Climate Change: How the Caribbean can build resilience

The persistent economic cost of hurricanes

The IMF reported that “tropical cyclones caused damage of USD548 billion worldwide (in constant 2010 dollars) for the first 14 years of this century. Not surprisingly, these tropical cyclones have had a significant negative socio-economic implications, with the biggest impact felt in small states and islands.

The IMF estimates that in small states, seven years after an average storm strikes (not a category 5+ storm, just an average one!), GDP per capita is still almost 2.5% lower than if the storm had not hit.

They further found that the effects of storms are very persistent: even after 20 years, the economy has not fully recovered from the shock. In 2017, the Caribbean was hit with 2 Category 5 storms.

Now, if nothing else, this should convince us of the importance of building resilience. Not just climate resilience, but overall socio-economic resilience. But we can’t achieve socio-economic resilience, if our economies are underperforming, because this economic underperformance translates into weak fiscal and external buffers — two of the most fundamental financial elements of resilience.

Resilience begins with preparedness

The IMF has recommended a series of comprehensive risk management strategies to increase resilience to mitigate the increasing costs that accompany climate change, including the increased frequency and intensity of storms. These include:

1. Preparing for the current and future costs of storms;

2. Adapting the current infrastructure to sustain the more intense weather conditions through:

● Improved early warning systems

● Better building codes and zoning laws

● Stricter enforcement to help reduce future damages

3. Building buffers in the form of a regional disaster fund, accessible only in the case of a disaster or for adaptation/mitigation projects; and

4. Improving insurance in the public and private sector to spread risks and reduce costs.

What more can the region do to build resilience?

Economic diversification

Cayman Islands gives us a great example of how a nation can diversify its economy — their economy grew 3.6% y/y in the first three quarters of 2018 and continues to grow alongside fiscal surpluses. Their offshore economic zone, Cayman Enterprise City, has made significant advances towards becoming a hub for technology, aviation, maritime, commodities, and derivatives businesses. Health City Cayman Islands offers a myriad of medical specialties, many of which are not available anywhere else within the region. The number of new company registrations grew 34.5% y/y in the first nine months of 2018. At the same time both stay-over and cruise arrivals to Cayman in 2018 grew 11% y/y.

Building buffers gives us the wherewithal to respond to shocks

Beyond economic diversification, we must build buffers that allow us to respond to shocks.

Grenada and Jamaica offer us two success stories in this region that have introduced fiscal resilience frameworks and have seen their economies return to sustained growth as a result.

Grenada was near crisis in 2014, but the expansion of public debt began with Hurricane Ivan in 2004. Grenada’s debt-to-GDP reached 110% in 2014 when the country embarked on its homegrown plan with the IMF.

Under its fiscal resilience framework, debt-to-GDP has been drastically reduced and is expected to have reached 65% by the end of 2018, and Grenada just finished its 6th year of consistent and robust growth. In Jamaica, debt-to-GDP has also fallen, macroeconomic stability is entrenched, costs of borrowing are down, inflation is down, employment and job creation are at historical highs, foreign exchange reserves are rising quickly, the business environment is improving, and the economy has had 15 consecutive quarters of growth.

Fiscal imprudence is the antithesis of resilience

High levels of debt are a major risk to the region. Greenidge et al (2012) an IMF paper demonstrated that at debt levels lower than 30% of GDP, higher debt-to-GDP is associated with faster economic growth. However, as debt rises beyond 30%, the effects on economic growth diminishes rapidly, and at debt levels reaching 55–56% of GDP, the growth impacts switch from positive to negative. Thus, beyond this threshold of 56% of GDP, debt becomes a drag on growth. The majority of the Caribbean is well beyond 56% debt/GDP, so every time the Government incurs a deficit, that is financed by additional debt, growth suffers.

Gender equality: a key ingredient to a resilient economy

Gender equality: McKinsey Global Institute found that if women were to participate in the economy “identically to men”, by 2025 we could add as much as USD28 trillion or 26% to annual global GDP (roughly the combined size of the current US and Chinese economies).

Barbados is the highest ranking Caribbean country on the World Economic Forum’s 2017 Global Gender Gap Index, at 23rd out of 144 countries, followed by Cuba at 25th, the Bahamas at 27th, and Jamaica at 51st. In ALL of these countries, the gender gap in “Educational Attainment” has been closed, but women still lag behind men somewhat in “Health and Survival”, and significantly in “Economic Participation and Opportunity” and “Political Empowerment”.

Although many reasons have been suggested to explain women’s lower participation in the labour force, lower wages, and smaller numbers in higher positions, when one considers that, as reported by the United Nations in February 2018, women do 2.6 times more unpaid care and domestic work than men do, we understand more clearly the constraints women face.

Women do 2.6 times more unpaid care and domestic work than men do, according to data from the United Nations.

According to the OECD, the use of digital platforms provides women with greater access to markets, knowledge and more flexible working arrangements, which can result in higher female employment rates on online platforms than in traditional industries. But globally, data shows that fewer women are online than men, fewer women own a mobile telephone, and according to the World Bank’s Global Findex Report, women face many more barriers than men with respect to access to financial services, leading to lower financial inclusion and higher rates of poverty.

So, there is tremendous work to be done to achieve universal financial inclusion digitally and achieve gender parity with respect to economic participation and wages.

More on building resilience

My full interview with the IMF exploring the topic of hurricanes, climate change and resilience can be viewed here: