Presentation to CAIB 2007 Conference, Guyana

November 2007By

Claremont Kirton

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CSME – an overview

A single market and single economy

Single market almost completed

Single economy currently being implemented

CSME – Mission statement 

 

• We envision a Caribbean Community :• in which every citizen has the opportunity to realise

his or her human potential and is guaranteed the full enjoyment of their human rights in every sphere;

• in which social and economic justice is enshrined in law and embedded in practice;

• a Community from which poverty, unemployment and social exclusion have been banished;

• in which all citizens willingly accept a responsibility to contribute to the welfare of their fellow citizens and to the common good;

• and one which serves as a vehicle for the exercise of the collective strength of the Caribbean region, and the affirmation of the collective identity of the Caribbean people, in the world community.

•

CSME – Development Vision• ECONOMIC • Self-sustaining economic growth based on strong international

competitiveness, innovation, productivity, and flexibility of resource use;

• A full-employment economy that provides a decent standard of living and quality of life for all citizens; elimination of poverty; and provision of adequate opportunities for young people, constituting an alternative to emigration;

• Spatially equitable economic growth within the Community, having regard to the high growth potential of member states with relatively low per capita incomes and large resources of under-utilised land and labour;

• NON-ECONOMIC• Social equity, social justice, social cohesion and personal security;

• Environmental protection and ecological sustainability;

• Democratic, transparent and participatory governance.

Development vision – economic dimensionAccelerated economic growth via adjustment and

transformation of regional economies, improved international competitiveness, sustained innovation and productivity growth.

Economies with lower per capita incomes to grow at fastest rates, so as to induce some convergence.

Policy implementation involves partnership between government, private sector , labour and civil society.

Private sector – lead role in investment as well as ownership/management of economic activities.

CSME – main economic driversEnergy

Agriculture

Sustainable Tourism and Agro-tourism

Manufacturing

New export services

CSME – enabling policies• Common sectoral policies will be complemented

by common regimes or harmonised policies in:• Human resource utilisation • Fiscal, monetary and incentives policies• Transport• Investment• Financial services• Capital market integration; • Competition• Regional quality infrastructure;• Small and medium enterprises • Corporate governance

CSME – enabling policiesThese will require:

Institutional arrangements, including human resources to support policy implementation

A Regional Development Strategy and related Plan which will include quantitative targets and indicators

MACRO-ECONOMIC ENVIRONMENT: CSME Region divided into:i) OECS countries – very small, open,

dependent on tourism, agriculture, remittances and foreign assistance. Monetary union, Central Bank -- ECCB.

ii) Bahamas, Belize, Barbados: fixed exchange rate, own Central Bank.

iii) Guyana, Haiti, Suriname, Jamaica, Trinidad & Tobago: own Central Banks; flexible, floating exchange rates; attempts at economic stabilization.

FINANCIAL SECTOR: OVERVIE W Financial depth (credit or money/GDP) greater

than average L AC.

Barbados, Jamaica, Trinidad have fairly active stock exchanges.

Commercial banks dominate financial sector; dominance even greater than explicit share indicates as many “near banks” are subsidiaries of commercial banks.

Share of commercial bank assets in total financial sector assets declining. Increasing role for NBFI s.

CARICOM Financial Services Agreement (CFSA)CFSA will establish the legal framework for

the unrestricted movement of capital and financial resources across the regional economic space.

Revised Treaty sets the broad policy framework.

CFSA expands Treaty provisions.

Financial services integration – direct benefits I– Regional pooling of liquidity and regionalization

of supply and demand for financial instruments

– Finance domestic investments over and beyond domestic savings

– Improved operation of financial markets in fairness, efficiency, transparency and degree of competition

– Product innovation, wider range of financial products and improvements in service quality.

Financial services integration – direct benefits II– Lower transactions costs for financial service firms

and their customers

– Lower liquidity risk for financial service firms

– Tendency towards the convergence of interest rates

– Larger and more efficient financial institutions

– Increased investment, production and employment.

 

Financial services integration – indirect benefits

• Stimulate domestic financial development

• Impose discipline on domestic macroeconomic policies

• Improve operations of domestic institutions, based on implementation of “best practices”.

Capital market integrationCross listing of regional firms – only 13 out

of 132 firms trading in CARICOM countries are cross listed

Financial sector leading in terms of sectoral distribution

Regional bond market – TT centred

Capital market integration: Key issuesRemoval of multiple listing fees and other

constraints to cross listingHarmonization of securities/company lawsHarmonization of listing rules, trading

requirements and proceduresUpdating trading technology – establishing

regional electronic business policyIncentives for firms to become publicly listed.Regional stock exchange

Monetary integrationPlans for Monetary Union

CMU to serve as catalyst for monetary integration

Full implementation of Rights of Establishment

Harmonization of legal, regulatory and policy environment

CARICOM Investment Code and CFSA

CSME roadmap for financial services integration IPhase I – 2006-2008:Political approval of Development Vision and

Regional Development StrategyFull implementation of free movement of

service providersPolitical approval of CFSA and Caricom

Investment RegimeEstablishment of the Regional Stock ExchangeHarmonization of financial regulatory

environment

CSME roadmap for financial services integration I: Monetary issues Phase I – 2006-2008: (i) Adoption of a Protocol on Monetary

Integration to the Revised Treaty setting out the framework for the completion of the CMU

(ii) Agreement on the adoption of a numeraire CARICOM Currency Unit as a further step towards full Monetary Union; and

(iii) Initiation of the Caribbean Monetary Union with ‘Category 1’ countries as the core—i.e. Member States that already satisfy the convergence criteria for the CMU

CSME roadmap for financial services integration IIPhase 2 – 2009 - 2015: Expansion of the CMU to encompass Category 2

and Category 3 countries. Issues to be addressed by the Protocol are (i) the nature and scope of a common monetary

policy (ii) the relationship between national central

banks and a regional monetary authority, (iii) legislative arrangements required to give

effect to monetary integration, and (iv) the operational requirements of monetary

integration.

Brewster: Multivariate Prioritization Analysis IExamined CSME policies using multivariate

analysis Variables used: urgencyshort-term economic impactlong term economic impactlogical dependence (building blocks)opportunity cost probability of attaining objective (risk)

Brewster: Multivariate Prioritization Analysis II18 out of 30 policy areas fall into high risk –

low probability of attainment in the foreseeable future.

All macroeconomic policy areas fall into this category: macroeconomic policy coordination; Monetary Integration/Union; Community Investment Policy; Fiscal Policy Harmonization.

Low risk areas – high probability of attainment in the foreseeable future include: trade in goods, trade in services; free circulation.

Brewster: Multivariate Prioritization Analysis IIIMedium category: banking and securities legislation regional development fund regional agricultural policy government procurement transportation other services

European Union financial integration – its experienceSome studies have attributed as much as

25% of EU GDP from single market to liberalization of financial services across borders.

Gains include: reduced intermediation margins, lowering cost of capital to investors;

procurement of services from other member states;

lower regulatory costs; impetus for financial innovation.

European Union financial integration – its experiencePre euro, significant intra-euro trade.With euro, significant increases in intra-euro and

extra euro area trade; promotion of cross border trade.

Increases in Foreign Direct Investment (FDI) and mergers and acquisitions.

Euro is a catalyst for developing the single market in financial services.

Euro area corporations maximising possibilities of appealing to broader group of investors to raise funds

European Union financial integration – its experienceBetween 1997 and 2005, euro area residents

doubled their holdings of equity issued in another euro area country.

Share of long term debt securities issued in euro area and held by other euro area residents has increased over the last decade.

Note, however, that integration in retail banking has not increased by much; cross border banking activity limited.

European Union financial integration – its applicabilityCareful about using EU experience as

blueprint for financial integration – motivation different; objective preconditions different also.

Pre euro, significant intra EU trade; high levels of institutional development; very complementary production structures; driven mainly by political versus economic motives.

European Union financial integration – its applicabilityCaribbean trade mainly extra regional rather

than intra-regional.Invisible extra-regional exports via tourism

and services keyInitial drivers of Caribbean regional

integration were economic not political. Role of remittances via transfers from

DiasporaRole of marine borders unlike EU mainly land

borders

Organization of Eastern Caribbean States (OECS)Common currencyCentral bank and stock exchangeCommon courtJoint diplomatic representationDirectorate of civil aviationJoint regulation of telecommunicationsJoint pharmaceutical procurement system

Eastern Caribbean Central Bank Establishing markets and institutions Implementing regulatory framework Removing legal and administrative barriers

to creating single financial space.Currently, there exists: Common market for EC dollar and foreign

currencies Interbank market to provide liquidity for

banks

ECCBA regional government securities market

(Regional Government Securities market)A securities market for sharesA secondary market for primary mortgagesInstitutions include: Eastern Caribbean

Securities Exchange, EC Central Securities Depository and EC Central Securities Registry

Eastern Caribbean Home Mortgage Bank EC Institute of Banking and Financial Services

Eastern Caribbean Currency Union (ECCU)Three key institutional arrangements for

financing development: commercial banking sectordevelopment finance institutions capital markets.

EC Enterprise Fund and EC Unit Trust

Integrated regulatory framework

THANKS