Working Paper Series: Special Edition of 2016 to 2018 Interns

The government consumption variable is statistically significant at the 1 per cent level in both models with negative coefficients of -0.99 and -0.97 respectively. This is partially explained by the negative spill over effect an increase in government consumption can have on an economy through higher levels of taxes and borrowing. Moreover, high levels of government consumption may crowd out private investments thus leading to a contraction in growth. With respect to population growth, the results suggest the variable has a positive and statistically significant impact on economic growth. This may be due to the rise in the population positively impacting human capital thus resulting in a rise in economic growth. FDI inflows were shown to have a positive and statistically significant impact on growth in both models with a coefficient of 0.09. This indicates that foreign direct investment inflows positively contribute to growth in the ECCU, primarily through the tourism channel. Furthermore, the findings indicate that the growth rate of US GDP positively influences growth in the ECCU with coefficients of 0.81 and 0.84 in models 1 and 2 respectively. This provides evidence of how tightly linked the ECCU economies are to that of the US as a 1 per cent change in US GDP leads to an almost proportional change in GDP in the Eastern Caribbean. The ECCU has been pegged to the US dollar since at 1976 at US$1.00=EC$2.70. Also, tourism is the main driver of the ECCU economies, with the US market being the most dominant source of tourists. The findings show that the occurrence of natural disasters is negatively associated with an average decline in economic growth of 0.79 percentage point. However, this figure was not statistically significant in model 1. Based on the results, natural disasters that incur damages of more than 1 per cent of GDP significantly and negatively impact economic growth and are associated with a 2.8 percentage point decline in growth in the short run. On average in the ECCU, intense natural disasters costs as a per cent of GDP ranged from a low of 3.6 per cent in Anguilla to a high of 89.5per cent in Montserrat. The negative impact of disasters is likely due to the destruction of critical infrastructure, including the tourism plant, the housing stock, roads and bridges, necessary for the smooth functioning of the economy. As a result, such events tend to negatively impact the export earning capacity of the countries, while concurrently leading to an increase in the demand for imports related to reconstruction activities, thereby further dampening growth.

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