (Jansen, Stern and Weiss, 2015[27]).

Increased local processing of food products constitutes a further opportunity to help revitalise the agri-food industry in the countries of the OECS. Lack of sufficient processing facilities is an important reason why many processed (non-fresh) and semi-processed products (in particular, meat and fish) are subject to a high share of imports. In response to this situation, increased local processing could certainly increase the value-added of local agricultural produce. Products that require less processing capacity, plant and equipment, such as jams, local sweets, dried fruits, and other foods, could constitute initial opportunities in this regard. These products could be sold as souvenirs to tourists, or indeed exported to niche markets. There is already some, mainly small-scale, agro-processing in the OECS region of products such as dried fruits and jams, jellies, fruit juices and syrups, cassava flour and bread, pepper sauce, chips, sea moss products, honey, coconut oil, chocolate, and processed spices, and there are different initiatives by governments and donors to further expand this sub-sector in the OECS region. To date, however, this industry remains at an early stage of development. Meanwhile, there is already significant production of liquor (mainly rum) and beer in several OECS countries, and there is scope to expand local production and exports (Figure 2.7, Panel C) (Jansen, Stern and Weiss, 2015[27]; World Bank, 2008[18]).

A further measure that would play an important role is to strengthen the skills among potential agro-processors, and to support the development of more forward and backward linkages with the tourism sector and retailers. Agro-processors require business skills such as financial literacy and marketing, as well as industry-specific skills, and knowledge about aspects such as food processing and machinery, packaging, quality control, and food safety and hygiene. Furthermore, there is a need for more linkages between agro-processors and both farmers and the tourism sector (hotels, yachts, cruise ships) and retailers. The organisation of farmers into groups or co-operatives could facilitate this process in terms of so-called backward linkages. Meanwhile, agro-processors could enter contracts with farmers in a similar way to off-takers, agreeing upon a schedule of production and delivery for the inputs that they require (Jansen, Stern and Weiss, 2015[27]). Governments could support this process through programmes that match agro-processors with tourism establishments, supporting them in building the right skills.

2.3.3. Attracting more young people into agriculture and reducing government involvement, could make agricultural sectors in the OECS region more dynamic

Encouraging more young people to become agro-entrepreneurs could revitalise and transform the region’s agricultural sectors. Currently, youth unemployment is high in the OECS region. In particular in rural areas, the agricultural sector could potentially offer more employment opportunities for young people. At present, young people in the OECS region do not perceive farming and agro-processing as attractive career paths. In order to change this, governments would need to raise awareness among young people about opportunities in agriculture and agro-processing. They would also need to endow them with the right skills through capacity building, and through an increased offering of vocational training in the skills that modern agriculture and agro-processing require, plus in how to operate a farming enterprise successfully. This could allow for a shift from small-scale, subsistence farming to diversified, dynamic, business-oriented and commercial agricultural sectors. In turn, this could allow for more linkages with the tourism sector, and could open up opportunities for exports (Jansen, Stern and Weiss, 2015[27]).

In addition, reforming agricultural marketing boards and reducing government involvement in agriculture present opportunities to make the sector more dynamic. Most OECS countries have public marketing boards, which purchase and market agricultural produce, including fishery products in some cases. However, these marketing boards tend to make a loss, and to crowd out private sector-led marketing activities. Moreover, the infrastructure of the marketing boards is generally outdated, and it lacks maintenance when it comes to technological installations such as storage facilities and cooling units. In countries where marketing boards are mandated to buy all products that meet minimum quality standards, food losses are high, since those products that cannot be sold are then dumped (Jansen, Stern and Weiss, 2015[27]). Still, some efforts are already underway to reform marketing boards. In St. Lucia, for example, the marketing board is currently being reorganised in a bid to make it more profitable. One of the projects that it is putting in place is the establishment of a certified pack-house. It is also trying to export produce to other countries in the region.

2.3.4. Land reform could improve access to credit and enhance private investment in agriculture

In several countries in the OECS region, unclear and uncertain land ownership rights restrict access to collateral for credit and investment in agriculture. Many farmers are land tenants rather than landowners, and in some cases agricultural leases are short and last only one year. Insecurity of tenure limits both land tenants’ willingness to invest in improvements to their farms, and also their ability to access credit for such improvements. “Family land”, which is land that is co-owned in undivided shares by the heirs and successors of the original purchasers, presents another challenge, in particular in St. Lucia, where 45% of all land holdings are family land. This is because all of the beneficial co-owners of the land enjoy the right to live upon and to cultivate it, and no individual can borrow against it. In Dominica and Barbuda, meanwhile, communal land restricts land occupants’ access to collateral for credit and investment in agriculture. In Dominica, in the Carib Reserve, a reserve for the indigenous community of the Caribs, all land is communal and is held and administered by the Carib Council. In Barbuda, all land is communal and residents’ use of land is controlled by the Barbuda Council (Toppin-Allahar, 2013[31]).

One way to improve access to credit and efficiency would be to reform the region’s systems of land tenancy and land subdivision. Indeed, a modern framework of legislation that gives land tenants the option to buy agricultural smallholdings that are beneficially occupied could improve farmers’ access to credit, and could encourage more efficiency-enhancing investments in agricultural production. Furthermore, there is a need for a minimum size for land parcels, and for a requirement for responsible authorities to provide consent for any subdivisions of parcels below a certain size. This is required, for instance, in St. Lucia, where the frequent subdivision of small parcels is continuously reducing the average parcel size (Toppin-Allahar, 2013[31]). Vanuatu and Fiji are examples of SIDS in the Pacific, which have successfully implemented reforms to simplify tenure legislation and rights. These reforms allowed investors to benefit from clearer leasing conditions, which in turn facilitated the entry of private investors in the tourism industry in these countries. Similar reforms could facilitate access to credit and more private investment in agriculture in the OECS region (Piemonte and Fabregas, 2020[32]).

Moreover, OECS countries require modern, compulsory land registration systems and a strengthened institutional capacity for managing the land-registration systems that do already exist. At present, the lack of such systems, and of sufficient levels of institutional capacity, limit access to collateral for credit. Modern, compulsory land registration systems do exist in Antigua and Barbuda and St. Lucia, and are partially in place in Dominica and St. Kitts and Nevis. In Grenada and St. Vincent and the Grenadines, meanwhile, land ownership is still regulated by the Common Law Deeds system. Under this system, there is no modern land registration, and the onus is on the landowner to prove their ownership of the land. Even in those countries with modern land registration systems, these systems do not always work effectively. For instance, land records are not fully computerised and institutional capacity is often lacking, with examples of this including insufficient human resources and equipment for keeping records up to date (Toppin-Allahar, 2013[31]).

There is also a need to facilitate private investment in communal land in those countries where communal land continues to exist. Fiji is an interesting example of a country, which has successfully enabled private investment in communal land. Since 1940, Fiji counts with a Native Lands Trust Board (NLTB), now known as the iTaukei Land Trust Board (TLTB). Initially designed to facilitate the access of Indian-descent Fijians to farming land in the 1940s, the TLTB is a trustee which acts as an intermediary between landowning communities and private investors, and which now plays an important role to enable investments from foreign tourism developers. This main function of the TLTB is to negotiate, on behalf of landowners, the leasing of customary land to tourism developers for up to 99 years. This “simple” intermediary can guarantee to both parties: the security of preserving the community’s land property and negotiating a percentage of return of the results over investments – normally 9% –; and a horizon long enough for investors to be able to get the return expected over investment (Piemonte and Fabregas, 2020[32]).

Regional collaboration in modernising legislation, and in land administration and land use control, would allow for efficiency gains. At present, at the national level, many agencies that are in charge of land administration and of controlling land use lack the adequate human and financial resources to fulfil their mandates. In response to this situation, a harmonisation of legislation and regulation regarding land use and ownership in the OECS could allow for economies of scale and cost sharing (Toppin-Allahar, 2013[31]).

2.3.5. The production of higher quality fish products and fish processing could allow OECS countries to substitute part of their fish imports with local production

The importance of the fishing sector varies across OECS countries. Artisanal, subsistence-based fisheries remain important in all of the OECS countries, and this form of fishing continues to predominate on some of the islands. In some countries, such as Grenada, St. Vincent and the Grenadines, and St. Lucia, the fisheries sector has evolved into more commercialised fisheries, which make a significant contribution to food supply and food security, while also bringing in foreign exchange. In other countries such as Dominica, Antigua and Barbuda, and St. Kitts and Nevis, however, fisheries remain entirely artisanal, small-scale and subsistence based. In the case of Dominica, in particular, fishery resources are under-utilised as a source of domestic nutrition and food security, employment, and foreign-currency earnings. Furthermore, a large proportion of the fishing that takes place in the OECS region still tends to occur in limited depths of less than 50 metres, close to the shore, and using small fishing boats. The size of these vessels ranges from 3 to 25 metres, and is often less than 12 metres. Meanwhile, most fishers are daily operators, going out to sea in the morning and returning to land in the late afternoon or evening. This limits the variety of fish species fished by local fishers in the region. To be sure, St. Vincent and the Grenadines does have a high-sea fleet, albeit one that consists of vessels that are foreign owned, operated and crewed, and do not operate within the country’s exclusive economic zone (EEZ) or land at its ports. Indeed, this fleet merely operates under the country’s flag. St. Kitts and Nevis also had such a fleet in the past, but it has recently been suspended (FAO, 2021[33]).

Despite the fishing sector’s limited contribution to GDP in the region, the sector does play a very important social role in most OECS countries. Moreover, the fishery sector’s contribution to employment is more important than its contribution to GDP. In addition, fishing communities and the employment opportunities provided by the fisheries sector are extremely important for the social equilibrium of the population in many OECS countries. Fisheries sustain the livelihoods of many families in rural communities, contribute to rural development, and constitute a security net during economic downturns and crises such as the recent decline in tourists in the context of the COVID-19 pandemic (FAO, 2021[33]).

As countries in the OECS look again at the role that fisheries could play, there are opportunities to replace fish imports with local production. At present, all OECS countries import a substantial amount of fish (Figure 2.10). Indeed, fileted, high-quality fresh fish is imported to supply the tourism sector, since the local catch does not always meet the quality standards and demand of this sector. In order to satisfy local demand, meanwhile, mainly dry and salted fish is imported (FAO, 2021[33]). Against this backdrop, most OECS countries’ fish exports are relatively low, and could potentially be increased.

Increased processing in the region has the potential to replace imports of processed fish products, increase value-added from local fishery production, and reduce waste. At present, however, only small amounts of fish processing take place in the region. Indeed, in most OECS countries there are no, or very few, commercial facilities for processing fishery products. Most of the fish that is landed domestically is consumed in fresh form, although there is some traditional salting and drying at the subsistence level (World Bank, 2008[18]). Furthermore, an excess supply of fresh fish often results in wastage, due to a lack of modern fish-processing facilities.

In order to develop fish processing, to increase the quality of local fisheries’ produce, and to live up to the international standards that the tourism sector requires, it will be necessary to invest in the appropriate technology and infrastructure. In the quest to take better advantage of opportunities in seafood processing, to produce higher-quality fish and seafood products for the local tourism sector, and to reduce the post-harvest losses that often occur in artisanal fisheries due to a lack of cold storage facilities, it is particularly important to invest in post-harvest and processing facilities such as drying equipment, ice plants, refrigeration, and cold storage facilities (OECD, 2020[34]). In Dominica, refrigeration and cold storage facilities were destroyed by hurricane Maria in 2017, and the lack of such facilities results in wastage when the supply of fresh fish exceeds demand (FAO, 2021[33]). Deeper-water fishing, and investment in bigger vessels, which respect international standards, could increase productivity and the variety of fish species fished. There is also a need to develop certified facilities for food safety. Furthermore, fish safety has to be improved, since fish poisoning remains an issue in some countries in the region (FAO, 2021[33]; UNCTAD, 2022[35]).

2.3.6. Aquaculture and sea products offer further opportunities for the OECS region

Both the marine and the inland varieties of aquaculture present potential for further development in the OECS region. Indeed, aquaculture is seen as a sector with large growth potential worldwide, and it has expanded substantially in recent years, even as global fish production from catching wild fish has stagnated. Meanwhile, global demand for fish-based food products is predicted to continue to rise over the next few decades, as the world’s population continues to grow, and as purchasing power also increases in many places. In this context, aquaculture production is projected to account for 89% of the increase in world fish production by 2030, reaching 109 million tonnes in 2030 compared to 26 million tonnes in 2018 (FAO, 2020[36]). It is also worthy of note that opportunities exist in both inland and marine aquaculture (OECD, 2016[37]; OECD, 2020[34]). Some aquaculture projects have been developed or are in development across the OECS region, both in fresh water and in salt water. To date, however, and notwithstanding these projects, aquaculture still remains largely an untapped potential. According to a rating for the prevalence of marine aquaculture in the 2021 Ocean Health Index, all OECS countries score zero or close to zero out of 100 (Figure 2.11) (Ocean Health Index, 2022[38]). Overall, annual fisheries production from aquaculture is still at an embryonic stage, and is very low in all OECS countries (World Bank, 2022[2]; FAO, 2021[33]).

Figure 2.10. There are opportunities to replace fish imports with local production

In addition, technological upgrades could help OECS countries to overcome some of the challenges that they may face in the further development of aquaculture. The high cost of imported fishmeal, high energy costs, limited familiarity with fish species, a lack of skilled human resources in this area, and limited freshwater supply in some countries such as Antigua and Barbuda, are factors that currently limit the competitiveness of aquaculture in the OECS region. However, technological upgrades could help them to tackle some of these challenges. As an example of this, the use of renewable energy in the form of solar panels in Antigua and Barbuda has reduced energy costs for aquaculture, while aquaponics technologies have facilitated the re-use of freshwater supplies (FAO, 2021[33]).

Figure 2.11. There is scope to better exploit aquaculture, fisheries and other ocean products in the OECS region

The development of other sea products such as sea moss may present further opportunities. Sea moss products are already produced and sold on the local market, although there is potential for further development in this area, and this could possibly extend to exports of ocean products. At present, the OECS region does not perform very well in terms of the sustainable harvest of non-food marine resources such as seaweed and marine plants, sponges, shells, fish oil and meal, and marine ornamental fish. According to the Ocean Health Index for 2021, the region garners an average score of 60.2/100 in the category of natural products, compared to a global average of 73.1/100 (Figure 2.11).

2.4. Reform of the telecommunications sector and enhanced regional integration in cybersecurity and digital skills, could facilitate the expansion of digital services

Digital services constitute an opportunity for OECS countries. Globally, digitalisation has been growing exponentially over the past few decades and received a further boost in the context of the COVID‑19 pandemic (OECD, 2020[40]; OECD et al., 2020[41]). For OECS countries, digital services are particularly attractive as they do not require physical transport, the cost of which is high in the region.

In particular, opportunities in digital services lie in financial and insurance services, and in other business services, such as digital education, digital marketing and consultancy services, IT services, and personal services. In these areas, OECS imports are currently still relatively high (Figure 2.12). In 2021, financial intermediation accounted for 10.2% of the ECCU’s GDP, business services for 2.3% of GDP and computer related activities for only 0.2% of GDP (ECCB, 2022[1]). While OECS countries’ financial and insurance sectors are already quite large in international comparison, there is scope to further expand business services and computer related activities. Financial and insurance services accounted for 4.7% of GDP in OECD countries on average in 2021, for 3.9% of GDP in EU countries on average and for 7.3% of GDP in the United Kingdom, a country with a large financial services sector. Business services account for 11% of the EU’s GDP and computer programming and information services for 2.5% of GDP (OECD, 2022[42]; European Commission, 2022[43]; European Commission, 2022[44]). By contrast, there seem to be fewer opportunities in low value-added digital business services such as call centres, since wages in OECS countries tend already to be too high to be competitive in this industry segment. Indeed, several call centres in the region have closed recently, including one that had been operated by Brown Hill Communication in Nevis, and which closed in 2019 (Williams, 2019[45]). In Dominica, the Caribbean Call Centre likewise closed in 2016 (Dominica News Online, 2016[46]).

Figure 2.12. There are opportunities to diversify OECS countries’ services exports

Notwithstanding the significant room for its further development, digitalisation has been progressing rapidly in the OECS region. The share of individuals using the internet in the region has been expanding continuously. In 2017, for example, 68.6% of individuals in OECS countries on average were using the internet, compared to 46.6% in 2011 (World Bank, 2022[2]). Moreover, OECS countries have set ambitious targets for the share of individuals using the Internet, as reflected in the regional strategy scorecard mentioned above. This target foresees Internet usage of close to 100% in 2030 for most of the OECS countries. These targets will be relatively easy to attain if the share of individuals using the Internet in the region continues to expand at the same pace as over the past two decades. However, there is variation in mobile and fixed broadband penetration across the OECS region: some countries such as Dominica and Grenada have high mobile broadband penetrations, while there is still much scope for improvement in the rest of the region. Fixed broadband penetration is high in St. Kitts and Nevis and Montserrat but relatively low in the rest of the region (Figure 2.13).

Figure 2.13. There is variation in mobile and fixed broadband penetration across the OECS region

However, the structure of the telecommunications sector in the OECS member states could still pose a challenge to rapid digitalisation, and to the expansion of digital services. Indeed, the telecommunications sector presents tendencies towards a duopolistic structure across the entire OECS region. The two main (and in most countries the only) telecommunication providers in the region are Digicel, on the one hand, and Cable & Wireless/Flow/Columbus Communications, on the other. After an initial market reform in 2000, a multitude of firms did emerge. Over time, however, this more diverse array of competitors consolidated into today’s concentrated market structure. Both Digicel and Cable & Wireless/Flow/Columbus Communications own and operate one each of the two main submarine cables that are available in the OECS region, thus controlling the entire backbone of telecommunications access to the islands (ECTEL, 2021[48]; Commonwealth Network, n.d.[49]; PUC Anguilla, 2021[50]).

Internet prices have been decreasing, but prices for certain telecommunications services remain relatively high in the OECS countries by comparison with international levels. The regional telecommunications regulator, the Eastern Caribbean Telecommunications Authority (ECTEL), is regulating the quality of, and has set price caps for, certain services. ECTEL was established in 2000 and is the regulatory body for telecommunications in five OECS member states: Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines. However, prices for broadband Internet remain comparatively high by comparison with international levels. At USD 66.78, the monthly cost of an average broadband package in the OECS countries in 2022 is in line with countries in Latin America, where it stands on average at USD 66.15. Still, this is well above the North American average of USD 53.58, and twice the EU average of USD 32.21. Furthermore, both mobile and broadband Internet prices remain high as a share of GDP per capita by comparison with international levels (Figure 2.14) (Cable.co.uk, 2022[51]). There is evidence that the consolidation of the telecommunications sector into today’s market structure has contributed to higher prices (OECS Economic Affairs Council, 2016[52]).

Figure 2.14. The cost of Internet access is in line with international prices but remains high as a share of GDP per capita

Looking ahead, there is a great opportunity to reform the regulatory framework for the telecommunications sector in the OECS by facilitating other operators’ access to submarine fibre-optic cables in order to foster more competition in the sector, and thus to encourage lower prices and better service. Although the existing framework of regulation emphasises inter-connectivity and the sharing of resources, it does not oblige dominant infrastructure owners to provide access to fibre-optic cables to other operators. At present, therefore, new operators seem to be unable to enter the market since they cannot access the fibre-optic cable network, with the exception of a newly constructed submarine cable that now connects the Grenadines to St. Vincent. A new regulatory framework would have to introduce a requirement for the dominant owners of the infrastructure to provide access to other operators. In this connection, specific regulation for backbone access and pricing could be an option.

In addition, improvements in the existing regulatory regime could reduce prices and improve the quality of service in the OECS region. Given the small overall market size of OECS countries, fostering competition in telecommunications may be more difficult than in larger countries even with the right regulation in place since potential entrants might be scared away by the small market size, which makes it less profitable to enter as a competitor to existing regulators. To support lower prices and better quality of service, OECS countries might in addition require better and more thorough regulation on price and quality control in telecommunications, as it is the case for more monopolistic and oligopolistic sectors. Such regulation is already in place and telecommunications prices and quality are already monitored by ECTEL. However, there would be scope for further improvements of this regulation and for ensuring that all telecommunications services are covered.

A reform of the regulatory framework for telecommunications is already ongoing in the Eastern Caribbean. The process of replacing the Telecommunications Act in force in the ECTEL contracting states with the new Electronic Communications Bill began in 2009. In 2020, ECTEL published a revised Electronic Communications Bill. The Electronic Communications Bill aims at strengthening consumer rights and ensuring an open and competitive investment climate. It includes, among other things, provisions to broaden the scope of regulations from telecommunications to electronic communications, to address mergers and acquisitions within the ECTEL contracting states, to preserve an open Internet with the adoption of Net Neutrality provisions and to strengthen National Telecommunications Regulatory Commissions (NTRCs) to make them more efficient and effective. It also includes improved rules for the resolution of quality of service issues faced by consumers, and more penalties for breach of the legislation. The Electronic Communications Bill includes provisions for owners of submarine cables to provide access to other licensed telecommunications providers. However, at the time of writing, the Electronic Communications Bill had not yet been enacted since only St. Kitts and Nevis had formally adopted the bill (ECTEL, 2021[48]; ECTEL, 2020[53]; ECTEL, 2022[54]).

There is also an opportunity for regional co-operation in cyber security and data protection. At present, countries across the OECS perform poorly in terms of cyber security (Figure 2.15) (ITU, 2022[55]). Moreover, they lack a comprehensive framework for cyber security and data protection. To be sure, legislation covering cybercrime does exist in most OECS countries, except for Montserrat, but none of the region’s countries has adopted a cyber-security strategy per se. Meanwhile, legislation concerning privacy and data protection does exist in Antigua and Barbuda, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines, but not in the remaining countries of the OECS. Looking ahead, a harmonisation of legislation on cyber security and data protection across the region, the development of a regional cyber-security strategy, and the establishment of a regional watchdog for cyber security and data protection, would all help to facilitate the sharing of expertise and costs, while also increasing the integration of the regional market for digital and data-driven services. In turn, this would reduce barriers to cross-border investment in digital services (World Bank, 2020[56]; Ram, 2021[57]).

Figure 2.15. OECS countries are performing poorly in terms of cyber security by comparison with international standards

Regional co-operation would also make possible the sharing of costs in the promotion of digital skills. At present, there are not enough graduates with the technical and soft skills that are in demand from digitally enabled industries in the region, similarly to other countries in Latin America and the Caribbean (OECD et al., 2020[41]). One reason for this is that the cost of investing in specialised digital skills remains relatively high for graduates. Furthermore, the ongoing brain drain of digitally skilled workers is a challenge. At the same time, the adoption of digital technologies is low among private firms, in particular micro, small and medium-sized enterprises (MSMEs). Moreover, businesses in the region lack digital skills and a digital culture. In addition, few firms in the region accept digital payments or use digital platforms to advertise and sell their goods and services (World Bank, 2020[56]). For example, only 36.6% of firms have their own website or social media page (2011) (World Bank, 2022[59]). These challenges notwithstanding, some efforts to improve digital skills are already underway. One such example is at Sir Arthur Lewis Community College (SALCC), St. Lucia’s community college, which has recently been scaling up its digital literacy offering. Henceforth, OECS countries could work together to create more digital curricula at the regional level, both for high school graduates and for entrepreneurs. In so doing, they could make use of e-learning and online teaching via the collaboration of the region’s community colleges, and possibly also through a regional digital education hub. Such an approach would allow countries in the OECS region to share expenses and expertise in expanding digital skills. Furthermore, it could reduce the cost of training people for digital careers.

OECS countries are already in the process of improving digitalisation policies through the Caribbean Digital Transformation Project (CARDTP). The CARDTP aims to accelerate the digital transformation in the Eastern Caribbean by increasing access to digital services, technologies and skills by governments, businesses and individuals. The CARDTP is a USD 94 million project funded by the World Bank and co-ordinated by the OECS in partnership with the World Bank, ECTEL, the ECCB, the Caribbean Community Implementation Agency for Crime and Security (CARICOM IMPACS) and the Caribbean Telecommunications Union (CTU). It was launched in 2020 and the participating Eastern Caribbean countries are Dominica, Grenada, St. Lucia, and St. Vincent and the Grenadines. The three components of the CARDTP are a digital ecosystem, digital infrastructure and digital skills and entrepreneurship. At present, in the context of the project, the Payment System Act and the Money Services Business Act are being updated, a Payment System Strategy for the region is being developed, a demand-side survey on financial literacy and inclusion is being undertaken and an assessment of the technical and soft skills in demand among digitally-enabled industries is ongoing. A review and update of regional and national cybersecurity policies, legislation and regulation, and institutional and co-ordination structures as well as data protection and privacy laws are also planned in the context of the CARDTP (OECS, 2020[60]; Government of the Commonwealth of Dominica, 2022[61]).

2.5. A competition framework for the OECS region could enhance consumer welfare and promote economic growth

At present none of the OECS member states have a competition law nor a regulatory framework for controls on M&A (CARICOM, 2022[62]). To be sure, some member states of the OECS, such as St. Vincent and the Grenadines, have attempted to develop national legislation in this regard. At present, however, no functioning competition law is in place at the national level (WTO, 2014[63]).

The lack of a competition framework can create considerable costs, notably in terms of consumer and social welfare. Indeed, and as already noted, the absence of competition law and a competition authority in the OECS region has allowed for the development of duopolistic structures in the telecommunications sector. There is evidence that points to an increase in prices following a merger of two major players in the telecommunications sector in the OECS region in 2015. A well-designed competition law and an operational competition authority could have prevented this (OECS Economic Affairs Council, 2016[52]).

A regional OECS competition framework could reduce costs, foster private investment, and ultimately promote economic growth and productivity. Indeed, a well-designed competition law, an effective enforcement of the rules that it sets out, and a process of competition-based economic reform all serve to promote consumer welfare and economic growth while making markets more flexible and innovative. When customers can choose between different providers, they force firms to compete with one another. To be sure, choice for customers is a good thing in itself, but competition between firms also leads to increased productivity and economic growth (OECD, n.d.[64]; OECD, 2014[65]). In telecommunications, and indeed in other economic sectors, a competition framework could foster more competition in the OECS region, thereby reducing prices and increasing overall welfare.

Member states have already agreed to establish a supra-national competition authority to handle competition matters within its single market, but this still requires commitment to implement. A draft competition law aiming to establish a regional competition authority already exists, and it is currently being reviewed (OECS Economic Affairs Council, 2016[52]). The similarities across OECS member states’ legal systems facilitate this process. Indeed, the main challenge in making this regional competition authority operational has been to secure sufficient funding.

In the long run, not only are the benefits from lower prices and increased consumer welfare likely to outweigh the operational cost of running a competition authority, but the amount that the authority raises in fines is also likely to exceed its annual budget. During the period of 2015-20, for example, total fines amounted on average to 7.6 times the annual budget of the 58 competition authorities included in the OECD CompStats database, and to 6 times the annual budget in the EU (OECD, 2022[66]). Furthermore, other small-island administrations have successfully established competition authorities that are able to generate important revenue streams through fines. New Caledonia, a small island in the Pacific Ocean, which is a French oversea territory, with approximately 270 000 inhabitants, operationalised its competition authority in 2018, and the institution’s revenues have steadily increased from approximately EUR 68 000 in 2019, to over one million euros in 2021 (two-thirds of the institution’s budget in 2021) (ACNC, 2022[67]; ACNC, 2020[68]).

In order to take advantage of economies of scale and to pool costs, it would be beneficial for OECS countries to establish a joint regional harmonised competition framework. A joint regional approach could also prevent “regulatory arbitrage” – the avoidance of regulations by choosing more lenient jurisdictions. In addition, a regional approach could support the investment climate by reducing the cost of understanding the regulatory regime and increase regulatory predictability and stability for investors. It might further decrease the risks of regulatory capture and undue influence. However, the costs and benefits of a regional approach would need to be carefully assessed and evaluated and such an approach requires further study to identify the solution which responds best to the needs of OECS member countries.

As the region weighs its options in this regard, different models for regional competition authorities do already exist. In the case of the OECS, one alternative that may be assessed involves a regional competition authority that investigates and takes decisions on national and regional competition cases, which would correspond to the so-called one-tier regional state model. In proceeding in this manner, such an authority would benefit from economies of scale, in contrast to the small individual size of the OECS countries. A regional authority, and indeed the regional legislation that would back it up, could be based on the model of the regional telecommunications regulator, ECTEL, and the harmonised telecommunications regulation that is also already in place. Elsewhere, the West African Economic and Monetary Union (WAEMU) Commission is an example of a regional competition authority that follows the one-tier regional state model (Box 2.1). In contrast, most existing regional competition authorities such as those of the EU and CARICOM have decision-making power only for cross-border competition cases (Box 2.1). The most successful existing competition authorities, namely the European Commission, along with the European Free Trade Association (EFTA), and the Common Market for Eastern and Southern Africa’s (COMESA) authority, follow the joint enforcement model. In this model, both national and regional authorities apply competition provisions in their respective competition cases (national and regional cases) (OECD, 2018[69]). However, the member countries of these regional competition authorities do not face the same constraints as the OECS region in terms of its limited size. A deeper assessment and more information would be required to determine the optimal institutional set-up of a competition framework for the OECS region.

Box 2.1. Regional competition authorities in the West African Economic and Monetary Union (WAEMU) and the EU

The WAEMU Commission

The WAEMU Commission is an example of a regional competition authority that follows the one-tier regional state model. It is the executive body of the region, and it is responsible for the application of regional competition provisions. The WAEMU Commission’s competition directorate, which is part of its department for regional-market trade, competition and co-operation, is the competent body. It is also known simply as the WAEMU Competition Commission. This body enjoys exclusive decision-making power in dealing with anti-competitive practices, both at national and regional levels, and national authorities have the roles of support the WAEMU Commission.

However, the WAEMU Commission has been confronted with a set of practical challenges. For example, the centralisation of jurisdiction on competition matters has led to the decline of national initiative, resulting in fewer activities in the field of domestic competition law. This centralisation has also had a negative impact on the diffusion of competition culture in the member states, and has impeded the potential development of national expertise. As a further result of this centralised approach, member states have been reluctant to adapt their domestic laws to community law, notwithstanding their obligation to do so, because they fail to see the usefulness of so doing given the centralisation of power.

Competition regulation in the EU

In the European Union, the European Commission – and in particular its Directorate-General for Competition (DG COMP) – enforces EU competition provisions directly, working together with the National Competition Authorities (NCAs) of the member states. Since 2004, the Commission and the NCAs form the European Competition Network (ECN), a framework that is able to ensure close co‑operation among its members in the application of European competition rules, and is capable of facilitating an allocation of cases according to the principle of assigning them to the authority that is best suited to bring an end to an infringement of competition law. In principle, the Commission investigates cases that affect trade in more than three member states, that are closely related to other aspects of EU law, or that raise novel competition issues. The EU Commission informs NCAs of any investigation that it plans to undertake in their jurisdiction, and NCAs assist the Commission where required. Regional-level competition provisions in the EU include provisions on anti-competitive agreements, abuse of dominance, mergers, and state-aid/competitive neutrality.

Source: (OECD, 2018[69]), Regional Competition Agreements: Benefits and Challenges.

An OECS regional competition framework would be complementary to the CARICOM regional competition authority, which is responsible for cross-border competition cases at the regional level. The CARICOM Competition Commission (CCC) was established by the revised treaty of Chaguaramas, and it was inaugurated in 2008. The CCC has exclusive original jurisdiction only in the event of cross-border anti-competitive conduct, but not for national cases, which are the responsibility of CARICOM member states’ national competition authorities – and which could become the remit of an OECS competition framework. CARICOM regional competition provisions apply to anti-competitive agreements and the abuse of dominance, and exclude provisions on mergers and state-aid/competitive neutrality, which are currently being negotiated. CARICOM regional provisions are not directly enforceable in the member states, but member states are required to enact legislation in order to ensure that the CCC’s determinations are enforceable in their jurisdictions (OECD, 2018[69]). The CARICOM member states are required to develop their own national competition authorities with responsibility for monitoring and enforcing the regional authority’s legislation at the domestic level (CARICOM, 2001[70]). Some CARICOM countries, such as Trinidad and Tobago and the Bahamas, have recently developed national competition authorities (OECD, 2018[69]). When establishing a regional competition framework for the member states of the OECS, it would be important to define co-ordination mechanisms with the CARICOM Competition Commission, which has power over cross-border cases in the OECS region.

As the OECS develops its competition framework, it would be important to define and ensure co‑ordination mechanisms between the regional and national levels for enforcement purposes. For example, designated government officials at the national levels could support a regional competition authority. These officials would be designated by their governments, and would serve as a presence on the ground, receiving complaints, making sure to obtain all of the relevant information, assessing whether a competition contravention has occurred, and undertaking preliminary investigations and analysis. Then, these designated officials would forward cases to the regional authority whenever they determine that there has indeed been a competition contravention (OECS Economic Affairs Council, 2016[52]). This approach would follow ECTEL’s model, in which national telecommunications operators ensure a presence on the ground, and work together closely with ECTEL.

In the OECS, it would also be possible to establish an institution to jointly regulate competition, consumer affairs issues, the energy sector and possibly telecommunications at the regional level. Such an approach could facilitate an additional pooling of resources, while also reducing costs, given the small size of OECS countries (OECS Economic Affairs Council, 2016[52]). Moreover, sector-specific regulation has the potential to complement competition regulation, depending on the viability of competition in different sectors. The model of a joint regulatory institution for competition and consumer affairs has been successfully employed in Barbados and Jamaica, in the form of the two countries’ Fair Trading Commissions, and also in the United Kingdom, with its Competition and Market Authority. In the Bahamas, the Utilities Regulation and Competition Authority (URCA) is responsible for both telecommunications and the electricity sector (URCA, n.d.[71]). Nonetheless, such an approach has its costs and benefits and would need to be carefully assessed and evaluated in order to determine the optimal institutional set-up for the OECS region.

2.6. Strengthening financial-sector infrastructure, reducing NPLs, and reforming development banks could improve access to finance for private businesses

Eight Eastern Caribbean countries share a common currency through the Eastern Caribbean Currency Union (ECCU). Their common monetary authority is the Eastern Caribbean Central Bank, which was established in 1983.

In the ECCU the domestically focussed financial sector is dominated by banks and credit unions, offshore finance is small and comprises banking and insurance. There is also an important number of credit unions, and credit-union membership is relatively widespread. Offshore financial sectors do also exist in the region, most importantly in Antigua and Barbuda, St. Kitts and Nevis, and Anguilla, but they account for less than 2% of GDP, and for a relatively small share of worldwide offshore activity. Offshore activities range from international banking for corporations and individuals, to insurance. The ECCU’s financial system comprises 20 commercial banks, 160 insurance companies, 49 credit unions, 6 development banks or boards, a number of offshore banking entities, and a range of other non-bank financial institutions. In addition, the Eastern Caribbean Security Exchange Limited (ECSE), and the Eastern Caribbean Securities Market (ECSM), were launched in 2011. However, financial markets remain relatively under-developed (IMF, 2013[72]; ECCB, 2018[73]).

Figure 2.16. Levels of domestic credit to the private sector are moderate in OECS countries

Figure 2.17. Credit growth in the OECS region has been negative over the last decade

Access to finance is a challenge for firms in the OECS region, and especially for MSMEs (World Bank, 2008[18]). Indeed, access to finance is ranked by firms as the top obstacle in Dominica, St. Lucia, St. Kitts and Nevis, and St. Vincent and the Grenadines. 41.3% of firms in the OECS region on average identify access to finance either as a very severe obstacle, or at least as a major one (2010) (World Bank, 2022[59]). In the World Bank’s Doing Business ranking, the worst performance of OECS countries relative to others according to statistics for 2020 was, on average, in the category of Getting Credit, in which their average score stood at 26.7 out of 100, with their average rank coming in at 160.7^th out of 190 countries (World Bank, 2021[74]).

Credit to the private sector remains moderate, and has indeed been declining, thereby hampering economic development. Domestic credit to the private sector in the OECS region as a percentage of GDP is only a third of the OECD average (Figure 2.16). Domestic credit growth turned negative in the OECS region following the 2008 financial crisis, and started picking up again slowly only in 2018 (Figure 2.17). There is evidence for a strong positive relationship between credit growth and GDP growth (Bofinger et al., 2022[75]). Hence, an expansion in domestic credit, and in particular one that is directed at the productive sector, could contribute to higher levels of economic growth in the region.

2.6.1. High levels of NPLs, a large amount of personal loans and mortgages, and development banks, which reflect the loan portfolios of commercial banks, hamper access to credit in the OECS region

High levels of non-performing loans (NPLs) have contributed to negative credit growth and to difficult access to finance in the region. Indeed, NPLs are four times as high in the OECS region as they are in the OECD, and they reach levels as high as 25% of gross loans in Anguilla and 23.5% of gross loans in St. Kitts and Nevis, according to statistics for 2020 (Figure 2.18, Panel A). Furthermore, the build-up of NPLs after the 2008 financial crisis (Figure 2.18, Panel B) has coincided with negative credit growth during the years that followed. In practice, high levels of NPLs negatively affect credit growth, economic activity and unemployment. They contribute to macroeconomic challenges, and clog up bank credit that could have been directed towards productive activities. Banks’ deleveraging in response to the high levels of NPLs and to deteriorating levels of asset quality in the OECS region has led to a contraction in credit to the private sector (Beaton, Myrvoda and Thompson, 2016[76]; IMF, 2017[4]).

Figure 2.18. Non-performing loans are high in several countries in the OECS region

In the OECS region, NPLs started increasing in the wake of the global financial crisis of 2008 (Figure 2.18, Panel B). Before the global financial crisis, credit had been expanding at relatively high rates in the OECS region (Figure 2.17, Panel B), boosted by the Cricket World Cup in the West Indies in 2007, as well as by economic activity in tourism and construction. This expansion of credit led to an increase in private and public debt, increasing borrowers’ vulnerability to shocks (World Bank, 2018[77]). Moreover, the financial crisis resulted in a decline in tourist arrivals, resulting in turn in a loss of income, and an increase in unemployment in the tourism sector. This impaired the ability of the tourism sector, of the construction industry, to which it has close links, and also of unemployed employees from the tourism sector, to service their loans. This resulted in a sharp increase in NPLs, in particular in tourism, construction and personal loans (IMF, 2017[4]). What is more, three commercial banks in the Eastern Caribbean region went insolvent and had to be taken over by the ECCB following the 2008 financial crisis (Beaton, Myrvoda and Thompson, 2016[76]). Banks with a higher exposure to tourism and construction were more affected by NPLs (Beaton, Myrvoda and Thompson, 2016[76]). Over the past five years, most OECS countries have managed to consolidate NPLs to a certain extent. However, unfavourable macroeconomic conditions such as slow economic growth, high unemployment, and the loss of clients’ incomes have nevertheless hampered the resolution of NPLs (IMF, 2017[4]).

The relaxation of due-diligence standards, and a range of other country-specific factors, have also contributed to the build-up of high levels of NPLs in the OECS region. Indeed, standards of due diligence were relaxed as a consequence of large CBI inflows and this has resulted in an increase in NPLs in some countries in the region. (Figure 2.17, Panel B) (IMF, 2017[4]). In some countries, such as St. Lucia, the legal framework has favoured the build-up of a large amount of NPLs through protracted insolvency procedures. Indeed, lenders are required, in the case of defaults, to sue borrowers in court in order to enforce the take-over of collateral, and this is a lengthy and costly process. Other factors that have contributed to the high level of NPLs in the region include difficulties in valuing and realising collateral, information gaps that hinder both risk and collateral valuation, depressed real-estate markets, weaknesses in prudential and supervisory frameworks, and the absence of a market for distressed assets (Al-Hassan et al., 2020[78]).

Figure 2.19. Bank loans are dominated by mortgages and other personal loans in the OECS region, and also by government loans in some of the countries

OECS countries have already taken measures to tackle high levels of NPLs, but challenges remain. Following the 2008 financial crisis, the ECCB intensified its oversight of banks through more frequent stress tests and more rigorous audit requirements. Moreover, the New Banking Act was passed in all ECCU member states in 2015-16 (ECCB, 2017[79]). This law strengthens regulatory and supervisory frameworks by introducing higher minimum capital requirements, more effective liquidation or recapitalisation for failed banks, higher penalties for banks in the case of contraventions of provisions, and stronger protection for depositors. The ECCB is also introducing risk-based supervision in order to improve risk management. Furthermore, the Eastern Caribbean Asset Management Corporation was established in 2015-16 by member states, together with the ECCB, in order to help clean up banks’ balance sheets and to improve the quality of their assets by purchasing NPLs from banks (World Bank, 2018[77]; ECCB, 2022[80]; Beaton, Myrvoda and Thompson, 2016[76]).

A further challenge is that personal loans and mortgages crowd out credit to the productive sector in the OECS region. Indeed, mortgages and other personal loans account for 58.2% of gross loans on average in the OECS region (Figure 2.19). Furthermore, government lending is another important part of banks’ loan portfolio in some countries such as Dominica, St. Kitts and Nevis and Antigua and Barbuda. By contrast, loans to the productive sector remain relatively limited in the region.

Moreover, development banks in the OECS region currently do not always fulfil their role of providing finance for productive investment in under-served segments of the private sector in general, and in high-potential priority sectors in particular. In fact, development banks in most OECS member states mirror the portfolio of commercial banks, which consists largely of personal loans and mortgages. The portfolio of St. Lucia’s development bank, for example, is made up mainly of housing loans (43.6%), education loans (11.2%), and bridging finance (8.2%). Loans to industry and services account for only 22.1% and 5.1% of the portfolio respectively. In total, the social sector accounts for approximately 55.6% of the portfolio, and the productive sector for 44.4% (2018) (SLDB, 2018[81]). The loan portfolios of the development banks of Antigua and Barbuda and Grenada, both consist largely of housing loans or mortgages (57% and 50.2% respectively), and student loans (12% and 14% respectively) (Grenada Development Bank, 2020[82]; Antigua and Barbuda Development Bank, 2009[83]). By contrast, Dominica’s development bank is channelling more funds into the productive sector than other development banks in the region. According to figures dating from 30 June 2019, the loan portfolio of Dominica’s development bank was made up mainly of loans to industry (27.9%) and the tourism sector (26.6%). Housing loans accounted for 22.9% of the portfolio, while education loans made up 16.6% of it (AID Bank, 2019[84]).

2.6.2. Strengthening financial-sector infrastructure, reforming national development banks, and building up a regional venture capital fund could improve access to finance

Access to finance could be improved by steering development banks towards financing more productive investment by the private sector. Development finance institutions, such as development banks, exist to encourage growth in the private sector through providing long-term loans and equity capital in situations where private financing is discouraged by high risk (OECD, 2014[85]). The OECS member states should refocus investment portfolios of their national development banks away from mortgages towards more productive investments. The Brazilian Development Bank (BNDES) provides a relevant example. In 2019, BNDES portfolio was primarily made up of loans to trade and services (55.2%) followed by industry (23.5%), agriculture (12.0%) and infrastructure (9.3%) (Brazilian Development Bank, 2022[86]). Similarly, Mexico’s national development bank, Nacional Financiera (Nafin), promotes financial inclusion in the country through a focus on microenterprises (Griffith-Jones, 2021[87]). Nafin’s portfolio was made up of 46% commercial loans, followed by 32% industry and 21% services in 2019 with 97.5% of these loans going to microenterprises in 2021 (Nacional Financiera, n.d.[88]).

A regional venture capital fund constitutes another potential opportunity for improving access to finance for young entrepreneurs and start-ups. Venture capital is a subset of private-equity financing – equity capital provided to enterprises that are not quoted on a stock market. Venture capital financing serves to support the pre-launch, launch, and early-stage development phases of a business. As such, venture capital is particularly important for young companies with potential to deliver innovation and growth, but with untested business models and no track record, and it replaces and/or complements traditional bank finance (OECD, 2015[89]). In 2018, the EU launched Venture EU, a pan-European venture capital fund-of-funds programme, in order to attract more private investment to young enterprises and start-ups who lack appropriate investment vehicles for providing such financing. In the context of this programme, six venture capital funds received EU seed funding of EUR 410 million with the objective of crowding-in private investment (European Commission, 2018[90]; European Commission, 2018[91]; EIF, 2017[92]).

The establishment of a credit bureau at the regional level in the OECS is another opportunity for improving access to credit. Credit bureaus allow financial institutions and other creditors to share and access credit information, and to manage their lending risks better, thereby increasing access to finance. An ECCB initiative supported by the International Finance Corporation and the Canadian Department of Foreign Affairs, Trade and Development to set up a regional credit bureau is ongoing (ECCB, n.d.[93]; Beaton, Myrvoda and Thompson, 2016[76]). However, at present, none of the OECS countries have a credit bureau (World Bank, 2022[2]; World Bank, 2021[74]). This limits potential lenders’ access to the financial history of borrowers. Setting up a credit bureau at the regional level would allow OECS countries to benefit from economies of scale.

Another potentially important measure would be to modernise foreclosure and insolvency regimes in OECS countries (Al-Hassan et al., 2020[78]). Effective insolvency regimes are essential for the resolution of NPLs. They provide mechanisms for creditors to realise their claims in a predictable, speedy and transparent manner (IMF, 2017[4]). However, resolving insolvency takes four years in Dominica, three years in Antigua and Barbuda, and two years in St. Lucia. This compares to 1.7 years in OECD countries. Moreover, the recovery rate for secured creditors through judicial reorganisation, liquidation, or debt enforcement proceedings is only 29.6% in Dominica, 37.1% in Antigua and Barbuda, and 43.5% in St. Lucia. This compares to the 70.2% rate that OECD countries registered in 2020 (World Bank, 2021[74]). Furthermore, few OECS countries have fast-track pre-insolvency procedures or out-of-court settlement mechanisms, and nor is the active promotion of such mechanisms a widespread phenomenon (IMF, 2017[4]). In addition, long periods for collateral resolution, plus outdated frameworks for foreclosure and the resolution of bankruptcies, reduce banks’ willingness to supply credit (Beaton, Myrvoda and Thompson, 2016[76]).

Looking ahead, a further strengthening of banking supervision could increase the resilience of the ECCU banking system, and could help to prevent future surges in NPLs. The ECCB is committed to the implementation of Basel II/III regulation. It has elaborated an implementation roadmap, and has established a dedicated team within its Bank Supervision Department for the implementation of Basel II/III. It has also set up a Basel II/III Implementation Working Group, comprising representatives of financial institutions in the region and the ECCB (ECCB, 2022[94]). The Basel II/III regulations are international standards developed by the Basel Committee on Banking Supervision in order to assess the capital adequacy of banks, and to ensure that they maintain sufficient capital to cover their risks and absorb potential losses.

2.7. Reducing bureaucracy and business costs could facilitate more private investment in the OECS region and boost productivity

2.7.1. E-government could reduce red tape

Administrative procedures tend to be long and onerous in the OECS region, representing an obstacle for private companies. Business procedures that tend to be particularly complex and burdensome across the region include resolving insolvency, as discussed above, for which the OECS countries achieved an average Doing Business score of 17.7/100 in 2020, and a rank of 151^st out of 190. They also include registering property, for which the OECS countries’ average Doing Business score was 45.4/100, with a ranking of 151^st out of 190. Furthermore, complex and burdensome business procedures also include paying taxes, an activity for which the OECS countries garnered an average Doing Business score of 66.7/100, and a rank of 117^th out of 190 (World Bank, 2021[74]). In addition, customs and trade regulations tend to be particularly lengthy and costly in the OECS region. Indeed, exporting and importing is both time-consuming and expensive in many of the member countries (Figure 2.20). It can take several days to clear perishable, fresh goods, which compromises their freshness, quality and marketability (World Bank, 2008[18]). In addition, information on business procedures, and in particular on changes in these procedures, can sometimes be difficult to obtain.

Figure 2.20. In some OECS countries, trade costs are high and delays are long

E-government and the digitalisation of public services present an opportunity to reduce bureaucracy, simplify administrative procedures and enhance transparency. In some areas there may even be scope to create economies of scale through regional co-operation. This could take place, for example, via a shared e-government platform for all member countries. At present, OECS countries’ performance in terms of e-governance is only moderate (Figure 2.21).

Figure 2.21. E-governance provides opportunity and room for improvement

One significant step would be for OECS countries to consider abolishing all passport, customs and border controls for goods and people within the Eastern Caribbean Economic Union. The revised Treaty of Basseterre, which is the ECCU’s foundation stone, establishes a customs union and the free internal circulation of goods and free movement of people. Currently, however, goods and people moving between the OECS member states still have to comply with a number of administrative, physical, technical and fiscal requirements at each port of entry (OECS, n.d.[97]; OECS, n.d.[98]). A set-up similar to the EU’s Schengen area of passport-free movement could eliminate these requirements for all passengers and goods circulating within the ECCU, removing red tape and customs and border procedures for trade.

2.7.2. The development of renewable energy could reduce high energy costs

OECS countries’ reliance on imported petroleum products for electricity generation leads to high energy prices in the region, and these represent a significant constraint for business. In addition, electricity prices are also highly volatile since they depend on international oil prices. As of 2020, electricity prices for industry and commerce in the OECS region were three times higher than in the EU on average, and eight times higher as a share of GDP per capita (Figure 2.22). There are, however, some differences between countries. Indeed, electricity prices are particularly high in Montserrat, Grenada, St. Lucia, and St. Kitts and Nevis. In Antigua and Barbuda and St. Vincent and the Grenadines, they are considerably lower, and are indeed in line with EU prices. There is also scope to improve the quality of the electricity supply in the region, with power outages still a frequent problem in OECS countries (Figure 2.23). As already noted, renewable energy represents an opportunity to reduce energy costs.

Figure 2.22. Electricity prices are high in most OECS countries

Figure 2.23. The electricity supply in the OECS region remains unstable

2.7.3. A regional fast-ferry service, and better organisation of existing intra-regional maritime transport, could improve intra-regional connectivity and reduce transport costs

An efficient maritime shipping sector is particularly important for island states with small domestic markets. It enhances competitiveness by making it possible to trade goods and services in a timely manner, and without excessive costs. Given the small size of OECS islands, businesses need to import most of their inputs. At the same time, they often need to export in order to achieve economies of scale, in particular in the manufacturing sector. Inefficient maritime transport services can drive up production and export costs, making firms’ tasks all the harder (Compete Caribbean, 2013[103]; World Bank, 2008[18]).

The availability and cost of transport directly affect the competitiveness of private businesses in the OECS region. In addition to an irregular transport system, high transport costs for exports and imports of goods represent an important obstacle for the region’s manufacturing and agricultural sectors (World Bank, 2008[18]). Furthermore, limited inter-island passenger transport poses another constraint for intra-regional tourism and multi-island tourism, which is also known as island hopping.

Formal maritime transport is limited and expensive in the OECS region. Moreover, OECS countries perform poorly in terms of liner-shipping connectivity (Figure 2.24). Formal maritime transport in the OECS region consists of large international shipping lines, which operate between the United States or Europe and their regional hubs in Barbados and Trinidad, serving other islands in the Caribbean through designated feeder lines. As a result, direct formal freight transport between islands in the region is generally not available. Moreover, goods exports that rely on formal maritime transport need to be shipped through the United States, resulting in higher costs of freight transport between OECS islands than from the individual islands to the United States, despite the much shorter distances. Transport costs within the OECS region can reach up to 90% of the price of certain retail goods (Compete Caribbean, 2013[103]).

The informal maritime transport sector is highly fragmented and lacks organisation. Local, largely informal maritime transport is made up primarily of small vessels with a cargo capacity of under 500 tonnes. They operate between OECS islands, and connect the region with other major islands in the Caribbean, such as Barbados and Trinidad and Tobago. They are operated largely by the isolated owners of individual vessels, on an informal basis, and lack organisation and co-ordination. The reliability of these vessels, and the frequency with which they serve shipping routes, are limited. Indeed, services generally do not follow a schedule, costs are relatively high, transit time is often long, and the arrival of ships is uncertain. Vessels tend to be old, and do not always respect safety standards. Moreover, the operational methods of loading, unloading, and carrying cargo tend to be poor. Furthermore, vessels lack refrigeration capacities and adequate warehouses, and cargo insurance tends not to be available (Compete Caribbean, 2013[103]; Jansen, Stern and Weiss, 2015[27]). Due to a lack of better alternatives, however, private companies generally rely on these private vessels for inter-island transport (World Bank, 2008[18]).

In addition, the transport by air of freight and passengers in the region is limited and expensive. Air freight services within the region are rather limited, and are provided primarily by the regional airline, Leeward Islands Air Transport (LIAT). Similarly, passenger flights – the only means of passenger transport between most OECS islands – are often scarce, and have further been reduced in the context of the COVID-19 pandemic. In many cases, there is only one flight a week. Furthermore, air passenger flights and air freight both tend to be expensive in the region (Barbet-Gros et al., 2015[104]).

Figure 2.24. Maritime connectivity in the OECS region is limited

A better organisation of the existing intra-regional maritime transport sector, plus greater co‑ordination between vessel owners, could enhance efficiency and facilitate technological upgrades. At present, the isolation of the small vessels that are used for intra-regional transport, and the lack of co-ordination among them, limits the kinds of opportunities for economies of scale that would make it possible to upgrade the service that they can offer by marketing their services and communicating with clients, and by financing technological upgrades and investments in refrigeration and warehousing capacity. In a vicious circle, moreover, vessel owners are forced to lower their prices in order to preserve their narrow client bases, resulting in a reduction in revenues. In turn, this further limits vessel owners’ ability to invest in the technological upgrades that would be necessary in order to improve the quality of their services (Compete Caribbean, 2013[103]).

A regional fast-ferry service could improve the availability of regional transport, both for passengers and freight. A feasibility study for a regional fast ferry appears already to be in preparation. There are currently 11 ferry systems in the Caribbean region, such as the privately operated service that operates between St. Kitts and Nevis, which could serve as an example for a regional fast-ferry service. Ferry systems in other parts of the world, such as the Greek ferry system, and ferry routes in the Baltic Sea, could also serve as inspiration for the OECS region. However, while several carriers tend to compete on high-demand routes in the Baltic Sea such as Tallin to Helsinki, Sassnitz to Ronne or Trelleborg to Rostock, the ferry systems in Greece and the Baltic both require public subsidies, since they do not operate exclusively on routes that are commercially viable. At present, prices of ferry transport are considerably higher in the Caribbean than in the Baltic and in Greece (Barbet-Gros et al., 2015[104]).

Moreover, a regional fast-ferry service could stimulate more regional and international stayover tourism. A regional fast-ferry service would facilitate travel between the islands, and would reduce travel costs, thereby allowing the region to tap into new markets such as international stayover tourists who are interested in island hopping and thus visiting several islands, as well as local intra-regional tourists. A regional fast-ferry service could also facilitate the movement of motor vehicles between the islands of the OECS (Barbet-Gros et al., 2015[104]).

In order to establish a regional fast-ferry service, however, regional collaboration and co-ordination between governments, and the facilitation of the movement of people and goods across the region, will be key. In particular, a regionally organised, transparent and professionally managed procurement process will be essential in the successful establishment of a regional fast-ferry system. In the past, the project of building a fast-ferry service has failed due to a lack of regional co-operation between governments. Cumbersome, complex and time-consuming regulations, plus restrictions to the movement of people and goods across the region, are another obstacle to the establishment of a regional fast-ferry service. Furthermore, the temporary importation of vehicles would need to be recognised across the region in order to facilitate the transport of motorised vehicles. In addition, there is also a need for adequate port-related and other shore-based infrastructure, such as ferry terminals, docks and passenger processing facilities, which do not yet exist in all of the countries in the OECS (Barbet-Gros et al., 2015[104]).

2.8. Debt consolidation through prudent public expenditure and debt for climate swaps

Public sectors across the region are relatively large and have grown over the last decade. Most OECS countries have a relatively large number of ministries given their small size, and public-sector employment is relatively high in many countries in the region. Public-sector employment in the OECS region accounts on average for 24% of total employment, as compared to 18% in the OECD, although there is great variation between countries (IMF, 2017[106]). Public administration, defence, and compulsory social security, amount to 12.7% of GDP in the OECS region, or to 10.2% of GDP if Montserrat, where this ratio is much higher, is excluded from the calculation; up from 7% in the mid-2000s. This compares to approximately 6% in the OECD and the EU (Figure 2.25) (ECCB, 2022[1]).

Figure 2.25. OECS countries have large public sectors

As a result, current expenditures are relatively high in the region, crowding out other forms of public spending, like social benefits. Indeed, a large portion of central government budgetary spending goes to compensation for public employees. The average share of GDP that this expense represents in the OECS is 10%, which is much higher than the SIDS average of 4.57% (Figure 2.26). Furthermore, spending on social-benefits programmes accounts on average for just 1.89% of GDP, which stands in contrast to the SIDS average of 4.37%. While public employment does function as a mechanism to improve outcomes for citizens, it also means there is relatively less room for spending on social benefits. In order to build up the social capacity of the OECS member states, it would, indeed, be important to develop a strategy to increase spending on social services.

Some of this has been driven by wage growth since 2008. Public-sector wages are higher than private-sector wages in Dominica, St. Vincent and the Grenadines, St. Lucia, Grenada, and St. Kitts and Nevis. The wage differential is the largest in Dominica and St. Vincent and the Grenadines, where public-sector wages are 70% and 50% higher than private sector wages respectively. In turn, high public wages put pressure on private sector wages, driving up overall wages in OECS countries as well as production costs, and thereby constraining profitability and hampering private investment and job creation (IMF, 2017[106]; World Bank, 2018[77]; James et al., 2019[108]). Overall, wage growth has been outpacing growth in labour productivity in the OECS region. In turn, this has contributed to relatively high unit labour costs (James et al., 2019[108]). The increasing gap between wages and productivity, and indeed the relatively high labour costs per se, have been contributing to high levels of unemployment in the region (IMF, 2017[106]; World Bank, 2018[77]).

Figure 2.26. Public-sector pay accounts for a significant share of government expenses

2.8.1. Debt for climate swaps could help OECS countries reduce their external debt burden

Overall, levels of public debt in the OECS have been falling steadily since the early 2000s. Indeed, there has been an impressive drop in overall debt levels, particularly for St. Kitts and Nevis, which has set an example in the region for sustained debt reduction. Starting from a region-wide high of 152.2% in 2005, it has now become the country with the lowest ratio in the region, with the exception of Montserrat. St. Kitts and Nevis managed this by cracking down on loose fiscal policy, by making steady repayments of the principal of its debt, by repaying some of its outstanding debts in full, and also through various fiscal and budgetary reforms (Government of St. Kitts and Nevis, 2016[111]). In part, this reform was fuelled by prudent spending of CBI revenues (IMF, 2021[112]). Elsewhere in the region, Grenada has also seen an improvement. Indeed, before the onset of the COVID-19 pandemic, Grenada reached just above the debt-reduction target set out by the ECCB. However, other member states have struggled to reduce their debt levels. Dominica, for example, was battered by back-to-back hurricanes in 2015 and 2017, leading the government to take on more debt to fund reconstruction efforts. The debt levels of both St. Lucia and St. Vincent and the Grenadines have also been creeping up over the past decade, with the Inter-American Development Bank (IDB) recommending policy reforms similar to those of St. Kitts and Nevis (IDB, 2017[113]).

Despite the overall decrease, however, debt remains a primary concern in the region. Indeed, the OECS’s development strategy from 2018, the ODS, highlighted the reduction of public debt as one of its region-wide goals. According to the ODS, reducing public debt is necessary in order to free up limited policy space in the region, thereby making room for expansionary fiscal policy. In addition, debt levels are also important due to the member states’ exposure both to external crises and to frequent natural disasters, which can be costly for the region, and require adequate room to react. With this in mind, the ECCB has set out a regional target for the ratio of public debt to GDP ratio to fall within 60% by 2035. This is an attempt to bring debt levels into line with global thresholds of acceptable indebtedness (OECS Commission, 2018[114]). Prior to the COVID-19 pandemic, the aim had been to achieve the 60% target by 2030. As of 2021, the regional average was still well above this target, with public government debt to GDP standing at 88.2%, and ranging from 68.2% in St. Kitts and Nevis to 111.1% in Dominica (ECCB, 2022[1]). Against this backdrop, reforming tax-incentive schemes, and a broader tax reform, could help to raise additional revenues to reduce government debt.

Figure 2.27. After a steady reduction over recent decades, public debt has rebounded in the context of COVID-19

Notwithstanding the trend towards debt consolidation in recent years, the COVID-19 pandemic has induced a sharp rise in public debt in the region. To be sure, the pandemic has led to a sharp increase in government expenditure worldwide, but it has been particularly difficult for tourism-centric economies like those of the OECS. With containment policies preventing travel, and a global recession reducing demand, tourism revenues dropped steeply. Likewise, employment in the sector also took a major hit because many jobs that depend heavily on tourism services were unable to function as normal. This led national governments to support impacted households through direct transfers, payroll support, and short-term unemployment insurance programmes (IMF, 2021[116]). Combined with other relief policies, these expenditures created a sharp squeeze on the already limited room for fiscal manoeuvre in the OECS, causing a sharp increase in the region’s public-debt ratios from 2019 to 2020 (Figure 2.27). Tax reform, including the reduction of tax incentives, could allow OECS countries to increase tax revenues, and to consolidate government debt.

In addition, external debt is a concern in the region. OECS countries have relatively high levels of external debt. External debt amounts on average to 56.1% of Gross National Product (GNI) and 206.1% of exports in Dominica, Grenada, St. Lucia, and St. Vincent and the Grenadines compared to 27.6% and 114.1% on average, respectively, in upper middle-income countries (World Bank, 2022[117]). More than half of public debt was made up of external debt in the ECCU (54.5%) (ECCB, 2022[1]). In 2021, Dominica and St. Vincent and the Grenadine’s risk of external debt distress was evaluated as high by the World Bank and the IMF and Grenada’s level of risk was evaluated as already being in distress (World Bank, 2022[118]). Upper middle-income and high-income countries’ – such as OECS countries’ – external debt tends to be made up to a large share of private lending, which is more expensive than concessional loans (Piemonte, 2021[119]).

Debt for climate swaps could help OECS countries reduce their external debt burden. In debt for climate swaps, bilateral and multilateral debt relief is granted to developing countries, including SIDS, to reduce their external debt if they invest the liberated funds in national climate adaptation and mitigation programmes. Debt for climate swaps are currently being negotiated in several OECS member states, including Antigua and Barbuda, Grenada, St. Lucia, and St. Vincent and the Grenadines. In addition to helping OECS countries reduce their external debt burden, debt for climate swaps could also help them to become more resilient to natural disasters. The additional financing available for climate adaptation and mitigation measures from debt for climate swaps could allow OECS countries to invest in resilience measures to natural disasters such as disaster-resilient infrastructure (Fuller et al., n.d.[120]) (United Nations, 2021[121]).

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