International finance and Caribbean development

Abstract

Introduction Globalization, defined as the international integration of markets in goods and services, is at the centre of the development process in the contemporary world and is an inescapable part of the external environment in which Caribbean 1 countries must exist. Global financial integration, the integration of the world's financial markets into a single global marketplace, is a subset of globalization. The developing countries of the Caribbean can ill afford to disregard the existence of this process. Indeed, advances in communications and recent developments in finance make the path toward financial integration unavoidable (World Bank, 1997). The real issue is not whether the Region should be part of this new age of global capital, but rather, how to proceed along the road to financial integration such that the considerable benefits could be realized and the significant pitfalls mitigated.Creating the right macroeconomic environment is a prerequisite for effective financial integration. But the small countries of the Caribbean also face peculiar constraints in attracting global capital. Small size and the associated structural inefficiencies, a limited natural resource base and high transportation costs to export markets, all reduce the relative attractiveness of many of the economies to international capital. In effect, these features make the Caribbean market for global funds inefficient. Providers of international capital find it difficult to adequately measure and allocate the risks. The imminent cessation of preferential trading arrangements, under which critical segments of the regional productive sector have operated, exacerbates the risk perceptions. A relatively broad consensus has emerged concerning the necessary conditions for successful financial integration. These include an appropriate macroeconomic framework, a liberalized trading environment so as to preclude large domestic price distortions, a sound and well regulated banking system and appropriate capital market infrastructure. It is the thesis of this paper, that in the small and very vulnerable countries of the Caribbean, these conditions are not sufficient to ensure financial integration. It is argued that in spite of the low and declining volume of official flows to the Region, such flows are critical in assisting these countries address risk perceptions and help to induce increased private flows. This paper examines the recent developments of international capital flows into the Caribbean. It first reviews the experience of the Region in the 1990s with respect to both official and private capital flows. The major determinants of the flows are then examined and the policy implications are identified. The impact of external flows on domestic savings is analyzed. Finally, the paper examines the accessibility of international capital markets to regional economies and the role the Caribbean Development Bank could play in facilitating such access.