Declining Caribbean Growth Tied to Productivity, Human Capital, IMF Study Finds

The IMF Working Paper Potential Growth and Productivity in the Caribbean, prepared by economists from the International Monetary Fund in collaboration with data from the Innovation, Firm Performance and Gender (IFPG) survey conducted by Compete Caribbean and other regional research bodies, delivers a sobering narrative about the region’s economic trajectory. It reveals a sustained and broad-based slowdown in both realised and potential growth over the past four decades. Five-year-ahead growth forecasts, often used as a proxy for potential development, have slipped from about 3.5 percent in the 1990s to barely 2 percent today, with actual output tracing a similar downward arc. Tourism-dependent states have experienced a steady decline, while commodity exporters have seen volatile yet equally modest averages, apart from a few outliers such as Guyana and Suriname, whose growth patterns diverged due to specific resource booms. Caribbean per-capita incomes have failed to converge with U.S. levels since 1990, unlike the strong catch-up seen in emerging Asia and Europe, and in some cases have moved further away since the global financial crisis.

Potential Growth Erodes as Productivity Falters

The authors assess potential growth using two complementary approaches, one based on forecaster expectations and another using a novel growth-accounting framework that adjusts for the frequent and severe impact of natural disasters in the region. Their findings show average potential growth in the Caribbean falling from 4.2 percent in the 1980s to just 1.2 percent in the 2010s. This decline is overwhelmingly driven by shrinking contributions from total factor productivity (TFP) and human capital, while capital stock growth and demographic effects have remained broadly steady. Historical decomposition suggests that if the TFP and human capital contributions of the 1980s had persisted, today’s potential growth would be more than triple its current rate. The country-level data confirm this deterioration as a systemic phenomenon affecting nearly all economies in the bloc, regardless of size, structure, or export profile.

Inefficient Firms, Lost Opportunities

To dig deeper into the microeconomic roots of this slowdown, the researchers apply the Hsieh-Klenow misallocation framework to firm-level data from the IFPG survey, covering nearly 2,000 firms across 13 Caribbean nations. The exercise reveals substantial inefficiencies in resource allocation, with potential aggregate TFP gains from more efficient reallocation ranging from 34 percent in Grenada to an extraordinary 107 percent in Guyana. Commodity-based economies generally show higher misallocation, but tourism-driven economies are far from immune. Manufacturing sectors tend to suffer more inefficiency than services, though patterns vary. Simulation results suggest that efficiency gains from better allocation could close between 9 and 36 percentage points of the per-capita income gap with the United States. The analysis finds that capital misallocation is a bigger drag than labour misallocation, with many firms operating far below optimal scale. In a fully efficient allocation scenario, the distribution of firm sizes shifts markedly upward, with the largest 20 percent of firms seeing the greatest expansion, although some currently oversized firms would contract. Across the region, about 64 percent of firms would expand under an efficient allocation model, showing the potential productivity lift is broad-based rather than concentrated.

Barriers That Choke Productivity

Firm-level survey responses point to the most severe structural barriers: limited access to affordable finance, cumbersome customs and trade regulations, and an inadequately educated workforce. The latter issue reflects concerns about the quality of local education and training, lack of key soft skills, and shortages of trained professionals in technical fields. Econometric analysis underscores these perceptions, linking higher financing costs, burdensome tax administration, slow and opaque licensing processes, and poor workforce education to significantly lower firm productivity. These effects are particularly acute for small and young firms, which face the steepest penalties from such constraints. Older firms, while more resilient in some respects, report particular struggles with infrastructure bottlenecks such as unreliable transportation networks. Quantifying the potential gains from removing these barriers, the paper estimates that aggregate TFP could rise between 8 and 23 percent depending on the country, with Belize, St. Lucia, and Grenada standing to benefit the most.

The Reform Imperative for a Resilient Future

Reversing the Caribbean’s prolonged growth malaise will require a decisive structural reform agenda. This includes enhancing human capital quality, reducing the cost and expanding access to finance, streamlining tax and licensing systems, and systematically eliminating firm-specific distortions that prevent resources from flowing to their most productive uses. These reforms must be complemented by sustained investment in climate-resilient infrastructure and robust disaster preparedness, given the frequency and heavy toll of hurricanes and other extreme weather events. Without such measures, potential growth is likely to remain stuck near current low levels, perpetuating the income gap with advanced economies and leaving the region vulnerable to external shocks. The paper warns that the Caribbean’s challenge is not merely to survive these recurring storms, both literal and economic, but to seize the opportunity for structural transformation as a pathway to long-term resilience and prosperity.