What Drives Economic Diversification in CARICOM Economies?
This chapter explores the determinants of economic diversification for a panel of 15 Caribbean Community (CARICOM) countries. Indeed, successful diversification in these countries remains largely elusive, despite several policy initiatives put forward by their governments to establish well-diversified economies and develop a multitude of different industries. This raises an important policy question—what are the factors that drive diversification in these economies? Using panel cointegration econometric methods, this chapter shows that macroeconomic fundamentals, including an increased current account balance, foreign direct investment inflows and credit to the private sector, improve diversification. However, increased national debt, government investment expenditure and exchange rate volatility stymie diversification efforts. We also show that another obstacle to diversification is corruption, an important measure of institutional quality. Using a panel quantile regression framework, we further uncover that the effects of corruption and private sector credit are more meaningful in economies which have already achieved higher levels of diversification.
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