An Assessment of Trade Performance and Competitiveness of OECS Countries

An Assessment of Trade Performance and Competitiveness of OECS Countries October 28, 2005 Prepared by Christopher Vignoles for the Caribbean Regional Negotiating Machinery (CRNM)

TABLE OF CONTENTS I. Introduction... 1 II. The Importance of Trade... 2 III. Trade in Services... 4 A. Importance of Services Trade... 4 B. Trade Performance... 5 C. Travel Services measuring tourism s competitiveness... 7 (i) Tourism arrivals stopover visitors and cruise ship passengers... 7 (ii) Tourism visitor expenditures... 8 (iii) Price competitiveness... 9 (iv) Tourism competitiveness monitor... 10 (v) The tourism satellite account... 11 D. Commercial and Transportation Services... 12 E. The Provision of Services via Modes 3 and 4... 14 F. Evaluating Services Trade... 16 IV. Merchandise Trade... 18 A. Trade Performance... 18 (i) Growth and patterns in the direction of trade... 18 (ii) Composition of trade by sectors... 20 (iii) Export concentration and principal products... 22 B. Competitiveness, Specialization and Complementarity... 23 (i) Real effective exchange rate... 24 (ii) Market access and penetration... 24 (iii) International competitiveness of exports... 26 (iv) Export specialization... 28 (v) Trade complementarity and intensity... 30

C. Evaluating Merchandise Trade... 31 V. Competitiveness through Cost Structures... 33 A. Inputs and Factors of Production... 33 (i) Labor... 33 (ii) Capital... 34 (iii) Inputs as goods and services... 35 B. Infrastructure Costs... 36 (i) Transport... 36 (ii) Telecommunications... 36 (iii) Electricity... 37 VI. Trade and Integration: A Strategy for Growth... 39 A. Exports and Growth... 39 (i) Challenges in scale, cost and preference erosion... 39 (ii) Opportunity in diversification... 41 B. A Strategy for Competitiveness... 41 (i) Unilateral action... 42 (ii) A multilateral agenda... 43 (iii) Regional integration... 44 Statistical Appendix Bibliography The views expressed in this document reflect those of the author and not of the Caribbean Regional Negotiating Machinery. The author would like to thank Henry Gill, Ramesh Chaitoo and Dr. Claudius Preville for their valuable comments on a draft of this report.

I. INTRODUCTION The Organization of Eastern Caribbean States (OECS) was formed in 1981 with the signing of the Treaty of Basseterre in St. Kitts & Nevis. The OECS includes seven full member states (Antigua & Barbuda, Commonwealth of Dominica, Grenada, Montserrat, St. Kitts & Nevis, St. Lucia and St. Vincent & the Grenadines) and two associate members (Anguilla and the British Virgin Islands). 1 Its mission is to contribute to the sustainable development of the sub-region through regional integration initiatives. While the OECS began as a union to promote cooperation and solidarity, it has evolved into a relatively advanced integration process. The organization s supreme decision-making body is the OECS Authority, made up of prime ministers and chief ministers from all member states, and it is supported by an administrative secretariat located in Castries, St. Lucia. Also, the seven full members and Anguilla have formed a currency union, with the adoption of the Eastern Caribbean dollar, supervised by the Eastern Caribbean Central Bank. All OECS full member states are partners in the wider regionally integrated Caribbean Community (CARICOM). For more than 30 years, CARICOM members have sought to deepen relations through economic integration, foreign policy coordination and functional cooperation. In 2001, they signed the Revised Treaty of Chaguaramas and committed to, among other things, the creation of a CARICOM Single Market and Economy (CSME). 2 While the CSME process is moving forward, many OECS countries have voiced reservations about its potential benefits and costs. This report will not attempt to evaluate the CSME s impact on OECS member states since it is not yet fully implemented. However, at this time, it is important for OECS countries to evaluate their economic performance, identify development bottlenecks and implement possible solutions, to increase the gains and diminish the losses from a single common market (and eventual single economy) across the Caribbean region. This report attempts to provide an analysis of the sub-region s trade performance and competitiveness over the last ten years (for which data is available, 1993-2003). Chapter II of this report briefly looks at the importance of trade for the economies of the OECS sub-region. Chapters III and IV analyze the performance of services and merchandise trade, respectively. They also attempt to provide insights into the competitiveness of sectors and products in both categories of trade. Chapter V identifies the cost structures faced by firms operating across the OECS, and assesses the impact on competitiveness in production and trade. Chapter VI summarizes the conclusions and puts forth a possible strategy for competitiveness to drive sustainable export-led growth in the region. A statistical appendix and a bibliography follow the report. 1 In this report, the OECS refers to full members only. In some data calculations, OECS does not include Antigua & Barbuda and Montserrat due to lack of comparable data. 2 CARICOM includes the seven OECS full member states, plus The Bahamas, Barbados, Belize, Guyana, Haiti, Jamaica, Suriname and Trinidad & Tobago. The Bahamas is not party to the Revised Treaty of Chaguaramas and the CSME. 1

II. THE IMPORTANCE OF TRADE Trade plays a very significant role in the economies across the OECS sub-region. As small island states, the OECS countries are relatively open economies and therefore, rely on export income to create jobs, buy imports, and maintain an overall healthy balance in external accounts. Furthermore, these countries are fiscally dependent on international trade transactions for revenue to finance government operations and increasing external debt payments. The constraints of small size render a country to open its economy and integrate into the global trading system. In micro states, the smallness of domestic markets drive firms to seek external markets, while at the same time, limited domestic resources increase the need for consumers and producers to buy goods and services abroad. The openness of OECS countries is evident through the trade openness indicator, measured as exports and imports of goods and services as a percentage of output (trade/gdp). The OECS as a whole displays an openness indicator of 124 percent; this share ranges from 140 percent in Antigua & Barbuda to 113 percent in St. Kitts & Nevis. 3 Given this degree of openness, any changes in trade performance have a direct impact on economic output. Another method to measure the importance of trade is to evaluate the impact of exports and imports on a country s balance of payments. Over the last decade, the sub-region s current account balance has deteriorated from approximately 10 percent to 20 percent of GDP. 4 This poor performance is the result of a growing merchandise trade deficit (stagnant exports and rising imports) and relatively stagnant services exports (traditionally, a strong surplus account). Thus far, the OECS sub-region has been able to finance the current account imbalance with substantial inflows of foreign direct investment and development aid. The production and trade structures of OECS countries show that they are predominantly services economies. Services related sectors contribute between 60-75 percent of GDP, while industry (including manufacturing) accounts for roughly 20-28 percent of output. 5 In terms of trade structures, OECS member states export mostly services and import mostly goods. Services exports account for almost 80 percent of the region s total exports, up from a 66 percent share in the early 1990s. For the past decade, goods have accounted for 70 percent of imports into the OECS (see Table 1 in the Statistical Appendix). The importance of trade in OECS countries is also evident in their dependence on international trade taxes as a source of fiscal revenues. Revenue from international trade transactions accounts for just over 50 percent of total revenue in Antigua & Barbuda, Grenada and St. Lucia, 45 percent in Dominica and St. Vincent & the Grenadines, and 37 percent in St. Kitts & Nevis. 6 This indicates a significant dependence on trade to finance government operations, including the increasing burden of interest payments on debt. OECS member states are among the most 3 In comparison, the trade openness indicator for the Caribbean as a whole is 72 percent, for the MERCOSUR countries it is less than 30 percent. See World Bank World Development Indicators (WDI) database. 4 IMF Balance of Payments Statistics database. 5 World Bank WDI. 6 Total revenue excludes grants. See IMF (2004b, 2004c, 2005c and 2005d) and ECCB (2004). 2

indebted countries in the world. In 2004, six countries in the sub-region were among the fifteen most indebted emerging economies St. Kitts & Nevis ranked second with a public sector debt to GDP ratio of almost 180 percent. 7 14.0 10.5 Figure 2.1 Export Growth Performance, 1990-2003 1990-1995 1995-2000 2000-2003 Growth Rate (%) 7.0 3.5 0.0-3.5-7.0 OECS Antigua & Dominica Grenada St. Kitts & St. Lucia St. Vincent Barbuda Nevis & Grens. Notes: Exports of goods and services. Growth is measured as annual average over time period. Source: UN, IMF and WTO data. In conclusion, OECS economies are small, open and deeply integrated into the global trading system. Export growth, particularly in services sectors, is therefore a key to their development prospects. However, as the balance of payments indicates, export growth has slowed in recent years due to a number of factors, including the erosion of preferences, increased competition from foreign suppliers, and slumping tourism demand (see Figure 2.1 above). OECS countries must find ways to improve their competitiveness and boost exports in this era of growing liberalization, or face the prospect of dwindling economic growth. In the next two chapters, the report takes a closer look at the performance of services and merchandise trade, as well as the competitiveness of specific sectors and products. 7 IMF (2005b). 3

III. TRADE IN SERVICES This chapter looks at the importance and performance of services sectors in the OECS regional and national economies. It also attempts to evaluate the competitiveness of services sectors, particularly tourism, over the last decade. The analysis is carried out in two ways: (i) by sector, for travel, commercial and transportation services; and (ii) by mode of supply, for trade in services through commercial presence and the temporary movement of labor (Modes 3 and 4, respectively). It is important to note that the lack of comprehensive and reliable services data, worldwide and especially in the region, limits the scope of analysis. 8 Given the importance of services in many OECS economies, the capacity to collect, maintain and disseminate services data should be improved. A. Importance of Services Trade Services account for 80 percent of total exports and 30 percent of total imports in the OECS. The sub-region as a whole is a net exporter of services. During the period 2000-2002, it exported twice the value of services as it imported; this ratio has remained relatively consistent over the past decade. Services exports are relatively more important as a source of foreign exchange in Antigua & Barbuda, St. Lucia and St. Vincent & the Grenadines, accounting for more than threequarters of total exports. The OECS travel (mainly tourism) industry is the most important sector in the sub-region s services export structure (see Figure 3.1 below). Between 1993-2003, the travel sector accounted for 73 percent of all services exports (this share has decreased slightly over time). In 2003, OECS travel services receipts reached US$ 914 million, roughly three times the value of total goods exports during the same year. Travel services exports account for over 85 percent of total services exports in St. Lucia; this figure is roughly 70 percent in Antigua & Barbuda, Grenada and St. Kitts & Nevis, 65 percent in St. Vincent & the Grenadines, and 60 percent in Dominica. Commercial, transportation and government services make up the remaining share of services receipts. The largest sector, commercial services, accounts for 16 percent of OECS total services exports. 9 It makes up the largest share of exports in Dominica and St. Vincent & the Grenadines (30 and 26 percent of total services, respectively). The transportation sector is the third largest source of services export earnings, accounting for 10 percent of the total. Government services exports are negligible. 8 For example, current methods of compiling services data do not allow one to look at trends vis-à-vis different destinations. Furthermore, problems still exist in some countries (OECS member states included) in measuring two of the four modes of supply for services trade (Mode 3 commercial presence and Mode 4 movement of labor). 9 Commercial services include, among others, telecommunications, financial, insurance and professional (such as engineering and legal) services. 4

Figure 3.1 OECS Services Exports by Area, 1993-2003 100% 80% Share of total. 60% 40% 20% 0% 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Travel Commercial Transportation Source: See Table 2 in the Statistical Appendix. Services industries are also an important source of employment in the OECS sub-region. It is estimated that the tourism sector employs, both directly and indirectly, up to 40 percent of the regional labor force. Another 20 percent, approximately, is estimated to work in the public sector. 10 Adding the other services sectors share of employment (for which data is largely unavailable) shows the overwhelming importance this area of trade has on employment in the sub-region. For example, in St. Lucia the share of employed persons working in services-related industries (including construction and utilities) was roughly 70 percent in 2003. B. Trade Performance OECS services trade has been characterized by slowing growth in exports and imports. The subregion s total services exports grew by an average 3.2 percent a year between 1993-2003; a moderate performance, yet relatively weak compared to CARICOM as a whole (4.6 percent) and to all less developed countries (6 percent). Services exports grew fastest in the first versus the second half of the decade, posting growth rates of 5.9 percent and 0.6 percent, respectively. As Figure 3.2 shows, total services exports peaked in 1999 reaching US$ 1.24 billion, however, they contracted over the next three years, and despite growth of 10 percent in 2003 have failed to reach their 1999 level. Total services imports demonstrated a similar pattern of growth expanding at an average 8.2 percent a year between 1993-1998 and 0.8 percent a year between 1998-2003. All OECS member states experienced similar trends in growth, with faster growth in the first half of the decade relative to the second half. The poor performance between 1998-2003 can be 10 World Bank (2005). 5

attributed to three countries: Dominica and Antigua & Barbuda displayed contractions in their total services exports of 1.9 and 0.4 percent a year, respectively; while St. Lucia s growth was stagnant (0.5 percent). In terms of total services imports, Grenada experienced the fastest growth relative to other OECS member states (7.4 percent a year), while Dominica displayed the slowest growth at an average 2.1 percent a year. 1,300 US$ Millions 1,100 900 700 500 Exports Imports 300 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Source: See Tables 2-4 in the Statistical Appendix. Figure 3.2 OECS: Services Trade, 1993-2003 Similar to total services exports, OECS travel exports displayed moderate 3 percent growth a year between 1993-2003. This growth was comparable to CARICOM as a whole (3.9 percent), but much weaker than some regional tourism competitors such as the Dominican Republic (9.8 percent a year). Travel receipts grew every year since 1995, with the exception of 2001-2002 as a result of weakening tourism demand worldwide. This sector s exports grew fastest in Dominica and St. Vincent & the Grenadines (over 6 percent a year for both), and remained stagnant in Antigua & Barbuda and St. Kitts & Nevis. St. Lucia s travel receipts grew at an average 10 percent a year up to 1998, but have since remained stagnant. The second most important area, commercial services, was the fastest growing sector in the OECS services export portfolio. Between 1993-2003, commercial services receipts grew by 4.5 percent a year. However, this was the result of a strong performance in the first half of the decade (annual 15 percent growth) rather than the second half, where the sector actually contracted by almost 5 percent a year. The poor performance is due to slumping financial and insurance services receipts as the two sectors, together, have contracted by roughly one-third (in absolute terms). OECS transportation services exports have maintained average growth of 3 percent a year. Grenada s transportation receipts (both air and maritime) have performed the best relative to other OECS member states, growing at 18 percent a year since 1998. The performance of OECS services sectors can also be measured through trends in global services market share. The OECS s share of global services trade has declined in recent years, from 0.09 percent in 1993 to 0.07 percent in 2003. In travel services, the OECS global market share has been volatile and displayed a downward trend from a high mark of 0.22 percent in 1994 to a minimum of 0.17 percent in 2002. The OECS share in global transportation services imports is slightly down over the last decade, while the sub-region has lost approximately onethird of its share of commercial services over the same period. 6

C. Travel Services measuring tourism s competitiveness To measure the competitiveness of the OECS s tourism product, this report analyzes a variety of traditional and non-traditional indicators. Traditional measures of tourism performance and competitiveness include tourism arrivals (both stopover and cruise passenger visitors), tourism earnings, and the real effective exchange rate. Non-traditional indicators include the World Travel & Tourism Council s competitiveness monitor and the tourism satellite account. It is important to note that while this section focuses on the tourism sector, there are other sectors within travel services with significant potential for growth such as offshore education and healthrelated services. 11 (i) Tourism arrivals stopover visitors and cruise ship passengers OECS total tourism arrivals have grown at 3.5 percent a year between 1993 and 2003. Tourism arrivals grew strongly in the first half of the period (over 7 percent growth). Growth over the next five-year period was relatively stagnant with arrivals contracting, on average, 0.1 percent a year. There are two main categories of tourism arrivals: (i) stopover tourists, whose arrivals have increased by 2 percent a year; and (ii) cruise passengers, whose arrivals have grown by almost 5 percent a year. Given this performance, stopovers now represent a smaller share of total arrivals in the OECS from a decade earlier (from a 43 to a 38 percent share). The consumer market structure of the OECS tourism industry is relatively diversified. Between 1998-2003, 31 percent of stopover arrivals came from Europe, another 30 percent from the United States, 27 percent from the Caribbean and 13 percent from other countries. Intra-regional stopover arrivals have displayed the strongest growth performance, increasing by an average 5.2 percent a year over the last decade, versus growth of 2 percent and 1 percent a year in European and American stopover visitors, respectively. The increasing importance of the Caribbean as a consumer market for OECS tourism is, in part, the result of increasing popularity of cultural tourism within the region (i.e. music festivals, carnivals, holiday celebrations). There is potential for additional growth of Caribbean tourist visitors if the region can address some existing constraints such as weak intra-regional transport links (see Figure 3.3 below). To measure the OECS tourism industry s competitiveness one can also analyze trends in its market share of total Caribbean stopover and cruise passenger arrivals. The OECS share of total stopover arrivals to the Caribbean has remained relatively stable at 5 percent between 1993-2003. While this share has not increased over time, the sub-region did display relatively strong growth of 2 percent a year since 1998 (second fastest growth among Caribbean regional groupings, behind the Hispanic Caribbean destinations). 12 As a result, the Hispanic Caribbean has increased its share of total visitor arrivals to the region from 28 percent to 37 percent a decade later. 11 For more detailed information on offshore education and health-related services see World Bank (2005). 12 Regional groupings include: OECS, Other CARCIOM (non-oecs), Other Commonwealth (Anguilla, BVI, Bermuda, Cayman Islands and Turks & Caicos Islands), Hispanic Caribbean (Cancun and Cozumel-Mexico, Cuba and the Dominican Republic), Dutch Caribbean (Aruba, Bonaire, Curacao, Saba, St. Eustatius, St. Maarten), French Caribbean (Guadeloupe and Martinique), and US Territories (Puerto Rico and USVI). 7

Figure 3.3 OECS Stopover Arrivals by Origin, 1993-2003 300 250 Visitors ('000) 200 150 100 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 United States Europe Caribbean Source: See Table 5 in the Statistical Appendix. A closer look at stopover arrivals to the Caribbean by consumer market (or origin) yields similar results. The OECS share of all US stopover arrivals to the Caribbean has decreased slightly from 2.8 percent in 1993-1998 to 2.5 percent in 1998-2003, given that increasing numbers of American tourists are now heading to Hispanic Caribbean destinations. Similarly, the OECS share of European visitors to the region has dropped from 6.3 to 5.4 percent. In this case, the Hispanic Caribbean s market share has grown by 8 percentage points to capture almost 50 percent of European visitors. The OECS sub-region has performed best in capturing intraregional visitors it has increased this share by almost 1 percentage point to receive one-fifth of all intra-regional stopover arrivals. In the Caribbean cruise ship market, the OECS has consistently held a 10 percent market share of arrivals. This has been the result of a strong performance in the mid 1990s, when arrivals grew an average 11 percent a year. However, this performance has been much weaker in recent years cruise passenger arrivals contracted 1.4 percent a year between 1998-2003. In contrast, other Commonwealth and Hispanic Caribbean destinations have displayed growth of over 10 percent a year during the same period. The Hispanic Caribbean, alone, has more than doubled its share of the cruise passenger market to 18 percent (mainly due to Cozumel s increasing popularity as a cruise destination). See Tables 5-7 in the Statistical Appendix for more detailed information on Caribbean tourism arrivals. (ii) Tourism visitor expenditures Visitor expenditures in the OECS grew at an average 3.4 percent a year since 1993 to reach almost US$ 1 billion in 2003. This was a relatively weak performance given growth of 4 percent for non-oecs CARICOM countries, 4.5 percent for US territories and 7 percent for Hispanic Caribbean destinations. As a result, the OECS share of total visitor expenditures in the Caribbean declined by one-half a percentage point to 4.8 percent. Given that the OECS accounts for a 4.4 percent share of tourism visitors, spending per visitor in the OECS is higher relative to other Caribbean destinations. 8

Visitor expenditures in Grenada displayed the strongest growth (almost 14 percent a year), while expenditures in Antigua & Barbuda and St. Kitts & Nevis displayed the weakest performance (both at an average 0.8 percent a year between 1993-2003). The growth in expenditures in Hispanic Caribbean destinations was driven by Cozumel, Cuba and the Dominican Republic, increasing by an average 17, 11 and 9 percent a year, respectively. There is potential for the OECS to boost tourism expenditures from a variety of sources. First, while cruise ship passengers account for 60 percent of arrivals, they represent less than 10 percent of tourism earnings. It is important that the OECS look into strategies to increase the foreign exchange spent on-shore by cruise passengers on transportation, tour guide, retail sales and entertainment services. Second, the yachting sector is another area of potential growth for tourism earnings. While not yet systematically incorporated in the measurement of tourism expenditures, the yachting sector is a maturing segment with estimated earnings of more than US$ 75 million a year. Some of the sector s development constraints that should be addressed include a general lack of awareness of yachting s economic impact, little formal training in yachting-related skills, poor inter-island collaboration and no private sector organization. 13 (iii) Price competitiveness Analysis of the OECS s price competitiveness of its tourism product yields mixed results. At the macroeconomic level, the real effective exchange rate (REER) is used to: first, analyze trends in a country or region s international price competitiveness over time, and second, compare these trends with trade partners and competitors. To measure the competitiveness of tourism, the IMF constructs a REER based on tourism customers. IMF calculations of this real exchange rate for the OECS region show a relatively stable trend between 1990 and 2003 (see Figure 3.4). Perhaps the most noticeable change has been sustained depreciation in 2002 and 2003; and while largely on the basis of a depreciating US dollar, this trend has improved the sub-region s tourism price competitiveness in its major export markets. However, similar trends in the sub-region s main tourism competitors (such as the Dominican Republic) have also weakened the relative competitiveness of the OECS tourism product. 14 Figure 3.4 OECS: Real Exchange Rate (Tourism-based), 1990-2003 110 REER Index 105 100 95 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Note: 1990 = 100; decrease = depreciation. Source: IMF (2004a). 13 UN-ECLAC (2004). 14 For more information on the tourism-based REER see IMF (2004a). 9

At the firm level, price competitiveness can be measured through production costs, which are a reflection of the allocation of resources and cost of inputs within an economy. IMF calculations indicate that prices of tourism products in the OECS tend to be among the highest in the Caribbean. This trend is most visible in high food and accommodation prices, which are the direct result of high labor and utility costs. A strategy to pursue the high-end tourism market and offer a differentiated product is a valid one; however, there is evidence that the OECS tourism product is not that different from other lower-cost Caribbean destinations. Hence, the sub-region may be pricing itself out of the market and suffering a loss in price competitiveness. 15 For more on cost structures in the OECS, see Chapter V of this report. (iv) Tourism competitiveness monitor The tourism competitiveness monitor is an indicator calculated by the World Travel & Tourism Council that ranks over 200 countries on the basis of seven indices of competitiveness. 16 As Table 3.1 shows, in 2004, the OECS ranks very low in price competitiveness. Only one member state, Dominica, ranks among the top 100 countries in price competitiveness of its tourism product. Also, relative to other Caribbean tourism destinations, the OECS ranks relatively poorly in the human resources index. This is a worrying trend for the OECS given the importance of human resources in terms of skills, training and customer service as a key input to the tourism industry. The OECS performed well in the infrastructure and social indicators. Grenada, St. Vincent & the Grenadines and St. Kitts & Nevis all rank in the top 16 countries in terms of infrastructure; all OECS member states are among the top 54 countries in the social indicator. At the same time, the Hispanic Caribbean does not display high marks in the social area. Other CARICOM countries (The Bahamas, Barbados, Jamaica and Trinidad & Tobago) displayed high rankings in the technology, human resources and openness. Among OECS member states, St. Kitts & Nevis had the highest overall tourism competitiveness index, pointing to the relatively high potential to further develop its tourism product. While Dominica displayed a high mark in price competitiveness, it had the lowest overall index due to poor values in environment, human resources and openness. It is important to note that these rankings should not be interpreted strictly, but rather as indications of the general areas where individual member states, and the OECS as a whole, appear to require additional resources to improve its tourism product s competitiveness. 15 IMF (2003a, 2004a). 16 The indices are related to the tourism industry: Price Competitiveness is based on hotel prices, power purchasing parity, and taxes on goods and services; Infrastructure is based on roads, railways, and access to sanitation and drinking water; Environment is based on population density, CO2 emissions, and environmental treaties; Technology is based on internet hosts, telephone mainlines, high-technology exports, and mobile phones; Human Resources is based on life expectancy, adult literacy, school enrolment, urban population, gender indicators, and various travel and tourism-related employment statistics; Openness is based on visa requirements, trade openness, and international taxes; and Social is based on the human development index, daily newspapers, personal computers, television sets, and crime. For more detailed information on the tourism competitiveness monitor visit http://wttc.org. 10

Table 3.1 Tourism Competitiveness Monitor, 2004 Price Comp. Infrastructure Environment Technology Human Resources Openness Social Tourism Index Index Rank Index Rank Index Rank Index Rank Index Rank Index Rank Index Rank Avg. Antigua & Barbuda 6 (118) 57 (73) 90 (45) 44 (99) 86 (5) 69 (38) 59 Dominica 37 (84) 40 (131) 67 (76) 37 (106) 47 (101) 65 (51) 49 Grenada 81 (6) 48 (95) 62 (82) 55 (82) 48 (96) 69 (41) 61 St. Kitts & Nevis 5 (120) 73 (16) 66 (49) 70 (68) 96 (9) 70 (44) 69 (37) 64 St. Lucia 12 (112) 65 (51) 60 (83) 63 (61) 59 (73) 74 (28) 56 St. Vincent & Grens 79 (8) 47 (98) 54 (90) 39 (105) 67 (56) 64 (54) 58 OECS Avg. 15 78 54 67 56 63 68 The Bahamas 69 (27) 51 (91) 77 (59) 63 (61) 72 (37) 58 (69) 65 Barbados 27 (98) 87 (3) 43 (121) 79 (56) 84 (25) 73 (33) 67 (44) 66 Jamaica 18 (109) 63 (39) 19 (164) 72 (64) 51 (90) 79 (17) 64 (52) 52 Trinidad & Tobago 19 (108) 69 (24) 16 (170) 66 (78) 60 (66) 52 (92) 67 (43) 50 Other CARICOM 21 72 32 74 65 69 64 Costa Rica 55 (56) 72 (17) 55 (83) 77 (58) 60 (66) 52 (91) 54 (79) 61 Cuba 63 (40) 41 (130) 57 (87) 72 (43) 60 (63) 59 Dominican Rep. 58 (51) 54 (57) 42 (127) 42 (106) 49 (96) 63 (65) 42 (107) 50 Puerto Rico 88 (9) 85 (50) 47 (102) Hispanic Carib. 57 63 57 65 60 54 52 Source: WTTC Competitiveness Monitor (2004). (v) The tourism satellite account A satellite account is a statistical methodology to measure the impact of economic sectors that are not defined as specific industries in a country s national accounts. Using a satellite account to measure tourism is beneficial because a variety of sectors and industries (transportation, hotel, food and beverage, etc) contribute to create one tourism product. Since tourism does not supply one homogenous product, the tourism satellite account (TSA) is calculated from the demand-side of economic activity. The TSA allows for comparisons between countries and sectors, a valuable tool for policymakers in the OECS in order to understand the economic and social impacts of tourism in their countries. The World Travel & Tourism Council published the first Caribbean tourism satellite account report in 2004. 17 Travel and tourism consumption is an aggregate demand-side indicator that measures the value of consumption of tourism-related goods and services by and on behalf of visitors in a resident economy. 18 Between 1993-2003, travel and tourism consumption in the OECS grew, on average, by 1.6 percent a year, compared to 5.0 percent growth for the Caribbean as a whole. As a result, the OECS has gone from a 5.9 percent share of Caribbean travel and tourism consumption in 1993, to 4.2 percent a decade later. Consumption increased fastest in Grenada (5.5 percent a 17 For TSA data see WTTC (2004). 18 Travel and tourism consumption is made up of four demand-side accounts: personal travel & tourism (personal spending by an economy s resident s on tourism); business travel (public and private sector spending goods and services during business travel); government expenditures (expenditures by government agencies to provide tourism services to visitors); and visitor exports (expenditures by international visitors on goods and services in a resident economy). 11

year); it contracted in St. Kitts & Nevis and remained stagnant in Antigua & Barbuda (-0.5 and 0.1 percent growth a year, respectively) over the same period. A closer look at the external component of travel and tourism consumption (visitor exports, or spending by international visitors on goods and services) yields similar results. Visitor exports account for a majority of tourism consumption in the OECS. Between 1993-2003, OECS travel and tourism exports were relatively stagnant, posting growth of just 0.5 percent a year versus 4.5 percent in the Caribbean. Grenada s and St. Vincent & the Grenadines s exports grew at 4.7 and 4.3 percent a year, respectively; this rate was -2.4 percent a year for St. Kitts & Nevis. The competitiveness of tourism can also be evaluated through capital investment, a TSA concept that captures investment by the private and public sector in tourism-related facilities, equipment and infrastructure. Capital investment in travel and tourism in the OECS increased by almost 5 percent a year to reach US$ 390 million in 2003; compared to growth of 7 percent a year in the Caribbean as a whole (US$ 6.7 billion in 2003). Travel and tourism capital investment has displayed strong growth in Antigua & Barbuda, Grenada, St. Kitts & Nevis and St. Vincent & the Grenadines (growth of over 5 percent a year over the last decade). However, investment in Dominica and St. Lucia has decreased over the same period, a poor sign for the development and maintenance of the tourism infrastructure in these countries. The TSA methodology uses the demand-side aggregates to construct supply-side accounts. One such account is travel and tourism GDP, measuring the direct and indirect value-added of travel and tourism to the resident economy. Consistent with the results from the demand-side data, the OECS s performance in travel and tourism GDP has been weak (relative to the Caribbean as a whole) and worsening (tourism GDP increased 2.4 percent a year between 1993-2000 and decreased 0.7 percent annually over the next three years). Hence, it is crucial that OECS member states address the constraints that are weakening their tourism competitiveness and affecting economic output. This is particularly important for countries that rely heavily on tourism for economic activity. In Antigua & Barbuda, over 85 percent of its GDP is tourism-related; this figure is almost 50 percent in St. Lucia. For more detailed data on the OECS tourism satellite account see Table 8 in the Statistical Appendix. D. Commercial and Transportation Services Commercial services are the fastest growing sector in the OECS services export structure. Antigua & Barbuda, Grenada and St. Vincent & the Grenadines account for roughly two-thirds of total OECS commercial services; while Dominica, St. Kitts & Nevis and St. Lucia make up one-third of the total. A breakdown by category (or sub-sector) shows that insurance and financial services exports each account for roughly a 15 percent share of total commercial services; other business services makes up the remaining 70 percent. Due to a lack of detailed data it is difficult to analyze the other business services sub-sector. OECS insurance services exports are characterized by strong growth in the mid 1990s (22 percent growth a year) and a strong contraction over the last five years (-8 percent a year). Antigua & Barbuda accounts for most trade in the sub-regional insurance services sub-sector, characterized by a relatively large reinsurance sector. The decline in receipts could be attributed 12

to the departure or downsizing of many reinsurance brokers in Antigua due to increasing severe weather activity across the Caribbean. 19 Similar to the performance of insurance services, OECS financial services exports have demonstrated strong growth between 1993-1998, but have declined in subsequent years. St. Vincent & the Grenadines dominates sub-regional financial services, accounting for roughly half of all OECS financial services receipts. The decline throughout the OECS is, in part, the result of increased scrutiny by the OECD and other international actors to curb harmful international tax practices. This scrutiny has enhanced supervision and regulation throughout the OECS offshore financial sector and prompted a general decline in size, and therefore earnings, of the sub-sector. For example, in 2001, St. Vincent & the Grenadines had 44 offshore banks; this number stood at 11 in late 2003. 20 As mentioned earlier, OECS transportation services exports have increased at a moderate and consistent pace over the last ten years. This growth has been driven by Antigua & Barbuda its exports of transportation services account for roughly 60 percent of the OECS total. The other member states each make up between a 5 and 10 percent share of OECS transportation exports. A breakdown by category shows that air transport services make up the majority of total transportation services receipts (a 66 percent share), while maritime services receipts make up the rest. Air transport services exports represent primarily the foreign exchange earnings (passenger fares) of the sub-regional airline, LIAT, based out of Antigua. LIAT is partly owned by the governments of some OECS member states and Trinidad & Tobago. While the airline s operations provide an important share of total transportation services earnings and help diversify services exports outside of the tourism sector, the airline s efficiency and competitiveness have been in question. LIAT has suffered from financial and operational troubles in recent years. A failed privatization in 1995 has led to financial injections of US$ 36 million by Caribbean governments. Also, efforts to secure regional routes and air access for LIAT have been costly and, so far, have failed to provide reliable and low-cost supply within the sub-region. 21 Maritime transport services account for roughly one-third of OECS transportation services. In recent years, growth in maritime transport services has remained relatively stagnant, with foreign exchange earnings registered at around US$ 40 million a year. Each OECS member state accounts for an equal share of the regional total, and is probably attributed to port handling and maintenance fees in the islands shipping and cruise ship port operations. A lack of detailed data for this sub-sector limits the scope of analysis. More research is needed to understand the impact and performance of commercial (i.e. insurance and financial) and transportation services sectors on member states and the regional economy. 19 WTO (2001). 20 IMF (2005c). 21 World Bank (2005). 13

E. The Provision of Services via Modes 3 and 4 The provision of services by a foreign company through its commercial presence in a resident economy (Mode 3) is another mode of supply for services. While the WTO has developed a statistical tool (the Foreign Affiliates Trade in Services or FATS) to measure Mode 3 trade, few countries currently report this data. As a result, the use of foreign direct investment statistics, particularly those inflows and outflows in services-related industries, is considered an acceptable proxy for measurement. Foreign direct investment into the OECS sub-region targets mostly services-related industries. Between 1997 and 2003, FDI into the tourism sector averaged US$ 150 million a year, while investment into manufacturing, agriculture and fuels (together) averaged just US$ 5 million a year. Other services sectors such as retail, financial, insurance, education and construction (together) received on average US$ 11 million over the same period. FDI inflows targeting the OECS tourism industry focused on St. Lucia and St. Vincent & the Grenadines in the late 1990s, and on St. Kitts & Nevis and Grenada between 2000-2003 (see Figure 3.5). 80 70 60 US$ Millions. 50 40 30 20 10 0 1997 1998 1999 2000 2001 2002 2003 Grenada St. Kitts & Nevis St. Lucia St. Vincent & Grens. Source: See Table 9 in the Statistical Appendix. Figure 3.5 FDI Inflows into Tourism Sectors, 1997-2003 Analysis of the sub-region s total FDI inflows, into both services and non-services sectors, shows a volatile and overall stagnant performance over the last decade. In the OECS, FDI as a percentage of GDP fluctuated from 8 percent in the mid 1990s, up to 11 percent in the late 1990s, and 9 percent between 2000-2003. St. Kitts & Nevis displayed a strong performance in attracting FDI inflows more than doubling its ratio to 23 percent of GDP. The OECS sub-region s share of total FDI into CARICOM demonstrates similar trends. In 1998, the OECS accounted for 17 percent of inflows into CARICOM, this share declined to 13 percent in 2001, and then rose to 16 percent in 2003. This volatility in FDI shares is expected given the lumpiness of foreign investment, particularly in the tourism sector. At the same time, FDI 14

inflows relative to all developing countries have remained stagnant and maintained a share of 0.13 percent over the last decade. Foreign direct investment is an important source of foreign exchange for OECS member to maintain healthy balance of payments and to boost growth and development. Given this, and the relatively stagnant growth in FDI inflows in recent years, it is important for the OECS to focus on a strategy to improve its investment climate. A recent survey of Grenada s investment climate highlighted a number of constraints to attracting FDI, including high costs of doing business, inefficient transport operations and the high cost of capital. 22 These bottlenecks appear to be relevant for the OECS sub-region as a whole (for more information see Chapter V). Furthermore, the OECS s wide use of incentives to attract foreign direct investment appears to be a liability. First, the benefits of investment incentives such as corporate income tax holidays and concessions on import-related taxes appear limited. While investment incentives have increased in recent years, the sub-region s FDI performance has not improved. Second, the costs of investment incentives appear significant. It is estimated that the annual foregone fiscal revenue from tax concessions is approximately 9.5 to 16 percent of GDP. 23 In addressing the overall constraints to an improved investment climate, the OECS should pursue a regional framework (preferably with all CARICOM partners) for investment incentives to avoid the current competition that is yielding marginal benefits. The provision of services by foreign national persons who enter a resident economy on a temporary basis is the fourth and final mode of supply of services. Measurement of Mode 4 trade also suffers from a general lack of statistics. The value of trade via Mode 4 can be estimated, imprecisely, through the balance of payments (namely through compensation of employees and worker remittances) and other migration statistics. 24 Analysis of Mode 4 using these proxies suggests that this mode of supply is an important source of foreign exchange for the region. First, the Caribbean as a whole, has the highest emigration rates in the world with roughly 12 percent of its labor force emigrating to industrialized countries, and it is the largest recipient of worker remittances in the world (more than 10 percent of GDP in 2002). Second, total remittances are a relatively large source of foreign exchange in the OECS. For example, Grenada, St. Kitts & Nevis, Dominica and St. Vincent & the Grenadines are among the top 30 countries in terms of total remittances as a percent of GDP. 25 However, questions remain regarding the benefits of remittances versus the costs of emigration. More research in this area is necessary to understand the precise implications of Mode 4 trade for the OECS member states. 22 FIAS (2004). 23 IMF (2005a). 24 Compensation of employees captures compensation to individuals working abroad for less than one year. Workers remittances capture transfers from abroad by individuals working for more than one year. It is important to note that these proxies both under- and over-estimate Mode 4 trade, since they do not distinguish between workers in services or non-services related sectors, and do not measure those flows through unofficial channels. See World Bank (2004). 25 IMF (2005a). 15

F. Evaluating Services Trade This analysis of OECS services trade yields a number of interesting observations and conclusions: Services sectors are extremely important for OECS economies, as they accounted for 80 percent of the total exports while providing jobs for approximately two-thirds of the regional labor force. OECS travel (tourism) services receipts, alone, accounted for 75 percent of total services exports and represented three times the value of all merchandise exports in 2003. The OECS has been characterized by slowing growth of services exports, which has translated into a general loss of market share in global services. Travel services receipts have displayed volatility with a general downward trend (behind poor growth performances by Antigua & Barbuda, St. Kitts & Nevis and St. Lucia). At the same time, OECS commercial services exports have lost significant global market share (resulting from poor growth performances by Antigua & Barbuda, Dominica and Grenada). The OECS has performed moderately in terms of growth of tourism arrivals, and has lost some competitiveness in the US and European markets at the expense of Hispanic Caribbean destinations. However, the sub-region has become more competitive in attracting intraregional tourists it now captures one-fifth of all Caribbean visitors. Analysis of the OECS tourism product s price competitiveness yields mixed results. At the macroeconomic level, it appears to have gained competitiveness in the main consumer markets from a depreciating United States dollar. At the firm level, high cost structures appear to be pricing the OECS out of the market, particularly relative to some of the low-cost tourism destinations in the Hispanic Caribbean. Tourism-related output has been weak and worsening. Tourism GDP increased 2.4 percent a year between 1993-2000 and decreased 0.7 percent annually over the next three years. OECS member states, particularly those that rely heavily on tourism for economic activity, should address the constraints that are weakening their tourism competitiveness and affecting economic output. Policy measures could focus on improving the region s cost structures and price competitiveness, and increasing visitor arrivals through the development of transport links (i.e. airlift capacity). Diversification at various levels of the services sector can help boost export sales. For example, economies can diversify within tourism services by tapping potential sources of earnings such as on-shore cruise passenger expenditures and the yachting sector; diversify within travel services by focusing on promising sectors such as education and health-related travel; and diversify within services, in general, into potentially competitive areas such as ICT-based services (i.e. internet gaming) and other business services. Trade in services via Modes 3 and 4 are important sources of foreign exchange for the OECS countries. A majority of foreign direct investment is targeted at the tourism sector, while total remittances (relative to GDP) into Grenada, St. Kitts & Nevis, Dominica and St. Vincent & 16

the Grenadines are among the highest in the world. More research is needed in these areas to understand the full impact and potential of this trade to OECS economies. In the next chapter, the report focuses on the trade performance and competitiveness of the merchandise sector. 17

IV. MERCHANDISE TRADE In the OECS, goods make up 20 percent of total exports and 70 percent of total imports. Between 2000 and 2002, the OECS imported four times as many goods (in value terms) than it exported, up from approximately 2.5 times a decade earlier. Merchandise exports are relatively more important as a source of foreign exchange in St. Kitts & Nevis and Dominica (42 and 37 percent of total exports, respectively), and a less important source for Antigua & Barbuda (9 percent). This chapter looks at the merchandise trade performance of the OECS sub-region and individual member states, and attempts to evaluate their export competitiveness, specialization and trade complementarity. A. Trade Performance (i) Growth and patterns in the direction of trade In the last decade, OECS merchandise trade has been characterized by relatively stagnant exports and rising imports. Between 1993 and 2003, total exports contracted by an annual average of 1.2 percent to reach US$ 320 million in 2003 (see Figure 4.1). Goods destined to non-oecs CARICOM partners grew the fastest (6.5 percent a year), while exports to the EU displayed the worst performance declining by an annual average of 6 percent since 1993. 26 Exports to the United States and Canada displayed poor growth in the first half of the decade (-4.4 percent), but recovered strongly with growth of almost 10 percent a year. 2,100 US$ Millions. 1,800 1,500 1,200 900 600 300 Imports Exports 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Source: See Tables 10-11 in the Statistical Appendix. Figure 4.1 OECS: Merchandise Trade, 1993-2003 While the sub-region s overall merchandise export performance was relatively weak, some member states performed better than others. Grenada and St. Kitts & Nevis displayed relatively 26 Note that in the direction of trade section, the category non-oecs CARICOM partners includes The Bahamas, Barbados, Belize, Guyana, Haiti, Jamaica, Suriname and Trinidad & Tobago. In all other cases, trade with CARICOM refers to all 15 member states. 18