Building Resilience while Rome Burns
The Caribbean was ravaged by back-to-back Category 5 storms in 2017, and reconstruction is ongoing. But building true resilience requires us to go beyond strengthening our infrastructure to rethinking our entire economic structure and fiscal framework to reduce vulnerabilities on all fronts. Here I take a look at the case of Sint Maarten, which suffered hurricane-related damages in September 2017, equivalent to 250% of GDP, and what is necessary to build a more resilient economy.
Post-storm tally — Hurricane damages in numbers…
The IMF found that even 20 years after an average storm hits, we can still feel the effects of the storm on the economy. And that is after an average storm has hit. After a category 5 storm, you can imagine that the effects are felt well beyond 20 years.
Sint Maarten’s economy contracted 4.8% in 2017 and 8.5% in 2018- a contraction of 13% over two years. This means that in order to recover the size that the economy was 2016, 2018 GDP would have to grow by 15%.
1/3 of hotel rooms became inoperable between August 2017 and December 2017 in Sint Maarten. And you can see that other countries suffered similar or even greater losses to their tourism sectors in the aftermath of the hurricane.
Total tourism arrivals were severely affected, with stayovers down 24% y/y in 2017 and 56% y/y in 2018.
Unemployment is still high around 10%, and what is interesting is that 42% of the unemployed in 2018 reported that their unemployment was related to Hurricane Irma. And before the hurricanes, the World Bank had estimated that the poverty rate was around 26.87% in Sint Maarten, which puts the country in the middle compared to the rest of the countries in the Caribbean.
In terms of overall storm damages, Sint Maarten was the second most negatively affected, relative to GDP.
Recovery costs were estimated at USD2.3 billion, with 2/3 needed in the immediate to short-term.
What do we need to do differently to ensure our survival?
While a number of reforms are necessary at many levels, there are three reforms we must embrace now to build resilience.
First, we have to recognize that governments and government spending cannot create sustainable growth, so we need private sector led growth and job creation. Secondly, we need to build fiscal resilience and national savings in the form of a sovereign wealth fund. And third, we must ensure that there is gender equality.
- Private sector led growth strategy
Government spending does not create sustainable growth. Fiscal multipliers tell us for every dollar that the government spends, how much ends up adding to GDP. In other words, how much does fiscal spending grow your economy. In no country in this region is the fiscal multiplier equal to or greater than 1. So, for every dollar that the government spends in this region, we end up getting less than $1 added to our GDP. This is partially because of high fiscal leakage where a lot of what we spend is lost to imports because 80–90% on average of what we consume is imported. There are other reasons of course, in countries like Trinidad and Guyana for example, corruption contributes to fiscal leakage.
In fact, if we look at the equation for calculating GDP, we will find it does not really apply very neatly to our economies.
And that is because of this fiscal leakage that I mentioned earlier. That 80–90% of what we consume ends up being imported, and imports has a negative sign in the equation, meaning it is a drain on GDP and our economies. It takes away from economic activity. Really, in the Caribbean, we should have a negative sign in front of the variable C for consumption.
So let’s talk about G for Government spending. When the government spends, and the government pays salaries, and consumes goods, electricity, vehicles, paper, etc., most of that is imported. And the salaries that the government pays, drives consumption for public sector workers, meaning it drives imports. So even G probably should have a negative sign or maybe a fraction, for the Caribbean.
This is why government spending does not create sustainable growth in this region. And that is a huge misconception that a lot of people in general and policymakers have in this region. And a lot of governments like to make us continue to believe this fallacy and propagate this belief, because they want to spend money and attract votes, and they have a budget that they want to use up. This is something we have to really change in our thinking, and stop looking to the government to be the engine that drives growth and drives job creation in our economies. This is something that I wanted to highlight first before I go on into why we need private sector led growth.
2. Building Fiscal Resilience and National Savings
In Sint Maarten, Irma-related expenditure was estimated at 2% of GDP in 2017, while the total fiscal deficit was 3.5% of GDP. While membership in the CCRIF will provide some buffers, we need to be able to consistently be fiscally prudent.
In comparing Sint Maarten to some other countries in the region, I noticed that the public sector wage bill in Sint Maarten is actually above the regional average. The IMF for example had recommended reducing the public sector wage bill in Sint Maarten in order to bring this down to the regional average or below the regional average.
We need to look at the public sector spending on goods and services as well because the government spends on average 6.45% of GDP on goods and services, which is the third highest in the region, and is well above the regional average of 4.5%.
At 7.7% of GDP, the public pension fund and social insurance was twice the government’s liquidity position and this violated the fiscal framework. In terms of the arrears therefore, we need to be deliberate about how we manage that going forward. We have to look at the fiscal rules framework and think critically — does this serve us well and what we can do in terms of reform.
The fiscal rule states that there should be current budget deficits, but we have arrears that have accumulated over time. Interest payments are capped at 5% of fiscal revenue. When support from The Netherlands ends, Sint Maarten will have to return to capital markets. As we borrow more to recover from these storms, the cost of borrowing goes up. If your credit rating drops, the cost of your borrowing goes up. Are we ready and willing to access capital markets? And will doing so force us to break this rule?
We are supposed to borrow only for capital spending. How does that speak to natural disaster recovery? There is no long-term fiscal anchor for debt-to-GDP, but there was a paper done by Greenidge et al (2012) that found anywhere between 55–56% of GDP in this region, debt becomes unsustainable and each additional dollar of debt actually causes GDP to contract. It actually puts downward pressure on GDP. So we need to have a debt anchor established for Sint Maarten.
In terms of building fiscal buffers and to promote resilience, the IMF recommends three steps:
● Calibrating the debt ceiling — for Sint Maarten the IMF is recommending 40% as a debt limit
● Calibrating the structural fiscal rule
● Caps on expenditure growth
An increase in resilient public investment for example from 0% to 80% would actually increase output between 3–11% — this is reconstruction costs saved and the output decline saved each year.
In terms of the cost of the insurance, being part of the CCRIF is important. Covering 90% of the fiscal cost of disasters requires coverage of 13–31% of GDP and costs 0.5%-1.8% of GDP. From a fiscal budgeting standpoint we need to build these costs into the budget so we have the funds to build resilience and to pay for the insurance.
We have a financing gap between what we earn and what we need to spend to ensure fiscal resilience. Making insurance fiscally neutral implies grants in the range of 0.2–1.1% of GDP per year, or USD40 million per year in the Eastern Caribbean — so that it does not have a negative impact on the budget. We can look at these kinds of ratios and come up with our own scenario here for Sint Maarten but this varies widely in terms of which country are we thinking of. We have to budget now specifically for investing in resilience and for the CCRIF for example.
In terms of how national savings works, we don’t have a lot of experience with sovereign wealth funds in the Caribbean. Trinidad, I believe, has the longest standing sovereign wealth fund, while Guyana and Suriname have passed legislation to establish their own, but these are commodity-producing countries. Turks and Caicos Islands broke that trend and they established a National Wealth Fund and capitalized it with USD8 million this year, and they have some guidelines as to what’s likely to work for Sint Maarten as well. The funds can only be withdrawn when you have an accumulated balance on your sovereign wealth fund of over 25% of GDP. When you build these rules for your sovereign wealth fund, to guarantee sustainability, you also have to think about how you can use it to help you recover and also prepare, and the ex ante building of resilience.
3. Building Gender Equality
In terms of gender equality, in this region we do have women who have reached the highest highs in terms of government and private sector leadership. According to the gender equality index of the World Economic Forum, there is one very important gender gap that we have closed in the Caribbean, and that is education.
So much so that we have possibly over-rotated where the education of boys is concerned, and this is something people and policy makers are talking about more and more. Women are more educated than men in the Caribbean on average, and the data is there to prove it. Yet still, women do not participate as much in the labour force as men, and when we do, women do not earn as much as men, and women are still outnumbered by men in leadership and decision-making roles in the region — even though we are more educated than men.
If we can harness that human capital better, it will make a big difference to our economies and our households. McKinsey estimated that if women participated in the economy equally to men, we would add USD28 trillion or 26% of current global economic activity, to the global GDP. And that is a proxy you can assume for any country — that over time you will grow your economy by 26% if you ensured gender equality. Remember we said earlier that even if we grow 2–3% we will still take 6–13 years to recover from the storm? Well if women were able to participate equally in the economy, we would be there now.
This is a cross-section of some Caribbean and Latin American countries showing the potential gains in GDP from higher labor force participation. Women participate less in the labor force than men do in almost every country I have seen in this region — meaning that men are looking for jobs more than women are, even though we are more educated. This chart tells us if we achieved gender parity, how much we could gain in terms of GDP per capita. Now, we did not get the data for Sint Maarten but we can look at countries similar in size like Saint Lucia at 7% — so we know we can add quite a bit to the economy.
In the tourism sector there is a big wage gap. We don’t have the data for Sint Maarten but you can see from some other countries around the region that there is a gender wage gap in the tourism sector. If we eliminate this wage gap and insofar as we are more skilled than the men, there is no reason we should have this wage gap. Again, it will add more to your economy.
The distribution of unpaid work — now this is something I have a real challenge with. Women do 2 or 3 more hours a day of unpaid care work in the home than men do. And that is probably why we are paid less. Because we have to spend less time at work and because we have to look after kids and/or the elderly, which is becoming more of a challenge in the region, not just looking after kids, but also elderly parents.
If you look at unpaid work of males compared to the women in Latin American countries — we didn’t have the data for any Caribbean countries — but it is multiples times the men. In addition to being more educated, we work harder at home and we are still not paid as much.
Concerning Sint Maarten’s labor force participation rate, 60% of men that are eligible to work are looking for work or are in the labor force, but only 54% for women. Almost half of your women are not looking for work and in general we are more educated than men. And we are more unemployed. Less of us are looking for work, we are paid less and we are more unemployed.
There are lots of structural issues and constraints and I go back to my point that I made earlier: We have to think very differently if we want to survive.
Recap — 3 reforms to embrace to build resilience
To recap, what are the outcomes we want to achieve? We want to reduce poverty and we want everyone’s well-being improved. We want gender equality such that we can empower our women to provide better for their families and their communities. And we want to build resilience so we become climate proof in the region.
See my full presentation on Building Resilience While Rome Burns in the video below.