Understanding Economic Growth in the Caribbean Region

A Conceptual and Methodological Study

J. Rodrigo Fuentes Karl Melgarejo Valerie Mercer-Blackman

IDB WORKING PAPER SERIES Nº IDB-WP-595

June 2015

Country Department Caribbean GroupInter-American Development Bank

June 2015

Understanding Economic Growth in the Caribbean Region

A Conceptual and Methodological Study

J. Rodrigo Fuentes Karl Melgarejo Valerie Mercer-Blackman

Cataloging-in-Publication data provided by the Inter-American Development Bank Felipe Herrera Library

Fuentes, J. Rodrigo. Understanding economic growth in the Caribbean region: a conceptual and methodological study / J. Rodrigo Fuentes, Valerie Mercer-Blackman, Karl Melgarejo. p. cm. — (IDB Working Paper Series ; 595)Includes bibliographic references. 1. Economic development—Caribbean Area. 2. Economic policy. I. Mercer-Blackman, Valerie. II. Melgarejo, Karl. III. Inter-American Development Bank. Country Department Caribbean. IV. Title. V. Series. IDB-WP-595

Correspondence email: CET@iadb.org

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2015

.

70

80

90

100

110

1980 1990 2000 2010year

GDP percapita WEO GDP percapita PWT

The Bahamas(index 2000=100)

80

90

100

110

1980 1990 2000 2010year

GDP percapita WEO GDP percapita PWT

Barbados(index 2000=100)

60

80

100

120

140

1980 1990 2000 2010year

GDP percapita WEO GDP percapita PWT

Guyana(index 2000=100)

80

90

100

110

1980 1990 2000 2010year

GDP percapita WEO GDP percapita PWT

Jamaica(index 2000=100)

100

120

140

160

180

1980 1990 2000 2010year

GDP percapita WEO GDP percapita PWT

Suriname(index 2000=100)

50

100

150

200

1980 1990 2000 2010year

GDP percapita WEO GDP percapita PWT

Trinidad and Tobago(index 2000=100)

Source: World Bank and Penn World Table 7.1.

100

120

140

160

180

1960 1970 1980 1990 2000 2010year

GDP percapita WDI GDP percapita PWT

Suriname(index 2000=100)

70

80

90

100

110

1960 1970 1980 1990 2000 2010year

GDP percapita WDI GDP percapita PWT

Jamaica(index 2000=100)

60

80

100

120

140

1960 1970 1980 1990 2000 2010year

GDP percapita WDI GDP percapita PWT

Guyana(index 2000=100)

40

60

80

100

120

1960 1970 1980 1990 2000 2010year

GDP percapita WDI GDP percapita PWT

Barbados(index 2000=100)

40

60

80

100

120

1960 1970 1980 1990 2000 2010year

GDP percapita WDI GDP percapita PWT

The Bahamas(index 2000=100)

50

100

150

200

1960 1970 1980 1990 2000 2010year

GDP percapita WDI GDP percapita PWT

Trinidad and Tobago(index 2000=100)

.

.2

.4

.6

.8

1

1950 1960 1970 1980 1990 2000 2010year

Trinidad and Tobago

.5

.6

.7

.8

.9

1

1970 1980 1990 2000 2010year

The Bahamas

.6

.8

1

1.2

1.4

1960 1970 1980 1990 2000 2010year

Barbados

0

.05

.1

.15

.2

.25

.3

1950 1960 1970 1980 1990 2000 2010year

Guyana

.2

.25

.3

.35

.4

.45

1950 1960 1970 1980 1990 2000 2010year

Jamaica

.1

.2

.3

.4

.5

1970 1980 1990 2000 2010year

Suriname

tttt yyty 231210 lnlnln

ε

)1/( 321

tttt yyty 231210 lnlnln

ε

1962 - 2011 The Bahamas Barbados Guyana Jamaica SurinameTrinidad and

Tobago

Constant 2.532** 0.905** 1.093 1.439* 0.080 0.539*

(0.746) (0.409) (0.694) (0.762) (0.214) (0.314)

Per capita GDP in t-1 (log) 1.210** 1.144** 1.231** 1.187** 1.137** 1.548**

(0.129) (0.149) (0.141) (0.150) (0.180) (0.112)

Per capita GDP in t-2 (log) -0.471** -0.258* -0.320** -0.306* -0.180 -0.601**

(0.129) (0.141) (0.144) (0.150) (0.192) (0.114)

Trend (t) 0.002** 0.001 0.001* 0.001 0.001 0.001*

(0.001) (0.001) (0.001) (0.001) (0.001) (0.001)

Long-run growth rate 0.008** 0.0106** 0.015** 0.004 0.026 0.019**

(0.002) (0.005) (0.007) (0.004) (0.058) (0.007)

Note: Signi ficant at the 5 (**) or 10(*) percent levels . Estandar errors in parenthes is . Estimation period: The Bahamas (1962 - 2011),

Barbados (1962 - 2009), Guyana (1962 - 2010), Jamaica (1968 -2011), Suriname (1977 -2010), Trinidad and Tobago (1962 - 2011).

Country a

Dates Growth Rate b

The Bahamas (1) 1962–1976 –0.028 (0.033)

1977–2011 0.006 (0.003)

Barbados (1) 1962–1971 0.064 (0.008)

1972–2011 0.011 (0.001)

Guyana (2) 1962–1974

1975–1990

0.016 (0.003)

–0.023 (0.003)

1991–2011 0.019 (0.006)

Jamaica (3) 1968–1973 0.067 (0.003)

1974–1985 –0.021 (0.007)

1986–1994

1995–2011

0.042 (0.001)

0.038 (0.002)

Suriname (1) 1977–1989 –0.030 (0.004)

1990–2010 0.037 (0.019)

Trinidad and Tobago (1) 1962–1982

1983–2011

0.028 (0.004)

0.041 (0.012)

.

itititit

ititititititititit

Xy

PSPSyyy

'

'''

1

11

t

i

φ

π

itS

0,0

PDxOPEPDxDPEPDOPEDPEINSFDhyg 12.035.083.040.066.055.375.061.170.1 0

Actual Projected Transitional Structural Policy Public

Country Change Change Convergence Factors Environment Debt

The Bahamas 2.09 –1.04 –0.31 0.21 –0.34 –0.60

Barbados 0.40 –1.03 –0.38 0.19 –0.35 –0.50

Guyana –6.66 –1.30 –0.96 0.87 –1.59 0.38

Jamaica –1.67 –1.45 –0.33 –0.28 –0.57 –0.27

Suriname 5.81 4.19 –0.05 0.48 0.51 3.25

Trinidad and Tobago 6.69 –0.49 –0.60 –0.38 0.04 0.45

Overall Change Attributed to:

Projected Policy Public

Country Change Environment Debt

The Bahamas 1.95 0.48 1.48

Barbados 2.25 0.49 1.75

Guyana 1.55 –0.84 2.39

Jamaica 3.72 0.89 2.83

Suriname 3.75 2.47 1.28

Trinidad and Tobago 1.41 0.41 1.00

Notes: Trade in Guyana and Suriname with data only for the period 2001–05.

0.0

20.0

40.0

60.0

80.0

100.0

1980 1990 2000 2010

The Bahamas

0.0

20.0

40.0

60.0

80.0

100.0

1980 1990 2000 2010

Barbados

0.0

20.0

40.0

60.0

80.0

100.0

1980 1990 2000 2010

Guyana

0.0

20.0

40.0

60.0

80.0

100.0

1980 1990 2000 2010

Jamaica

0.0

20.0

40.0

60.0

80.0

100.0

1980 1990 2000 2010

Suriname

0.0

20.0

40.0

60.0

80.0

100.0

1980 1990 2000 2010

Trinidad and Tobago

Source: ECLAC

The

Bahamas Barbados Guyana Jamaica Suriname

Trinidad and

Tobago*

United States 79 25 53 63 4 51

Canada 9 13 15 19 1 13

Europe 6 40 5 13 49 10

Others 6 23 26 5 47 33

Total of tourists 1,344,190 567,724 156,910 1,951,752 220,475 360,661

Population 347,176 273,925 756,040 2,706,500 529,419 1,346,350

Tourists/population 3.87 2.07 0.21 0.72 0.42 0.29

Source: Caribbean Tourism Organization; World Bank.

Note: arrivals exclude daily stopovers (such as cruise passengers)

* Data for Trinidad and Tobago are for 2010.

-.3

-.2

-.1

.0

.1

.2

60 65 70 75 80 85 90 95 00 05 10

The Bahamas United States

-.10

-.05

.00

.05

.10

.15

.20

60 65 70 75 80 85 90 95 00 05 10

Jamaica United States

-.08

-.04

.00

.04

.08

.12

60 65 70 75 80 85 90 95 00 05 10

Barbados United States

-.15

-.10

-.05

.00

.05

.10

.15

60 65 70 75 80 85 90 95 00 05 10

Guyana United States

-.16

-.12

-.08

-.04

.00

.04

.08

.12

60 65 70 75 80 85 90 95 00 05 10

Suriname United States

-.15

-.10

-.05

.00

.05

.10

.15

.20

60 65 70 75 80 85 90 95 00 05 10

Trinidad & Tobago United States

The Bahamas

(HP filter, log)

Barbados

(HP filter, log)

Guyana

(HP filter, log)

Jamaica

(HP filter, log)

Suriname

(HP filter, log)

Trinidad and Tobago

(HP filter, log)

Source: Author’s estimation using Hodrick and Prescott filter and World Bank data.

)1)(1(

}0,0{}1,1{

1

1

ctjtctjtjc

ctjtctjtjc

SSSSTI

SSCountSSCountTI

1 2 3 4 5 6 7

1. The Bahamas 1.00 0.76 0.43 0.43 0.44 0.50 0.83

2. Barbados

1.00 0.60 0.48 0.66 0.48 0.70

3. Guyana

1.00 0.36 0.44 0.39 0.49

4. Jamaica

1.00 0.64 0.52 0.35

5. Suriname

1.00 0.78 0.61

6. Trinidad and Tobago

1.00 0.52

7. United States 1.00

[1] [2] [3]

Transitional convergence

Initial real per capita GDP

–1.6435 ** –1.7326 ** –1.6712 **

(in logs)

(0.397)

(0.419)

(0.440)

Structural factor

Human capital

1.7226 ** 1.8111 ** 1.8856 **

(in logs)

(0.461)

(0.483)

(0.536)

Private credit

0.5577 * 0.6253 * 0.5283

(% of GDP, logs)

(0.318)

(0.338)

(0.337)

Institutions

2.8809 ** 3.1274 ** 2.8630 **

(in logs)

(1.039)

(1.080)

(1.191)

Policy environment index

Domestic policy environment –1.0107

–0.9590

–1.3944

(0.849)

(0.846)

(0.993)

Outward policy environment 0.2228

0.2249

0.0008

(0.176)

(0.205)

(0.239)

Government burden

Public debt –0.8784 –0.7802 –0.6471

(% of GDP, logs) (1.413) (1.429) (1.597)

Domestic Policy Environment × 0.344 * 0.3338 * 0.4198 *

Public Debt (0.214) (0.212) (0.244)

Outward Policy Environment × 0.069 ** 0.0635 * 0.0916 **

Public Debt (0.032) (0.035) (0.040)

Country size

Dummy small country –0.4815 –11.4622

(1 if population <3 million) (0.644) (7.401)

Domestic Policy Environment × 0.6407 *

Dummy Small Country (0.329)

Outward Policy Environment × 0.8595 **

Dummy Small Country (0.434)

No. of observations

693

693

693

No. of

countries

115

115

115

No. of instruments

118

119

119

Serial correlation tests (p value)

AR(1)

(0.000)

(0.000)

(0.000)

AR(2)

(0.728)

(0.747)

(0.726)

Overidentifying restrictions (p value)

Hansen Test

(0.399)

(0.348)

(0.357)

𝑈0 = 𝐸0 ∑ 𝛽𝑡𝐿𝑡 ln 𝑐𝑡∞𝑡=0

LCc /

𝐾𝑡+1 + 𝐶𝑡 = 𝑒𝑧𝑡𝐾𝑡𝛼[(1 + 𝛾)𝑡𝐿𝑡]1−𝛼 + (1 − 𝛿)𝐾𝑡

δ

t

tt kk )1(~

t

tt cc )1(~

tk~

tc~

max{�̃�𝑡+1,𝑐�̃�} 𝐸0 ∑ 𝐿𝑡 ln(1 + 𝛾)𝑡 �̃�𝑡∞𝑡=0

(1 + 𝑛)(1 + 𝛾)�̃�𝑡+1 + �̃�𝑡 = 𝑒𝑧𝑡�̃�𝑡𝛼 + (1 − 𝛿)�̃�𝑡

𝑍𝑡 = 𝜌𝑍𝑡−1 + 휀𝑡 , 휀𝑡~𝑁(0, 𝜎𝜀2)

δ

ln �̃�𝑡+1 = ln(𝛼𝛽) − ln(1 + 𝛾) − ln(1 + 𝑛) + ln �̃�𝑡

�̃�𝑡 = 𝑒𝑡𝑧𝑡𝑘𝑡

𝛼

ln �̃�𝑡

ln �̃�𝑡 = 𝑧𝑡 + 𝛼 ln �̃�𝑡

ln �̃�𝑡 = 𝐴 + (𝛼 + 𝜌) ln �̃�𝑡−1 − 𝛼𝜌 ln �̃�𝑡−2 + 휀𝑡

𝐴 ≡ 𝛼(1 − 𝜌)[ln(𝛼𝛽) − ln(1 + 𝛾)] �̃�𝑡(1 + 𝜆)𝑡 = 𝑦𝑡

ln 𝑦𝑡 = 𝜙0 + 𝜙1𝑡 + 𝜙2 ln 𝑦𝑡−1 + 𝜙3 ln 𝑦𝑡−2 + 휀𝑡

𝜙0 ≡ 𝐴; 𝜙1 ≡ (1 + 𝛾); 𝜙2 ≡ 𝛼 + 𝜌; 𝜙3 ≡ −𝛼𝜌