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Why Sir Richard Branson is right on the money

Tuesday, November 07, 2017

For years Caribbean governments have been calling on international organisations, multilateral development banks, and developed countries to formulate a major economic package of aid and debt relief.

The advocacy has generally fallen on deaf ears, but recently Sir Richard Branson has made a call for a Marshall Plan for the region, similar to the aid package the US provided to rebuild Western Europe after World War II.

Maybe now the international community will listen. Given the recent hurricanes in the region, Sir Richard's timing demonstrates his political acumen.

The dilemma is that potential donors feel the Caribbean nations are well-off, middle-income countries that do not need aid. This stance rests on the use of per capita income as a criteria for aid — a measure which overlooks the vulnerability of the small developing economies.

The Caribbean has experienced a persistent economic recession, with a few exceptions, since the onset of the global financial crisis that erupted in late 2008. Rates of growth have been varied among the countries, but have been low and fluctuating, hovering around one per cent, and the rate of unemployment has been almost 14 per cent.

In an effort to promote and sustain economic growth, governments have pursued fiscal policies that have contributed to a build-up of external debt. The crisis was precipitated by a combination of long-term structural and institutional factors, compounded by cyclical short-term factors such as commodity prices, in particular oil prices. The forecast for 2017 is for subdued economic growth. In these challenging circumstances, there are several issues that require urgent attention to facilitate the economic recovery of the Caribbean. The United States — as a global superpower and largest economic partner of the Caribbean in trade, investment, and tourism — can play an important role in assisting the region to achieve sustainable economic development.

The Caribbean countries continue to be among the most indebted in the world. The debt is now a major impediment to economic growth because it has deprived the governments of the ability to use fiscal policy to promote growth.

The situation is now at a point where a major policy initiative has to be mounted to significantly reduce the debt if sustainable economic growth is to be resumed. Conventional wisdom in the economics profession is that when the debt stock is over 75 per cent of gross domestic product (GDP) the debtor country cannot grow its way out of debt.

Most countries have debt/GDP ratios between 50 and 100 per cent and debt servicing consumes a significant share of foreign exchange and government revenue.

The reduction of the debt will ease the liquidity constraints, solvency risk, and allow governments to increase public investment in infrastructure, education and health. The debt burden has to be reduced by strategy combining (a) restructuring of multilateral debt; (b) reduction of bilateral debt by debt swaps for climate mitigation, environment, education and cancellation; and (c) conversion of commercial debt into multilateral debt.

The Caribbean, without doubt, needs a Marshall Plan to build resilience and lay the basis for sustainable economic growth.