International Monetary Fund research has provided fresh detail to confirm what Caribbean economic thinkers have long known – the region’s economies are highly exposed to external factors.
Using data going back almost 40 years, an IMF paper noted how a fall in oil prices and an increase in the US gross domestic product (GDP), for example, have a “positive and large impact” on most Caribbean countries even after accounting for other variables such as exchange rate fluctuations and overall price changes.
The working paper, The Caribbean and Its Linkages with the World: A GVAR Model Approach, uses a Global Vector Auto-regressive (GVAR) model tailored for the Caribbean region, which includes its major trading partners, representing altogether around 60 per cent of the global economy.
Economists consider GVAR an effective and straightforward way of understanding how events and people interact in a complex web such as the global economy.
The IMF researchers, Mauricio Vargas and Daniela Hess, said: “We provide stylized facts of the main interrelations between the Caribbean region and the rest of the world, and then we quantify the impact of external shocks on Caribbean countries through the application of two case studies: A change in the international price of oil, and an increase in the US GDP.
“The results from the model help to disentangle effects from various channels that interact at the same time, such as flows of tourists, trade of goods, and changes in economic conditions in the largest economies of the globe.”
The authors said that global spill-overs are a central element in international economics and that Caribbean countries are “as acutely exposed to them as many others”.
Production and trade in goods and services and financial flows depend not only on internal market supply and demand forces but also on competitiveness and world growth, they said.
During the past decades, the paper noted, many small and large countries have leaned towards trade openness and financial liberalisation, stating that some evidence suggests that this might benefit their economies.
But it also argued that the more integrated small open economies are the more they are likely to suffer disproportionately from shifting economic conditions in the largest economies of the globe, “as they are less able to diversify away from the sectors in which they have comparative advantages”.
“That is the case for most Caribbean countries, which are highly internationally integrated, especially through tourism flows – a sector often hit hard by downturns in larger economies,” the IMF research paper said.
To measure the strength of macroeconomic linkages between Caribbean countries and the rest of the world, the paper introduces a Caribbean-tailored GVAR model.
The IMF GVAR model features 45 developing, emerging market and advanced economies, of which one-third are in the Caribbean.
The analysis, which gathered data from 1980 to 2017, focussed on specific spill-overs for Caribbean countries, such as the effect of an expansionary economic policy in the United States or an oil price drop.
The paper argued that one of the main advantages of implementing a GVAR model to assess macroeconomic impacts of external shocks is that “it allows to internalise second-round effects that are usually considered as exogenous or static in less sophisticated models”.
The IMF working paper said measuring linkages between different regions of the globe is a challenge.
But it said the GVAR methodology “shows itself to be useful to condense large amounts of information in a way that permits researchers to isolate global shocks or country-specific shocks and gauge their impact across the board”.