Noted economic commentator, Professor Nouriel Roubini, has called on Caricom nations to deepen trade and financial integration to address the issues of small size, high debt levels and the need for greater diversification.
He created consternation at the forum when he declared that the currencies in the region are overvalued to different degrees and that "currency adjustment is part of the solution."
He said Caribbean countries were weary about adjusting the value of their currencies for a number of reasons, including higher inflation and higher input costs of exports.
While he said he was aware of the risks of currency adjustment, "The reality is that if your currency is overvalued, if your external imbalances are large, if that implies a significant increase in your foreign liabilities eventually and increases your foreign debt making it unsustainable, then devaluation is necessary."
Speaking to regional journalists in Montego Bay, Jamaica on Thursday afternoon on the sidelines of an International Monetary Fund (IMF) forum on "Unlocking Economic Growth," Roubini advocated greater integration: "I would say first of all that you need a greater amount of trade integration.
"If you are a small island, the size of your market is limited by the size of your island and if you have a full integration–economic, trade, financial and otherwise–then you can see how individual parts of this system economies can specialise in a variety of different production and service activities in which they have comparative advantage. Therefore they would have a much larger market than they have right now."
He said greater trade, financial and economic integration also helps to insure against risks that may arise from individual shocks, vulnerabilities or natural disasters–all of which Caricom nations have suffered in the last two decades.Roubini bats for integration, devaluation
"You need more cooperation, more integration and more openness to trade and financial investment, in addition to national policies to incentivise the kind of industries that are within the comparative advantages of individual nations," said Roubini.
The IMF forum, which was held on Thursday and Friday at the Montego Bay Conference Centre focused on three policy concerns that the region faces as it tries to achieve stronger and sustained growth in the wake of the global financial crisis: energy costs, tax competition and financial sector vulnerabilities.
On the issue of oil prices, which have plummeted by about 25 per cent in the last two months, Roubini said he expects a stabilisation at around current levels, adding that if there were a further decline to US$80 a barrel, "there might be a reaction by large producers in OPEC to restrict supply to prevent prices falling further."
Light, sweet crude for December delivery gained $1.57, or 2 per cent, to US$82.09 on the New York Mercantile Exchange after falling on Wednesday to US$80.52 a barrel, the lowest price since June 2012.
Roubini said the recent decline in oil prices would affect different Caricom countries in different ways, given the fact that most regional countries are net oil importers, while one, T&T, is a net exporter of oil and refined petroleum products.
Roubini said: "While oil prices are falling right now–and that provides something of a boon to countries that are net oil importers–all the investments in alternative energy and energy efficiency should not be postponed."
Roubini, a professor at New York University's Stern School of Business and the chairman of his own economic consultancy firm, shot to prominence eight years ago as he was one of the few public thinkers in the US who predicted that "the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence, and, ultimately, a deep recession."
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PetroCaribe issue
Nicknamed Dr Doom, Roubini said that Venezuela's PetroCaribe initiative, which provides financial assistance to many regional oil-importing countries, may be at risk if oil prices remain at low levels for an extended period.
"One should also be aware that while the fall might be a net benefit to importing countries, there is this scheme, PetroCaribe, where Venezuela is subsidising imports of Venezuelan oil by a number of Caribbean countries.
"Venezuela, which is in a severe economic mess, might not be able to afford to subsidise these countries any longer. If they decide that they can no longer afford PetroCaribe, then that situation could have a negative impact on the cost of importing energy for a number of these Caribbean countries.
"One of the side effects of this falling oil price might turn out to be a negative rather than a positive for countries that rely too much on PetroCaribe."
Five important factors
Delivering the feature address on Friday morning, Roubini said that there were five global trends that are likely to have an impact on the Caribbean in the future: the recovery of US economic growth; the possibility of the normalisation of interest rates by the Federal Reserve in the US; the slowdown of China and other large emerging markets; the end of what he called the commodity super cycle and the strength of the US dollar.
All of these factors posed both threats and opportunities:
�2 On the issue of the recovery in economic growth in the US, Roubini said that this will have a "significant and positive" impact on the Caribbean, given the trade links between the Caribbean and the US. The recovery of the US economy has the potential to lead to an increase in the number of Americans seeking to vacation in the region, he said. But he noted that now was not a time for the Caribbean to be complacent because "the comparative advantage of the region in tourism is shrinking over time" as there are many of other destinations where tourists can go. He also said the potential opening up of Cuba in the future is also a potential challenge to the Caribbean's tourism offering.
�2 He argued that because most of the countries in the region are pegged to the US dollar, interest rates in the region are likely to increase when the US Federal Reserve decides to normalise interest rates. He also said that while there is not too much dependence in the region on the international capital markets, the rise in US interest rates will impact those countries that have twin fiscal and current account deficits, as their borrowing costs will increase.
�2 Roubini said that many people in the region argue that a possible slowdown in the Chinese economy would not have much impact in the Caribbean because China is not a big importer of regional goods. He said while that might be true, there were a number of caveats, including that China matters because it is a large importer of commodities and a slowdown there could impact the price of commodities like alumina. He noted that overcapacity in China could put pressure on light manufacturing in the Caribbean, such as in the apparel sector.
�2 He said the end of the commodity super cycle would be positive for net importers of commodities. But, there are a number of caveats, including that there are a number of commodity importers that also export commodities, such as Jamaica, which which sells alumina.
�2 According to Roubini, the strengthening of the US dollar has a potential downside for the region as it could lead to currencies that are even more overvalued, which would lead to a loss of competitiveness in the region vis a vis non-US currencies.
He then identified 12 specific problems/risks of the Caribbean including: slow economic growth, low diversification; high levels of fiscal deficits and debts; high labour costs and the widespread presence of trade unions; vulnerability to natural disasters and the small size of many of the economies.