Oftentimes the Caribbean region is referred to as a melting pot because of the high cultural, linguistic and ethnic diversity among each of its islands. As many as 40 million individuals reside on a total of 28 different island nations in the West Indies, each of which possess their own unique economic characteristics.
In almost all cases, a politically stable environment can be found throughout the Caribbean. Half of the islands that make up the region, for instance, are overseas territories of either the United Kingdom, the United States, the Netherlands or France, while the other half are sovereign nations. Furthermore, some islands are a lot more developed than others. As an example, according to the World Bank, Haiti, the Caribbean's second largest nation by population, is the poorest country in the entire Western Hemisphere. On the other hand, the Organization for Economic Co-operation and Development considers the twin-island state of Trinidad and Tobago to be an economically developed nation.
Although every island in the Caribbean has its own distinct economic features, there are a number of common characteristics shared among the different economies of the region. A few of these characteristics are explored below.
Caribbean economies have benefited tremendously from strong regional and international trade relationships. The small physical size of most islands has made it virtually impossible for any Caribbean nation to produce all of the goods that its citizens and firms need on its own. By way of illustration, the British Overseas Territory of Montserrat has an abundance of construction, however it is highly dependent on imports from Dominica, a neighboring island, in order to meet local demand for fruits and vegetables.
Trade is so vital to the survival of Caribbean economies that multiple trade blocs have been formed in the region, all of which aim to remove trade barriers, such as tariffs and quotas, among member-states. The Caribbean Community and Common Market (CARICOM) and the Organization of Eastern Caribbean States (OECS) are the two most popular trade alliances in the West Indies. Additionally, many islands have established preferential trade agreements with Canada and members of the European Union. This helps expose these small economies to wider markets.
Limited Natural Resources
As mentioned above, trade plays a very significant role in the development of Caribbean economies. Although some islands like Anguilla, Bermuda and the Cayman Islands heavily rely on tourism and financial services to earn foreign currency, the majority of Caribbean nations make money from exporting raw materials and manufactured goods to international markets. In the long-run, this can be a problem because of the limited amount of resources that these nations posses.
Earning foreign exchange is a critical activity for every nation. A government that possesses sizeable foreign exchange reserves is able to further develop its local economies by acquiring state-of-the-art public infrastructure from abroad and thus improving its domestic social services. In an effort to increase their standard of living, Caribbean states may try to raise more foreign currency by exporting and, therefore, putting a large burden on their limited natural resources. This would lead to a complete depletion of what little resources they have.
Vulnerable to Natural Disasters
On numerous occasions, natural disasters have impeded economic progress in the Caribbean. As a result of the geographic location of the region, virtually all Caribbean economies are susceptible to the dangerous forces of nature. Between the months of June and November, hurricanes threaten these small nations. Added to that, there is always the possibility of a volcanic eruption or earthquake occurring without much warning. In other words, both businesses and governments constantly need to be prepared for unexpected events that could result in the sudden loss of much needed infrastructure, valuable capital and irreplaceable lives.
When a Caribbean island is affected by a natural disaster, its government is forced to allocate its limited financial resources to rebuilding the economy by repairing damages. Thus, several occurrences of natural disasters will result in the inefficient use of capital and would hinder long-term economic growth. In addition, a major act of God will cause funds allocated to social services, such as healthcare and education, to be reduced and therefore decrease the country's standard of living.
For example, in 2004, Hurricane Ivan caused more than $360 million worth of damage to property and infrastructure in Jamaica alone. Instead of servicing debt or investing that money in increasing the island's productive capacity, the funds had to be used just to bring the island back to the state it was in pre-Hurricane Ivan.
The Bottom Line
Much like the culture of Caribbean islands, each nation's economy is different. Some islands are much more sector diverse than others while others rely on foreign aid to keep the afloat. Nevertheless, many Caribbean nations share similar economic characteristics and challenges. Generally speaking they engage in trade liberalization, and are constrained to exporting a limited amount of natural resources in order to gain foreign exchange.