The paradox of development financing in Caribbean small islands
07 Jul 2015 by Stacy Richards-Kennedy, Assistant Resident Representative, UNDP Trinidad and Tobago Country Office
Small island developing states (SIDS) in the Caribbean are, for the most part, middle income countries and rank relatively high on the Human Development Index. In spite of this, they continue to experience social development challenges related to citizen security, public health, widening income gaps, retention of highly trained nationals, climate change and natural disasters.
To address these challenges and advance a coherent and effective post-2015 development agenda, adequate levels of financing will be required. Yet, the possibility of accessing concessional financing is quite limited for Caribbean SIDS.
A recent study commissioned by the UNDP on Financing for Development Challenges in Caribbean SIDS, through the Country Office for Trinidad and Tobago and prepared by Prof. Compton Bourne (former President of the Caribbean Development Bank) highlights several paradoxes when it comes to the experience of Caribbean SIDS with development financing.
For instance, despite the achievement of reasonable domestic savings rates by Caribbean SIDS, there is a shortage of investible resources. While foreign direct investment is an important source of development finance, this has been on the decline in many Caribbean countries since 2009. Moreover, Caribbean small states have experienced less success in accessing Official Development Aid (ODA), particularly since the onset of the global economic crisis, and flows from traditional bilateral donors have decreased or fluctuated considerably.
Many of the Caribbean SIDS have unsustainably high debt service ratios and this severely limits their fiscal capacity. Furthermore, given that few Caribbean SIDS satisfy the per capita income criteria to qualify as International Development Association (IDA) -only countries, IDA-gap countries or IDA-blend countries, they have less access to IDA and World Bank funds.
What then are the benefits of graduating to middle income status? How are Caribbean SIDS to underwrite the costs of medium to long-term development projects without an enabling environment that is bolstered by concessional financing for productive investment?
In preparation for the third international Conference on Financing for Development in Addis Ababa, the study outlines the experience of Caribbean SIDS and emphasizes the need for new approaches and measures which could improve the development finance prospects of Caribbean SIDS.
These include :
- the abandonment of per capita national income as an eligibility criterion for concessional and non-concessional financing and the inclusion of economic vulnerability as a criterion,
- the introduction of eligibility categories based on vulnerability measures that reflect a gradual transition in access to development finance rather than an abrupt end that is interestingly or ironically termed ‘graduation’,
- the establishment of special funds to address structural gaps, environmental and climate change adaptation investment needs,
- and the strengthening of national statistical data capacity, debt relief for heavily indebted Caribbean SIDS and in the event of major losses from natural disasters, diaspora funds, a return to international capital markets and greater domestic financial savings by Caribbean SIDS to contribute to widen their development financing options.