Endogenous and Exogenous Restraints on Productivity and Growth in the Caribbean

This chapter investigates further the slowdown in growth in the Caribbean and introduces the popular Middle-Income TrapMiddle-Income Trap (MIT) (MIT) hypothesis to explain the slowdown. The MIT hypothesis says that middle-income countries tend to grow more slowly than both low- and high-income countries. The hypothesis has a certain logical appeal as it seems to make sense that middle-income countries will be squeezed between the more technologically advanced and the less technologically advanced that have the advantage of lower wages. The notion of a trap and the fear of economic stagnation tend to resonate with worried policymakers who usually need no prompting to engage in trap-talk. A test suggests that the MIT hypothesis is not confirmed in the Caribbean but rather the explanation for slow growth lies in lack of economic diversification. For the tourism-intensive Caribbean, this has been a major weakness. The chapter provides empirical support for the argument that tourism cannot lead the path to faster growth. Policymakers should also be concerned that the Caribbean population is ageing fast (faster in some countries like BarbadosBarbados) and the demographic changes will affect productivity and growth. Not least in the list of concerns are the many obstacles and disincentives that make the investment and entrepreneurial environment less attractive than that of other regions of the world.