---

KWR Special Report

The State of the Caribbean Economy and Impact of US–China Relations
By Dr. Scott MacDonald

New York (KWR) June 6, 2019 – This month the Cuban government imposed food rationing, covering everything from chickens to soap. Sadly Cuba has limped into yet another economic crisis. The Cuban government blames the situation on the hardening of the U.S. trade embargo by the Trump administration. While U.S. sanctions are hurting, the Cuban economy faces a more fundamental problem – a substantial ratcheting down of help from Venezuela. The collapse of Venezuela’s state–owned oil company has resulted in the reduction of close to two–thirds of shipments of subsidized fuel that the Caribbean country used for power and to earn badly needed hard currency in international markets. Considering that Cuba imports much of its food, a reduction in its oil allowance has resulted in belt–tightening.

While Cuba struggles with a loss of a key external prop, most likely making its economy contract in 2019, the rest of the Caribbean is enjoying a continued economic expansion. Although market-oriented economies have their downsides, it is the creaky Marxist–Leninist experiments in the region – Cuba and Venezuela – that are struggling. Most Caribbean economies are linked to the global capitalist system and the main drivers for growth are the continued economic expansion in the U.S. and Canada and greater traction in key commodity prices. Additionally, most Caribbean governments have made efforts to better manage their external debt and budgets.

Selected Caribbean Real GDP Growth Rates

Source: International Monetary Fund, April 2019. 1. Antigua and Barbuda, Aruba, The Bahamas, Barbados, Dominica, Dominican Republic, Grenada. Haiti, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, and Trinidad and Tobago. Belize is considered part of Central America; Suriname and Guyana are part of South America. 2. The East Caribbean Currency Union countries are Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines as well as Anguilla and Montserrat, which are not IMF members.

According to the International Monetary Fund (IMF), real GDP growth for the Caribbean (excluding Belize, Cuba, Guyana and Suriname) expanded by 4.7 percent in 2018 and is projected to grow by 3.6 percent in 2019 and 3.7 percent in 2020. This is decidedly a better performance than earlier in the decade and includes a significant turnaround in Barbados and Jamaica, two countries that had significant debt management challenges. Indeed, Jamaica (according to the IMF) has taken its public sector down from 121.3 percent of GDP in 2015 to a little under 100 percent in 2018, with a further drop expected this year.

Barbados’ turnaround has probably been the most dramatic. In mid–2018, when the new government of Prime Minister Mia Mottley came into office, the country’s economy was in dire straits. Working with the IMF, the Mottley government has stabilized the economy, rebuilt badly depleted foreign exchange reserves (now up to covering 13.5 months of imports from 7.2 months in mid–2018) and there is growing hope that the island will see a return to growth (though very small) in 2019. The tasks ahead remain substantial, including overhauling the state–owned enterprises, dealing with high unemployment and reducing a public sector debt of over 170 percent of GDP.

The countries that constitute the East Caribbean Currency Union (ECCU) have also seen a healthy rebound, pushed along by tourism and reconstruction in Dominica (from damage during the 2017 hurricane season). According to the IMF, real GDP was 2.1 percent in 2018; in 2019 it is expected to reach 4.0 percent and 3.1 percent in 2020. Dominica expanded by 8.0 percent last year and is looking to do the same this year.

The recovery in commodity prices, namely gold, oil and natural gas, has also helped the Caribbean, in particular, Guyana, Suriname and Trinidad and Tobago. Suriname and Trinidad and Tobago, in particular, were hit hard by economic slowdowns. Indeed, Trinidad and Tobago suffered from a multi-year recession, with the economy contracting from 2014 to 2017. The economy managed slight growth in 2018, which is expected to continue in 2019. Suriname began a recovery in 2017, it gained ground in 2018 (with 2.0% growth) and the expansion is expected to further improve in 2019 and beyond.

Where the Caribbean is not doing well is Cuba. The challenge in Cuba is twofold. The first is that the economy has long been mismanaged. It is top-heavy with large and generally inefficient state–owned enterprises (some of them owned by the military). At the same time, while reforms implemented under Raúl Castro opened up a fledgling private sector through the 2010s, Communist Party nervousness about market-oriented reforms being too successful led to a clawing back of economic freedoms. This has led to a stop-go reform process, which has hobbled economic expansion, including allowing the island to develop a greater ability to feed itself.

The second issue facing Cuba is its dependence on an external benefactor. During the Cold War, Cuba was highly dependent on Soviet assistance in keeping the economy going. This included everything from creating markets for Cuban exports in Eastern Europe and the Soviet Union as well as supplying cheap crude oil, which was refined in the Caribbean country and then sold for badly needed foreign exchange in international markets. When the Soviet Union collapsed in the early 1990s, Cuba was hard hit. The Special Period (Perído especial) was noteworthy for a massive contraction in growth, food rationing and a breakdown in transportation. What was to save Cuba was the arrival of Hugo Chávez in Venezuela, who was a major admirer of Fidel Castro. Venezuelan oil flowed to Cuba, where it was used for domestic use as well as sold on international markets.

Cuba’s problem is that the Venezuelan socialist experiment has run its course. Venezuela, once one of the wealthiest countries in the world, has been grossly mismanaged, suffering from hyperinflation, a multi-year economic contraction, a breakdown of law and order throughout the country, and a massive outflow of people. According to the United Nations, Venezuelan refugees now number 3.4 million, with 2.7 million now in countries in Latin America and the Caribbean. Still more Venezuelans are expected to leave. The collapse of international oil prices in 2014 as well as years of bad economic policies are now reflected by one of Latin America’s worst economic crises, which has rippled into Cuba, now dealing with lower oil shipments.

Cuba’s economic troubles can also be observed as part of a larger systemic shift in the Caribbean, the advent of a new Cold War between a re-engaged United States and China and, to a lesser extent, Russia. Since the first decade of the twenty-first century China entered the Caribbean in a meaningful fashion. Chinese state-owned or state–backed companies arrived in the region to undertake long-needed infrastructure programs, including upgrades on roads, ports and airports. They also extended loans from Chinese state banks to finance many of these projects. At the same time, China put on a charm offensive, providing ambassadors throughout the region as well as scholarships for Caribbean students. China’s standing steadily rose through the 2010s, emerging as a significant trade partner with a wide range of countries, including Cuba, the Dominican Republic and Jamaica (though much of the trade has been in favor of China).

China’s motivations for becoming a player in the Caribbean are both economic and strategic. On the economic side, China is constantly in need of new markets for both goods and employment of Chinese workers. Moreover, upgrading infrastructure in the Caribbean (including ports and airfields) helps facilitate trade with the U.S. Despite the current trade war between the U.S. and China, the two countries have an extensive trade relationship and Chinese goods still need to reach U.S. ports, including those on the east coast via the Panama Canal and Caribbean waters. In considering economic factors, China became a major economic force in Venezuela, with an eye to that country’s oil, and Panama, through trade flows from the Pacific to the Caribbean and beyond to the Atlantic.

In strategic terms the Caribbean serves two purposes for China. The first is that by extending its influence into the Caribbean it partially counterbalances U.S. efforts to contain China in the South China Sea. The second is that economic statecraft is helping China reduce the number of countries that continue to diplomatically recognize Taiwan (officially known as the Republic of China), which Beijing regards as a breakaway province, not an independent country. China’s efforts in the Caribbean and Central America over the last two years saw Panama, El Salvador and the Dominican Republic end their formal diplomatic relationship with Taiwan and recognize China. Considerable pressure was also brought on Haiti by the Chinese, who were willing to offer considerable help in overhauling one of the Caribbean’s longtime economic laggards.

Chinese economic statecraft, its engagement in port facilities in Panama and The Bahamas and support for Venezuela and Cuba have set off alarms in Washington. The Caribbean had faded in importance to Washington policymakers with the end of the Cold War. Indeed, the region was often said to be "too democratic and not poor enough" to merit ongoing U.S. attention, especially when considering problems in the Middle East, the rise of Chinese power, and the return of Russia as a more weighty international power.

China’s diplomatic gains vis–à–vis U.S. ally Taiwan in the Caribbean and Beijing’s ongoing support for the Maduro regime in Venezuela have raised the Caribbean in Washington’s national security agenda. While the Obama administration was focused on normalizing relations with Cuba, helping the region in dealing with climate change (a major issue in the Caribbean), and developing alternative energy options, the Trump administration is pursuing a new hard line toward the region. Economic sanctions have been tightened on Cuba with a view that by putting the Caribbean country under pressure, it could make Havana rethink the support it is giving the Maduro regime in Venezuela.

For the Caribbean, the hardening of relations between the U.S. and China complicates the region’s affairs. A number of Caribbean countries have been supportive of forcing Maduro out and holding new elections. Other countries have taken a hands–off approach, indicating that the solution to Venezuela’s crisis must come from domestic dialogue (i.e. with no external pressure). A number of the latter countries are carefully watching their relationship with the United States, with concern that there past cordial relationship with Venezuela may be counted against them as the new Cold War intensifies in the region. One other issue between Caribbean states and the U.S. is that the latter’s disapproval of recognizing China and dropping Taiwan is seen as hypocritical, considering that Washington did exactly that in 1979.

The state of the Caribbean economy in 2019 is generally at one of its better points in recent years. The economic expansion is continuing throughout most of the region, efforts to reduce debt continue, and international investment trends are positive. However, the intensification of a new Cold War between the U.S. and China could shorten the length of the growth cycle as Washington and Beijing could seek to demand loyalty. Cuba remains the odd man out, maintaining its failed socialist economic experiment and being the only non-democratic state in the region. While Washington has not been forthcoming with economic largesse (more like economic stinginess), China has been willing to extend credit. For the U.S. to regain lost diplomatic ground it needs to try the positive side of economic statecraft, thinking about creating a joint U.S.-Caribbean infrastructure development fund, giving some thought to the impact of U.S. sanctions against Cuba on its regional allies, and doing more to help the regional approach to climate change. If indeed the Caribbean is the U.S.’s third border, it would be beneficial to both the North American country and its southern neighbors that the region’s economy has a fair chance to work.

---

---

KWR International Advisor

Editor: Dr. Scott B. MacDonald, Sr. Consultant

Publisher: Keith W. Rabin, President

---

To obtain your free subscription to the KWR International Advisor,
please click here to register for the KWR Advisor mailing list

For information concerning advertising, please contact:
Advertising@kwrintl.com

Please forward all feedback, comments and submission and reproduction requests to:
KWR.Advisor@kwrintl.com

Website content © KWR International