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An essential role of government in any country is to provide the appropriate environment for economic growth and development.  Government's economic policies must therefore be geared towards ensuring that jobs are created in the economy at a pace that is in keeping with maintaining an acceptable rate of employment while at the same time increasing its citizen's purchasing power so that their standard of living would improve or at least be maintained.   This entails adoption of the appropriate mix of fiscal, monetary, exchange rate and other policies aimed at increasing employment, keeping inflation low and generating economic growth.

 
However, the ability of countries like St. Lucia (and other OECS countries) to successfully implement such policy measures could be thwarted by the extreme vulnerability to external shocks such as, rising import prices, falling export prices, reductions in access to concessional financing and inflows of foreign direct investment.  This situation could be compounded by our country's vulnerabilities to natural disasters such as hurricanes and volcanic eruptions.  The experience of Grenada in 2004 in sustaining damages caused by hurricane Ivan to the tune of 200 per cent of GDP attest to the extreme vulnerabilities of our countries to natural disasters.  
 
St. Lucia, like all the other Organisation of Eastern Caribbean States (OECS) islands, is heavily dependent on tourism as the main generator of foreign exchange and a major source of employment.  Notwithstanding the fact that the sector has contributed immensely to economic growth, the heavy reliance on tourism could also be a source of vulnerability as the current global economic recession demonstrates.  As a result of the deepening recession in the US and other major source markets for tourism, the number of visitors coming to our shores has been declining, from September 2008 relative to the same period in 2007 and is expected to fall at an even faster rate in the coming months.  As more persons become unemployed in the US, UK and other countries, spending on leisure and travel is expected to fall significantly. 
 
The heightened vulnerability of St. Lucia's economy to external shocks can be viewed in the context of the historical shift towards a services oriented economy over the last three decades.  St. Lucia's economy since the 1970s has shifted from largely agrarian to a services oriented economy dominated by tourism and other services.  Table 1 shows that from the 1980s the share of agriculture, manufacturing and mining and quarrying (non services) to total GDP has declined consistently from 21.6 per cent in the 1980s to 10.9 per cent in the 2000 to 2007 period.  In particular, the share of the agricultural sector fell from13.7 per cent to 4.6 per cent of GDP.  Conversely, the relative shares of the services sectors (tourism, transport, communications, wholesale and retail, banking and insurance and government services, etc) have increased from78.4 per cent to 89.1 per cent over the same period.  In particular, the share of the tourism sector rose from 9.5 per cent to 12.6 per cent.  Further, tourism earnings account for approximately 68 per cent of total exports of goods and services.     
 
Table1: Share of Total GDP

	1980s	1990s	2000 - 07
Services	78.4%	82.3%	89.1%
o.w. Hotels & Restaurants	9.5%	10.8%	12.6%
Non Services	21.6%	17.7%	10.9%
o.w. Agriculture	13.7%	10.6%	4.6%

Source: National Accounts (Government of St. Lucia)
 
The structural changes to the economy have important implications for the type of training and skills required for the labour force as well as the kind of goods and services produced.  Over the last decade or so there has been a proliferation of various services oriented skills such as accounting, legal  services, entertainment skills, hair dressing and culinary skills, among others.  These types of services have varying levels of value added (the additional value generated in the production of goods and services) as the higher end services such as legal, accounting and medical services generate greater value added compared with the lower end services. These structural changes to the economy have important implications for the generation and distribution of income and spending and how government's economic policies shape the pattern of income and spending in the economy.    
 
The dominance of services in the economy also has implications for government's fiscal policies, particularly taxation policies.  Unlike an economy whose productive sectors are dominated by the production of goods, the tax base may be less visible in a services dominated economy, i.e. identifying what activities should be taxed.  As a result of the shift towards services, an increasing share of St. Lucia's tax revenue is generated from services oriented transactions.  Figure 1 shows that while taxes on services as a ratio of total tax revenue has been rising from the year 2000, taxes on goods has been declining.  
 
Figure 1

 

Government's tax policy should therefore be adapted to reflect the changing structure of the economy.  Currently, taxes on imports account for 50 per cent of total tax revenue.  Given the scenarios of the increasing importance of services in domestic economic activities coupled with St. Lucia's international trade obligations under the Economic Partnership Agreement (EPA) and the World Trade Organization (WTO), public policy should be geared towards restructuring the tax system to better reflect the changing economic circumstances.   
 
The current global economic crisis and the negative consequences for the economy have given added impetus for implementing the required reforms to the tax regime.  As the recession in the industrialized economies deepens, St Lucia's economy is expected to experience a slowdown in activities that is likely to result in a fall in imports which could dampen collections of revenue from trade taxes.  This scenario could result in deterioration in government's fiscal position particularly at a time when government is expected to provide a fiscal stimulus to the domestic economy.    
 
A fundamental review of the tax regime may be justified if St. Lucia is to strengthen its economic resilience in the face of changing economic circumstances. 

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Mr. Embert St. Juste is Director of Research and Policy at the Ministry of Finance in Saint Lucia.  Mr. St Juste is a professional economist with 20 years experience having worked at the Ministry of Finance for 15 years and the Eastern Caribbean Central Bank (ECCB) about 5 years.  He has considerable experience in economic policy issues, in particular fiscal and monetary policy.  Mr. St Juste has conducted extensive research in tax policy, in particular in the area of tax incentives and tax reform.  He has also written papers on monetary policy, in particular monetary policy under a fixed exchange rate regime.  Mr. St Juste has also presented research papers at the ECCB and the Central Bank of Barbados' Annual Research Seminars.     Before returning to the Ministry of Finance, Mr. St Juste was a Senior Economist in the Research Department of the ECCB and headed the Country Economist Unit of that department.  He has conducted  analysis on the economies of most Eastern Caribbean Currency Union (ECCU) countries and has garnered considerable experience in economic policy issues facing the ECCU.     Mr. St Juste holds a Bachelors degree in Economics from the University of the West Indies and a Masters degree in Fiscal Studies from the University of Bath in the UK.  Mr. St Juste has a keen interest in macroeconomic analysis and policy, in particular fiscal policy analysis.