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by Carol Phillip-Tudor

The World Bank (WB) indicates that the Caribbean and Latin America have been holding steady, despite tighter external conditions. In a report entitled “International Flows to Latin America: Rocking the Boat?” the (WB) explored the impact of Foreign Direct Investment (FDI) and remittances – the latter being monies sent from relatives living overseas – which the  (WB) has said represents a “far larger share of net flows into the region than the more volatile non-FDI flows.”

World Bank’s Chief Economist for the region, Augusto de la Torre,highlights that this development represents a shifting economic trend.

“As international investors shift their focus back to advanced economies, particularly the United States, as a result of monetary policy normalization, emerging economies face much tighter financial conditions.  Still, the impact of this reversal in capital flows is less significant for Latin America and the Caribbean thanks to its new reliance on more stable international flows.”

What are the stable international flows?

According to the report, these are FDI (foreign Direct Investment) and remittances jointly, two flows often examined separately; these (2) two emerging stable flows are showing a “clear break with history.The region has re-balanced its sources of financing away from portfolio and bank credit flows and towards FDI and remittances.”

The (WB) report made other important findings regarding Remittances and FDI:

• Both are more stable. FDI typically goes to factories and the like, which cannot be easily taken out of the country. Remittances are not only stable but are actually counter cyclical, increasing when economic conditions worsen in the recipient country.
• Both FDI and remittances widen the external deficit and appreciate the real exchange rate, thus reducing external competitiveness.
• Yet, they are fundamentally different in that FDI has the potential to raise productivity, whereas remittances, for all their benefits in terms of protecting households from poverty, do not.
• Institutional quality drives both but in opposite directions. The quality of human and physical capital and a reliable contractual and business environment, for instance, pull FDI inflows that naturally leverage on the local workforce. By contrast, glaring deficiencies in the enabling environment push workers abroad, in the search of opportunities that are not found at home.

The report concludes that the countries in the region that have already managed to attract considerable FDI should strive to capitalize on potential POSITIVE externalities. “Maximizing the learning spillovers and technology diffusion of FDI will help raise productivity and offset the lower external competitiveness that tends to be a side effect of the domestic demand-driven growth pattern that characterizes the region.”

However, the drawback of remittances is that the flow produces no productivity in the local economy and the World Bank correctly predicts that if remittances are too heavily relied upon, then“the region could see social progress stall”.

The report went on to say, “The countries in the region that rely heavily on remittances, on the other hand, face even more daunting challenges. To start with, they should focus on innovative policies to encourage households to use at least part of their remittance income toward asset building . . . more fundamentally, the report says, those countries should put a premium on the hard task of continuously improving their domestic enabling environments to attract both their own workers and FDI, and then harness the productivity benefits of the efficient interaction between the two.”

This final recommendation by the (WB) presents an even more daunting challenge to St. Kitts and Nevis, who FDI appears to come from within St. Kitts and Nevis’s own coffer with a fund called the S.I.D.F ( Sugar Industry Diversification fund).

Additionally, St. Kits and Nevis’ passports -both the regular and diplomatic ones – are constantly being discovered in the hands of questionably characters hostile to the United States and Canada in particular. Kittitians and Nevisian living in the diasporas, whose remittances keep their families members at home afloat, could be greatly affected if shady characters cause the open border policy of the United States and Canada to change adversely towardordinary citizens of St. Kitts and Nevis.