i. The small island economies in the Caribbean, pose conceptual and operational questions for the Bank to provide these members with cost-effective development banking services. In response to a request from the Latin America and the Caribbean (LAC) Region, and with the support of the Joint Audit Committee (JAC), OED undertook this review of the effectiveness of Bank assistance strategies for a group of member countries in the Caribbean region over the last fifteen years. 1/
ii. The objectives of the review have been to: (a) identify the thrust and assess the effectiveness of Bank assistance strategies designed to overcome the region's development constraints; (b) evaluate the cost-effectiveness of the instruments-lending, free-standing technical assistance, economic and sector work (ESW), aid coordination, and policy dialogue-and the main regional institutions employed in implementing them: the CDB and the Caribbean Group for Cooperation in Economic Development (CGCED); and (c) draw lessons of experience as to how the Bank can effectively help the region address some of the major emerging new obstacles to attaining sustainable economic and social development.
iii. Caribbean countries have had in common a number of stubborn structural problems including uneven economic diversification away from agriculture and preferential markets, poor macroeconomic management in the three largest MDCs, high levels of unemployment and an inadequate educational system. The average annual GDP growth for the CARICOM countries ranged between 6.3 percent and -0.8 percent over the 1970-79 period. Over the 1980s, the average annual growth rates widened to between 6.3 percent and -2.2 percent. The MDCs recorded negative or low growth rates for output, especially during the 1980s, whereas growth in all the other Caribbean countries was comparatively robust. Trinidad and Tobago, Guyana and, to a lesser extent, Jamaica, were the worst performers. Such economic growth as was achieved in the Caribbean was propelled by the expansion of exports, tourism, and the high volume of inflows such as aid and remittances from abroad. The smaller countries also managed to weather the terms of trade and natural shocks of the 1970s and early 1980s without acquiring large external debt burdens.
The Bank's Assistance Strategy, Relevance, and Timeliness
iv. In dealing with the challenges facing the Caribbean economies, the Bank adopted the following approach: (a) initial formulation of a strategy for the region as a whole; (b) continuation of traditional as well as policy-based lending to the MDCs, notably Guyana and Jamaica, throughout the 80s, and Trinidad and Tobago in the early 90s; and (c) reliance, after 1977, on the Caribbean Development Bank (CDB) for lending to the LDCs while maintaining them under the umbrella of a sub-regional development strategy. The regional assistance strategy for the Caribbean led to gradual disenchantment with the initial approach of regional lending and to a shift in focus to the sub-regional context of the LDCs. Between 1975 and 1984, the Region produced three Regional Program papers. The regional approach, based on the assumption that economic interrelationships existed between the various Caribbean countries, did not really succeed. Its abandonment was formalized in the last 1984 RPP, which recognized that progress at the regional level had been much slower than anticipated (mainly due to different country interests) while the Bank had become less influential in regional matters. The failure of the regional approach, in the sense of a unit of economically interrelated countries, should not come as a surprise, considering that the makings of economic integration based on relative comparative advantage were not there to start with.
v. For the MDCs, the initial approach can be characterized as "traditional". Beginning in the 1960s, investment lending with modest conditionalities was the main instrument employed. Agriculture, transport and, later in the 1970s, education, were the main sectors targeted. For the least developed country among the MDCs, Guyana, the Bank targeted its assistance strategy initially to building up the necessary infrastructure especially for sea defenses, highways development, and power-together with projects to promote agricultural and livestock development with particular attention to farm mechanization. Similar sectors were the focus of attention both in Jamaica and Trinidad and Tobago. After the second oil price shock in 1979, the rise in international interest rates, and the severe recession that gripped the industrial countries in 1980-82, the Bank's strategy shifted sharply towards adjustment lending and the associated policy dialogue. Adjustment lending was characterized by very modest success until the late 80s, especially in the cases of Guyana and Jamaica. Since then, there has been a progressive shift in Bank strategy back towards investment lending while continuing to rely, for selected countries, on adjustment lending, with greater success than in the earlier period. One area in which the Bank's regional strategy does not seem to have been sufficiently developed is unemployment for which no real in-depth study was carried out.
vi. For the small island economies, the basic assumption underlying the Bank's strategy is that these countries are especially vulnerable to the vagaries of international markets, to changes in donor policies (levels and composition of assistance, provision of preferential trading arrangements, and immigration policy) and to natural disasters. In this context, the Bank addressed the main constraints through sectoral loans for power, agricultural rehabilitation, transport and education. However, the Bank's assistance in banana and sugar-related projects did not take into account that these two main products had lost their comparative advantage and were being artificially supported by preferential markets in the EC and the USA. The Bank could have been more forceful in exploring, together with the countries, the venue of economic diversification.
vii. The Bank's assistance strategy until the early 90s adapted reasonably well to the development needs of the region, in particular of the OECS, but it entailed a lengthy learning process especially when the strategy moved away from the traditional investment lending to the program and adjustment loans. A close look at current Bank strategy, as reflected in the Business Plans for the Caribbean and other program documents, shows first of all a remarkable awareness of the problems facing the Caribbean countries. These range from the decline in aid flows to the region, the erosion of preferential arrangements, especially for bananas and sugar, and the decline of the Caribbean Basin Initiative in relation to NAFTA, on the external side, to the fragility of the macroeconomic framework in most countries, the need to move from stabilization to sustainable growth, the poor quality of public sectors and government services, the weakness in the human resources basis, the high level of unemployment and the vulnerability of the ecosystem, on the domestic front. The action programs reflect these concerns, both at the country specific level and at the regional one. With respect to the individual countries, the ESW includes an appropriate balance of macro and sector specific issues, including cost-effective farming out of relevant components to CDB for the smaller countries. The lending program shows an increasing role of investment projects with respect to adjustment lending, and the sector focus on basic infrastructure, health and education and private sector development, appears to be the right one. At the same time, there is a renewed regional focus on unemployment, trade and environment.
The Instruments of the Bank's Intervention
CDB and CGCED
viii. In implementing its regional strategies, the Bank relied on two institutions in addition to its own lending and ESW. One is the CDB, established in 1970, and the other is the Caribbean Group for Cooperation in Economic Development (CGCED), established in 1977 under the chair of the Bank, with the first meeting held in June 1978. The creation of the CDB satisfied the Bank's goal to channel additional development funds to the IBRD/IDA member countries at a lesser cost for the Bank. Over the years the Bank has put considerable effort in strengthening the CDB's organization to make it a more effective regional development institution and in improving CDB's ability to appraise and supervise projects. Significant progress has been made in the achievement of these objectives and, although certain manpower shortcomings still remain to be overcome, the Bank's future lending activity should continue to rely heavily on CDB. The CGCED's purpose was to pursue three objectives: (a) to mobilize external resources in support of economic development in the Caribbean, especially for the smaller islands; (b) to coordinate aid flows so as to avoid duplication of effort; and (c) to improve the quality of the policy dialogue between donor and recipient countries. Since its establishment in 1977, the CGCED has met 11 times. Judging from capital flows to the Caribbean countries, the CGCED, at least initially, appears to have been successful in mobilizing a large volume of external financial resources, including a large volume of concessionary financial aid. In addition, it has provided a forum for policy dialogue on issues affecting the whole region. From the recipient's perspective, especially the OECS countries, the resources mobilized were highly effective as shown by their overall good economic performance.
Country Economic and Sector Work (ESW)
ix. ESW expanded during periods of economic stress and contracted as the situation improved. A review of a sample of economic and sector reports from the mid- 1970s and from the latter half of the 1980s showed the latter, generally, to have covered a wider scope of issues such as the impact of external shocks, to have employed more sophisticated analytical analysis, and displayed a better understanding of the special development problems of small (island) countries.
Free-Standing Technical Assistance (FSTA)
x. The main issue with the FSTA projects, and especially those on public sector management has been the very slow pace of implementation and the longer term sustainability. The Bank did not employ this instrument extensively, partly because of numerous other multilateral and bilateral agencies engaged in overlapping or duplicating technical assistance, and partly because Bank experience has shown it to be a difficult and costly instrument to employ effectively. Of the eight free-standing operations approved by the Board during the period, the MDCs accounted for all the projects. Four were approved for Jamaica, two for Guyana, and one each for Trinidad and Tobago and Barbados.
Inter-Agency Resident Mission (IARM)
xi. The resident mission is a good example of the kind of technical assistance the UNDP can mount. IARM was in operation for about four years. Its main objective was to help enhance the benefits that the OECS countries could derive from the CGCED. The immediate objectives were to assist OECS countries to formulate and implement appropriate development policies, and improve the management of public sector resource, specifically the programming and monitoring of public sector investments. The main lessons yielded by the project were: the IARM's operational life was much too short to accomplish all its objectives, and the preparation of Public Sector Investment Program (PSIP) was a critical step in formulating a sound development program.
xii. The policy dialogue, advice and, sometimes, direct inputs into the design and formulation of policy reforms, have become a key instrument of Bank assistance to Caribbean countries. Toward this end, the Bank has increasingly resorted to its ESW as input in the preparation of PSIPs, Medium-term Policy Framework Papers (MPFPs), and Country Assistance Strategy (CAS) papers-specific materials which facilitate the policy dialogue. The original expectations were that the CGCED would facilitate this dialogue. In the event, however, the CGCED has proven to be an imperfect forum for the Bank's policy dialogue with its borrowers. In fact, one-on-one discussions between Bank staff and government officials have been essential ingredients for an effective dialogue and the Caribbean governments have become increasingly responsive to this assistance instrument and are usually ready to participate actively.
Lending: OED Evaluation Experience
xiii. As of end-August 1993, Bank lending to the 12 CARICOM countries and to the Caribbean Development Bank (CDB), reached US$2 billion, comprising 147 investment projects and policy-based programs. Of the 147 loans/credits, PCR-PAR performance ratings are available for 76 completed operations (representing commitments of US$ 1.1 billion) to eight countries in the region (and the CDB). Among these completed projects, 66 percent have been judged as satisfactory against a Bank-wide satisfactory average of 75 percent and the LAC Region's satisfactory average of 71 percent. Notably, the percentage of adjustment programs judged satisfactory, 45 percent, is considerably lower than the Bank-wide average of 73 percent. However, following a 1974-79 deterioration in portfolio performance with the percentage of projects rated satisfactory declining to the mid-50s range, for projects approved in the second half of the 1980s, performance trends show the satisfactory ratios oscillating around the 70 percent level. There are large differences in performance among countries in the Region. Among the MDCs, average performance levels range from the highest of 100 percent satisfactory in Barbados to the lowest of 54 percent both in Guyana and Jamaica. All the smaller borrowers: Bahamas, Belize, the CDB, Dominica, and Grenada - with a low number of projects evaluated - have achieved a 100 percent satisfactory performance rating. The main factors behind the poor performance of projects include, in the case of SALs, the Bank's insufficient attention to the country's ownership and absorptive capacity vis-A-vis the reform packages proposed (Guyana, Jamaica), and to local conditions (conflicts among agencies and levels of government) and inadequate reliance on local expertise, including CARICOM, the OECS and the University of the West Indies.
xiv. Currently, 47 ongoing projects and programs in the 10 countries (more than half in the MDCs) and the CDB have received supervision ratings as reported by the Bank's Operational Policy Review (OPR) Department. Only one of these projects and programs (Jamaica's Population and Health Project) is considered as "problem" project with severe implementation problems indicating a possible improvement in the Region's aggregate portfolio performance in the years ahead.
Lessons of Experience
xv. The review of the Bank's assistance effort in the Caribbean yields many lessons for the Bank, other donors and aid recipients. Among the more instructive are the following:
- In the earlier days of Bank involvement in the Caribbean, a region comprising mostly small-island countries, the Bank came with pre-determined views in terms of the countries' ability to respond to the prescriptions derived from the larger non-Caribbean countries with which Bank staff worked. This was especially true for policy based lending in countries such as Jamaica and Guyana and for investment lending in Trinidad and Tobago. There is evidence that the Bank has became more flexible in its approach to country needs, including the involvement of local staff in projects and other assistance activities.
- The pace of economic reforms has been an especially irksome issue in the Caribbean. Most of the times, the Bank tried to persuade the country to implement the reforms at a quick pace, which was the common orthodoxy in the rest of the Bank. Recipient governments (Jamaica, Guyana, Trinidad and Tobago) have argued that too fast a pace of reform is unrealistic in the Caribbean, given the cumbersome decision-making process and consensus building requirements. The Bank should have realized that whenever the desired rapid reform pace was not achievable it would have been preferable to adjust the size of the lending program accordingly, including moving away from policy-based quick-disbursing lending towards investment lending with adequate sector policy conditionality.
- While the Bank could not project the fate of banana and sugar exports in the late 1980s and the early 1990s, it was inconsistent in its approach to the development of the agriculture sector in the region. Although the comparative advantage of both products had long since been lost, production was sustained because of preferential markets offered by the EC and the USA and because of the monetary rewards obtained by traditional interest groups with strong links to the two crops. The Bank should have researched more intensively and much earlier alternative diversification strategies, especially considering the very long lead time that a diversification process requires.
- In some aspects of the assistance program, the Bank identified the issues properly but failed to follow up. The critical problem of unemployment in the region was identified early in the 1970s, and mentioned in various documents since then. However, no in-depth study of this regional "time bomb", or the strategies to tackle it, took place. Further outmigration is a function of the state of the global economy and more specifically of the countries around the region where the potential for workers immigration lies. All the demographics point to a situation which will worsen over the next 10 years; an early start on analyzing the problem is highly desirable.
- The Bank, in devising its projects, has often neglected (Jamaica, Guyana) the limited indigenous capacity for implementation, including insufficient interministerial coordination, while at the same time failing to tap local expertise when available. Furthermore, the mechanisms for beneficiary involvement were either not in place or the process was very time-consuming (Guyana). Finally, in some cases, the socio-political aspects of projects were not adequately taken into account (Jamaica, Sites and Services Project). In such situations, the Bank should have scaled down its lending program.
Agenda for the Future
(i) Regional vs. Country Focus: Need for Balance
As with the Pacific Islands, the Caribbean countries constitute a region more in logistic than in substantive terms. More specifically, the benefits of integration are limited by the fact that their factor endowments are very similar. Furthermore, the Caribbean countries have quite different features between the MDCs and the LDCs and even among the countries within each group. This explains the importance of maintaining a specific country focus (as the LAC Region has done so far), and to design a regional or subregional strategy for specific issues. While substantial benefits are associated with common services and coherent policies, the design and implementation of regional arrangements is demanding. Therefore, the main prospects for the regional approach is in the analysis of some common development issues such as trade, human resources, environment and the role of the private sector.
(ii) Economic Diversification and Comparative Advantage
As indicated above, the Caribbean countries, because of the poor perspective of the primary products, from bananas and sugar to bauxite and oil, are facing serious constraints to their development prospects. Maintaining their current productive basis is already a major achievement and it would imply turning around the negative economic trends of the more recent years, especially for the MDCs. Looking at individual countries, likely areas of concentration would seem to be financial services for Barbados; food-processing activities for Guyana; for Trinidad and Tobago, while maintaining their fairly significant agricultural basis, and possibly converting it from primary products to more marketable crops, continued reliance on its oil related activities in association with Venezuela; and finally for Jamaica, further expansion of its relatively more developed industrial basis, once proper market signals are provided and the institutional fabric of the country drastically overhauled. For the smaller Caribbean countries, tourism should remain a key sector, while additional growth prospects could come from a "division of labor" in a number of areas which are of common interest such as health and education facilities, financial services, coast guard services, etc. Unemployment remains a key problem in the Caribbean and the diversification and specialization efforts indicated above are imperative to prevent unemployment from becoming a worsening feature.
(iii) Institutional Development and Human Resources: Further Constraints to Growth and Employment
Growth of output and employment are constrained not only by a limited productive basis but by weaknesses in the institutional setup and in human resources. These two problems are present in different degree among the countries. They are most acute in Guyana and Jamaica, less serious in Barbados and the smaller islands, and significant in Trinidad and Tobago. With respect to institutional development, the negligible results of the administrative reform programs launched in some of these countries (e.g. Jamaica), confirms that, as OED has observed in its evaluation work, without a serious overhaul of the civil service system the prospects for serious institutional development are dim. The Bank may have contributed to the problem by focusing on the formulation of sophisticated blue prints for reforms, leaving their implementation to domestic unskilled staff and "passing through" foreign consultants.
The human resources issue is related to the institutional aspect and to the issue of unemployment. An inadequately skilled labor force has very little chance to find gainful employment whether domestically or abroad. In those countries where the human resource basis, also as a result of migration of the more talented people, is especially weak, i.e., Guyana, Jamaica and Trinidad and Tobago, the Bank as well as the other donors should make special efforts. This is an area in which a regional approach could be taken including the Bank and all the other institutions such as IDB, OECS, and the private donors. In particular, the University of the West Indies should be the central focus of the higher and technical education for the Caribbean with particular attention devoted to the training of teachers at the lower levels of learning.
(iv) The Role of the Bank: Defining an "Appropriate" Role
The appropriate role of the Bank in the Caribbean is influenced by the obligations of the institution towards its member countries and by the "transaction" costs linked to Bank assistance for small countries. Clearly, small countries are entitled to the Bank's attention in terms of policy dialogue within the framework of a well defined development strategy based in turn on a well focussed ESW.
Ongoing ESW in the LAC Region for the Caribbean countries indicates that by and large, especially with the increasing reliance on Medium-Term Policy Framework papers, the Bank is well placed to capture the development issues facing the Caribbean and to develop the consequent policy recommendations. The reaction of some of the Caribbean countries, expressed in the course of the visits of the OED study team, is that greater effort should be made by the Bank to understand the sociological and political aspects when analyzing their economic problems and formulating development strategies. More important, however, is the Bank's need to reflect a greater perception of the countries' varied cultural background into its lending program especially in terms of beneficiaries and their participation in the design of the projects. The reality of ethnic composition in some of the Caribbean countries is often neglected in this phase of the Bank's assistance strategy.
With respect to the Bank's operations, the following aspects appear of particular relevance. First, given the poor experience of the past, further reliance on SAL type operation should remain limited. The last SAL to Trinidad and Tobago, albeit a successful one, should give way to assistance at the sectoral (e.g., agriculture) investment level. SALs should not be considered priority instruments in Jamaica and Guyana where the reform pace is severely hampered by outstanding development constraints which make the countries less equipped for effective use of broad resource transfer operations. SECALs and Sector Investment loans would seem a more appropriate venue for Bank lending at this stage. Finally, special attention should be given to self-standing technical assistance projects. While their number has been limited, their poor outcome represents a wasted opportunity to make progress in the critical institutional areas which technical assistance projects normally address.
(v) CGCED: The Need for Increasing its Relevance for the MDCs
It would seem that the LDCs find the CGCED an interesting forum for the discussion of their individual interests. At the same time, the MDCs rely more for their "business" on the direct relationship between them and the Bank. An interesting innovation introduced by the LAC Region, implemented at this year's meeting, has been to extend the participation to private financial institutions. This novelty appears to have been well received by the larger Caribbean countries as it offers them an opportunity for direct discussions with potential lenders in the broader context of the regional development framework.
(vi) Relying on Other "Local" Expertise: CARICOM, OECS and the University of the West Indies
A greater use by the Bank of the institutions such as CARICOM and the OECS should be made when it comes to formulating the strategy for the Caribbean. We have already discussed above the role of the University of the West Indies. A lot more could be achieved if the partnership with CARICOM and OECS were to be strengthened. The Bank has traditionally been reluctant to interact with such institutions. This attitude is often at the basis of the criticism levelled by non-government organizations and governments alike, of the Bank's lack of understanding of the local conditions.
(vii) Aid Coordination: Improving the Quality of Declining Aid
Aid flows to the Caribbean from all parts of the international financial community have been declining steadily over the last ten years. The Caribbean is moving from an age of high aid, often dictated by geopolitical consideration, to an age of aid retrenchment, also in part dictated by new geopolitical considerations. In this context, aid coordination between the Bank and IDB, and with bilateral donors, becomes imperative. The quality of the assistance in terms of its relevance for the recipient countries, is under continuous discussion. Occasions such as the CGCED meetings, and the donors meeting before that, should be used to coordinate the quality of the flows more than their level. The danger of aid dispersion among many areas of intervention answering to the parochial considerations of individual donors and of multilateral organizations remains very high. If the priority intervention areas in the Caribbean are those of human resources, institutional development, environment and privately led economic diversification-cum-employment, then the role of the Bank is to make sure that the bulk of the dwindling aid flows into these areas. From the view point of the development process, concentrating the efforts in this area should be more important than "assigning" areas of interventions to one or the other among the donors.
1/ For purposes of this review, the Caribbean region is defined to comprise the 12 countries that am members of the Bank and the Caribbean Community and Common Market (CARICOM). Specifically, the countries include the four most developed countries (MDCs), i.e., Barbados, Guyana, Jamaica, and Trinidad and Tobago, the six countries forming the Organization of Eastern Caribbean States, i.e., Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines, along with The Bahamas and Belize. In addition, the review includes the Caribbean Development Bank (CDB).