OECS Report-Assessment of Trade Performance and Competitiveness

8/9/2019 OECS Report-Assessment of Trade Performance and Competitiveness

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An Assessment of Trade Performance andCompetitiveness of OECS Countries

October 28, 2005

Prepared by Christopher Vignoles

for the Caribbean Regional Negotiating Machinery (CRNM)


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TABLE OF CONTENTS

I. Introduction........................................................................................................................... 1

II. The Importance of Trade ..................................................................................................... 2

III. Trade in Services................................................................................................................... 4

A. Importance of Services Trade ............................................................................................. 4

B. Trade Performance.............................................................................................................. 5

C. Travel Services measuring tourisms competitiveness.................................................... 7

(i) Tourism arrivals stopover visitors and cruise ship passengers .................................... 7

(ii) Tourism visitor expenditures .......................................................................................... 8(iii) Price competitiveness...................................................................................................... 9

(iv) Tourism competitiveness monitor................................................................................. 10

(v) The tourism satellite account ........................................................................................ 11

D. Commercial and Transportation Services......................................................................... 12

E. The Provision of Services via Modes 3 and 4 .................................................................. 14

F. Evaluating Services Trade ................................................................................................ 16

IV. Merchandise Trade............................................................................................................. 18

A. Trade Performance............................................................................................................ 18

(i) Growth and patterns in the direction of trade ............................................................... 18

(ii) Composition of trade by sectors ................................................................................... 20

(iii) Export concentration and principal products ................................................................ 22

B. Competitiveness, Specialization and Complementarity ................................................... 23

(i) Real effective exchange rate ......................................................................................... 24

(ii) Market access and penetration ...................................................................................... 24

(iii) International competitiveness of exports ...................................................................... 26

(iv) Export specialization..................................................................................................... 28

(v) Trade complementarity and intensity............................................................................ 30


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C. Evaluating Merchandise Trade ......................................................................................... 31

V. Competitiveness through Cost Structures ........................................................................ 33

A. Inputs and Factors of Production ...................................................................................... 33

(i) Labor ............................................................................................................................. 33

(ii) Capital ........................................................................................................................... 34

(iii) Inputs as goods and services......................................................................................... 35

B. Infrastructure Costs........................................................................................................... 36

(i) Transport ....................................................................................................................... 36

(ii) Telecommunications ..................................................................................................... 36

(iii) Electricity...................................................................................................................... 37

VI. Trade and Integration: A Strategy for Growth ............................................................... 39

A. Exports and Growth .......................................................................................................... 39

(i) Challenges in scale, cost and preference erosion.......................................................... 39

(ii) Opportunity in diversification....................................................................................... 41

B. A Strategy for Competitiveness....................................................................................... 41

(i) Unilateral action............................................................................................................ 42

(ii) A multilateral agenda.................................................................................................... 43

(iii) Regional integration....................................................................................................... 44

Statistical Appendix

Bibliography

The views expressed in this document reflect those of the author and not of the CaribbeanRegional Negotiating Machinery. The author would like to thank Henry Gill, RameshChaitoo and Dr. Claudius Preville for their valuable comments on a draft of this report.


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I. INTRODUCTIONThe Organization of Eastern Caribbean States (OECS) was formed in 1981 with the signing ofthe Treaty of Basseterre in St. Kitts & Nevis. The OECS includes seven full member states(Antigua & Barbuda, Commonwealth of Dominica, Grenada, Montserrat, St. Kitts & Nevis, St.

Lucia and St. Vincent & the Grenadines) and two associate members (Anguilla and the BritishVirgin Islands).1 Its mission is to contribute to the sustainable development of the sub-regionthrough regional integration initiatives.

While the OECS began as a union to promote cooperation and solidarity, it has evolved into arelatively advanced integration process. The organizations supreme decision-making body is theOECS Authority, made up of prime ministers and chief ministers from all member states, and itis supported by an administrative secretariat located in Castries, St. Lucia. Also, the seven fullmembers and Anguilla have formed a currency union, with the adoption of the EasternCaribbean dollar, supervised by the Eastern Caribbean Central Bank.

All OECS full member states are partners in the wider regionally integrated CaribbeanCommunity (CARICOM). For more than 30 years, CARICOM members have sought to deepenrelations through economic integration, foreign policy coordination and functional cooperation.In 2001, they signed the Revised Treaty of Chaguaramas and committed to, among other things,the creation of a CARICOM Single Market and Economy (CSME).2

While the CSME process is moving forward, many OECS countries have voiced reservationsabout its potential benefits and costs. This report will not attempt to evaluate the CSMEs impacton OECS member states since it is not yet fully implemented. However, at this time, it isimportant for OECS countries to evaluate their economic performance, identify developmentbottlenecks and implement possible solutions, to increase the gains and diminish the losses froma single common market (and eventual single economy) across the Caribbean region.

This report attempts to provide an analysis of the sub-regions trade performance andcompetitiveness over the last ten years (for which data is available, 1993-2003). Chapter II ofthis report briefly looks at the importance of trade for the economies of the OECS sub-region.Chapters III and IV analyze the performance of services and merchandise trade, respectively.They also attempt to provide insights into the competitiveness of sectors and products in bothcategories of trade. Chapter V identifies the cost structures faced by firms operating across theOECS, and assesses the impact on competitiveness in production and trade. Chapter VIsummarizes the conclusions and puts forth a possible strategy for competitiveness to drivesustainable export-led growth in the region. A statistical appendix and a bibliography follow thereport.

1 In this report, the OECS refers to full members only. In some data calculations, OECS does not include Antigua &Barbuda and Montserrat due to lack of comparable data.2 CARICOM includes the seven OECS full member states, plus The Bahamas, Barbados, Belize, Guyana, Haiti,Jamaica, Suriname and Trinidad & Tobago. The Bahamas is not party to the Revised Treaty of Chaguaramas and theCSME.


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II. THE IMPORTANCE OF TRADETrade plays a very significant role in the economies across the OECS sub-region. As small islandstates, the OECS countries are relatively open economies and therefore, rely on export income tocreate jobs, buy imports, and maintain an overall healthy balance in external accounts.

Furthermore, these countries are fiscally dependent on international trade transactions forrevenue to finance government operations and increasing external debt payments.

The constraints of small size render a country to open its economy and integrate into the globaltrading system. In micro states, the smallness of domestic markets drive firms to seek externalmarkets, while at the same time, limited domestic resources increase the need for consumers andproducers to buy goods and services abroad. The openness of OECS countries is evident throughthe trade openness indicator, measured as exports and imports of goods and services as apercentage of output (trade/GDP). The OECS as a whole displays an openness indicator of 124percent; this share ranges from 140 percent in Antigua & Barbuda to 113 percent in St. Kitts &Nevis.3 Given this degree of openness, any changes in trade performance have a direct impact oneconomic output.

Another method to measure the importance of trade is to evaluate the impact of exports andimports on a countrys balance of payments. Over the last decade, the sub-regions currentaccount balance has deteriorated from approximately 10 percent to 20 percent of GDP.4 This poor performance is the result of a growing merchandise trade deficit (stagnant exports andrising imports) and relatively stagnant services exports (traditionally, a strong surplus account).Thus far, the OECS sub-region has been able to finance the current account imbalance withsubstantial inflows of foreign direct investment and development aid.

The production and trade structures of OECS countries show that they are predominantlyservices economies. Services related sectors contribute between 60-75 percent of GDP, while

industry (including manufacturing) accounts for roughly 20-28 percent of output.5 In terms oftrade structures, OECS member states export mostly services and import mostly goods. Servicesexports account for almost 80 percent of the regions total exports, up from a 66 percent share inthe early 1990s. For the past decade, goods have accounted for 70 percent of imports into theOECS (see Table 1 in the Statistical Appendix).

The importance of trade in OECS countries is also evident in their dependence on internationaltrade taxes as a source of fiscal revenues. Revenue from international trade transactions accountsfor just over 50 percent of total revenue in Antigua & Barbuda, Grenada and St. Lucia, 45percent in Dominica and St. Vincent & the Grenadines, and 37 percent in St. Kitts & Nevis.6This indicates a significant dependence on trade to finance government operations, including the

increasing burden of interest payments on debt. OECS member states are among the most

3 In comparison, the trade openness indicator for the Caribbean as a whole is 72 percent, for the MERCOSURcountries it is less than 30 percent. See World Bank World Development Indicators (WDI) database.4 IMF Balance of Payments Statistics database.5 World Bank WDI.6 Total revenue excludes grants. See IMF (2004b, 2004c, 2005c and 2005d) and ECCB (2004).


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indebted countries in the world. In 2004, six countries in the sub-region were among the fifteenmost indebted emerging economies St. Kitts & Nevis ranked second with a public sector debtto GDP ratio of almost 180 percent.7

Figure 2.1 Export Growth Performance, 1990-2003

In conclusion, OECS economies are small, open and deeply integrated into the global tradingsystem. Export growth, particularly in services sectors, is therefore a key to their developmentprospects. However, as the balance of payments indicates, export growth has slowed in recent

years due to a number of factors, including the erosion of preferences, increased competitionfrom foreign suppliers, and slumping tourism demand (see Figure 2.1 above). OECS countriesmust find ways to improve their competitiveness and boost exports in this era of growingliberalization, or face the prospect of dwindling economic growth. In the next two chapters, thereport takes a closer look at the performance of services and merchandise trade, as well as thecompetitiveness of specific sectors and products.

7 IMF (2005b).

-7.0

-3.5

0.0

3.5

7.0

10.5

14.0

OECS Antigua &

Barbuda

Dominica Grenada St. Kitts &

Nevis

St. Lucia St. Vincent

& Grens.

GrowthRate(%)

1990-1995

1995-2000

2000-2003

Notes: Exports of goods and services. Growth is measured as annual average over time period.

Source: UN, IMF and WTO data.


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III. TRADE IN SERVICESThis chapter looks at the importance and performance of services sectors in the OECS regionaland national economies. It also attempts to evaluate the competitiveness of services sectors,particularly tourism, over the last decade. The analysis is carried out in two ways: (i) by sector,

for travel, commercial and transportation services; and (ii) by mode of supply, for trade inservices through commercial presence and the temporary movement of labor (Modes 3 and 4,respectively).

It is important to note that the lack of comprehensive and reliable services data, worldwide andespecially in the region, limits the scope of analysis.8 Given the importance of services in manyOECS economies, the capacity to collect, maintain and disseminate services data should beimproved.

A. Importance of Services TradeServices account for 80 percent of total exports and 30 percent of total imports in the OECS. Thesub-region as a whole is a net exporter of services. During the period 2000-2002, it exportedtwice the value of services as it imported; this ratio has remained relatively consistent over thepast decade. Services exports are relatively more important as a source of foreign exchange inAntigua & Barbuda, St. Lucia and St. Vincent & the Grenadines, accounting for more than three-quarters of total exports.

The OECS travel (mainly tourism) industry is the most important sector in the sub-regionsservices export structure (see Figure 3.1 below). Between 1993-2003, the travel sector accountedfor 73 percent of all services exports (this share has decreased slightly over time). In 2003,OECS travel services receipts reached US$ 914 million, roughly three times the value of totalgoods exports during the same year. Travel services exports account for over 85 percent of totalservices exports in St. Lucia; this figure is roughly 70 percent in Antigua & Barbuda, Grenadaand St. Kitts & Nevis, 65 percent in St. Vincent & the Grenadines, and 60 percent in Dominica.

Commercial, transportation and government services make up the remaining share of servicesreceipts. The largest sector, commercial services, accounts for 16 percent of OECS total servicesexports.9 It makes up the largest share of exports in Dominica and St. Vincent & the Grenadines(30 and 26 percent of total services, respectively). The transportation sector is the third largestsource of services export earnings, accounting for 10 percent of the total. Government servicesexports are negligible.

8 For example, current methods of compiling services data do not allow one to look at trends vis--vis differentdestinations. Furthermore, problems still exist in some countries (OECS member states included) in measuring twoof the four modes of supply for services trade (Mode 3 commercial presence and Mode 4 movement of labor).9 Commercial services include, among others, telecommunications, financial, insurance and professional (such asengineering and legal) services.


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Figure 3.1 OECS Services Exports by Area, 1993-2003

Services industries are also an important source of employment in the OECS sub-region. It isestimated that the tourism sector employs, both directly and indirectly, up to 40 percent of theregional labor force. Another 20 percent, approximately, is estimated to work in the publicsector.10 Adding the other services sectors share of employment (for which data is largelyunavailable) shows the overwhelming importance this area of trade has on employment in thesub-region. For example, in St. Lucia the share of employed persons working in services-relatedindustries (including construction and utilities) was roughly 70 percent in 2003.

B. Trade PerformanceOECS services trade has been characterized by slowing growth in exports and imports. The sub-regions total services exports grew by an average 3.2 percent a year between 1993-2003; amoderate performance, yet relatively weak compared to CARICOM as a whole (4.6 percent) andto all less developed countries (6 percent). Services exports grew fastest in the first versus thesecond half of the decade, posting growth rates of 5.9 percent and 0.6 percent, respectively. AsFigure 3.2 shows, total services exports peaked in 1999 reaching US$ 1.24 billion, however, theycontracted over the next three years, and despite growth of 10 percent in 2003 have failed toreach their 1999 level. Total services imports demonstrated a similar pattern of growth expanding at an average 8.2 percent a year between 1993-1998 and 0.8 percent a year between1998-2003.

All OECS member states experienced similar trends in growth, with faster growth in the first halfof the decade relative to the second half. The poor performance between 1998-2003 can be

10 World Bank (2005).

0%

20%

40%

60%

80%

100%

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Shareoftotal.

Travel Commercial Transportation

Source: See Table 2 in the Statistical Appendix.


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attributed to three countries: Dominica and Antigua & Barbuda displayed contractions in theirtotal services exports of 1.9 and 0.4 percent a year, respectively; while St. Lucias growth wasstagnant (0.5 percent). In terms of total services imports, Grenada experienced the fastest growthrelative to other OECS member states (7.4 percent a year), while Dominica displayed the slowestgrowth at an average 2.1 percent a year.

Figure 3.2 OECS: Services Trade, 1993-2003

Similar to total services exports, OECS travel exports displayed moderate 3 percent growth ayear between 1993-2003. This growth was comparable to CARICOM as a whole (3.9 percent),but much weaker than some regional tourism competitors such as the Dominican Republic (9.8percent a year). Travel receipts grew every year since 1995, with the exception of 2001-2002 as aresult of weakening tourism demand worldwide. This sectors exports grew fastest in Dominicaand St. Vincent & the Grenadines (over 6 percent a year for both), and remained stagnant inAntigua & Barbuda and St. Kitts & Nevis. St. Lucias travel receipts grew at an average 10percent a year up to 1998, but have since remained stagnant.

The second most important area, commercial services, was the fastest growing sector in theOECS services export portfolio. Between 1993-2003, commercial services receipts grew by 4.5 percent a year. However, this was the result of a strong performance in the first half of thedecade (annual 15 percent growth) rather than the second half, where the sector actuallycontracted by almost 5 percent a year. The poor performance is due to slumping financial andinsurance services receipts as the two sectors, together, have contracted by roughly one-third(in absolute terms). OECS transportation services exports have maintained average growth of 3percent a year. Grenadas transportation receipts (both air and maritime) have performed the bestrelative to other OECS member states, growing at 18 percent a year since 1998.

The performance of OECS services sectors can also be measured through trends in globalservices market share. The OECSs share of global services trade has declined in recent years,from 0.09 percent in 1993 to 0.07 percent in 2003. In travel services, the OECS global marketshare has been volatile and displayed a downward trend from a high mark of 0.22 percent in1994 to a minimum of 0.17 percent in 2002. The OECS share in global transportation servicesimports is slightly down over the last decade, while the sub-region has lost approximately one-third of its share of commercial services over the same period.

300

500

700

900

1,100

1,300

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

US$Millions

Exports

Imports

Source: See Tables 2-4 in the Statistical Appendix.


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C. Travel Services measuring tourisms competitivenessTo measure the competitiveness of the OECSs tourism product, this report analyzes a variety oftraditional and non-traditional indicators. Traditional measures of tourism performance andcompetitiveness include tourism arrivals (both stopover and cruise passenger visitors), tourismearnings, and the real effective exchange rate. Non-traditional indicators include the WorldTravel & Tourism Councils competitiveness monitor and the tourism satellite account. It isimportant to note that while this section focuses on the tourism sector, there are other sectorswithin travel services with significant potential for growth such as offshore education and health-related services.11

(i) Tourism arrivals stopover visitors and cruise ship passengersOECS total tourism arrivals have grown at 3.5 percent a year between 1993 and 2003. Tourismarrivals grew strongly in the first half of the period (over 7 percent growth). Growth over thenext five-year period was relatively stagnant with arrivals contracting, on average, 0.1 percent ayear. There are two main categories of tourism arrivals: (i) stopover tourists, whose arrivals have

increased by 2 percent a year; and (ii) cruise passengers, whose arrivals have grown by almost 5percent a year. Given this performance, stopovers now represent a smaller share of total arrivalsin the OECS from a decade earlier (from a 43 to a 38 percent share).

The consumer market structure of the OECS tourism industry is relatively diversified. Between1998-2003, 31 percent of stopover arrivals came from Europe, another 30 percent from theUnited States, 27 percent from the Caribbean and 13 percent from other countries. Intra-regionalstopover arrivals have displayed the strongest growth performance, increasing by an average 5.2percent a year over the last decade, versus growth of 2 percent and 1 percent a year in Europeanand American stopover visitors, respectively. The increasing importance of the Caribbean as aconsumer market for OECS tourism is, in part, the result of increasing popularity of cultural

tourism within the region (i.e. music festivals, carnivals, holiday celebrations). There is potentialfor additional growth of Caribbean tourist visitors if the region can address some existingconstraints such as weak intra-regional transport links (see Figure 3.3 below).

To measure the OECS tourism industrys competitiveness one can also analyze trends in itsmarket share of total Caribbean stopover and cruise passenger arrivals. The OECS share of totalstopover arrivals to the Caribbean has remained relatively stable at 5 percent between 1993-2003. While this share has not increased over time, the sub-region did display relatively stronggrowth of 2 percent a year since 1998 (second fastest growth among Caribbean regionalgroupings, behind the Hispanic Caribbean destinations).12 As a result, the Hispanic Caribbeanhas increased its share of total visitor arrivals to the region from 28 percent to 37 percent a

decade later.

11 For more detailed information on offshore education and health-related services see World Bank (2005).12 Regional groupings include: OECS, Other CARCIOM (non-OECS), Other Commonwealth (Anguilla, BVI,Bermuda, Cayman Islands and Turks & Caicos Islands), Hispanic Caribbean (Cancun and Cozumel-Mexico, Cubaand the Dominican Republic),Dutch Caribbean (Aruba, Bonaire, Curacao, Saba, St. Eustatius, St. Maarten), FrenchCaribbean (Guadeloupe and Martinique), and US Territories (Puerto Rico and USVI).


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Figure 3.3 OECS Stopover Arrivals by Origin, 1993-2003

A closer look at stopover arrivals to the Caribbean by consumer market (or origin) yields similarresults. The OECS share of all US stopover arrivals to the Caribbean has decreased slightly from2.8 percent in 1993-1998 to 2.5 percent in 1998-2003, given that increasing numbers ofAmerican tourists are now heading to Hispanic Caribbean destinations. Similarly, the OECSshare of European visitors to the region has dropped from 6.3 to 5.4 percent. In this case, theHispanic Caribbeans market share has grown by 8 percentage points to capture almost 50 percent of European visitors. The OECS sub-region has performed best in capturing intra-regional visitors it has increased this share by almost 1 percentage point to receive one-fifth ofall intra-regional stopover arrivals.

In the Caribbean cruise ship market, the OECS has consistently held a 10 percent market share ofarrivals. This has been the result of a strong performance in the mid 1990s, when arrivals grewan average 11 percent a year. However, this performance has been much weaker in recent years cruise passenger arrivals contracted 1.4 percent a year between 1998-2003. In contrast, otherCommonwealth and Hispanic Caribbean destinations have displayed growth of over 10 percent ayear during the same period. The Hispanic Caribbean, alone, has more than doubled its share ofthe cruise passenger market to 18 percent (mainly due to Cozumels increasing popularity as acruise destination). See Tables 5-7 in the Statistical Appendix for more detailed information onCaribbean tourism arrivals.

(ii) Tourism visitor expendituresVisitor expenditures in the OECS grew at an average 3.4 percent a year since 1993 to reachalmost US$ 1 billion in 2003. This was a relatively weak performance given growth of 4 percentfor non-OECS CARICOM countries, 4.5 percent for US territories and 7 percent for HispanicCaribbean destinations. As a result, the OECS share of total visitor expenditures in the Caribbeandeclined by one-half a percentage point to 4.8 percent. Given that the OECS accounts for a 4.4percent share of tourism visitors, spending per visitor in the OECS is higher relative to otherCaribbean destinations.

100

150

200

250

300

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Visitors('000)

United States Europe Caribbean



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Visitor expenditures in Grenada displayed the strongest growth (almost 14 percent a year), whileexpenditures in Antigua & Barbuda and St. Kitts & Nevis displayed the weakest performance(both at an average 0.8 percent a year between 1993-2003). The growth in expenditures inHispanic Caribbean destinations was driven by Cozumel, Cuba and the Dominican Republic,increasing by an average 17, 11 and 9 percent a year, respectively.

There is potential for the OECS to boost tourism expenditures from a variety of sources. First,while cruise ship passengers account for 60 percent of arrivals, they represent less than 10percent of tourism earnings. It is important that the OECS look into strategies to increase theforeign exchange spent on-shore by cruise passengers on transportation, tour guide, retail salesand entertainment services. Second, the yachting sector is another area of potential growth fortourism earnings. While not yet systematically incorporated in the measurement of tourismexpenditures, the yachting sector is a maturing segment with estimated earnings of more thanUS$ 75 million a year. Some of the sectors development constraints that should be addressedinclude a general lack of awareness of yachtings economic impact, little formal training inyachting-related skills, poor inter-island collaboration and no private sector organization.13

(iii)Price competitivenessAnalysis of the OECSs price competitiveness of its tourism product yields mixed results. At themacroeconomic level, the real effective exchange rate (REER) is used to: first, analyze trends ina country or regions international price competitiveness over time, and second, compare thesetrends with trade partners and competitors. To measure the competitiveness of tourism, the IMFconstructs a REER based on tourism customers. IMF calculations of this real exchange rate forthe OECS region show a relatively stable trend between 1990 and 2003 (see Figure 3.4). Perhapsthe most noticeable change has been sustained depreciation in 2002 and 2003; and while largelyon the basis of a depreciating US dollar, this trend has improved the sub-regions tourism pricecompetitiveness in its major export markets. However, similar trends in the sub-regions main

tourism competitors (such as the Dominican Republic) have also weakened the relativecompetitiveness of the OECS tourism product.14

Figure 3.4 OECS: Real Exchange Rate (Tourism-based), 1990-2003

13 UN-ECLAC (2004).14 For more information on the tourism-based REER see IMF (2004a).

95

100

105

110

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

REERIndex

Note: 1990 = 100; decrease = depreciation. Source: IMF (2004a).


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At the firm level, price competitiveness can be measured through production costs, which are areflection of the allocation of resources and cost of inputs within an economy. IMF calculationsindicate that prices of tourism products in the OECS tend to be among the highest in theCaribbean. This trend is most visible in high food and accommodation prices, which are thedirect result of high labor and utility costs. A strategy to pursue the high-end tourism market and

offer a differentiated product is a valid one; however, there is evidence that the OECS tourismproduct is not that different from other lower-cost Caribbean destinations. Hence, the sub-regionmay be pricing itself out of the market and suffering a loss in price competitiveness.15 For moreon cost structures in the OECS, see Chapter V of this report.

(iv)Tourism competitiveness monitorThe tourism competitiveness monitor is an indicator calculated by the World Travel & TourismCouncil that ranks over 200 countries on the basis of seven indices of competitiveness. 16 AsTable 3.1 shows, in 2004, the OECS ranks very low in price competitiveness. Only one memberstate, Dominica, ranks among the top 100 countries in price competitiveness of its tourismproduct. Also, relative to other Caribbean tourism destinations, the OECS ranks relatively poorlyin the human resources index. This is a worrying trend for the OECS given the importance ofhuman resources in terms of skills, training and customer service as a key input to thetourism industry.

The OECS performed well in the infrastructure and social indicators. Grenada, St. Vincent & theGrenadines and St. Kitts & Nevis all rank in the top 16 countries in terms of infrastructure; allOECS member states are among the top 54 countries in the social indicator. At the same time,the Hispanic Caribbean does not display high marks in the social area. Other CARICOMcountries (The Bahamas, Barbados, Jamaica and Trinidad & Tobago) displayed high rankings inthe technology, human resources and openness.

Among OECS member states, St. Kitts & Nevis had the highest overall tourism competitivenessindex, pointing to the relatively high potential to further develop its tourism product. WhileDominica displayed a high mark in price competitiveness, it had the lowest overall index due to poor values in environment, human resources and openness. It is important to note that theserankings should not be interpreted strictly, but rather as indications of the general areas whereindividual member states, and the OECS as a whole, appear to require additional resources toimprove its tourism products competitiveness.

15

IMF (2003a, 2004a).16 The indices are related to the tourism industry: Price Competitiveness is based on hotel prices, power purchasingparity, and taxes on goods and services;Infrastructure is based on roads, railways, and access to sanitation anddrinking water;Environmentis based on population density, CO2 emissions, and environmental treaties; Technologyis based on internet hosts, telephone mainlines, high-technology exports, and mobile phones; Human Resources isbased on life expectancy, adult literacy, school enrolment, urban population, gender indicators, and various traveland tourism-related employment statistics; Openness is based on visa requirements, trade openness, andinternational taxes; and Social is based on the human development index, daily newspapers, personal computers,television sets, and crime. For more detailed information on the tourism competitiveness monitor visithttp://wttc.org.


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year); it contracted in St. Kitts & Nevis and remained stagnant in Antigua & Barbuda (-0.5 and0.1 percent growth a year, respectively) over the same period.

A closer look at the external component of travel and tourism consumption (visitor exports, orspending by international visitors on goods and services) yields similar results. Visitor exportsaccount for a majority of tourism consumption in the OECS. Between 1993-2003, OECS traveland tourism exports were relatively stagnant, posting growth of just 0.5 percent a year versus 4.5percent in the Caribbean. Grenadas and St. Vincent & the Grenadiness exports grew at 4.7 and4.3 percent a year, respectively; this rate was -2.4 percent a year for St. Kitts & Nevis.

The competitiveness of tourism can also be evaluated through capital investment, a TSA conceptthat captures investment by the private and public sector in tourism-related facilities, equipmentand infrastructure. Capital investment in travel and tourism in the OECS increased by almost 5percent a year to reach US$ 390 million in 2003; compared to growth of 7 percent a year in theCaribbean as a whole (US$ 6.7 billion in 2003). Travel and tourism capital investment hasdisplayed strong growth in Antigua & Barbuda, Grenada, St. Kitts & Nevis and St. Vincent &the Grenadines (growth of over 5 percent a year over the last decade). However, investment inDominica and St. Lucia has decreased over the same period, a poor sign for the development andmaintenance of the tourism infrastructure in these countries.

The TSA methodology uses the demand-side aggregates to construct supply-side accounts. Onesuch account is travel and tourism GDP, measuring the direct and indirect value-added of traveland tourism to the resident economy. Consistent with the results from the demand-side data, theOECSs performance in travel and tourism GDP has been weak (relative to the Caribbean as awhole) and worsening (tourism GDP increased 2.4 percent a year between 1993-2000 anddecreased 0.7 percent annually over the next three years). Hence, it is crucial that OECS memberstates address the constraints that are weakening their tourism competitiveness and affectingeconomic output. This is particularly important for countries that rely heavily on tourism for

economic activity. In Antigua & Barbuda, over 85 percent of its GDP is tourism-related; thisfigure is almost 50 percent in St. Lucia. For more detailed data on the OECS tourism satelliteaccount see Table 8 in the Statistical Appendix.

D. Commercial and Transportation ServicesCommercial services are the fastest growing sector in the OECS services export structure.Antigua & Barbuda, Grenada and St. Vincent & the Grenadines account for roughly two-thirdsof total OECS commercial services; while Dominica, St. Kitts & Nevis and St. Lucia make upone-third of the total. A breakdown by category (or sub-sector) shows that insurance andfinancial services exports each account for roughly a 15 percent share of total commercial

services; other business services makes up the remaining 70 percent. Due to a lack of detaileddata it is difficult to analyze the other business services sub-sector.

OECS insurance services exports are characterized by strong growth in the mid 1990s (22 percent growth a year) and a strong contraction over the last five years (-8 percent a year).Antigua & Barbuda accounts for most trade in the sub-regional insurance services sub-sector,characterized by a relatively large reinsurance sector. The decline in receipts could be attributed


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to the departure or downsizing of many reinsurance brokers in Antigua due to increasing severeweather activity across the Caribbean.19

Similar to the performance of insurance services, OECS financial services exports havedemonstrated strong growth between 1993-1998, but have declined in subsequent years. St.Vincent & the Grenadines dominates sub-regional financial services, accounting for roughly halfof all OECS financial services receipts. The decline throughout the OECS is, in part, the result ofincreased scrutiny by the OECD and other international actors to curb harmful international taxpractices. This scrutiny has enhanced supervision and regulation throughout the OECS offshorefinancial sector and prompted a general decline in size, and therefore earnings, of the sub-sector.For example, in 2001, St. Vincent & the Grenadines had 44 offshore banks; this number stood at11 in late 2003.20

As mentioned earlier, OECS transportation services exports have increased at a moderate andconsistent pace over the last ten years. This growth has been driven by Antigua & Barbuda itsexports of transportation services account for roughly 60 percent of the OECS total. The othermember states each make up between a 5 and 10 percent share of OECS transportation exports.A breakdown by category shows that air transport services make up the majority of totaltransportation services receipts (a 66 percent share), while maritime services receipts make upthe rest.

Air transport services exports represent primarily the foreign exchange earnings (passengerfares) of the sub-regional airline, LIAT, based out of Antigua. LIAT is partly owned by thegovernments of some OECS member states and Trinidad & Tobago. While the airlinesoperations provide an important share of total transportation services earnings and help diversifyservices exports outside of the tourism sector, the airlines efficiency and competitiveness havebeen in question. LIAT has suffered from financial and operational troubles in recent years. Afailed privatization in 1995 has led to financial injections of US$ 36 million by Caribbean

governments. Also, efforts to secure regional routes and air access for LIAT have been costlyand, so far, have failed to provide reliable and low-cost supply within the sub-region.21

Maritime transport services account for roughly one-third of OECS transportation services. Inrecent years, growth in maritime transport services has remained relatively stagnant, with foreignexchange earnings registered at around US$ 40 million a year. Each OECS member stateaccounts for an equal share of the regional total, and is probably attributed to port handling andmaintenance fees in the islands shipping and cruise ship port operations. A lack of detailed datafor this sub-sector limits the scope of analysis. More research is needed to understand the impactand performance of commercial (i.e. insurance and financial) and transportation services sectorson member states and the regional economy.

19 WTO (2001).20 IMF (2005c).21 World Bank (2005).


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E. The Provision of Services via Modes 3 and 4The provision of services by a foreign company through its commercial presence in a residenteconomy (Mode 3) is another mode of supply for services. While the WTO has developed astatistical tool (the Foreign Affiliates Trade in Services or FATS) to measure Mode 3 trade, fewcountries currently report this data. As a result, the use of foreign direct investment statistics,particularly those inflows and outflows in services-related industries, is considered an acceptableproxy for measurement.

Foreign direct investment into the OECS sub-region targets mostly services-related industries.Between 1997 and 2003, FDI into the tourism sector averaged US$ 150 million a year, whileinvestment into manufacturing, agriculture and fuels (together) averaged just US$ 5 million ayear. Other services sectors such as retail, financial, insurance, education and construction(together) received on average US$ 11 million over the same period. FDI inflows targeting theOECS tourism industry focused on St. Lucia and St. Vincent & the Grenadines in the late 1990s,and on St. Kitts & Nevis and Grenada between 2000-2003 (see Figure 3.5).

Figure 3.5 FDI Inflows into Tourism Sectors, 1997-2003

Analysis of the sub-regions total FDI inflows, into both services and non-services sectors,shows a volatile and overall stagnant performance over the last decade. In the OECS, FDI as a

percentage of GDP fluctuated from 8 percent in the mid 1990s, up to 11 percent in the late1990s, and 9 percent between 2000-2003. St. Kitts & Nevis displayed a strong performance inattracting FDI inflows more than doubling its ratio to 23 percent of GDP.

The OECS sub-regions share of total FDI into CARICOM demonstrates similar trends. In 1998,the OECS accounted for 17 percent of inflows into CARICOM, this share declined to 13 percentin 2001, and then rose to 16 percent in 2003. This volatility in FDI shares is expected given thelumpiness of foreign investment, particularly in the tourism sector. At the same time, FDI

0

10

20

30

40

50

60

70

80

1997 1998 1999 2000 2001 2002 2003

US$Millions

.

Grenada St. Kitts & Nevis St. Lucia St. Vincent & Grens.



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inflows relative to all developing countries have remained stagnant and maintained a share of0.13 percent over the last decade.

Foreign direct investment is an important source of foreign exchange for OECS member tomaintain healthy balance of payments and to boost growth and development. Given this, and therelatively stagnant growth in FDI inflows in recent years, it is important for the OECS to focuson a strategy to improve its investment climate. A recent survey of Grenadas investment climatehighlighted a number of constraints to attracting FDI, including high costs of doing business,inefficient transport operations and the high cost of capital.22 These bottlenecks appear to berelevant for the OECS sub-region as a whole (for more information see Chapter V).

Furthermore, the OECSs wide use of incentives to attract foreign direct investment appears tobe a liability. First, the benefits of investment incentives such as corporate income tax holidaysand concessions on import-related taxes appear limited. While investment incentives haveincreased in recent years, the sub-regions FDI performance has not improved. Second, the costsof investment incentives appear significant. It is estimated that the annual foregone fiscalrevenue from tax concessions is approximately 9.5 to 16 percent of GDP.23 In addressing theoverall constraints to an improved investment climate, the OECS should pursue a regionalframework (preferably with all CARICOM partners) for investment incentives to avoid thecurrent competition that is yielding marginal benefits.

The provision of services by foreign national persons who enter a resident economy on atemporary basis is the fourth and final mode of supply of services. Measurement of Mode 4 tradealso suffers from a general lack of statistics. The value of trade via Mode 4 can be estimated,imprecisely, through the balance of payments (namely through compensation of employees andworker remittances) and other migration statistics.24

Analysis of Mode 4 using these proxies suggests that this mode of supply is an important source

of foreign exchange for the region. First, the Caribbean as a whole, has the highest emigrationrates in the world with roughly 12 percent of its labor force emigrating to industrializedcountries, and it is the largest recipient of worker remittances in the world (more than 10 percentof GDP in 2002). Second, total remittances are a relatively large source of foreign exchange inthe OECS. For example, Grenada, St. Kitts & Nevis, Dominica and St. Vincent & theGrenadines are among the top 30 countries in terms of total remittances as a percent of GDP. 25However, questions remain regarding the benefits of remittances versus the costs of emigration.More research in this area is necessary to understand the precise implications of Mode 4 trade forthe OECS member states.

22 FIAS (2004).23 IMF (2005a).24 Compensation of employees captures compensation to individuals working abroad for less than one year. Workersremittances capture transfers from abroad by individuals working for more than one year. It is important to note thatthese proxies both under- and over-estimate Mode 4 trade, since they do not distinguish between workers in servicesor non-services related sectors, and do not measure those flows through unofficial channels. See World Bank (2004).25 IMF (2005a).


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F. Evaluating Services TradeThis analysis of OECS services trade yields a number of interesting observations andconclusions:

Services sectors are extremely important for OECS economies, as they accounted for 80percent of the total exports while providing jobs for approximately two-thirds of the regionallabor force. OECS travel (tourism) services receipts, alone, accounted for 75 percent of totalservices exports and represented three times the value of all merchandise exports in 2003.

The OECS has been characterized by slowing growth of services exports, which hastranslated into a general loss of market share in global services. Travel services receipts havedisplayed volatility with a general downward trend (behind poor growth performances byAntigua & Barbuda, St. Kitts & Nevis and St. Lucia). At the same time, OECS commercialservices exports have lost significant global market share (resulting from poor growthperformances by Antigua & Barbuda, Dominica and Grenada).

The OECS has performed moderately in terms of growth of tourism arrivals, and has lostsome competitiveness in the US and European markets at the expense of Hispanic Caribbeandestinations. However, the sub-region has become more competitive in attracting intra-regional tourists it now captures one-fifth of all Caribbean visitors.

Analysis of the OECS tourism products price competitiveness yields mixed results. At themacroeconomic level, it appears to have gained competitiveness in the main consumermarkets from a depreciating United States dollar. At the firm level, high cost structuresappear to be pricing the OECS out of the market, particularly relative to some of the low-costtourism destinations in the Hispanic Caribbean.

Tourism-related output has been weak and worsening. Tourism GDP increased 2.4 percent ayear between 1993-2000 and decreased 0.7 percent annually over the next three years. OECSmember states, particularly those that rely heavily on tourism for economic activity, shouldaddress the constraints that are weakening their tourism competitiveness and affectingeconomic output. Policy measures could focus on improving the regions cost structures andprice competitiveness, and increasing visitor arrivals through the development of transportlinks (i.e. airlift capacity).

Diversification at various levels of the services sector can help boost export sales. Forexample, economies can diversify within tourism services by tapping potential sources ofearnings such as on-shore cruise passenger expenditures and the yachting sector; diversify

within travel services by focusing on promising sectors such as education and health-relatedtravel; and diversify within services, in general, into potentially competitive areas such asICT-based services (i.e. internet gaming) and other business services.

Trade in services via Modes 3 and 4 are important sources of foreign exchange for the OECScountries. A majority of foreign direct investment is targeted at the tourism sector, while totalremittances (relative to GDP) into Grenada, St. Kitts & Nevis, Dominica and St. Vincent &


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the Grenadines are among the highest in the world. More research is needed in these areas tounderstand the full impact and potential of this trade to OECS economies.

In the next chapter, the report focuses on the trade performance and competitiveness of themerchandise sector.


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IV. MERCHANDISE TRADEIn the OECS, goods make up 20 percent of total exports and 70 percent of total imports. Between2000 and 2002, the OECS imported four times as many goods (in value terms) than it exported,up from approximately 2.5 times a decade earlier. Merchandise exports are relatively more

important as a source of foreign exchange in St. Kitts & Nevis and Dominica (42 and 37 percentof total exports, respectively), and a less important source for Antigua & Barbuda (9 percent).This chapter looks at the merchandise trade performance of the OECS sub-region and individualmember states, and attempts to evaluate their export competitiveness, specialization and tradecomplementarity.

A. Trade Performance

(i) Growth and patterns in the direction of trade

In the last decade, OECS merchandise trade has been characterized by relatively stagnant exports

and rising imports. Between 1993 and 2003, total exports contracted by an annual average of 1.2 percent to reach US$ 320 million in 2003 (see Figure 4.1). Goods destined to non-OECSCARICOM partners grew the fastest (6.5 percent a year), while exports to the EU displayed theworst performance declining by an annual average of 6 percent since 1993. 26 Exports to theUnited States and Canada displayed poor growth in the first half of the decade (-4.4 percent), butrecovered strongly with growth of almost 10 percent a year.

Figure 4.1 OECS: Merchandise Trade, 1993-2003

While the sub-regions overall merchandise export performance was relatively weak, somemember states performed better than others. Grenada and St. Kitts & Nevis displayed relatively

26 Note that in the direction of trade section, the category non-OECS CARICOM partners includes The Bahamas,Barbados, Belize, Guyana, Haiti, Jamaica, Suriname and Trinidad & Tobago. In all other cases, trade withCARICOM refers to all 15 member states.

0

300

600

900

1,200

1,500

1,800

2,100

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

US$Millions

.

Exports

Imports

Source: See Tables 10-11 in the Statistical Appendix.


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robust growth of 6.7 and 5.9 percent a year, respectively, while the other OECS member statesall saw their total goods exports decline during this period. At the same time, the impressivegrowth of exports to non-OECS CARICOM members was the result of strong performances bySt. Lucia and Dominica (11.6 and 7.9 percent growth to that destination, respectively).

The OECS relies on markets that grant it preferential access as its major export destinations.CARICOM, the EU, and the Unites States and Canada account for an 88 percent share of OECSgoods exports. As Figure 4.2 shows, CARICOM is the most important destination accounting forover one-third of exports (the OECS sub-region holds a 14 percent share, while other CARICOMpartners have increased their share markedly to almost 20 percent). The EU accounts for anotherthird, however, this mark has declined by almost 10 percentage points. The United States andCanada hold a 25 percent share of OECS goods exports, up from 21 percent a decade earlier. Theremaining goods are destined to Latin America (3 percent share) and other countries (9 percent).

Figure 4.2 OECS Merchandise Exports by Destination, 1993-2003

The OECS, as a sub-region, has increased the share of merchandise exports destined forCARICOM relative to extra-regional partners. Between 1993-1998, CARICOM accounted for 26percent of exports; this share rose to 31 percent in the period 1998-2003. A closer look at intra-regional trade flows shows that the OECS relies mainly on Trinidad & Tobago, Barbados andJamaica as destinations for its goods. Exports to Trinidad & Tobago have shown relativelystrong growth since 1998, with average growth of 13 percent a year to reach a one-quarter shareof the total. It is also important to note that since 1993, exports to Belize and Suriname have

displayed the fastest growth (although from a low base), evidence of growing trade links between the sub-region and these two CARICOM partners. For the OECS, its sub-regionalpartners account for 40 percent of intra-regional exports, with Antigua & Barbuda and St. Luciaeach accounting for a 10 percent share of sales.

During the period 1993-2003, OECS goods imports grew at an annual average of 6.2 percent toreach US$ 1.7 billion. The regions total imports displayed stronger growth in the first half of thedecade (over 9 percent a year) than in the second half (3.3 percent a year). Imports from Latin

0

50

100

150

200

250

300

350

400

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

US$Millions

.

Rest of World

EU

US / Canada

OECS

CARICOM

(non-OECS)



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America and non-OECS CARICOM partners displayed the fastest growth of 11 and 6.5 percenta year, respectively. Imports between OECS member states demonstrated a relatively slow rateof growth (1.6 percent a year) over the last decade. Imports grew fastest in Antigua & Barbuda(12 percent a year), while St. Lucia displayed relatively slow growth (3 percent).

The most important source of goods for the OECS is the United States and Canada sourcing 40 percent of imports, although this share has declined in recent years. Another 30 percent ofimports arrive from the European Union; this share has increased by roughly 5 percentage pointsfrom the first half of the decade. Non-OECS CARICOM members account for another 15percent, while the OECS sub-region holds a 3 percent share. Latin America and other countriessource 4 percent and 10 percent of OECS goods imports, respectively.

CARICOM is responsible for a small and decreasing share of imports into the OECS currently17 percent, down from 20 percent a decade earlier. The goods sourced from the CARICOMregion come predominantly from Trinidad & Tobago. Roughly 64 percent of the OECSs intra-regional imports come from Trinidad, up from a 58 percent share in the first half of the decade.Trinidad & Tobago accounts for at least a 60 percent share of intra-regional imports of Grenada,St. Kitts & Nevis, St. Lucia and St. Vincent & the Grenadines. Barbados is the source of 14 percent of intra-regional imports, while Guyana, Jamaica, St. Vincent & the Grenadines,Dominica, St. Lucia and Grenada each hold another 3-5 percent share. For more information seeTables 10-12 in the Statistical Appendix.

(ii) Composition of trade by sectors

Analysis of the composition of trade by sectors shows a changing trend in the export structure ofOECS member states. During the period 1993-1995, 58 percent of OECS exports were foodproducts, and 41 percent were manufactures. Over the next decade, manufactured exports grew by almost 3 percent a year, driven by sales of electrical machinery, telecommunications

equipment, boats and floating structures and cosmetics; while the food sector contracted byalmost 6 percent a year (from US$ 177 million to just over US$ 100 million in 2003). As aresult, food exports now make up a 37 percent share, and manufactured products 57 percent. TheOECS did not export many fuel products during the 1990s, however, their share rose to 4 percentin 2002-2003 as a result of rising kerosene exports by St. Lucia.27 Exports of ores and metals, andraw agricultural materials are negligible and have remained stable at 0.8 and 0.3 percent,respectively (see Figure 4.3).

A breakdown of the composition of exports by destination shows that the OECS exports mostlymanufactured goods to the United States and mostly food products to the European Union.Between 1993-2003, 86 percent of exports to the US were manufactures and 13 percent were

food products. Conversely, 87 percent of exports to the EU were food products while 12 percentwere manufactures. The share of food products in total exports to the EU has been decliningsteadily over the last decade, (from a 90 to 75 percent share) as a result of a weak performance inbanana exports. OECS exports to CARICOM are relatively diversified, roughly half of exports

27 Anecdotal evidence suggests that these are re-exports, that is, products that are exported in the same state (novalue-added) as they are imported.


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are manufactures and another 40 percent are food products. Exports of fuels, ores and metals,and raw agricultural products are negligible for all OECS countries, with the exception of St.Lucias kerosene exports (or re-exports).

Figure 4.3 OECS: Sector Composition of Exports, 1993-2003

During 1993-2003, Dominica and Grenada demonstrate a relatively balanced export structure bysector, with food and manufactured products each accounting for half of merchandise exports.Manufactured exports by these two countries have, similarly to the overall OECS trend,increased their importance at the expense of food products. St. Kitts & Nevis displays arelatively manufacture-intensive export structure. On the other hand, St. Lucia and St. Vincent &the Grenadines are relatively food-intensive exporters.

The composition of OECS imports by sector shows that most goods coming into the region aremanufactured products. Between 1993-2003, approximately 65 percent of total imports weremanufactures, while another 25 percent share were food and raw agricultural products. Theremaining imports were fuels (8 percent share) and ores and metals (1 percent share). All theseshares have remained relatively stable over the last decade, with the exception food and rawagricultural products they have declined slightly in importance at the expense of fuels. Thiscould be the result of price effects (higher international fuel prices), rather than real changes inthe quantity traded. Imports by individual OECS member states are characterized by similartrends, each countrys manufactured goods represent between 63 and 72 percent of imports.

Analysis of the composition of imports by destination also yields similar results. OECS imports

from the US and the EU are predominantly manufactured products (72 and 70 percent,respectively). The remaining goods from the EU are mostly food products; from the UnitedStates they include food, raw agricultural and fuel products. Between 1993-2003, 45 percent ofimports from CARICOM partners were manufactures, 30 percent were food products, andanother 25 percent were fuels. It is important to note that the OECS imports almost three-quarters of its fuel needs from CARICOM member states (mostly Trinidad & Tobago).

0%

20%

40%

60%

80%

100%

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Percentoftotal

Food & Agriculture Manufactures Fuels & Metals Other



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(iii) Export concentration and principal products

Analysis of the sub-regions export structure shows an improvement in the concentration ofproducts. Between 1993-1996, the top 20 products accounted for 70 percent of total exports; thisshare decreased to 66 percent in 2000-2003. The decline in concentration appears to be related toa decreasing dependence on bananas as a source of foreign exchange across the OECS.Furthermore, at the beginning of the decade, four products made up half of total exports; at theend of the decade, nine products covered this share. A breakdown of the top 20 exports to theworld shows that nine are agricultural and food products, ten are manufactures and one is a fuel-related product (see Table 4.1).28

Table 4.1 OECS: Top 20 Products Exported to the World and CARICOM, 2000-2003

The export concentration of individual OECS member states varies significantly. Exportstructures are most concentrated (that is, the top 20 products account for the highest share of totalexports) in St. Kitts & Nevis (91 percent) and Dominica (87 percent). Exports are leastconcentrated in Antigua & Barbuda (56 percent) and St. Lucia (75 percent). Another indicator tomeasure the relative concentration of exports is the Hirschman-Herfindahl Index (HHI).29

28 Note: seven of the ten manufactured exports and kerosene were not in the Top 20 at the beginning of the decade.29 The Hirschmann-Herfindahl Index is a measure of product concentration. It is calculated as HHIj=i[(Xij/Xtj)^2],where Xij is export of product i by country j, and Xtj is the total exports of country j. The index runs from 0 to 1,with 1 indicating the greatest concentration.

World Share Acc. CARICOM Share Acc.

Code Product Description (%) Share Code Product Description (%) Share

0573 Bananas, fresh or dried 17.8 17.8 5541 Soap; organic surface-active product 11.2 11.2

7721 Elect's such as switches & relays 9.1 26.9 04601 Flour of wheat or of meslin 10.3 21.4

07524 Nutmeg, mace and cardamoms 5.1 32.0 1123 Beer made from malt 8.4 29.8

5541 Soap; organic surface-active product 4.5 36.5 5530 Perfumery, cosmetics, etc 7.3 37.204601 Flour of wheat or of meslin 3.6 40.1 33421 Kerosene 4.9 42.1

1123 Beer made from malt 3.0 43.1 0573 Bananas, fresh or dried 3.5 45.6

5530 Perfumery, cosmetics, etc 2.5 45.6 11102 Lemonade & flavoured waters 3.0 48.6

77884 Elect. capacitors & condensers 2.2 47.8 04221 Rice, semi/wholly milled 3.0 51.5

7599 Parts for office machines 2.2 50.0 05481 Manioc, arrowroot, salep 2.8 54.3

77323 Electrical insulators of ceramic 2.1 52.1 08199 Sweetened forage 2.5 56.8

0611 Sugars, beet and cane 1.9 54.0 7810 Passenger motor cars, for transport 2.3 59.1

33421 Kerosene 1.8 55.8 64243 Toilet paper in rolls 2.2 61.4

05481 Manioc, arrowroot, salep 1.6 57.4 53342 Other paints & enamels 2.1 63.5

79321 Yachts & other vessels for pleasure 1.6 59.0 5542 Organic surface-active agents, n.e.s. 1.8 65.4

7810 Passenger motor cars, for transport 1.3 60.2 59141 Disinfectants packed for sale 1.8 67.2

11102 Lemonade & flavoured waters 1.2 61.5 67491 Other sheets & plates 1.8 69.0

7643 Radiotelegraphic & radiotelephonic 1.2 62.7 05797 Avocados, mangoes, guavas 1.4 70.404221 Rice, semi/wholly milled 1.2 63.8 04212 Rice, husked 1.1 71.5

7723 Resistors, fixed or variable 1.1 64.9 72346 Other excavating & extracting eq't 0.8 72.4

08199 Sweetened forage 0.9 65.8 81242 Lamps & lighting fittings 0.8 73.2

Top 20 Exports 65.8 Top 20 Exports 73.2

Total (1,077 products) 100.0 Total (627 products) 100.0

Source: Author using UN-COMTRADE.


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Calculations of the HHI for OECS member states yield similar results, namely that St. Kitts & Nevis and Dominica enjoy the most concentrated export structures (HHI of 0.26 and 0.19,respectively); while St. Lucia is the least concentrated with an HHI of 0.09. Productdiversification can also be measured using a proxy the total number of product lines exportedin a given time period. Grenada shows the greatest diversification over the last decade, from

exporting 414 different products during 1993-1996 to almost 500 products a decade later. St.Kitts & Nevis is characterized by less diversification, exporting 694 products at the beginning ofthe decade, versus just 570 products in 2000-2003.

The OECS export structure to CARICOM is more concentrated than to the world, and theconcentration is increasing. The top 20 products account for 73 percent of intra-regionalmerchandise exports, up from a 69 percent share during the period 1993-1996. This is also thecase in individual member states, as a few products dominate intra-regional export structures. InDominica, the top five exports are chemical products such as soap and disinfectants. Together,these five products represent almost 80 percent of Dominicas intra-regional exports. Grenadasintra-regional exports are dominated by one product (flour of wheat), while in St. Kitts & Nevisthis is the case with lemonade, flavored waters and margarine. In both countries, these productsmake up one-third of intra-regional merchandise exports. In St. Lucia, two products (beer andkerosene) account for half of intra-regional exports, while in St. Vincent & the Grenadines thisshare is held by five food products (flour of wheat, rice, manioc, bananas and flavored waters).For more on the principal products exported to the world and the region see Tables 14-15 in theStatistical Appendix.

While concentrated at the product level, OECS intra-regional exports show a relatively balancedstructure by technology content.30 In 2002 (the latest year for which data was available), roughly30 percent of intra-regional exports were resource-based manufactures, another 30 percent weremedium-technology manufactures, 25 percent were primary products, and the rest were low-technology manufactures. The share of medium-technology manufactures in total intra-regional

exports has increased by seven percentage points since 1993, mainly due to growth of soap andother chemical exports by Dominica. It is interesting to note that almost one-third of OECSexports to CARICOM partners are high- and medium-technology manufactures; this share is 20percent for Barbados, 16 percent for Jamaica and 5 percent for Trinidad & Tobago.

B. Competitiveness, Specialization and Complementarity

In this section, measures of international competitiveness, export specialization and tradecomplementarity are presented through a variety of indicators. For consistency, all the indicators(except the real effective exchange rate) are calculated at the SITC Revision 2 three-digit level ofaggregation.31

30 See Lall (2000) for more detailed information on the classification of exports by technology content.31 One caveat to using such a high level of aggregation is that it can mask specific product performances. However,in the case of the OECS, its export structure is characterized by three-digit sectors dominated by one or fewproducts.


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(i) Real effective exchange rate

As mentioned in the previous chapter, the real effective exchange rate (REER) is a measure ofinternational price competitiveness. To measure the competitiveness of merchandise trade, theIMF constructs a REER based on consumer prices and weights of unit prices of exports andimports. Figure 4.4 displays this REER for the OECS, and shows a sustained appreciationthrough the 1990s (with a slight correction between 1993-1995) that resulted in a general loss of price competitiveness in merchandise trade during this period. Between 2001 and 2003, theREER depreciated approximately six percent a year, driven largely by the depreciation of the USdollar, providing an improvement in the international price competitiveness of the sub-region.

Figure 4.4 OECS: Real Effective Exchange Rate (CPI-based), 1990-2003

The IMF has calculated various REER measures for the individual OECS member states duringthe period 1990-2003. These reveal that St. Kitts & Nevis and St. Vincent & the Grenadinesexperienced the greatest loss in international price competitiveness (or appreciation) during the1990s. The least appreciation occurred in Antigua & Barbuda and Dominica. The results in

Grenada and St. Lucia are somewhat contradictory, depending on the real exchange rate used.

32

(ii) Market access and penetration

The OECSs preferential access in major export markets has an impact on the regionscompetitive position relative to its competitors. The region receives preferential treatment in allof its major export markets through CARICOM, the Cotonou Agreement (EU), the CaribbeanBasin Initiative and Caribbean Basin Trade Partnership Act (US), the CARIBCAN (Canada), andthe Generalized System of Preferences (both in the EU and US). Over the last decade, the OECShas lost relative competitiveness, either through the erosion of preferences or through theexpansion of preferential treatment to competitors, in its major export markets. To measure theeffects of this loss of competitiveness one can analyze the levels of market penetration over time.

The OECSs market penetration in the European Union has improved marginally over the lastdecade to reach 0.02 percent of total EU imports. Of the 186 different product lines exported tothe EU, 119 of them have gained market share. However, two of the top three exports (in value

32 For more REER data and an explanation of how it is measured see IMF (2004a).

90

100

110

120

130

140

150

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

RE

ERIndex

Note: 1990 = 100; decrease = depreciation. Source: IMF (2004a).


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terms) have lost significant market penetration namely bananas (1.2 to 0.2 percent share) andsugar (0.5 to 0.2 percent share). With these two examples, one can see the impact of preferenceerosion and the lack of competitiveness of some OECS countries based on inefficiencies, lackof economies of scale, and high labor and transport costs versus other more efficient producers.Further erosion of preferences in the EU market will likely see these trends continue. However,

there have been some important gainers as measured by EU market penetration. Ships andfloating structures have increased their share by 2 percentage points to 2.5 percent, spices haveincreased their share by almost 1 percentage point, while feedstuffs have increased by 0.1percentage point.

Penetration into the US market has been weaker, as the OECS share in total US imports hashalved to 0.007 percent since 1993. Of the 115 products exported to the US, just under half ofthem have gained some, if only marginal, market share. As in the EU market, spices haveincreased their share significantly to reach roughly 0.3 percent of US imports of that product.Fresh fish have also increased their market share (though only marginally). The biggest loserin market penetration has been sugar, going from a 1.2 percent share in 1993 to 0.02 percent in2003. It is interesting to note that the top three products exported to the US in 1993-1996 dresses, jerseys and pullovers, and brassieres all lost significant market shares to reach almostzero in 2003. This could be the result of preference erosion in apparel production vis--visMexico and other Central American competitors.

Table 4.2 OECS Market Penetration in CARICOM, 1993-2003

Analysis of the OECS sub-regions penetration into the CARICOM market yields mixedresults.33 During the period 1993-1998, the sub-region experienced a loss of market share from1.1 to 0.6 percent of CARICOM imports. However, this share improved slightly over the next

five-year period to reach 0.8 percent in 2003. A closer look at the product performance showsthat in 1993, three OECS products held a greater than 25 percent share of CARICOM imports,another two held a share greater than 10 percent. As Table 4.2 demonstrates, this trend worsenedin 1999, yet recovered in 2003 to display two products above a 25 percent market share and six

33 Note that CARICOM import shares include OECS member states.

1993 1999 2003

Market 3 1 2

Share flour of wheat, flour of wheat flour of wheat,

> 25% vegetable oils, scrap metal

soap

2 2 6fresh fish,

Market fruit & nuts (bananas), fruit & nuts (bananas), crustaceans & molluscs,

Share non-alcoholic beverages soap fruit & nuts (bananas),

> 10% alcoholic beverages

stone & sand, and soap

Source: Author using UN-COMTRADE.


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above a 10 percent share. Over the last decade, the big gainers in market penetration have beenfresh fish, alcoholic beverages, and crustaceans (improving by 10, 9 and 6 percentage points,respectively). The big losers have been vegetable oils and soap (losing 38 and 16 percentagepoints, respectively).

(iii) International competitiveness of exports

The international competitiveness indicator charts all OECS exports into four categories basedon supply-side performance (measured through their growth in world market share) and demand-side trends (measured through growth in global imports).34 The four categories include:champions export sectors that increase their world market shares and face growing globaldemand; achievers in adversity sectors increasing their world market shares while globaldemand falls; underachievers sectors facing growing demand but with supply-sideconstraints leading to declines in market share; and declining sectors those exports facingconstraints in both supply and demand, with falling market shares and decreasing growth inglobal imports.

This competitiveness analysis is useful because it identifies products that face supply- anddemand-side constraints. In response, countries can pursue export promotion or niche marketingstrategies to improve supply performance, and boost international demand by opening newmarkets via multilateral trade liberalization. At the same time, one can identify in which sectorsthese efforts may be least cost-effective. Figure 4.5 shows OECS exports divided into the fourcategories, with the size of the bubble representing the export value between 1997-2003.

Figure 4.5 Competitiveness of OECS Exports, 1997-2003

34 Here, OECS excludes Antigua & Barbuda and Montserrat due to lack of comparable data. This indicator wascalculated at the SITC Revision 2, three-digit level of aggregation and excludes re-exports. International demand ismeasured by the average annual growth in world imports between 1997 and 2003. The national or regional export

-12%

-6%

0%

6%

12%

-40% -20% 0% 20% 40% 60%

Avg. Ann. Increase in OECS World Market Share

Avg.

Ann.

GrowthinWorldImports

.


ACHIEVERS IN ADVERSITY

CHAMPIONS

DECLINING SECTORS

UNDERACHIEVERS

fruit (bananas)

elect. switches

soap

spices

flour of wheatsugar rice

alc. beverages

elect. machinery


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79 product groups accounting for 36 percent of total exports are classified as champions. Inthe top 20 exports there are eight champions, three of these products are food andagricultural products, while the other five are manufactures. Electrical switches and relays,electrical machinery and ships are some of the best performers having gained significantworld market share while facing robust global import growth.35

14 product groups representing 4 percent of total exports are achievers in adversity. Oneproduct, flour of wheat, dominates this category. It increased its world market share by anaverage 1 percent a year between 1997-2003, while global imports contracted by 8 percent ayear over the same period.

89 products accounting for 53 percent of total exports are underachievers. One exportsector, fruit and nuts (namely, bananas), accounts for half of all underachievers (in valueterms) and has lost an average 12 percent a year in world market share.

15 products representing 6 percent of total OECS exports are declining sectors. Two ofthese products are sugar and rice. For more information see Tables 16 in the appendix.

The international competitiveness of the top 20 exports was also calculated for the individualOECS member states to identify the sectors that could benefit from additional national resources.

In Dominica, 16 of the top 20 products (more than 80 percent in value terms) areunderachievers led by the top two products bananas and soap. Two championsdisplaying significant increases in world market shares are perfumery and cosmetics, andnon-alcoholic beverages.

Between 1997 and 2003, Grenada had 11 of its top 20 products (more than 50 percent invalue terms) labeled as champions. This category was led by its most important export

(spices, namely nutmeg), as well as, equipment for distributing electricity, and paper andpaperboard.

St. Kitts & Nevis had 7 champions representing 60 percent of total exports. Electricalswitches and relays and electrical machinery represent the majority of this category, whilesugar (the second most important export) dominated the declining sectors.

For St. Lucia, 11 of its top 20 exports were champions, however, they accounted for onlyone-quarter of exports in value terms. Of these, alcoholic beverages, kerosene andtelecommunications equipment experienced strong growth in world market shares. Thecountrys top export (bananas) was the biggest underachiever.

performance is measured by taking the average annual growth of the exporters world market share in each three-digit product/sector over the same period.35 Electronics exports from St. Kitts & Nevis include cable network switches and light dimmer switches from twofirms (sourcing the North American markets), which enjoy comparative advantages versus Asian competitors inproximity (speed to market and sourcing of specialized skills), cheap access to inputs, and language. See WorldBank (2005).


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Finally, St. Vincent & the Grenadines had 15 of its 20 exports as underachievers ordeclining sectors (accounting for over 90 percent of total exports). Of the countrys top 13exports all lost world market shares, with 8 of them being agricultural and food products.

(iv) Export specialization

The OECSs export performance and international competitiveness can also be evaluated usingthe export specialization index (ESI).36 It measures a countrys (or regions) internationalspecialization in specific products by dividing that products share in a countrys (or regions)total exports, by its share in world imports. It is assumed that if a specific products share inOECS exports is greater than the products share in world imports, that is, an ESI greater thanone, then the region is specialized in production and appears to be an efficient producer of thatproduct. Trends in ESI over time and across different markets can help identify increasing (ordecreasing) specialization, comparative advantages and sectors where promotional resources canbe targeted.37

The OECS appears to be specialized in 32 out of a total of 222 products exported to the world

between 2000-2003. Of these 32 products, 24 of them either increased or maintained their ESIfrom earlier in the decade (1993-1996); their breakdown is relatively diversified between foodand agricultural products (10 of them), crude materials (7) and manufactures (7). Of the 190products that do not display an ESI, 10 of them lost it between the two periods. It is interesting tonote that eight of these were manufactures, namely apparel products.

Specialization versus different export markets allows one to compare (both at the aggregate andsectoral levels) export performances in the regions major export destinations. The OECSappears specialized in 26 out of 192 different products exported to CARICOM. Of the 16products that increased their ESI, half of them did not appear specialized at the beginning of thedecade they include products such as stone, perfumery, image and sound recorders and some

apparel sectors. Of the remaining 166 products that did not have an ESI in 2000-2003, 12 ofthem (8 of which are manufactures) lost it from the earlier period of 1993-1996.

The OECS was specialized in 18 out of 166 products exported to the EU in 2000-2003, 16 ofthese having increased their ESI from 1993-1996. Two products, sugar and bananas, eithermaintained or decreased their specialization, a sign of preference erosion and weakeningcompetitiveness over the last decade. In the US market, the OECS appears specialized in 35 outof the 189 products exported to that destination, although 13 of these (mostly manufactures) haveexperienced a decrease in their ESI. Twenty products have increased their specialization 5 ofthem are food and agricultural products, 3 are crude materials, 11 are manufactures (namely

36 The ESI is calculated as ESIijk= (Xijk/Xijt) / (Mjk/Mjt), where Xijk is the exports of partner i to partner j ofproduct k, Xijt is the total exports of partner i to partner j, Mjk is the imports of partner j of product k, and Mjt is thetotal imports of partner j. Note that: (1) re-exports, that is a countrys recorded exports that have not received anydomestic value added, are not included in the calculation of the ESI; and (2) the index was calculated at the SITCRevision 2, three-digit level of aggregation.37 One weakness of the ESI indicator is that it does not isolate the effects of preferences on export performance inparticular markets, which could lead to distortion in trade flows and weak conclusions regarding competitiveness.


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electrical equipment) and 1 product is not classified elsewhere. It is interesting to note that of the19 products that lost ESI over the decade, half are in apparel sectors. For a breakdown of ESI byexport market see Table 4.3 below.

Table 4.3 OECS: Trends in Export Specialization Index by Destination, 1993-96 to 2000-03

222 World 192 CARICOM 166 European Union 189 United States

Increase ESI No. Products No. Products No. Products No. Products

Total 22 16 16 20

Food/Tobacco 9 (034,036,046,054,075, 6 (036,046,057,075, 7 (034,042,054,072, 5 (022,025,046,

081,098,111,112) 081,112) (075,098,111) 075,111)

Crude Materials 6 (273,533,551,553, 4 (273,282,553,591) 3 (273,551,562) 3 (263,273,551)

591,592)Manu actures 7 ,7 ,75 ,77 ,77 , 7 ,7 ,7 , , 75 ,7 ,77 ,77 , , 57,7 ,7 7,75 ,77 ,

77 ,7 , 7 , 77 ,77 ,7 , ,

Others 0 0 0 1 (951)

No Change

Total 2 5 1 2

Food/Tobacco 1 (042) 3 (042,054,122) 1 (061) 1 (034)

Crude Materials 1 (554) 2 (288,592) 0 0

Manufactures 0 0 0 1 (764)

Others 0 0 0 0

Decrease ESI

Total 8 5 1 13

Food/Tobacco 4 (057,061,072,091) 2 (091,111) 1 (057) 2 (054,098)

Crude Materials 0 2 (533,554) 0 3 (269,554,592)

Manufactures 3 (642,716,845) 1 (642) 0 7 (656,692,716,771,

793,845,847)

Others 1 (941) 0 0 1 (941)

World CARICOM European Union United States

No ESI

Total 190 166 148 154

of which lost: 10 12 1 19

Food/Tobacco 0 1 (058) 0 3 (036,057,072)

Crude Materials 2 (269,424) 1 (424) 0 3 (277,282,553)

Manufactures 8 (696,697,843,844, 8 (641,681,697,723, 1 (893) 13 (658,694,696,742,744,842,

846,848,893,897) 775,831,881,899)

Others 0 2 (941,961) 0 0

Note: See Table 16 of the Statistical Appendix for a list of SITC Revision 2, three-digit sectors/products.

Source: Author's calculations using UN-COMTRADE.

843,844,846,848,884,893,897)


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(v) Trade complementarity and intensity

Analyzing trade complementarity is important to get a measure of how a countrys (or regions)export supply fits into the import demand of its trading partners. In this case, the tradecomplementarity index calculates the OECSs export commodity profile versus the importcommodity profiles of its major trading partners (CARICOM, US and EU) relative to the worldnorm.38 The TCI has a threshold

Documents

OECS Report-Assessment of Trade Performance and Competitiveness