The impact of privatisation on the banking sector in the Caribbean

Includes bibliography

Introduction With the failure of the import-substituting industrialisation policies of the post-war period, Caribbean countries shifted to an export-promotion strategy in the 1980s. Export promotion inevitably demanded a shifting of the relative price and productivity of tradable goods and services. To provide the necessary incentives for export promotion, countries pursued a mixture of reforms and restructuring to attract investment and to promote the competitiveness of production and exchange. The period also coincided with a shift in the development paradigm of the developed countries and major International Financial Institutions (IFIs). This new development strategy explicitly favoured open markets, a liberalised trading framework and a retreat of the State from productive activity. In fact, the orthodoxy of government failure became so entrenched that many economists argued that the State's role should be confined to regulation and the provision of infrastructure. As a result, the Welfare State, long championed in the post-war period, was deemed an anachronism. In Europe, in particular, the word Â'sclerosis' was borrowed from medicine to describe rigidities attributed to Â'overactive' government intervention in economic activity and rigid, inflexible markets. The new policy consensus, which was called the 'Washington Consensus', outlined a package of market-oriented policies aimed at resuscitating flagging economies. Important components of the package included price stability, fiscal prudence, trade openness through the reduction of tariffs and elimination of quotas, deregulation and privatisation of State enterprises. Privatisation was established as a particularly crucial plank of the reforms. This was so because it was believed that price incentives would be thwarted if the State were allowed to burden the allocation of resources by siphoning off finance to inefficient State-owned enterprises. Indeed, the evidence in many countries pointed to the crowding out of productive private sector activity by heavy State borrowing on the domestic financial market. This paper provides an analysis of privatisation in the banking sector in the Caribbean and its impact on the performance of the sector and economic growth. The study attempts to evaluate whether privatisation and liberalisation, in general, have led to significant gains in efficiency and profitability of the sector and whether the depth of the financial system has led to more productive allocation of credit for investment and growth. Section II outlines the rationale that was used to recommend privatisation as an alternate strategy to State ownership of productive activity. Section III of the paper provides an overview of the international experience with financial sector privatisation, while section IV gives the Caribbean experience. Section V is an evaluation of the impact of privatisation on the performance and growth in the banking sector. Meanwhile, Section VI looks at institutional restructuring and the significance of the rising trend of mergers and acquisitions in the regional financial sector. Section VII underscores the importance of strong prudential and regulatory standards and reform in this area. Section VIII examines the impact of privatisation and liberalisation in the banking sector on economic growth. Finally Section IX concludes the paper with some policy recommendations.