The Caribbean Economy in the Age of Globalization

The Caribbean Economy in the Age of Globalization

Previous Publications US-Caribbean Relations: Their Impact on Peoples and Culture (1998) The Repositioning of US-Caribbean Relations in the New World Order (1997) Pilgrims from the Sun: West Indian Migration to America (1995) In Search of a Better Life: Perspectives on Migration from the Caribbean (1990) Problems of Development in Beautiful Countries (1984) Caribbean Dependence on the United States Economy (1979) Guyana (coauthor) (1969) The Jamaican Economy (1968)

The Caribbean Economy in the Age of Globalization Ransford W. Palmer

THE CARIBBEAN ECONOMY IN THE AGE OF GLOBALIZATION

Copyright © Ransford W. Palmer, 2009. All rights reserved. First published in 2009 by PALGRAVE MACMILLAN® in the United States—a division of St. Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010. Where this book is distributed in the UK, Europe and the rest of the world, this is by Palgrave Macmillan, a division of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN-13: 978–0–230–60380–6 ISBN-10: 0–230–60380–7 Library of Congress Cataloging-in-Publication Data is available from the Library of Congress. A catalogue record of the book is available from the British Library. Design by Newgen Imaging Systems (P) Ltd., Chennai, India. First edition: May 2009 10 9 8 7 6 5 4 3 2 1 Printed in the United States of America.

To My Grandchildren Andrew and Elizabeth

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Contents

List of Tables

ix

Preface

xi

1 The Caribbean Economy: An Overview

1

2 The Decline of Traditional Exports

13

3 Nontraditional Exports as the Frontier of Caribbean Development

21

4 The Service Economy

31

5 The Caribbean Tourist Industry

41

6 Migration

51

7 The Travel Economy

69

8 Investment and Consumption

77

9 The Role of Government

91

10 Caribbean Economic Integration: Drifting toward a Single Market and Economy

107

11 Caribbean External Economic Relations

127

12 Epilogue

145

Appendix

153

Notes

159

References

169

Index

175

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Tables

1.1 1.2 1.3

1.4

1.5

2.1 4.1 4.2 5.1 6.1

6.2 7.1

Profile of the Caribbean Community and Common Market (CARICOM) Comparison of Per Capita Income Growth among Selected Countries, 1973 and 2003 (US$) Percentage Distribution of Employment among the Main Industrial Sectors for Selected CARICOM Countries Percentage Contribution of the Main Sectors to Gross Domestic Product for Selected CARICOM economies, 2000 The Evolution of the Economies of Jamaica and Antigua and Barbuda; Share of Main Sectors in GDP at Current Factor Cost, 1960, 1970, 1980, 1991, and 2000 European Union Import Price and Free Market Price of Sugar (US cents per pound) The Ratio of Service Exports to Merchandise Exports, 1992 and 2004 The Offshore Financial Services Sector in Selected Caribbean Countries Travel as a Percentage of Total Receipts from Services, 2000, 2005 CARICOM Immigrants Admitted into the United States by Country of Birth, 1991–2000 and 2005 Permanent Residents in Canada from Top Caribbean Source Countries, 1997–2006 Total Foreign Exchange from Tourism and Immigrant Remittances as a Percentage of Exports of Goods and Services for Selected

2 4

6

8

10 16 32 35 42

52 52

x

LIST OF TABLES

Caribbean Countries, 1980 and 1999 8.1 Share of Net Foreign Direct Investment in GDP for Selected CARICOM Countries, 1990 and 2003 9.1 Educational and Income Profile of Selected Caribbean and Asian Countries, 1960–1996 9.2 Caribbean Enrollment Ratios and GDP and Gross Capital Formation per Employed Worker, 1993 10.1 Treasury Bill Rates for Jamaica and Trinidad and Tobago, 1991–1996 10.2 Share of Leading Caribbean Exports Sold within CARICOM, 1999 11.1 CARICOM Domestic Exports to the United States, the European Union, and Canada by SITC Sections, 2006 11.2 Net Inflows of U.S. Foreign Direct Investment* in the Caribbean, 2002–2006 (US$ millions) 11.3 Distribution of Patents and Trademarks in the Caribbean: Jamaica, Trinidad and Tobago, Barbados, and Haiti 12.1 Population Profiles of CARICOM and the United States, 2000 A.1 Competitiveness Ranking of Caribbean Tourism (Out of 124 Countries) A.2 Ranking of Components of Human, Cultural, and Natural Resources (Out of 124 Countries) A.3 Ranking of Components of Regulatory Framework (Out of 124 Countries) A.4 Data for Regression Analysis: USGDP and U.S. Imports from CARICOM, Trinidad and Tobago, and Jamaica. 1961:1 to 2007:1

70 78 98 100 115 118 130 132

139 148 153 153 154

156

Preface

T

his book looks at the Caribbean Community and Common Market (CARICOM) as a single economy by focusing on the common features of its disparate parts. The book relies on data from international institutions such as the World Bank, the International Monetary Fund, the United Nations, and the InterAmerican Development Bank, as well as data from national statistical agencies. Available data from particular countries are used when they better illustrate the larger Caribbean condition. The underlying thrust of the analysis is that Caribbean economies are evolving toward becoming service economies. Chapter 1 provides an overview of this changing structure and positions each national economy along the evolutionary path. Chapter 2 examines the decline of traditional exports sugar and bananas as engines of growth and attributes this decline to their inability to compete as preferential treatment in European markets is eroded. Chapter 3 looks at the struggle to develop nontraditional exports, and the failure of the export platform manufacturing model as an engine of growth. Chapter 4 examines the role of services in the evolving Caribbean economy, focusing on off-shore financial services, information technology, and air transportation. Chapter 5 analyzes the most important part of the service economy, the tourist industry. It discusses the nature of ownership, the negative externalities, and the competitiveness of the industry. Chapter 6 looks at the benefits and cost of migration as integral to the Caribbean economy, the nature of the migration cycle, and the dilemma migration poses for local investment in human capital. Chapter 7 constructs a model of the travel economy on the two pillars of tourism and migration, using Antigua and Barbuda as the prototype of such an economy. Chapter 8 underscores the role of foreign direct investment in the Caribbean and its implications for

xii

PREFACE

the distribution of income between labor and capital. Chapter 9 discusses the critical role of government in influencing the climate for foreign investment and its implications for the tax structure and the public debt. It also discusses the role of education in advancing competitiveness and presents some recommendations toward that end. Chapter 10 examines the slow process of Caribbean integration, the issue of a common currency, and the mobility of capital and labor. Chapter 11 breaks the Caribbean external economic relations into its important elements and assesses the impact of the U.S. economy on Caribbean economic growth. The epilogue in Chapter 12 explores the implications of the ever changing external environment and the realignment of economic powers in the world for the Caribbean.

Chapter 1

The Caribbean Economy: An Overview

T

he United Nations Human Development Report (2007/2008) lists the countries of the Caribbean Community and Common Market (CARICOM) as having medium to high human development with their human development index (HDI) ranging from 31 for Barbados to 146 for Haiti out of a total of 177 countries. The range in per capita gross domestic product (GDP) is just as wide, from $500 for Haiti to $17,497 for the Bahamas (table 1.1). Despite the wide variations in the level of development, the region has many common characteristics. Among them are small domestic markets, dependence on foreign trade and foreign capital, and a narrow export base. They also share a common history as European colonies, with Haiti having the distinction of being the first slave colony to fight and win its independence from its colonial master, France. The Caribbean was peopled by Arawak Indians before Columbus stumbled on it in search of the spice of the Indies. Later in the age of mercantilism, sugar and enslaved workers from Africa provided a lucrative source of wealth for the colonial powers. And for over 200 years this represented the order of international trade in human beings and products. It enriched Great Britain and helped to finance the settlement of America. The slave trade ended in 1807 in the Caribbean, and slavery in 1838, opening the way for British planters to petition the Crown for indentured servants from India to work the sugar fields. This history is reflected acutely in the current ethnic mix of the populations in Guyana as well as in Trinidad and Tobago where the social and political divisions remain sharp.

Table 1.1

Profile of the Caribbean Community and Common Market (CARICOM)

Countries

Antigua & Barbuda Bahamas Barbados Belize Dominica Grenada Guyana Haiti Jamaica St. Kitts & Nevis St. Lucia St. Vincent & The Grenadines Suriname Trinidad & Tobago

Human Development Index (HDI) Rank

Annual Growth Rate of GDP Per capita

Annual Growth Rate of GDP Per capita

Per Capita GDP US$

2005

1975–2005

1990–2005

2005

57 49 31 80 71 82 97 146 101 54 72 03 85 59

3.7 1.3 1.3 3.1 3.1 3.4 0.9 –2.2 1.0 4.9 3.6 3.2 –0.5 0.6

1.5 0.4 1.5 2.3 1.2 1.3 3.2 –2.0 0.7 2.9 0.9 1.6 1.1 4.3

10,578 17,497 11,465 3,786 3,938 4,451 1,048 500 3,607 9,438 5,007 3,612 2,986 11,000

Source: United Nations, Human Development Report 2007/2008

Population (million)

0.1 0.1 0.3 0.3 0.1 0.1 0.7 9.3 2.7 0.04 0.2 0.1 0.5 1.3

THE CARIBBEAN ECONOMY

3

The economic prospect for the Caribbean colonies with their narrow range of export agriculture was not considered bright when the sugar industry lost its monopoly position in European markets in the nineteenth century. So bananas were later introduced to diversify agriculture, but even this product had to depend on preferential treatment in European markets for its survival. Preferential treatment of the main export crops of sugar and bananas is the recurring story in the annals of Caribbean international trade. In the discussion of political independence in the 1950s and 1960s, the big question was this: how would these small economies fare on their own without the continuation of preferential treatment? The British answer was to bring the colonies together into a federation with a central political bureaucracy. But this experiment quickly failed because the economic disparity among island economies was too large at the time. The result was a parade of independent countries with small populations, few natural resources, and extremely foreign-trade-dependent economies. Now as World Trade Organization (WTO) rules are bringing the long period of unilateral preferential treatment for their exports to a close, the economic viability of these small countries will increasingly depend on their ability to compete in external markets. Preferential treatment has not prepared them to compete because it has not encouraged technological advancement in production. As a consequence, exposure to global competition is putting added pressure on governments to seek new beneficial trade arrangements with their major trading partners. More than ever, governments in the Caribbean are preoccupied with negotiating the right trade arrangements that would allow private sector producers to prosper. This is a far more complex undertaking than when the role of government was seen through the prism of socialism in the 1970s as capturing the “commanding heights” of their economies. This military metaphor implied a war against the foreign capitalists who controlled the most productive assets in their economies. Since the commanding heights were usually mineral resources, the strategy had the flavor of natural resource nationalism. Socialist governments in the Caribbean expanded the role of the state and in the process reduced the ability of their economies to generate tax revenues. The disaster that this economic philosophy brought on the Caribbean is evident even today in the form of excessive

4

THE CARIBBEAN ECONOMY AND GLOBALIZATION

government indebtedness. The two countries that exemplify this condition are Jamaica and Guyana, both now lagging behind the rest of the Caribbean in the growth of per capita income. Today, the disparity in economic growth across the region has slowed the drive for an integrated area in which labor and capital can move freely to stimulate region-wide growth and in the process reduce the wide disparity. Although full intraregional labor mobility has not yet been achieved, there has been some capital mobility, especially from oilrich Trinidad and Tobago to other Caribbean countries. And in the Organization of Eastern Caribbean States (OECS), an entity within CARICOM, a greater degree of economic integration has been achieved and its members that were once labeled “less developed” within CARICOM now have higher per capita incomes than some of those traditionally labeled as “more developed.” An even more dramatic realignment has occurred between the Caribbean and a number of similarly situated countries back in the 1970s. The East Asian countries, particularly South Korea and Singapore, have broken away from the Caribbean to achieve high rates of growth of per capita income. Table 1.2 shows that between 1973 and 2003, per capita income in Singapore and South Korea grew 20- and 40-fold, respectively, compared to only fourfold for Jamaica. This prompts the following question: What could have accounted for the widening gap? There are many reasons for the rapid growth of South Korea and Singapore but two are particularly significant. Table 1.2 Comparison of Per Capita Income Growth among Selected Countries 1973 and 2003 (US$) Countries

1973

2003

Jamaica Malaysia Rep. of Korea Panama Chile Trinidad & Tobago Singapore

763 395 302 785 672 882 1,252

3,083 4,187 12,634 4,319 4,591 8,007 21,492

Source: United Nations, Human Development Report, 2005; World Bank, World Development Report, 1980

THE CARIBBEAN ECONOMY

5

One is that early authoritarian leadership directed resources into investments for long-term growth and the other is the inflow of foreign investment. The case of South Korea is particularly interesting because American and Japanese investments flowed in to make it a capitalist bulwark against the communist north. Jamaica’s laggard status cannot be attributed to its small size because Singapore is a city state. It must be attributed to the policy promulgated in the 1970s when a socialist development strategy extended the role of government in the economy, causing the private productive sector to shrink. Thus, while government control and the concomitant social programs were expanding, the productive foundation that generated the tax revenues was contracting. The net result was a top-heavy structure that was eventually toppled by rising debt, forcing the government to seek the assistance of the International Monetary Fund. This assistance came with a painful structural adjustment mandate that required the reduction of government spending on social programs that the public had gotten used to. Although the socialist strategy was subsequently replaced by a more free-market-friendly one, the Jamaican economy still bears the scars of the previous strategy as reflected in its anemic growth performance. Guyana’s socialist experiment has produced an equally anemic growth performance. The Cooperative Republic of the 1970s plunged the country into decline. As in the Jamaican case, political leadership in Guyana was intoxicated with the illusion of control. As a result, it triggered a serious flight of capital and talent that choked off economic growth. As in the case of Jamaica, large numbers of skilled Guyanese fled their country for the United States. If it weren’t for the escape valve of migration, there might have been serious political instability. Other parts of the Caribbean have fared better. Trinidad benefited from the 1970s oil boom that built up its reserves and generated a fever of consumption. This fed inflation and the ultimate depreciation of the currency when the oil bubble burst later in the decade. The Trinidad economy has since recovered and has accumulated large surpluses on current account. The smaller eastern Caribbean islands have managed to achieve significant per capita income growth by shifting their economies away from agriculture toward tourism and financial services. But St. Vincent and the Grenadines

6

THE CARIBBEAN ECONOMY AND GLOBALIZATION

and Dominica still depend heavily on banana exports and are struggling to find new sources of growth in services as the elimination of preferential treatment exposes their inefficient banana production to intense competition from Latin America. Aside from oil and gas in Trinidad and bauxite in Jamaica, Guyana, and Suriname, there is a dearth of commercially exploitable mineral deposits in the region. The major contribution of these capital-intensive industries to the economy is measured more in the royalties earned from the minerals mined than in value-added locally. In general, the amount of local value-added is important for growth. But in the case of bauxite, the mineral is processed into aluminum in the United States and elsewhere where cheap electric power is available. As a result, the multiplier impact of investment in mining on the local economy is modest. Another view of the structure of Caribbean economies is through the prism of employment. From table 1.3, it is clear that the overwhelming share of employment is in a wide range of service industries, including government. The Bahamas tops the list in service employment followed closely by Antigua and Barbuda. The two countries with the largest share of employment in manufacturing, Table 1.3 Percentage Distribution of Employment among the Main Industrial Sectors for Selected CARICOM Countries Countries and Years Antigua & Barbuda, 2001 The Bahamas, 2006 Barbados, 2004 Belize, 2005 Dominica, 2001 Grenada, 1998 Guyana, 2002 Jamaica, 2006 St. Lucia, 2004 Suriname, 2004 Trinidad & Tobago, 2005

Agriculture*

Mining **

Manufacturing

Services***

2.6 0.6 3.3 20.2 21.0 13.8 21.3 18.2 14.8 8.0 4.3

0.3

4.3 4.4 5.8 10.0 7.8 7.4 12.8 6.5 7.5 7.0 9.7

92.8 95.0 90.9 69.6 70.6 78.6 61.9 74.7 77.7 79.1 82.4

*

0.2 0.6 0.2 4.0 0.6 5.9 3.6

Includes fishing and forestry Includes quarrying Includes transport, storage and communications; finance and real estate; government; education, health, and other social and personal services; wholesale and retail trade; hotel and restaurants; construction; and the public utilities **

***

Source: International Labor Organization

THE CARIBBEAN ECONOMY

7

Belize and Guyana, are also the two countries with the largest share of employment in agriculture. Sugarcane growing and reaping account for a large share of agriculture and the processing of sugar accounts for the most important component of manufacturing. But even in these two countries with the greatest potential for achieving economies of scale, the sugar industry is threatened by international competition. The Changing Shape of the Caribbean Economy Caribbean economies are undergoing a kind of metamorphosis as they struggle to break free from their ties to the land to become service economies. This process is reflected in the declining contribution of traditional exports to GDP and the rising contribution of services. Caribbean national accounts suffer from a serious deficiency of not being able to measure definitively the contribution of its most important service industry—tourism. In the Jamaican national income and product accounts, for example, the most extensive of the Anglophone Caribbean, the contribution of tourism is either hidden under “miscellaneous services” or combined with “wholesale and retail, hotel and restaurant services,” which in 2004 accounted for 26 percent of both GDP and the employed labor force. Because of the pervasiveness of the impact of the tourist dollar, the industry cries out for more accurate national accounting. Until this is done, a useful gauge of the contribution of the tourist sector is provided in the balance of payments where tourist travel is by far the leading contributor to foreign exchange earnings. In terms of the share of services in GDP, table 1.4 shows that the twin island country of Antigua and Barbuda leads the pack, followed by Barbados, St. Vincent and the Grenadines, Jamaica, Trinidad and Tobago, Guyana and Haiti. Each of these economies can be depicted visually as having a certain shape reflecting the stage of its evolution. None of the Caribbean economies in table 1.4 has a structure that is symmetrical, where each sector contributes an equal share of GDP. Most of them exhibit a pronounced drift toward services, combined with varying proportions of minerals, agriculture, and manufacturing.

8

THE CARIBBEAN ECONOMY AND GLOBALIZATION

Table 1.4 Percentage Contribution of the Main Sectors to Gross Domestic Product for Selected CARICOM Economies, 2000 Countries Barbados Guyana Jamaica Trinidad & Tobago Antigua & Barbuda St. Vincent & The Grenadines Haiti**

Mining

Agriculture

Manufacturing

Services*

0.9 13.6 4.6 31.3 1.7 0.2

6.3 32.8 6.9 1.3 3.9 10.8 25.6***

9.0 10.4 14.4 7.1 2.3 6.0 7.8

83.8 43.2 74.1 61.3 92.1 83.0 66.6

*

GDP minus agriculture, mining, and manufacturing Average for 2002–2006 *** Represents the share for the primary sector which is treated as agriculture because there is no mining activity **

Source: International Monetary Fund Staff Reports

Because tourism is the dominant service industry in the Caribbean, it means that as these economies evolve from primary producers into producers of services they remain anchored in the endowment of their natural resources. Tropical tourism depends on the endowments of nature: salubrious climate, white sand beaches, colorful vegetation, aquamarine sea, and beautiful scenery. The supply of these resources is fixed and the purpose of the tourist industry is to exploit the rent that they yield. As in mining, the cost of this exploitation rises as demand pushes the industry into areas where the quality of the endowment diminishes. The evolution toward services is a movement away from production that requires hard physical labor toward production that requires workers to have greater knowledge. This means that the success of the evolution will depend increasingly on a corresponding evolution of the structure of access to education. It took hundreds of years for this process to work its way through the economy of Great Britain where the industrial revolution began. The industrial revolution drew workers away from the physical labor of the farm and the restrictions of weather into factories to produce goods. Generations later, the production of goods gave way to the production of services. For the Caribbean, the evolutionary process has been compressed and is being driven largely by globalization. Globalization has stressed the need to adapt as competition

THE CARIBBEAN ECONOMY

9

replaces the traditional comfort zones of preferential treatment. But the process of adapting is disruptive; it ruins some expectations and brightens others. Usually those whose expectations are brightened are the ones who are better prepared educationally and, therefore, better positioned to take advantage of new opportunities. As a result, the evolutionary process is one of rising inequality that presents difficult challenges to national governments. It also presents moral challenges to the international community that has a vested interest in poverty reduction and political stability. The evolution of the Caribbean economies is occurring within the evolution of the larger world. The emergence of Brazil, Russia, India, and China, the so-called Bric countries, is presenting the Caribbean with new opportunities for international trade and new sources of direct investment. Their emergence will make the foreign policy of the Caribbean more challenging and international trade negotiations more complex. But it may also bring well-needed acceleration to the slow pace of Caribbean integration. The United States sees the Caribbean as part of a basin, as in the Caribbean Basin Initiative, and the European Union sees the Caribbean as part of former African, Caribbean, and Pacific (ACP) colonies. But the Caribbean Community (CARICOM) also sees itself as part of a larger regional grouping, the Association of Caribbean States. The fact is that numbers count and they affect the bargaining power of small countries in the international arena. While CARICOM’s share of international trade is tiny, it accounts for a large share of their GDP. Therefore, small changes in external events can have a large impact on its populations. The levers in the hands of Caribbean policymakers are often inadequate to address the domestic consequences of external events, thus Caribbean foreign policy has always tried to make the case on both moral and economic grounds for special treatment. But as Parag Khanna (2008) reminds us, “Globalization apologizes to no one; we must stay on top or become its victim.” However, this sink or swim scenario need not be played out for small vulnerable economies such as those in the Caribbean if they pin their future to larger groups, be they traditional trading partners or emerging ones. This means that the practical scenario of the future is more likely to be one of swimming along rather than of choosing between sinking or swimming.

10

THE CARIBBEAN ECONOMY AND GLOBALIZATION

Table 1.5 The Evolution of the Economies of Jamaican and Antigua and Barbuda; Share of Main Sectors in GDP at Current Factor Cost, 1960, 1970, 1980, 1991, and 2000

Jamaica Agriculture Mining Manufacturing Services* Antigua and Barbuda Agriculture Mining Manufacturing Services*

1960

1970

1980

1991

12.0 9.6 13.6 64.8

7.8 15.9 13.2 63.1

8.2 14.3 16.2 61.3

6.8 10.6 18.6 63.7

26.9

3.0

6.7

6.7

1.9 71.2

10.2 86.8

6.9 86.5

6.0 87.3

2000

4.6 6.9 14.4 74.1 5.6** 2.3 92.1

* Represents GDP minus agriculture, mining, and manufacturing ** Includes mining Source: World Bank; Statistical Institute of Jamaica; IMF Staff Reports

The evolution into services is an extension of the W. Arthur Lewis (1963) theory of unlimited supply of labor. The rural-urban migration that the theory posited has already happened. Now the children and grandchildren of those migrants are mostly employed in services. With fewer farmers left to produce food crops and with the taste of urban workers shifted away from primary food products, the propensity to import consumption goods has grown sharply. And this in turn has fed the growth of the wholesale and retail trade sector where most people are employed. The weakness in this scenario is that the trade deficit must be financed by a steady inflow of foreign investment. External events can intervene, causing the system to breakdown. The evolution of the structure of the Caribbean economy from agriculture toward services over the period 1970 to 2000 is clearly illustrated in the data for Jamaica and Antigua and Barbuda in table 1.5. The Emergence of Trinidad and Tobago Jamaica has twice the population of Trinidad and Tobago and is the largest Anglophone Caribbean country. But since their political independence in 1962, both countries have intermittently shared the title of the largest economy when GDP is measured in U.S. dollars.

THE CARIBBEAN ECONOMY

11

During the 1970s and the 1980s, rising oil prices propelled the Trinidad and Tobago economy ahead of the Jamaican economy. In the latter half of the 1990s, declining exchange rates pushed a sluggish Trinidad and Tobago economy into second place. But in the first decade of the twenty-first century, rising oil prices moved Trinidad and Tobago back into the leading position, and with it came a higher per capita GDP. Trinidad and Tobago has accumulated a large balance of trade surplus from its oil exports and has attracted large inflows of foreign investment into its oil and gas industry. Mindful of the fact that its oil and gas deposits will not last forever, it has developed a strong financial sector and is actively diversifying into other services. In 1961, when Jamaica was the largest economy, it withdrew from the ten-member West Indies Federation. Trinidad followed when Prime Minister Eric Williams issued his famous mathematical justification: one from ten is zero. As the largest economy in the Anglophone Caribbean, Trinidad and Tobago now finds itself in a leadership position to accelerate the slow pace of regional economic integration through trade and capital investments. The Caribbean as Small Open Economies One of the principal indicators of globalization is trade openness, measured by the share of foreign trade (the sum of exports and imports of goods and services) in GDP. The Caribbean has always had a high degree of trade openness, dictated by their small domestic markets as well as by a past colonial experience that limited domestic production to a few primary products for export. As a result, these exports invariably represent a large share of total output. Globalization has made the Caribbean economies even more open as trade liberalization eliminates tariff barriers. Openness reflects the vulnerability to external developments that are quickly transmitted through the price of imports and exports. Historically, Caribbean governments have insulated their economies from external fluctuations through preferential trade agreements with major trading partners. As will be discussed later, these arrangements are giving way to new agreements that mandate reciprocity. Despite the growth of trade in services, the

12

THE CARIBBEAN ECONOMY AND GLOBALIZATION

common balance of payments experience of Caribbean economies is a persistent deficit on current account. Trinidad and Tobago with its petroleum and gas deposits is the exception. In 2005, it had a positive current account balance equal to 24 percent of GDP (IMF, World Economic Outlook Data Base, October 2007). In the literature, trade openness has been found to be positively related to the growth of income (Billmeier and Nannicini, 2007; Sachs and Warner, 1995; Dollar, 1992). The theoretical foundation is the Ricardian view that trade generates gains when countries specialize in producing those goods and services in which they have a comparative advantage. The resulting growth in income is made possible by participating in a larger market. If trade openness is positively related to growth, then the high degree of trade openness in the Caribbean should generate a high rate of growth and a high living standard. Although it is true that per capita income in the Caribbean is higher than that in most developing countries, the distribution of income is highly uneven. A large share of the gains from trade is siphoned off by foreign investors with the rest going into paying the wages of the labor force. A major share of this wage income goes to pay for consumption and capital goods imports. When most of the gains from trade get recycled abroad, the impact of trade openness on growth is diminished. This large leakage reflects the high dependence of the region on foreign investment. It also indicates that the impact of foreign investment on the local economy is much smaller than it could be. An extreme example is Dominica where there has been a net outflow of investment in recent years.

Chapter 2

The Decline of Traditional Exports

T

he export agricultural sector remains a major employer in many Caribbean countries. Because production is generally on a smaller scale than in Latin American countries, Caribbean producers are at a competitive disadvantage in world markets. Some of this disadvantage has been offset by preferential access to European and North American markets. These arrangements have provided a measure of social and economic stability to the Caribbean but they are now threatened by trade liberalization. Under WTO rules, preferential access is being replaced by new arrangements called Economic Partnership Agreements negotiated between the European Union and its former African, Caribbean, and Pacific colonies. Sugar Sugar, once a major source of wealth for Britain and its Caribbean colonies, has been in decline for the past 100 years. Yet it has retained much significance in the Caribbean as a source of employment. In the two largest Anglophone Caribbean countries—Guyana and Jamaica, the sugar industry has become so unprofitable that it is now largely owned by the state. Rather than let the industry die, the state has intervened to protect the employment of thousands of sugar workers and their families who still wield some political power at the polls. The sugar industry is in essence a mini welfare state within the state. Beyond generating employment, it provides housing, medical services in clinics, and facilities for sports.

14

THE CARIBBEAN ECONOMY AND GLOBALIZATION

Thus the industry plays a social as well as an economic role that Government ownership aims to maintain, at least for a while. In the national accounts, the sugar industry appears twice: in the agriculture sector (as sugarcane production) and in the manufacturing sector (as sugar, molasses, and rum production). Data from the Statistical Institute of Jamaica show that Jamaica’s sugarcane production fell from 3.7 million tons in 1974 to 1.9 million tons in 2004, and for the same period its sugar production fell from 366,000 to 181,000 tons. This means that the ratio of sugarcane to sugar production rose from 10.3 to 10.6, reflecting a decline in the yield of sugarcane. The role of sugar in exports has also declined. The category “sugar, sugar preparations and honey” fell from 20 percent of total exports in 1974 to 7.5 percent in 1998. All in all, the trend of the sugar industry is downward, which means that in its traditional operation it is not an engine of future growth. Yet the decline of the industry could be arrested by the application of technology and capital equipment to the growing, reaping, and manufacturing processes. But mechanization reduces employment in countries where thousands still depend on the industry for a livelihood. Nevertheless, the application of new technology at the manufacturing stage offers the promise of both reducing cost and introducing new by-products for both the domestic and export markets. Unfortunately, the willingness and the ability of governments to invest in new technology and to explore new products are limited by the claims of a burgeoning public debt against available tax revenues. Overall, the contribution of Jamaica’s agricultural sector (which includes forestry and fishing) has declined from 9 percent of GDP in 1995 to 5.5 percent in 2004. Yet the share of the sector in total employment has fallen only marginally, from 22.6 percent in 1996 to 21.6 percent in 2000, suggesting that the value of output per worker has also fallen. Guyana is the largest sugar producer in the Caribbean. Sugar (growing, reaping, and manufacturing) accounts for 19 percent of GDP and 26 percent of exports. It is a major employer of labor, accounting for half the employment in the extensive public sector that includes not only the central government but also a large number of government-owned companies. The sugar industry was nationalized during the 1970s as the Guyana Sugar Company

THE DECLINE OF TRADITIONAL EXPORTS

15

(GUYSUCO), part of a wave of nationalizations by the Cooperative Republic. Poor management and lack of modernizing investment made the industry inefficient. In the 1990s, with assistance from the World Bank, the Booker Tate Company (a private management firm) was brought in to manage the industry. Despite attempts at privatization, the Guyanese economy remains dominated by public enterprises. Because it is so heavily indebted, the growth of the economy has been stagnant and the rate of emigration high. Yet, unlike the smaller Caribbean countries, Guyana’s large land area allows it to benefit from economies of scale with the prospect of reducing the unit cost of sugar production. The Caribbean is primarily an exporter of raw sugar. Most of the refining takes place in other countries. In the United States alone, according to the U.S. Census Bureau, there were 18 firms engaged in sugar refining in 2002 with shipments totaling $3.2 billion. There were also 1,741 firms producing sugar and confectionary products valued at $24 billion. Clearly, the value added to a ton of raw cane sugar when it is refined and incorporated into a wide variety of products is many times its original value. This value added is made possible by the combination of capital, technology, skilled workers, and a large consumer market. Consumer demand for a wide variety of sugar products ultimately determines the industrial demand for raw sugar. This demand is generally regarded as inelastic with respect to income because of the small share of household income that is normally allocated to it. This income inelasticity of demand is to some extent supported by increased concern about the health implications of sugar consumption. So although a rise in personal income in the developed countries is not likely to increase household sugar consumption in those countries, over time an increase in the population will increase aggregate sugar consumption. The Caribbean accounts for an extremely small share of world sugar production, but export revenues from that small share have been a major source of foreign exchange. Global sugar production for 2005–2006 was estimated at 147.7 million tons, of which Brazil, the largest producer, accounted for roughly 20 percent (illovasugar. com). That same year, Brazil exported 16.5 millions tons compared to a combined total of 0.4 million tons (for 1999) for Guyana and Jamaica.

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THE CARIBBEAN ECONOMY AND GLOBALIZATION

Up until quite recently, Caribbean sugar received preferential treatment in the European market under the ACP/EU Protocol, a government to government agreement that indefinitely guaranteed ACP countries a fixed amount of exports at guaranteed prices. According to Article 5(4) of the Protocol, ACP prices were negotiated “within the price range obtaining in the Community, taking into account relevant economic factors.” Under the protocol, Guyana and Jamaica supplied fixed quantities of sugar to the EU—157,700 and 118,300 tons, respectively—at the European Union import price of 30.6 U.S. cents per pound in 2006 compared to the free market price of 14.8 cents a pound in the New York. The difference between the free market price and the ACP price represents a significant subsidy to the ACP producers as shown in Table 2.1. WTO rules now require that subsidies to EU sugar producers be abolished. This means that the negotiated price paid to ACP producers will now be lower. In 2005, the EU announced that it would reduce ACP sugar prices by 39 percent through 2010. According to the Financial Times (2005), “Reductions to EU sugar price are part of a broader market reorganization demanded by the World Trade Organization, which upheld a complaint by Brazil—one of the world’s most efficient sugar producers—that the price support was unfair” (p. 9). This will have a significant impact on the less efficient Table 2.1 European Union Import Price and Free Market Price of Sugar (US cents per pound) Years

EU Import Price

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

31.2 31.2 28.4 27.1 26.8 25.2 23.9 24.9 27.1 30.4 30.2 30.6

Free Market Price 13.3 12.0 11.4 8.9 6.3 8.1 8.2 6.2 6.9 7.5 10.1 14.8

Source: International Monetary Fund, International Financial Statistics Yearbook, 2007

THE DECLINE OF TRADITIONAL EXPORTS

17

Caribbean sugar producers. Brazil and Australia can produce sugar for less than 7 U.S. cents per pound, while Guyana’s most efficient factories can produce sugar at 18 U.S. cents per pound. In Jamaica’s state-owned factories, costs are as high as 40 cents per pound (p. 9). In place of the abolished unilateral preferential trade arrangements, the European Union has negotiated new reciprocal agreements called Economic Partnership Agreements with the ACP countries that took effect on December 31, 2007. According to Peter Mandelson (2007), the European commissioner for trade, “Reciprocal ACP tariff liberalization will be partial and gradual, with sensitive agriculture and industry products excluded or liberalized over very long periods of up to 25 years. Reform and adjustment will be assisted in ACP countries by €23bn over the next seven years” (Letter to FT, December 12, 2007, p. 10). A small share of Caribbean sugar is exported to the United States under the U.S. sugar quota at prices averaging 17 to 18 cents a pound in 1996. At these prices, the most efficient Caribbean producers can barely break even, and several producers have been unable to meet their quotas. Bananas In the small eastern Caribbean islands of Dominica, St. Lucia, and St. Vincent and the Grenadines, trade in bananas account for a large share of output and employment. Production in these countries suffers from the problem of small size and high cost, but producers hope that consumers will differentiate the higher quality of their fruit from that of their competitors. The fact is that the consumer is unlikely to recognize this kind of product differentiation. The end result is that as price takers in a competitive market these small producers will remain vulnerable to price changes in the worldwide industry. Vulnerability is not a function of size alone; it is also a function of lack of diversification. Banana growers in the Eastern Caribbean often make the argument that soil conditions do not allow for the profitable growing of alternative crops. Despite the fact that hurricanes frequently destroy entire crops with devastating effect on foreign exchange earnings, farmers feel obligated to replant because

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THE CARIBBEAN ECONOMY AND GLOBALIZATION

they see no viable agricultural alternative. But diversification within agriculture is only one aspect of the problem; diversification outside of agriculture is another. The latter is often difficult because it requires a different kind of labor force with different kinds of skills that in turn require investment in education and training. In the absence of these skills, it is difficult to attract foreign investment to generate alternative employment. Although there is always some short-run social cost of replacing or scaling down traditional industries, the Caribbean is now discovering that the long-run cost of perpetuating the dependence of inefficient industries on preferential arrangements is much greater. The safety net that these preferential arrangements provide is analogous to the welfare safety net provided in developed countries for their less fortunate population. Its rationale is more moral than economic. In banana production, timing is of the essence. The fruit must be reaped at the right time and shipped shortly thereafter in refrigerated freighters. Therefore, the coordination between production and shipping is crucial. It is not unusual to have the shipping done in ships owned by large producers. The biggest economic impact of the industry comes when bananas are reaped and shipped. On banana day, as it is called in some places, local merchants see their sales rise sharply. The larger Latin American sugar producers have greater yields per hectare in both sugar and bananas than the Anglo-Caribbean producers. This is reflected in the difference in export unit value per ton. The higher the yield in both crops the lower the producer price. In open competition, Belize and Jamaica would be at a competitive disadvantage were it not for preferential treatment. The removal of subsidies will have a significant impact on high-cost producers such as Jamaica and Belize. Because size is an important determinant of production cost, these small producers will have to seek efficiencies elsewhere, such as in transforming primary products into a variety of finished products. Accomplishing this will require the application of a new combination of capital, technology, and skilled workers.1 The transformation of molasses into rum and liqueurs has met with some success but these products represent only a small share of the value of sugar exports. The fact that in 2000 Jamaica exported 2 million tons of raw sugar and imported 490,000 tons of

THE DECLINE OF TRADITIONAL EXPORTS

19

refined sugar suggests a large potential for domestic refining. The multiplier effect of the value added from sugar refining could put economic growth on a higher trajectory. The Caribbean also produces rice, spices, and a variety of fruits and vegetables. Guyana is the rice bowl of the Caribbean where the crop is grown along the swampy coastal lands. Since 1991, rice production has more than doubled, accounting for over 12 percent of the GDP. Production efficiency has improved from 2 tons per hectare to close to 3 tons, while the value of exports has grown fivefold. Most of Guyana’s rice is sold within CARICOM. Minerals Trinidad and Tobago has oil and gas, and Jamaica and Guyana have bauxite. While these capital-intensive industries have not contributed significantly to employment, they account for a large share of the foreign exchange. These industries are characterized by substantial foreign investment and by targeted markets in the United States and Canada. Crude oil exports from Trinidad are processed in the United States and so are bauxite and alumina exports from Jamaica and Guyana. In 1975, Jamaica, Trinidad and Tobago, and Guyana proposed the first two regional aluminum smelters to be constructed in Trinidad and Tobago and Guyana. The Trinidad and Tobago smelter would get its power from locally produced natural gas and the Guyana smelter would use hydroelectric power (Palmer, 1979). Both smelters would process alumina from Jamaica and Guyana but neither smelter was built because of budgetary constraints. In 2006, Trinidad and Tobago approved the building of a smelter by Alutrint Ltd., a joint venture between Trinidad and Tobago’s state-owned National Gas Company and the Sural Group of Venezuela. And in 2007, the Aluminum Company of America (ALCOA) received government approval to build a US$1.5 billion smelter. The location of both smelters in the southern part of the country has raised fears among the local population about their potential negative environmental impact (www.reuters.com/ article/companyNewsAndPR/idUS4325939020070403). Mining, largely oil and gas, accounts for nearly a third of Trinidad’s GDP, nearly 5 percent of Guyana’s, and 5 percent of

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THE CARIBBEAN ECONOMY AND GLOBALIZATION

Jamaica’s. The pace of evolution of these economies toward services is to some extent controlled by the share of minerals in their total output. As oil and gas prices rise, that share is likely to rise. Moreover, a sustained rise in the price of oil could cause the country to suffer from Dutch disease as a rising exchange rate reduces the competitiveness of non-oil exports.

Chapter 3

Nontraditional Exports as the Frontier of Caribbean Development

T

he definition of nontraditional exports is fuzzy and may vary from country to country. In general, the foreign markets for these products have never been exploited and, therefore, they have never been a major source of foreign exchange. Quite often, they are indigenous products that have long been consumed domestically by the population. Over the years, as migration builds up a large expatriate population abroad, a foreign market is created for some of these products. But for many Caribbean countries, the most significant nontraditional exports come from offshore production where finished products are assembled from imported raw materials for export to the parent firms. These labor-intensive assembly industries typically operate with little sunk capital in free trade zones where they pay no taxes and employ workers with relatively low skills. In some instances, government will provide a subsidy for the training of labor. The expectation of the governments offering these incentives is that the foreign exchange benefits will more than offset the tax revenues foregone. Typically, production takes place in export-processing zones under arrangements that require dutyfree import of all raw material and the export of the finished product. Furthermore, because the level of skill required is low and the pool from which workers are drawn is large, offshore assembly operations can count on low wage rates.

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Nontraditional Exports and Economic Growth The nontraditional frontier is where the structure of the Caribbean economy is changing. The cooperation of government and the private sector on this frontier is essential for the creation of a new economy. To begin with, government must provide the right kind of macroeconomic framework that is conducive to the development of nontraditional exports. Exchange rates must be stable and interest rates low. Quite often, a stable exchange rate is achieved by pegging the local currency to the U.S. dollar as is the case in most of Caribbean countries. The combination of pegged exchange rates with dependence on offshore assembly production further ties these countries to the U.S. economy. The significance of exchange rates for export promotion is illustrated in the Central American experience. Wilmore (1997) points out that under a strategy of import substitution, “protection encourages Central American producers to substitute imports from the rest of the world.” Protection also discourages exports “because of the higher prices of protected intermediate goods and because of overvaluation of local currencies compared to free trade exchange rates.” Wilmore lists three measures undertaken by Central American governments to address the problem, starting in the mid-1980s: (1) they sharply reduced import tariffs; (2) they gave exporters access to intermediate goods at international prices by allowing them to operate in free trade zones or under a temporary import regime; and (3) they set the official rate of exchange at, or near, a market-clearing rate, and eventually removed exchange controls altogether, at least for exporters (p. 195). The importance of nontraditional exports for the Caribbean arose out of the need to replace import substitution as a development strategy in the debt-ridden1980s with an export promotion strategy that could generate foreign exchange to meet debt obligations. This strategy was encouraged by the conditions imposed by the International Monetary Fund for its balance of payments assistance. But it was also encouraged by the impending erosion of trade preferences for traditional exports that would reduce their ability to generate future foreign exchange earnings. As a result, the exploration of nontraditional export markets became a development imperative. While the immediate objective was to meet foreign debt obligations, the long-term objective was to accelerate the real growth of the economy. The long-run impact of nontraditional exports on growth

NONTRADITIONAL EXPORTS AS THE FRONTIER

23

may be visualized as a three-stage growth curve with GDP growth on the horizontal axis and the share of nontraditional exports in total exports on the vertical axis. As the share of nontraditional exports increases, the curve rises sharply at first, then it flattens out and rises sharply again. In the first stage, the increase in the share of nontraditional exports adds relatively little to GDP growth, but in the second stage, as productivity increases, GDP growth accelerates. In the final stage when nontraditional export growth reaches maturity, its impact on GDP growth diminishes sharply. A comparison of Jamaica and the Dominican Republic suggests that Jamaica is in the first stage while the Dominican Republic is in the second stage. This placement is guided by two things: one is that nontraditional exports represent a small share of Jamaica’s exports; and the second is that they are for the most part laborintensive products that add relatively little to GDP growth. In the case of the Dominican Republic, nontraditional exports from the free trade zones account for a much larger share of the total exports and register a larger impact on economic growth. Because of stubbornly high unemployment rates in the Caribbean, employment has become the major objective for attracting labor-intensive offshore industries. As a result, employment has grown much faster than GDP. In the Dominican Republic, employment in the free trade zones grew almost twelvefold from 16,400 to 183,300 over the period 1980 to1996, an average annual growth of 6.4 percent, compared to the 4.9 percent real GDP growth rate. In the meantime, the share of free trade zone exports in total exports grew from 29.7 percent to 98 percent. Virtually all of the export goods from the Dominican Republic now come from the free trade zones (IMF, 1998). During the latter half of the 1990s, wearing apparel was the most important component of Jamaica’s nontraditional exports. Overall, nontraditional exports accounted for only a third of total exports. Wearing apparel is also the most dominant component of Haiti’s exports. Between 2002 and 2006, it averaged 86 percent, having recovered from U.S. economic sanctions that were lifted in 1994. The IMF attributes this recovery to “significant consolidation of the industry and a step down the value-added ladder to inexpensive garments of lower quality, such as T-shirts” (IMF 2007a, p. 8). One characteristic of offshore employment common to all Caribbean countries is the dominance of women. It applies to the

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apparel industry as well as to the information technology industry. In her ethnographic study, Carla Freeman (2000) describes the situation of these women in Barbados: On the data entry floor of this offshore information processing facility, a hundred women sit in clustered computer stations, entering data from three hundred thousand ticket stubs for one airline’s two thousand daily flights. One floor below, an equal number of women work as “approvers” entering data from medical claims sent for processing by one of the largest insurance companies in the United States. This expanding company alone has close to one thousand workers, almost all of whom are women. As fingers fly, the frenetic clicking of keys filling the vast and chilly room where Walkman-clad women work eight-hour shifts at video display terminals, constantly monitored for productivity and accuracy, and typing to the latest dub, calypso, or “easy listening” music. The muffled clatter of keys creates a sort of white noise. Against the green glow of a sea of computer screens, it lends an Orwellian aura to this unusual workplace set in a nation better known as an upscale tourist destination. (pp. 1–2)

There is no question that the income earned by women will improve their level of living and that of their families. However, the extent to which their employment increases net foreign exchange earnings will depend on the impact of their incomes on the import of consumption goods. Nontraditional Exports and U.S. Policy The United States is a major player in the offshore assembly of nontraditional exports. U.S. trade policy promulgated under the Caribbean Basin Economic Recovery Act (CBERA), combined with the eagerness of Caribbean countries to create employment opportunities for their people and to diversify their economies, has encouraged the development of the offshore assembly industries that rely on a large share of U.S. content. These industries also include electronics and low-level information technology services. The U.S. content is as high as 91 percent in apparel (U.S. International Trade Commission, Publication 3102, 1998). If the 91 percent U.S. content is applied to Jamaica, then the net value of U.S. imports of textile and apparel from that country would be only 9 percent of

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25

the nominal value of US$472 million in 1997, representing roughly 0.8 percent of Jamaica’s GDP. To create this less than 1 percent contribution to GDP, the industry employed a little over 15,000 workers or 1.5 percent of the employed labor force. This would place the apparel industry in the first phase of the aforementioned growth curve for Jamaica. Furthermore, because of the large share of U.S. content, offshore assembly production offers little opportunity for backward linkage. Thus, although it increases the demand for labor, it does not increase the demand for domestic intermediate inputs and, therefore, does not encourage development in other sectors. The Competitiveness of the Offshore Assembly Industry Offshore assembly firms tend to be notoriously footloose because they have little sunk capital and are, therefore, able to move readily to other destinations where labor is cheaper and tax incentives and subsidies more attractive. In the short run, this footloose characteristic imposes an obligation on macroeconomic policy to keep wage rates low and often requires governments to reach negotiated agreements with labor unions. The long-run solution, however, lies in greater investment in education and training that will raise the quality of the workforce and move Caribbean countries up from the cheap labor offshore production phase of export development. Because the marketing of the finished product is done by the parent firm abroad, the offshore assembly industry does not require local people to have marketing skills. All that the local economy is required to supply, aside from tax incentives and subsidies, are utilities and cheap labor. The value added to the imported raw material is, therefore, largely the contribution of cheap labor. But labor is cheap only relative to labor in competing countries. The International Monetary Fund points out that the textile industry in Jamaica “typically ranked near the top compared to other countries in various components of the costs of production. . . . [O]f the ten countries studied, only Costa Rica and Columbia had higher total offshore assembly costs than Jamaica” (IMF 2000a, pp. 26–27). The IMF attributes this in part to high managerial costs and high interest rates. But an overvalued currency may have a part to play as well. These conditions have stimulated an exodus of apparel

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THE CARIBBEAN ECONOMY AND GLOBALIZATION

assembly firms to more attractive destinations in Mexico and Central America, thereby contributing to the decline in real output in the textile and apparel sub-sector in Jamaica. Indigenous Nontraditional Exports From a development perspective, the perfect nontraditional export is that which adds high value to indigenous raw materials. Rum is often cited as an example of such a product because all of its inputs are local. Although it has been a traditional domestic product, the opening of new markets for it abroad places it among the nontraditional exports. Furthermore, it is among the few Caribbean exports that have achieved world brand status. Examples are Appleton, Mount Gay, Captain Morgan, and Tia Maria. The production of nontraditional exports from indigenous material creates backward linkages and demands expertise ranging from growing the raw material to manufacturing the final product. Unlike offshore assembly operations, it requires people with managerial and marketing skills to identify and access niche markets abroad. Information is critical to the identification of niche markets. The cost of acquiring and interpreting information usually represents a large component of total cost. Export promotion agencies can help, but their role is often limited to advertising the attractiveness of investment opportunities rather than transmitting technical information to potential local exporters. A fundamental constraint facing these agencies is the lack of personnel sufficiently knowledgeable about new markets. Thomas Klak and Garth Myers (1998) in their analysis of Caribbean investment promotion point out that “much of the writing in the guidebooks adheres to a standard textbook outline of features known to be attractive to foreign industrialists: political stability, pro-investor policies, infrastructure, cheap and productive labor, incentives, and preferential market access. In general, context is highlighted only when it adds charm or additional opportunities for profit to the generic, proinvestor features” (pp. 91–92). In the countries of the Organization of Eastern Caribbean States (OECS), some attempt is being made to provide marketing information. Janice Piccinini (1998) reports that the Export Development and Agricultural Diversification Unit (EDADU) “incorporates

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27

into its marketing program the identification of markets for agroprocessed products once the processor demonstrates the ability to produce quality and quantity for the export market” (p. 16). But even when markets are identified, transportation remains a major obstacle. As Piccinini puts it, agro-processors are constrained not only by marketing experience but also by “lack of sea cargo transportation, and/or affordable air transportation” (p. 16). The cost and availability of transportation impose serious limitations on the export of perishable products. The challenge facing Caribbean exporters of indigenous nontraditional products, therefore, is to get the product to the market in order to exploit available niches. Many Caribbean countries rely on their large expatriate populations to create niche markets for food products. And because many of these countries depend heavily on tourism, niches are often created by introducing the product to the tourist in the hope of creating a demand for it later. But niches are never permanent because taste and preferences change over time and there is always the threat of competition. A small country must, therefore, maintain its competitiveness in order to sustain its niche. Marketing agencies must be on constant alert for new niches as old ones disappear. The prospect of niche hopping is in contrast to the virtually fixed markets for traditional exports. Financing Indigenous Nontraditional Exports Access to credit puts indigenous nontraditional exports at a disadvantage to exports based on U.S. content. The latter is typically financed by direct investment from abroad while the former must raise funds at home. Special government agencies have been set up to provide limited financing because access to commercial bank financing is negligible. From the small share of loans going to agriculture as a whole, it is reasonable to infer that the sub-sector of agriculture-based indigenous nontraditional exports gets little financing from commercial banks. The less than 1 percent received by textiles/footwear is to be expected since most of the financing comes from abroad. Even when domestic credit is available, it comes at a high cost. For example, over the period 1995–1999, the commercial bank lending rate in Jamaica averaged 48 percent (Bank of Jamaica, Statistical Digest).

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Export of Services Because of the limited potential of both indigenous and assemblytype nontraditional exports to accelerate economic growth, some Caribbean countries are turning their attention to telecommunications and information technology. The Dominican Republic has made the most progress in this area by privatizing the industry and attracting substantial foreign direct investment. Jamaica has also taken steps to develop an information-processing center in Montego Bay. But all is not well with this effort. Beverly Mullings, in her assessment of this effort, argues that “Unlike Barbados, where the image is one of an efficient service, the Jamaican industry is increasingly being viewed as one that is cheap but not efficient” (Klak, 1998, p. 151). Yet the production of services in these small countries has an important advantage over manufacturing. Efficiency in manufacturing firms is influenced by economies of scale. The larger the firm the lower its unit cost of production is likely to be. To be successful in international competition, the typical manufacturing firm must be big enough to enjoy at least some economies of scale. This is one reason why domestic manufacturing firms in the Caribbean have historically sought tariff protection against larger and more efficient competitors abroad. Efficiency in the production of services does not depend on size. A small firm can be as efficient as a large one. A small hotel can be just as efficient as a large hotel. And since the small firm requires a smaller amount of capital to get started, it also encourages participation of a larger number of entrepreneurs. This suggests that the production of services is particularly appropriate in small countries where capital is relatively scarce. There is, however, one relatively scarce factor that inhibits the growth of the production of high-value-added services—and that factor is human capital. Although the Caribbean, in comparison to developing countries elsewhere, has a high level of literacy, the supply of skills for the development of information technology services is limited. A World Bank report points out that “If secondary completion is used as a yardstick for assessing competitiveness of the labor force, based on household surveys, less than 20% boast this attainment, compared with 70% in the OECD countries, and over 60% in Singapore. An increase in the number of persons with

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29

secondary qualifications is clearly imperative” (World Bank, 1993, p. 4). It is important to point out that within the Caribbean there are variations in education attainment. For example, the secondary enrollment ratio in Jamaica is 66 percent compared to over 90 percent for Barbados. Perhaps this disparity underlies Beverly Mullings’ comparison of the performances of the information technology industry in the two countries cited earlier. The Impact of NAFTA on the Caribbean Basin Initiative The Caribbean Basin Economic Recovery Act of 1983, otherwise known as the Caribbean Basin Initiative (CBI), was a unilateral effort by the United States to stimulate U.S.-Caribbean trade and to encourage U.S. investment in the Caribbean. In 1993, NAFTA was created to expand the flow of trade among the United States, Canada, and Mexico. One of the industries directly affected was wearing apparel. A comparison of pre- and post-NAFTA economic performance of 11 Caribbean countries shows that of the two major wearing apparel producers—Jamaica and the Dominican Republic—Jamaica had a negative post-NAFTA growth rate (U.S. International Trade Commission, Publications 2541, 2853, and 3102). Although a number of factors may have contributed to this, it is useful to examine what role NAFTA may have played. NAFTA placed Jamaica’s apparel exports to the United States in direct competition with apparel from Mexico. This resulted in trade diversion. In the post-NAFTA period between 1995 and 1997, there was a dramatic decline in the principal SITC categories of wearing apparel, mirrored by a sharp increase in their imports from Mexico.1 The price advantage that NAFTA provides Mexico, as reflected in the price per square meter equivalent of U.S. apparel imports, was lower in all categories for Mexico in 1997. While the tariff reduction is a major factor here, the differential behavior of Mexican and Jamaican exchange rates also contributed to Mexico’s price advantage. There was a sharp depreciation of the peso in December 1994 from 3.1 to 7.8 to the U.S. dollar, while throughout the three post-NAFTA years the value of the Jamaican dollar remained relatively stable. Trade diversion was also aided by lower

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labor and transportation costs that made investment in Mexico more profitable. As is expected in an extremely trade-dependent economy, an estimate of the impact of exports on Jamaica’s real GDP over the period 1976 to 1996 confirms a positive and significant relationship.2 A US$1.00 change in exports changed GDP by US$4.00. In the post-NAFTA period from 1994 to 1996, the U.S. dollar value (in 1990 prices) of GDP fell from 953 million to 868 million, while exports fell from 351.2 million to 202 million respectively. To the extent that NAFTA diverted a significant share of U.S. apparel trade from Jamaica to Mexico, it had a negative impact on Jamaica’s economic growth. Assessment It is clear that nontraditional exports are driven by the offshore wearing apparel industry. In a region jealous of its sovereignty, the offshore assembly is where globalization trumps national sovereignty by providing employment, especially for women. When this is coupled with the traditional practice of pegging the local currency to the U.S. dollar, the destiny of the region becomes even more closely tied to the economic fortunes of America. The Caribbean Basin Trade Partnership Act of 2000 widened the access of Caribbean apparel to the U.S. market and provided NAFTA-equivalent tariff treatment for certain items previously excluded from duty-free treatment under the CBI program. But in order for economic development in the Caribbean to benefit fully from this wider market access, Caribbean countries must improve the productivity of their workforce and encourage the development of nontraditional exports that draw on indigenous resources. U.S. economic policy toward the region should encourage the flow of investment not only into offshore operations but into education and indigenous nontraditional exports as well.

Chapter 4

The Service Economy

In the area of Expanding Economic Opportunities, there is now a much better understanding and appreciation by the USA on the urgency of the steps that are required to expand the economic opportunities for the Caribbean people. There is also much better understanding and appreciation of the efforts being made on the part of the Caribbean to expand the service sector, in particular the international financial service sector as a prerequisite for economic diversification and enhanced competitiveness. Excerpt from closing remarks by the Honorable Dr. Denzil Douglas, prime minister of St. Kitts and Nevis at the “Conference on the Caribbean: A 2020 Vision,” Washington DC, June 21, 2007.

T

he erosion of preferential treatment for traditional exports and the anemic performance of nontraditional exports suggest that the road to the future goes through tourism and financial services. The smaller Caribbean economies, having abandoned their agriculture and having failed at nontraditional manufacturing, are gravitating toward information technology and financial services as the hope of the future. This chapter focuses on certain features of the Caribbean service economy as conduits through which globalization is channeled. In the national accounts, when agriculture, mining, and manufacturing are excluded, the rest of the GDP consists of services. In Jamaica, this means that 75 percent of the GDP is made up of services and that in the smaller islands of Antigua and Barbuda

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and St. Kitts and Nevis the share is in excess of 80 percent. This means that the impact of globalization is more likely to be channeled through services than through the other sectors. The leading contributors to the service sector are Government, wholesale and retail, finance and insurance, and communication and transportation. In most of these economies, tourism is the major industry, although in the national accounts its contribution is only partially reflected under miscellaneous services as hotels, restaurants, and clubs. However, in the balance of payments, receipts from tourism are recorded as travel and they account for the major share of service exports. A full discussion of tourism is in chapter 5. Table 4.1 shows the ratio of service exports to merchandise exports, which is another indicator of the relative importance of services in the CARICOM economies. The four countries that show consistently high ratios are Antigua and Barbuda, The Bahamas, Barbados, and Grenada. In 2004, despite a decline in St. Kitts and Nevis and St. Lucia, all the Eastern Caribbean islands had high ratios, reflecting the decline in agricultural exports. Belize, Guyana, Suriname, and Trinidad and Tobago had extremely low ratios, reflecting the dominance of mineral and sugar exports. Table 4.1 The Ratio of Service Exports to Merchandise Exports, 1992 and 2004 Countries

1992 %

2004 %

Antigua and Barbuda The Bahamas Barbados Belize Dominica Grenada Guyana Jamaica St. Kitts and Nevis St. Lucia St. Vincent & The Grenadines Suriname Trinidad & Tobago

527 641 326 101 81 325 27 98 239 153 75 6 74

1619 431 369 35 148 353 7 92 187 75 274 0.3 8

Source: International Monetary Fund, Balance of Payments Yearbook 2000; Caricomstats.org

THE SERVICE ECONOMY

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Offshore Banking Against the background of declining traditional exports, the financial services sector is being promoted as an engine of growth. To be an engine of growth, OFCs (offshore financial centers) must increase employment, tax revenues, and export earnings. Offshore banking is an important component of the financial services sector. An International Monetary Fund study defines it as “the crossborder intermediation of funds and provision of services by banks residing in OFCs to nonresidents” (Errico and Musalem, 1999). The British dependencies of Cayman Islands, British Virgin Islands, and Turks and Caicos Islands, with a combined land area of 850 square kilometers and a population of 83,000, are the leaders in Caribbean offshore banking. The Cayman Islands host hundreds of offshore banks with assets in excess of US$600 billion. The growth of offshore banking is a post–World War II phenomenon. According Michael Hudson (2003), in the 1960s, American banks were encouraged to set up offshore banks to capture the Eurodollars sloshing around in Europe. When the U.S. balance of payments ran a deficit during the Vietnam War, “U.S. officials sought to attract foreign exchange in any way they could, but their options were limited. One great possibility remained: attract foreign flight capital . . . Therefore, what U.S. geopolitical strategists were willing to accept were foreign bank deposits, regardless of where they came from” (www.counterpunch.org/ schaefer03252004.html). At their core, offshore banking centers are centers of tax avoidance. They operate as a net to capture flight capital escaping high tax liability in the countries of origin. Hence the watchwords are privacy and confidentiality. These surreptitious accounts, according to Hudson, “get lost in the IMF’s ‘errors and omissions’ line.” Since their reason for being is to allow foreign depositors to avoid taxation in their own countries, offshore banking centers often attract deposits gained from criminal activity, despite declared vigilance in bank supervision. The United States and the United Kingdom accused the offshore banking center in Antigua and Barbuda of money laundering, forcing the Organization of Eastern Caribbean States to tighten up its regulatory procedure by amending its International Business Corporation Act in 1998.

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Offshore banking centers operate on the premise that it is the responsibility of foreign depositors to pay taxes in their home countries and not the responsibility of the centers. Therefore, it is perfectly legitimate to accept their deposits, providing that they are not the result of criminal activity. But it is hard to ignore the fact that the very existence of these centers encourages tax avoidance. No matter how vigilant the supervisory authority in the host countries may be, it may not always be able to determine whether the sources of the offshore deposits are legitimate. Things get complicated when the source is a fraudulent transfer pricing scheme in which a company overprices its export of crude material to a foreign buyer and arranges to receive actual payment at a much lower price with the difference deposited in an offshore bank. The effect is to deprive the exporting country of tax revenues. Russian oligarchs are reported to have used a similar scheme to amass a great deal of offshore wealth in a short time. The money deposited in Caribbean offshore banks is not available for investment in these small countries. The money is simply being warehoused. In most cases, the banks are not really brick and mortar banks but a mail box or a brass plate with a bank name on it. The host country of these offshore entities benefits from the fees and taxes collected, wages paid to employees, and other local operating expenses. According to Anandya Bhattacharya, “the average annual wages of a bookkeeper in the Bahamas are a meager $6,000 and the annual fee for an offshore banking (Category B) license in the Cayman Islands is only $6,098. The total cost of operating a branch in these islands is much lower than in the primary centers of Eurocurrency operations” (Bhattacharya, 1980, p. 41). Often there are no taxes at all except those imposed on the wages of the local employees. The benefits in fees, taxes, and wages that accrue to countries with offshore banking centers cost the foreign countries precious tax revenues. Hudson sees the loss of tax revenues in these countries as forcing “individual tax payers to bear the fiscal burden through wage withholding for Social Security, Medicare and pension-fund contributions. Consumers also bear a rising burden through the sales tax and other local taxes” (www.counterpunch. org/schaefer03252004.html).

Table 4.2

The Offshore Financial Services Sector in Selected Caribbean Countries

Country/Jurisdiction

Anguilla Antigua & Barbuda Aruba The Bahamas Barbados Belize Bermuda British V.I. Cayman Islands Dominica Grenada Montserrat Netherlands Antilles Panama St. Kitts & Nevis St. Lucia St. Vincent & Grenadines Turks & Caicos * International Business Companies n.a.: not available Source: International Monetary Fund

Contrib. to GDP (%)

IBCs*

Banks

Insurance Companies

Mutual Funds

Trust Companies

Company Service Providers

n.a. n.a. n.a. n.a. 7 n.a. 27 40 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

3,000 8,000 5,000 47,000 4,000 15,000 12,000 350,000 45,000 8,000 3,000 50 20,000 n.a. 23,000 n.a. 10,000 16,000

7 22 7 212 63 9 4 11 427 5 15 13 45 80 1 1 20 8

20 0 29 n.a. 199 18 1,650 293 542 2 6 2 48 24 0 0 1 2,572

n.a. 0 0 706 10 n.a. 1,590 2,606 3,648 0 0 0 600 n.a. 0 0 4 10

12 n.a. 0 107 8 n.a. 29 188 346 5 11 n.a. n.a. 46 n.a. n.a. n.a. n.a.

29 6 16 165 30 40 n.a. 89 n.a. 22 11 n.a. 190 n.a. 46 10 33 35

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Because a relatively few skilled workers can handle a large volume of assets, the offshore banking sector is not a large employment generator. As a result its economic impact is greatest in small economies with small populations. Because of the secretive nature of offshore banking, data are not available regarding its economic impact. However, table 4.2 shows that the contribution of offshore financial services to GDP in Bermuda and the British Virgin Islands is quite large, 27 percent and 40 percent respectively. Not shown in this table is the even larger contribution of offshore financial services of other British dependencies in Europe: Gibraltar, Guernsey, Isle of Man, and Jersey. Some of the characteristics of offshore banking centers may also be found in the tourist industry, to the extent that many hotels in the Caribbean are foreign-owned and serve almost exclusively a nonresident population (See chapter 5). If industries with offshore characteristics were eliminated, many Caribbean economies would shrink considerably. Where there is a symbiotic relationship between the offshore and indigenous industries, success of the former usually drives activity in the latter. Information and Communications Technology (ICT) An adequate ICT infrastructure is a prerequisite for successful offshore economic activity, but it also facilitates the production and delivery of goods and services in the domestic economy. Natasha Ward (2002) sees development in the telecommunications industry as essential for the transition of the Caribbean into high valueadded production. This development will require the evolution of the industry from its traditional monopolistic ownership structure to one that is competitive. Allister Mounsey (2002) believes that the Internet has created new possibilities for the Caribbean to benefit from globalization. But in order for the region to exploit this technology successfully, it must deal with impediments from the old economy such as: retention of skilled personnel; the relatively high cost of factors of production versus the productivity of those factors; high taxation; and administrative and bureaucratic impediments to business development

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Air Transportation Air transportation is the life blood of Caribbean tourism but the economics of air transportation have not been favorable to the profitability of Caribbean-owned and -operated air carriers. They operate on the premise that the losses they incur will somehow be offset by the gains from the tourist industry they support. From the perspective of the efficient allocation of national resources, greater reliance ought to be placed on foreign airlines. But pride in flying the national flag trumps efficiency in resource allocation. Yet, flying one’s own national airlines offers no more guarantee to the uninterrupted flow of tourists than foreign airlines when major travel disruptions occur, such as the September 11, 2001 terrorist attacks on New York and Washington that closed American airspace. As Palmer (2004) described it, “September 11 was a disturbance of major proportions. It sharply interrupted the flow of tourists from North America and Europe—the major sources of Caribbean tourists. It triggered wholesale cancellations of tourist bookings which led to a sharp reduction in available seat miles flown by three major American airlines: American Airlines, Delta Airlines, and Continental Airlines” (p. 338). Caribbean tourism came to a halt. The impact of September 11 continues to be felt by the government-owned Air Jamaica, the largest Caribbean airline with 15 aircrafts and 3000 employees. It carries 55 percent of all passengers to Jamaica. High fuel cost and a rising wage bill have forced the airline to reduce its workforce and the number of flights and to sell its slots at London Heathrow Airport to Virgin Atlantic. Some of the reduction in workforce includes pilots who have been earning an average annual salary of $200,000, among the highest in the industry. In short, the recent history of the airline has been characterized by a moving away from government to private ownership and then back to government again. It started in 1969 under government ownership, and in 1993 the government sold a majority of the shares to Air Jamaica Acquisitions Group led by hotel magnate Gordon “Butch” Stewart. In 2004, the government took over the airline, which by then had lost US$682 million and incurred a debt of almost US$600 million, US$236 million of which was owed to the government. According to Omar Davies (2004), the then

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minister of finance, “Air Jamaica will be restructured and we will sell it as soon as it is possible to do so” (http://news.airwise.com/ stories/2004/12/1103829568.html). The new Jamaica Labor Party government that took power in 2007 is expected to take a serious look at the condition of the airline and propose action to stop the hemorrhaging of the country’s resources. British West Indian Airways, once the largest Caribbean airline, went out of business in December 2006 after operating for 60 years. Based in Port of Spain, Trinidad and Tobago, it carried 1.4 million passengers every year to Caribbean and international destinations on 70 daily flights. But it was not profitable; it needed continuous injection of funds from the Government of Trinidad and Tobago, which owned 75 percent of the stock. In 1995, the airline was privatized and a majority of the common stock was turned over to a private group of U.S. and Caribbean investors. According to Baptiste (1998), In 1995 the Government of Trinidad and Tobago virtually delivered BWIA to a U.S. private group known as the Acker Group in a domestically-controversial “privatization.” Why controversial? C Edward Acker, one of the chief American negotiators of the “privatization” on behalf of U.S. interests such as Acker’s own Atlantic Coast Airline, and the first Chief Executive Officer of the new BWIA, Arcadian Partners, had a history of stripping airlines such as PAA [Pan American Airlines]. Faced with adverse public opinion in Trinidad and Tobago, the government, while taking a minority share portfolio of 34.5 percent in the new Acker Group BWIA, negotiated what is called a “Golden Share” veto power over certain eventualities. (p. 27)

In 2007, it ended operations and was replaced by a new carrier: Caribbean Airlines. Intra-Caribbean air transportation in the Leeward Islands is provided by LIAT (Leeward Islands Air Transport); this has not been a profitable operation and is now badly in need of an infusion of capital to modernize its operations and to improve its punctuality. The lesson from the experience of these airlines is that privatization has not been successful because of the large losses incurred and the constant need for an infusion of capital. This has led to the

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view that air transportation, especially intra-Caribbean air transportation, is a public utility and should be subsidized by governments. The geography of the region requires air transportation to facilitate the movement of people and goods among the islands. It also requires that people have confidence that such sustainability of service is possible only through subsidy. This view is also fearful of total dependence on extra-regional carriers on the grounds that they may abandon a route if it ceases to be profitable. The justification for subsidy is also fed by the economic situation in the worldwide airline industry. Since deregulation of the industry in the 1980s, competition has intensified. This, coupled with the rising price of oil, has driven many large American carriers into bankruptcy, some returning only after radical debt restructuring. Against this background, the losses of Caribbean-owned air carriers do not appear exceptional. The fact, however, is that the cost to the Caribbean is higher because of the small size of the economies. If air transportation provides the link that facilitates the integration of the Caribbean Single Market and Economy, then it would assume a role akin to that played by railroads in uniting continental America in the nineteenth century. Maritime Transportation Just as air transportation is the life blood of the tourist industry, maritime transportation is the life blood of international trade for these extremely foreign trade–dependent economies. With the rise in the popularity of cruise tourism, maritime transportation has also become crucial to the growth of Caribbean tourism. Since 1980, the ratio of cruise passengers to total tourist arrivals in the Caribbean grew from 1:1.8 to 1:1.1. In 2005, there were over 22 million stay-over visitors compared to19 million cruise passengers. Despite the rise of cruise tourism, 90 percent of tourist spending is done by those who arrive by air.1 Caribbean importers face a higher per unit freight cost than their U.S. counterparts because the U.S. imports from the Caribbean are mostly primary goods while the Caribbean imports from the United States are mostly manufactured goods. Manufactured goods have

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more value per ton and, therefore, cost more to ship than primary goods, which are normally shipped in bulk. Other factors such as the use of smaller ships, multiple port calls for a limited amount of cargo, little or no competition in shipping services, and the high percentage of returning empty containers contribute to higher freight costs (Palmer, 2004). They also contribute to the disparity in the relative freight and insurance costs as illustrated by Jamaican imports from the United States and U.S. imports from Jamaica.2 The freight and insurance charge on U.S. imports is 3.78 percent compared to the 16.3 percent for Jamaican imports. When trade between the two countries is done in U.S. ships, the payments for freight on Jamaican imports flow to the United States. Thus U.S. export of goods to Jamaica is accompanied by the export of shipping services. When the United States imports goods from Jamaica in its own ships, there is no corresponding flow of payment for freight to Jamaica; those payments flow to the United States. In both cases the U.S. benefits. According to International Monetary Fund balance of payments data for the period 1992 to 1999, sea freight averaged 11.2 percent and 15.1 percent of the imports (f.o.b.) for Barbados and Jamaica respectively (International Monetary Fund, 2000a).

Chapter 5

The Caribbean Tourist Industry

T

ourism is the most important industry in the Caribbean. In Antigua and Barbuda, for example, where services account for over 80 percent of GDP, travel receipts represented 69 percent of services in 2005. The data in table 5.1 underscore the pervasive influence of tourism throughout the Caribbean. Tourism transmits its impact on the local economy through wages paid to labor, expenditures on goods and services bought from local producers, and taxes.1 The more integrated the industry is with the local economy, the greater is its impact on agricultural and manufacturing activity. Reality, however, indicates that although some backward linkages to local suppliers have been created, they channel only a limited share of the total supply of goods bought by the tourist industry. The tourist industry has a high propensity to import the products it uses. As a result, the leakage of foreign exchange through imports, combined with the outflow of profits, reduces the domestic impact of investment in the industry. Private foreign investment in the tourist industry often requires complementary public investment in infrastructure such as port facilities, roads, and communication systems. The rationale for this investment is that the businesses benefiting from this infrastructure will generate tax revenues over time to cover the cost of the investment and to finance other public sector activities. But when tax concessions to private investment reduce the flow of tax revenues from profits, the tax burden inevitably tends to fall on wage income, further widening the gap between wage income and profits.

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Table 5.1 Travel as a Percentage of Total Receipts from Services, 2000, 2005

The Bahamas Barbados Guyana Jamaica Suriname Trinidad & Tobago Belize Antigua & Barbuda Dominica Grenada Montserrat St. Kitts & Nevis St. Lucia St. Vincent & the Grenadines Average

2000

2005

88.1 66.3 44.4 65.8 17.4 38.4 73.5 69.9 53.7 60.5 55.6 59.3 86.5 64.5 58.8

83.2 61.5 23.9 66.3 — 50.5 70.9 68.6 66.7 61.2 60.8 74.6 86.8 66.2 64.7

Source: Calculated from Caricomstats.org

Caribbean governments seem to embrace the circuitous logic that by taxing wage income more heavily than profits they will ensure a high rate of return on foreign investment, a return that will encourage future capital inflows. By this logic, growth is seen to rely not so much on the reinvestment of profits by existing investors as on new capital from new investors. This poses a perpetual challenge to the government agencies that promote foreign investment. The Supply and Demand of Tourist Services The central unit of production in the tourist industry is the hotel. It is the hub that is connected to an array of activities such as labor, transportation, and supplies that sustain it. The hotel is the chief generator of foreign exchange and, therefore, its ability to attract paying customers is far more crucial to the success of the industry than is cruise tourism. The hotel takes many forms and produces differentiated products ranging from small bed-and-breakfast operations to full-service, all-inclusive establishments. In this labor-intensive service industry, efficiency may not necessarily depend on size since a small hotel can operate just as efficiently as a large one by personalizing its service. The large hotel, however, does have certain cost advantages arising from the quantity of supplies that it buys.

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While the demand for tourism is influenced by the growth of disposable income in source countries, the direction of that demand is influenced by the content of the tourist destination. In the Caribbean, this content includes a sunny and warm climate, and beautiful beaches and scenery. The supply of these natural resources is fixed. Investment in tourism makes these endowments accessible to the tourist at a price and allows the host country to extract economic rent. The price the tourist pays will have no effect of the supply of these endowments; it simply rations access to them. Since the supply of tourist endowments is fixed, a legitimate question that countries must ask themselves is this: will an ever expanding demand for access to these endowments cause them to become polluted and, therefore, to deteriorate? Because they are national assets, their deterioration over time will reduce the wealth of the nation. The issue of resource depletion and its place in the public sector balance sheet is highlighted by Bob Traa and Alina Carare (2007), using the analogy of oil reserves: “For some countries, oil reserves are the most important asset on the public sector balance sheet, and they feel well-off if they can sell the oil for use in (current) spending. But from a balance sheet perspective, the country is using a non-renewable resource and consuming its assets. The sovereign’s net worth is declining” (p. 47). Although service industries are generally considered to be environmentally clean, the environmental impact of the tourist industry can affect the extent of its development impact. Depletion of the beach as a resource by effluents pumped into the sea is always a threat. A World Bank study cites the example of Negril, Jamaica, in the 1980s, “where disposal of waste and untreated wastewater and sewage into the sea severely curtailed diving, leading to a substantial reduction in visitors” (Dixon et al., 2001, p. 9). Rising ocean levels due to global warming is also a potential threat. The protection of these assets is of paramount importance to the future survival of the industry. Although small Caribbean countries can do little about global warming, they can do much about maintaining the environmental integrity of their tourist assets. The World Bank takes the view that this effort requires shared responsibility: “All parties involved—the countries, the tourism industry, and the visitors themselves—have both a vested interest in the management of the environmental resource base and an obligation to do their part to support this management” (Dixon et al., 2001, p. 3).

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Hurricanes are a perennial threat to the tourist environment, and if the projections of the climatologists are correct, global warming will make these hurricanes stronger and more frequent. It will also raise sea level and inundate some of the treasured beach assets. Although this scenario may be exaggerated, planning for the integrity of the environment has acquired a heightened level of importance. This includes strict monitoring of land use and pollution. Countries seeking to diversify away from tourism must now weigh the environmental costs and benefits of new industries. Negative Externalities Some observers are concerned about a raft of other negative externalities generated by the tourist industry. Apostolopoulos and Sãnmez (2002), for example, see the Caribbean tourist industry “as a major threat to the region’s socioeconomic and public health sustainability. These include spatial and socioeconomic polarization, uneven development, ecological degradation, domination of regional political economies, management repatriation, rising alienation among locals, and structural under-development” (p. 1). Although these are legitimate concerns, they cannot all be attributed to the tourist industry. Socioeconomic polarization and uneven development in the Caribbean have their roots in the region’s long history of slavery and colonialism. Furthermore, the unevenness of development also reflects differences in natural endowments. Apostolopoulos and Sãnmez paint a stark picture of the health implications of global tourism: “The global leisure revolution, ongoing improvements in transport media, and movement between diverse climate zones (exemplified by global warming and climate change) have exacerbated the vulnerability of travelers to infectious diseases. Beyond the illnesses induced by travel itself, the exposure to unfamiliar infectious agents and demonstration of risky behaviors heightened by the vacation setting and culture, have the potential to cause enormous strains on the parties involved” (p. 2). This gloomy assessment is joined by a Congressional Research Service Report (2006) that links tourism to the rise in HIV infection rates in some Caribbean countries. According to the report, “Officials in Trinidad and Tobago have expressed concern about the growth of

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sex tourism, the so-called ‘beach bum’ phenomenon, and the link to the spread of AIDS. In Jamaica, the resort town of Montego Bay has the highest HIV infection rates in the country. In the Dominican Republic, AIDS activists are concerned about child prostitution in resort areas and the spread of HIV” (p. 18). Yet many tourists travel to improve their health in countries such as Costa Rica and Mexico where medical tourism is a thriving business and in parts of the Caribbean where wellness centers are emerging. While no government policy can eliminate the health risks associated with travel, vigilance can go a long way to reduce them. Ownership One enduring feature of the Caribbean tourism industry is the expatriate character of its ownership.2 This naturally follows from the dependence of the industry on foreign capital. In the 1970s, when a new international economic order was in vogue, leftist academics were fond of attacking the industry as a symbol of economic colonialism. Although, generally speaking, neoliberal economic thinking has won the day, there is still an undertone of concern about the expatriate character of ownership. The Small Islands Voice Global Forum (SIVGF) offers this view of the Dominican Republic: Most of the hotel chains are foreign-owned, and they are the ones who generate almost all the money. Local chains usually go bankrupt when they face foreign competition or, if not, they are eventually bought by foreign competition. It is true that foreign investment is positive because it allows the entry of foreign currency, it modernizes infrastructure and it generates a lot of work. However, the jobs set aside for the local population are mainly minimum wage positions, whilst the foreign personnel is awarded the better positions and wages. If we think about it foreign companies only see us as a country of opportunities. They exploit our tourism areas and obtain very cheap labor. (http://www.sivglobal.org)

Beyond the expatriate character of ownership is the racial and ethnic concentration of ownership. Caribbean capitalism is characterized by the dominance of minority ethnic groups in business. This is ostensibly due to their greater access to capital and willingness to take risk. SIVGF sees the racial divide in the ownership of

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Caribbean tourism as “a problem that dare not speak its name. It creates discomfort among many of the expatriate hotel owners and managers, and governments are fearful of dealing with it” (www. sivglobal.org). It suggests pessimistically that the problem of the racial divide between ownership and management on the one hand and workers on the other is likely to worsen if it is not addressed now, because new WTO rules will make it easier for developed countries to invest in the Caribbean tourist industry. This view sees the industry as turning into a case not unlike the old sugar plantations. In the same vein, Fitzroy A. Baptiste (1998) speaks of employment stratification of the Caribbean tourism industry that mirrors the race/color of the slave plantation: “The ‘new slaves’ include the nattily-dressed, poorly-paid, and mainly black waiters, waitresses, taxi drivers and security guards. The beaches of the Caribbean are filled with macho, black ‘beach bums’ who are ready to commoditize sex to white female tourists. They and others are also ready to commoditize other highs such as marijuana and cocaine” (p. 29). Norman Girvan (2002) has addressed an even more fundamental divide, especially as it relates to Jamaica: “On the one side there is the parasitic ruling class depending on policies of structural adjustment and liberalization. This class was consolidated out of the remnants of the old plantation-mercantile system in Jamaica together with a new brown and black bourgeoisie emerging out financial liberalization and privatization. On the other hand there is the majority black population experiencing varying degrees of social and economic exclusion” (p. 22). Back in the 1970s, a similar discussion was triggered by a report on foreign investment in Barbados by Paul Chen-Young (1973). It claimed that Black Barbadians were indifferent about whether enterprises were foreign or locally owned and attributed this indifference to the conservative and cautious nature of the Barbadian. In a follow-up survey, Ronald G. Parris (1975) reported that “a positive attitude toward the unlimited admission of foreign capital is held by a greater proportion of white businessmen than non-white businessmen in Barbados (p. 101). But Henke and Marshall (2003) are not hopeful about “the low-risk predilections of the wealthy, plantermerchant elite” in Barbados. They contend that this elite group’s “conscious ‘opt out’ strategy on the question of manufacturing diversity3 has made for a quite conservative enterprise culture indeed.” Further, they argue that “merchant capitalist societies like Barbados

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and others in the Eastern Caribbean, insufficiently display the sociocultural attributes required for the creation of high-level services: innovation-mediated risk research and development competencies, and affinities to industrial processes and networks” (p. 149). Tourism as a Maturing Industry The Caribbean tourist industry is maturing and is now facing increasing competition from other destinations offering different types of tourism experience. Improvements in air and sea transportation technology have brought many more exotic destinations within reach at reduced cost, with many of these destinations offering packages that appeal not only to the tourists’ desire for sun and sand but also to their intellectual and cultural curiosity. What tourism as a maturing industry has contributed to growth has been steadily declining as the industry’s ability to attract new capital has become weaker due to narrowing profit margins. Between 1980 and 2004, the number of rooms in tourist accommodations in the Commonwealth Caribbean grew at an average rate of 2.7 percent, but the growth rate over the last five years of that period declined to a mere 0.4 percent (Caribbean Tourist Organization, 2004). The benefits from past innovations in the industry, such as all-inclusive hotels, are dissipating and a new wave of innovation is required to put the industry on a higher growth trajectory. According to data from the Caribbean Tourist Organization, US$21.6 billion was spent by tourists in all of the Caribbean in 2004.4 Much of this spending occurred through travel agents and airlines reservation agents before the tourist arrived at their destinations. Competitiveness Of the 124 countries listed in the 2007 Travel and Tourism Competitiveness Index published by the World Economic Forum (2007), the ranks for the CARICOM countries listed range from 29 for Barbados to 108 for Suriname. Jamaica is ranked at 48 (table A.1). The rankings for Barbados and Jamaica are explained as follows: Barbados is ranked 2nd overall in national tourism perception, with a positive attitude toward tourists and toward the value of tourism in the country [table A.2]. The government is prioritizing the sector to

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a very high degree (ranked 2nd), spending a high percentage of GDP on the sector and ensuring quality destination-marketing campaigns. Further, the country has a regulatory environment that is quite conducive to the development of the sector, with low visa requirements and very open bi-lateral Air Service Agreements. Jamaica’s government is assessed as prioritizing the sector significantly (ranked 10th) [table A.3], spending a large percentage of the government budget on the sector (almost 17 percent, ranked 2nd) and ensuring effective destination-marketing campaigns. In this context, it is perhaps not surprising that Jamaica gets good marks for its policy environment, ranked 3rd—just after Singapore and Hong Kong—with low visa requirements , very open bilateral Air Service Agreements, and low foreign ownership restrictions [table A.3]. Air transport infrastructure is also quite developed given the country’s stage of development, and although the country has quite a few hotel rooms, other aspects of tourism infrastructure—such as the availability ATMs and the presence of major car rental companies— are weaker. Health and hygiene issues are also an area of concern (ranked 67th), with very low physician density in the country. Of even greater concern is the safety and security concern in Jamaica, ranked a very low 111th overall, just behind Uganda and Peru, with high levels of crime and violence and a police force that is not relied upon to protect from crime. Clearly the safety issue is hindering its overall T&T competitiveness (p. 20).

Impact of U.S. Economy on Caribbean Tourism Changes in U.S. economic performance will have a direct impact on tourist arrivals in Jamaica for the simple reason that 75 percent of Jamaica’s stay-over tourists come from the United States. Two regressions were run using data from the U.S. Department of Commerce and CARICOM Statistics to estimate this response of stay-over tourist arrivals (SOTA) and cruise ship arrivals (CTA) to changes in USGDP. All the variables were converted to indices with 2000 as the base year. The results are as follows: CTA 5 271.60 1 1.714 USGDP (24.47) (9.79) R 2 5 0.86 SOTA 5 20.147 1 0.975 USGDP (20.14) (26.65) R 2 5 0.97 t values are in parentheses.

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Both types of tourism are strongly explained by changes in USGDP. But because cruise tourism has grown faster than stayover tourism, its response to USGDP has been larger: a 1 percent change in USGDP has increased cruise arrivals by 1.71 percent compared to 0.97 for stay-over tourists. However, a larger share of the variation in SOTA was explained by USGDP. Each stayover tourist from the United States stays an average of 7.7 days and spends US$951 compared to US$83 for each cruise ship tourist. As a result, despite its faster growth, cruise ship tourism has a smaller impact on the Jamaican economy. The average daily spending of all stay-over tourists for Barbados and Jamaica in 2002 was US$135.5 million and US$91.7 million respectively, with accommodations accounting for roughly 60 percent (Caribbean Tourist Organization, annual report, 2004). The gap between average spending by the stay-over tourist and the cruise ship tourist may be narrower than it first appears. In Jamaica it has been 12 to 1. Two considerations may cause this gap to narrow. One is the extent of leakage from spending by the stayover tourist. For the Caribbean, UNEP5 estimates a leakage of 80 percent, defined as taxes, profits, and wages paid outside the country and the purchase of imported goods for tourists. If we assume that there is little or no leakage from spending by the cruise ship tourist, then the gap in average net spending is reduced to 2.4 to 1. The other consideration looks at the gap from the Caribbean perspective rather than from the perspective of the individual country. Spending by the stay-over tourist is confined to a particular destination. But what if the cruise takes the tourist to other, say four, destinations? If we assume that the cruise ship tourist spends the same amount in each destination, then for the Caribbean as a whole the spending gap between the two types of tourists becomes 0.6 to 1. Thus, from a Caribbean perspective, the cruise ship tourist has a bigger impact than the stay-over tourist in any one country. It follows, therefore, that while individual countries have an incentive to promote stay-over tourism, the Caribbean as a whole has an incentive to promote cruise ship tourism. Individual countries also have an incentive to reduce the leakage from tourist spending since this would expand the beneficial impact of the industry on the local economy. But globalization makes it difficult to achieve. The thrust of globalization is trade

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liberalization, which, for the Caribbean, means the elimination of special preferential treatment for its agricultural exports. Because the scale of agriculture in most Caribbean countries is small, the removal of special treatment for their exports puts them at a competitive disadvantage and stifles attempts to diversify into other areas such as poultry. Hotels seeking a reliable supply of highquality and competitively priced food products to satisfy the taste of their tourists from developed countries easily turn to foreign suppliers. Further, many of the tourist-dependent countries of the Caribbean have abandoned agriculture, making it necessary for the industry to import food. In some cases, the foreign multinationals that own the hotels may also have financial interests in the foreign firms that supply food and equipment. Conclusions The dominance of the tourist industry in the Caribbean is accompanied by a large permanent leakage from the spending of stay-over tourists. A major part of this leakage is represented by imports and the outflow of profits. The freedom of foreign investors to repatriate profits is a prerequisite for investment in an industry dependent on foreign capital that typically flows in with concessions that considerably reduce and sometimes eliminate taxes on profits. From this perspective, foreign investors in the Caribbean tourist industry and their foreign suppliers of food, equipment, and services appear to benefit far more than the local economy. The major benefits for the local economy derive from the wage income generated by direct and indirect employment of the local workforce and the taxes paid by the industry. Given the concessions to capital, it is not surprising that in many Caribbean countries the tax burden has shifted away from direct taxes on property and income to indirect taxes on goods and services. Evidence of this shift is found in Barbados (Palmer, 1993), a shift that indirectly places a greater tax burden on wage income.

Chapter 6

Migration

The Caribbean person is truly the first transnational figure who has emerged from colonial peoples. Their achievements have been immense to their host countries and their homeland rocks to which they are inextricably bound. Excerpt from an address at the “Conference on the Caribbean: A 2020 Vision,” in Washington DC, June 19, 2007, by the Honorable Dr. Ralph E. Gonsalves, prime minister of St. Vincent and the Grenadines and chairman of the Caribbean Community (CARICOM).

M

igration is an integral feature of the economy and culture of the Caribbean. One of the favorite pastimes of Caribbean people is to wave goodbye to their friends and relatives at the airport. In recent times, new airport architecture and security concerns have put a crimp on this practice. But the flow of emigrants continues as both an effect as well as a cause of the evolution of the Caribbean economy. In the contemporary Caribbean setting, migration represents a loss of skills as well as a future source of foreign exchange. Since 1965, the principal destination of the emigrants has been the United States. Table 6.1 shows the number of immigrants admitted to the United States for the periods 1991–2000 and 2005. There is also a steady flow of English- and French-speaking Caribbean immigrants to Canada and Dutch-speaking Surinamese to Holland. Table 6.2 shows migration to Canada from the leading Caribbean source countries.

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Table 6.1 CARICOM Immigrants Admitted into the United States by Country of Birth, 1991–2000 and 2005 Countries Anguilla Antigua & Barbuda The Bahamas Barbados Dominica Grenada Haiti Jamaica Montserrat St. Kitts & Nevis St. Lucia St. Vincent & the Grenadines Trinidad & Tobago Belize Guyana Suriname

1991–2000

2005

308 4,908 6,737 9,452 5,533 7,343 181,698 173,413 912 4,831 5,656 5,564 63,180 9,120 73,849 1,972

35 440 698 846 198 840 14,529 18,346 50 342 832 625 6,568 876 9,318 300

Source: U.S. Bureau of the Census

Table 6.2 Permanent Residents in Canada from Top Caribbean Source Countries, 1997–2006 Countries

1997 1998

1999 2000 2001 2002 2003 2004 2005 2006

Jamaica Haiti Guyana Trinidad & Tobago

2835 2235 2346 1621 1283 1429 1760 1193 1323 1787 1199 1164

2463 2775 2457 1983 1653 2484 2218 1945 1274 1665 1432 1394 896 916 937 693

2130 1880 1686 1657 1719 1651 1321 1176 1263 724 844 804

Source: Citizenship and Immigration Canada

Historical Overview Any history of Caribbean migration must begin with sugar and slavery. Unlike modern globalization where production goes in search of cheaper labor, the slave trade brought the cheap labor involuntarily to the production process, in particular the production of sugar. It was slave labor that the made the sugar industry profitable. The profitability of sugar made the Caribbean colonies the most prized among European colonies in the seventeenth and eighteenth centuries, so much so that wars were fought among the European powers to acquire Caribbean territory.

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When slavery was abolished in the British Caribbean in 1838, large numbers of slaves refused to continue to work in the sugar fields. In Jamaica, many settled in the hinterland to grow cash crops. In the face of this labor crisis, the plantation owners petitioned the Crown to allow the importation of indentured servants from India, most of whom went to Trinidad and Guyana. As a result, the populations of these two countries today are roughly equally represented by people of both Indian and African ancestry. The fortunes of the Caribbean sugar industry began to decline at the end of the nineteenth century due to competition from an expanding European beet sugar industry and the disappearance of the colonies’ monopoly access to the markets of Europe. With slavery abolished, the local economy was unable to absorb the freed slaves into employment. This signaled the beginning of an intraCaribbean population movement in search of employment. In the early part of the twentieth century, American investment in the Panama Canal and in railroads on the sugar plantations of Honduras and Cuba attracted large numbers of West Indians, particularly from Jamaica and Barbados. Some settled in their new countries and left a lasting impact on their cultural life (Richardson, 1985). This phase of Caribbean migration ended when the projects were completed, but the need for an escape valve persisted because the local economies could not create enough jobs to absorb those who were returning. Public policy in the colonies found it easier to encourage migration than to create jobs. Furthermore, migration was seen as a way to stifle potential labor unrest among unemployed workers. And because the great majority of the unemployed workers were unskilled, their migration was not seen as creating any loss in output. This perception lingered up until recently when migration began to include a large share of skilled workers. The next big migratory flow occurred during World War II when large numbers of unskilled workers were recruited to reap agricultural crops in the United States. This was an opportunity for them to send money home as part of a mandatory savings plan. Many of these migrant workers later violated their contractual agreements by refusing to return to their countries of origin when their work contracts expired.

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THE CARIBBEAN ECONOMY AND GLOBALIZATION

Caribbean migration to the United States up to this time involved mostly temporary workers. This was so because of the restrictive American immigration policy of the time. Whatever permanent migration there was came under the quotas of their colonial masters. The end of World War II triggered mass migration from the Caribbean colonies to Great Britain. These migrants held British passports and considered themselves British citizens. The first wave arrived on June 22, 1948 on the S.S. Empire Windrush with 492 Jamaicans aboard. As Mel Thompson points out, this was the beginning of a new racial experience for these British subjects (Palmer, 1990, pp. 41–45). Later, in 1962, when the Caribbean colonies were granted independence, Britain restricted the flow of immigrants with legislation. A rise in migration to the United States was to provide a new escape valve (Palmer, 1995). Two events signaled this rise. One was the arrival of independence in the early 1960s for the British colonies that removed them from the British quota. And the other was the Immigration and Nationality Act of 1965, which was a by-product of the civil rights movement in the United States of the 1960s. The act eliminated the quota system that favored European immigrants. It established an overall quota of 120,000 (later increased to 170,000) for all of the Western Hemisphere and within this quota an annual maximum of 20,000 for each country. Under the guiding principle of family reunification, the act allowed unlimited immigration of immediate relatives of U.S. citizens. Since its implementation in 1968, Caribbean immigration to the United States has grown sharply. The Economics of Caribbean Migration The economics of contemporary Caribbean migration revolves around the need to improve the economic condition of the migrant’s household. Migrants are pushed out by high unemployment and slow wage growth in the Caribbean and pulled in by better opportunities for employment and better working conditions in the United States. Response to these push and pull factors is controlled by the number of visas issued. Because the principle guiding the supply of visas is the reunification of families, more than half

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of those receiving immigrant visas are close relatives of American citizens. The rest receive immigrant visas based on other family preferences and the special skills they bring. During the 1960s, another phenomenon pulled Caribbean immigrants into the United States: the large-scale movement of American women into the labor force. This gave rise to the demand for immigrant women as household workers. More recently, the aging of the American population has intensified the demand for nurses and medical doctors, especially from English-speaking developing countries. The supply of these skilled workers by the Caribbean and other developing countries obviates the need for America to invest in the education and training of American-born personnel. But even where such investment is made, the choice of the American-born population is influenced by the availability of more lucrative alternative employment opportunities. This has resulted, for example, in a decline in the number of American-born women enrolling in nursing programs. Although globalization has led to the outsourcing of many jobs to lower-paid workers abroad, many service jobs cannot be outsourced, particularly those in the health care sector. This has led to in-sourcing, that is, bringing immigrants from abroad to fill these jobs at wages that are not particularly tempting to American-born workers but are highly attractive to foreign-born professionals. If we treat the household as a unit and accept the proposition that the objective of migration is to maximize household income, we can visualize the migration process as circular. This process is initiated, we assume, when the primary earner in the household migrates to find a better paying job. The income from this job allows him or her to remit money to the household back home to improve its welfare. As long as the household is divided, the expectation is that the immigrant will continue to remit funds back home. But at some point in time, under the family reunification principle of U.S. immigration policy, the household will be reunited in the United States, eliminating the need for the immigrant to continue to remit funds back home. When this happens, the migration circle collapses. The continued flow of remittances, then, signals that there are likely to be as many migration circles as there are divided households.1 Over 60 percent of the immigrants to the United States in 2007 were immediate relatives of U.S. citizens (United States

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Immigration and Customs Enforcement); this underscores the fact that every year some circles are collapsing as families are reunited. The circle may collapse also if the migrant returns home for good. In some Gulf countries that rely heavily on immigrant labor, the migration circle is more likely to collapse when the migrant returns home because there is little or no family reunification in the host countries. How long it takes for a migration circle to collapse in the case of Caribbean migration to the United States will be examined later in this chapter by developing a remittance profile of the immigrant. Remittances benefit the recipient country because they stimulate consumption spending, but there is little evidence that they stimulate capital formation. Billions of dollars flow to the Caribbean each year, mostly from the United States. Because they are what economists call transfer payments, no domestic output is produced at the time of receipt. Therefore, the multiplier impact on output is less than that of an equivalent amount of wages. Furthermore, because remittances do not finance capital formation, they tend to have little impact on economic growth in the long run. This raises an important question: if remittances have little or no impact on the growth of the country, would that country have been better off if the immigrants had remained at home? For a long time, Ireland was a net exporter of people because it was one of the poorest countries in Europe. Since it joined the European Union, it has benefited from the inflow of capital and has become the fastest growing economy in Europe and a net importer of workers. The point here is that growth and economic diversification attract immigrants while economic stagnation encourages emigrants. The Caribbean has one of the highest emigration rates in the world, yet the region is classified in World Bank data as middle income. As a net exporter of labor and a net importer of capital, it experiences opposing flows of remittances: one flows from immigrants abroad and another flows (profits) to investors abroad. The sustainability of these opposing flows is dependent on quite different things. The repatriation of profits depends on the volume and profitability of foreign investment, while the flow of remittances depends upon the growth of the immigrant population abroad

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and the level of their income. One depends on industrial policy at home and the other on immigration policy abroad. But in an important sense, the migration of workers abroad is related to the success of industrial policy at home. A more successful industrial policy would reduce migration and ultimately induce a net inflow of skilled workers as in the case of Ireland. The per capita income gap between individual Caribbean countries and the United States is a powerful factor that gives both push and pull in the migration process. When the gap widens, people perceive their country to be falling behind even if the economy is experiencing a positive rate of growth. The drive to improve one’s economic situation and to provide for the future of one’s children becomes irresistible for more people the wider the gap. Over the 24-year period between 1973 and 1996, Barbados is the only CARICOM country to improve its per capita income relative to the United States while Guyana, Jamaica, and Trinidad and Tobago fell behind. The widening gap for Jamaica and Guyana is a reflection of their economic stagnation during the 1970s and 1980s. This disparity in income growth has been an important push factor for generations of Jamaicans and Guyanese who have grown up witnessing the deterioration of their countries’ relative economic position. Income inequality within each Caribbean country is also a major push factor. Inequality breeds discontent and often encourages criminal behavior, which makes the social environment unsafe for everyone.2 Part of this inequality is a result of those globalization-induced changes that undermine some local industries that are unable to compete with more efficient producers abroad. This invariably creates unemployment that forces many into the low-wage informal economy. The national accounts do not reflect the output of the informal economy, but in Jamaica, where the unemployment rate was 14 percent in 2006, the informal economy accounted for an estimated 36.4 percent of GDP.3 Settlement In the United States, Caribbean immigrants settle mostly along the Atlantic coast with heavy concentrations in New York and Florida. Early in the twentieth century, New York City became the

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THE CARIBBEAN ECONOMY AND GLOBALIZATION

favorite destination because the banana boats connected the city to the banana exporting Caribbean. Today, immigrants from the Dominican Republic are concentrated on the island of Manhattan and immigrants from the English-speaking Caribbean are concentrated in the boroughs of Brooklyn and Queens. Prior to World War II, most West Indian immigrants settled in the Harlem section of New York City. Many became leading figures in their communities. Prominent among them was Marcus Garvey who promoted a back-to-Africa movement (to Liberia), arguing that blacks could not survive in a country dominated by whites. The movement failed and Garvey was eventually convicted and imprisoned for fraud, but he demonstrated a rare sense of black identity and leadership that was ahead of his time. He engaged thousands of black people with the notion that they could achieve a better life. The prominence of this kind of West Indian leadership was eclipsed by the massive migration of American blacks to the industrial centers of the North-East and Midwest. In New York, Harlem was their main destination. The influx of greater numbers meant greater African American political clout. As time passed, new West Indian migration began to focus on the borough of Brooklyn, a demographic shift that was a boon to the borough because the West Indians revitalized some of its most run-down areas. The movement of West Indians into Brooklyn was also influenced by the low cost of housing. As the white population moved out to the suburbs, lower-cost housing became available to the newcomers. These areas of immigrant concentration tended to be racially homogeneous but they provided a comfort zone that allowed newcomers an easy transition into the realities of day-today American life. As is the pattern in American life, some will later move out into more fashionable areas as their incomes rise. The U.S. Bureau of the Census data show that the median income of Caribbean households is roughly equal to that of American households, but this definition of “Caribbean household” includes people of Caribbean ancestry who were born in the United States. When broken down by generation, some evidence shows that the average income of first generation immigrants falls below the national average, while that of the second generation exceeds the national average, and by the third generation the difference disappears.

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Part of the reason for the below average income of the first generation can be attributed to their weaker bargaining power in the American labor market and to some occupational downgrading. This has led Barry Chiswick (1980) to assign a U shape to the immigrant occupational profile. In the initial years after arrival, many professional immigrants experience occupational downgrading in the sense that the qualifications they bring with them do not immediately allow them to get jobs equivalent to the ones they held in their country of origin. Medical doctors, for example, must pass an examination to get a medical license to practice medicine. While they are preparing for this examination, they need to feed their families; therefore, they must find some other type of work, quite often in a subordinate position in their profession . In New York City and Washington DC, many professional immigrants are known to drive taxi cabs as a temporary way to earn income. When they have acquired the necessary qualifications and licenses, their incomes rise as they move up on the right hand side of the U. Ultimately, how far incomes rise will depend upon the elasticity of the supply of skills. A highly elastic supply may predispose immigrants to accept wages lower than the national average but considerably higher than wages in their countries of origin. Because of the selectivity of the migration process, the share of skilled people in the immigrant population is higher than that in the labor force of their countries of origin. For example, in the case of Jamaica, the combined percentage of immigrants classified as “professional and technical workers” and “executive, administrative, and managerial workers” in the total migration to the United States has averaged around 19 percent compared to 14 percent in the Jamaican labor force.4 This brings up the complex issue of brain drain. If skilled people are unemployed at home and they migrate to another country where they can increase their productivity and income and send money back home, does their migration represent a loss of output? Students from developing countries who pursue advanced degrees in the sciences, for example, often opt for employment in developed countries where the jobs are and where the infrastructure is already in place. Yet the experience acquired by these immigrants could eventually benefit their country of origin if there are programs in place to induce them to return, even for short visits, to teach young people.

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THE CARIBBEAN ECONOMY AND GLOBALIZATION

Culture and Politics Immigrants bring with them their culture and their cuisine, creating a market for the exports of their countries of origin. Caribbean food and drink now occupy shelf space in many U.S. supermarkets and grocery stores, and music stores have special sections for Caribbean music. As the stock of immigrants has grown so has the market for these goods, reinforced in no small way by the large number of tourists who return to the United States with a taste for things Caribbean. West Indians bring their carnival celebrations to Toronto, New York, and Miami, where the carnival is transformed from its pre-Lenten roots into a summer festival. The largest celebration occurs in Brooklyn on Labor Day (the first Monday in September). It is a demonstration of West Indian cultural and political presence in New York City and it attracts leading local politicians to the parade. Despite this overt display of ethnicity, the political power of Caribbean immigrants is limited because they have a tendency to delay the acquisition of American citizenship. Without citizenship they cannot vote and without a vote politicians are not likely to listen to their concerns. The fact is that those immigrants who are not citizens have traded their political enfranchisement at home for economic opportunities and political disenfranchisement in their host country. From their point of view, economic opportunities trump political enfranchisement. This means that although Caribbean immigrants have achieved a measure of economic success, they have been slow to translate it into national political influence.5 This requires political activism that in turn requires citizenship. Because first generation immigrants are preoccupied with improving their economic condition and that of their children, the role of political activism is left largely to their children. The second generation has been socialized and educated in the American system and is, therefore, more adept at maneuvering its way through it. It does not send money home as the first generation does, but it does have a greater potential to engage in political action. Return Migration By virtue of the proximity of the Caribbean to the United States, Caribbean immigrants tend to return frequently to their countries

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of origin for short visits. Between 2002 and 2006, nonresident Jamaicans represented an average of 7 percent of all stop-over visitors.6 Beyond tourism, there is retirement. Most Caribbean immigrants entertain the hope that one day they will return home to live in retirement in a nice home built on ancestral property with money sent back home over the years. Few ever do; the reasons are many, but a few stand out. The most important reason is that they have sunk deep roots in their host country as their families have grown and as their assimilation into the host society has increased. A survey of Jamaicans in the Washington DC area by Palmer (2005) showed that relatively few of the respondents who were at or near retirement indicated a willingness to return to Jamaica to live in retirement. Aside from their deep roots in their host country, major deterrents in their country of origin were identified. Respondents were extremely concerned about their personal safety and access to health care. There has been a sharp rise in violent crime in Jamaica over the past decade, triggered in part by a stagnant economy. This has caused potential returnees to worry about their personal safety. They also worry about access to health care. Having gotten accustomed to the quality of health care in the host country and having reached that age when quick access is important, potential returnees worry about its availability. Although the biggest industry in the Caribbean is tourism and although governments go overboard to make sure that the tourist areas are safe, not many returning retired immigrants live in the tourist areas. Many are likely to return to their ancestral villages and towns where their new lifestyle easily identifies them as a returning immigrant with money. As a result, they often become victims of crimes. Yet immigrants returning to live in retirement bring with them significant benefits, chief among them is a steady flow of retirement income. And because their propensity to consume in retirement is generally lower than that of the younger Caribbean population, a significant share of their retirement income can go to finance investment. It is, therefore, in the interest of Caribbean governments to encourage this flow of income. Most will not return home to retire, however. This means that the challenge for both governments and private businesses is to induce the continued flow of funds when ties to the home country have

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weakened. It is at this historical juncture in the life of the immigrant when his income is at or near its peak that the opportunity to transform traditional remittances into capital flows is likely to be at its greatest. It is the time when the immigrant becomes a foreign investor and begins to receive a flow of profits in return. The Caribbean Dilemma As globalization exposes Caribbean industries to more competition, the need for a better educated labor force to develop new industries becomes paramount. But the Caribbean faces a dilemma. As it invests more in education, it loses a large share of its graduates to the United States. Nowhere is this more evident than in the health sector where there is growing demand for health care by an aging American population. Graduates from nursing and medical schools in the Caribbean have no difficulty finding employment in the United States. On the micro level, migration offers an opportunity for individuals and households to maximize their income; but on the macro level, this may not necessarily contribute to the growth of output. The Caribbean has traditionally depended largely on the export of agricultural commodities but as globalization erodes the preferential arrangements that gave these exports their competitive advantage, the Caribbean must turn to its human capital to create higher-valued output from these traditional exports. As migration drains away a large share of this human capital, no amount of remittance sent back by immigrants can effect the transformation required. In other words, although recipients of remittances may increase their level of consumption, there may be no increase in the capacity of the economy to sustain it. To sustain this level of consumption, one of two things must happen: there must be a sustained inflow of remittances (which implies that the recipients do not join their benefactors abroad) or a way must be found to divert a large portion of the remittances into capacity-creating investment. The Caribbean also faces the predicament of loosing a large portion of its human capital at a time when it is trying to attract foreign direct investment into service industries that require skilled human resources. This means that because of emigration the return on the national investment in education and training is often less than it

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ought to be. The demand for these skills by the large American economy and the inability of Caribbean economies to offer equivalent wage rates and working environments suggest that the portion of the wages earned abroad that is likely to be remitted to the Caribbean should be factored into the return on investment in education. The Philippines has apparently done that, therefore, expecting many of its skilled workers to emigrate in order to earn foreign exchange. The Significance of Remittances Remittances7 from immigrants8 abroad account for a significant share of foreign exchange for Caribbean countries. By 2000, the flow of remittances had become the second largest share of Jamaica’s foreign exchange earnings, behind receipts from tourism. The size and dependability of this inflow have improved the credit rating of the government in international capital markets. In the broader context of the movement of capital and labor, Jamaica, like most Caribbean countries, is a net exporter of labor and a net importer of capital. Just as remittances flow back from migrating labor, investment income flows from foreign investments in the Caribbean to the United States and other countries. Throughout the 1990s, much of the inflow of remittances from Jamaican immigrants was offset by the repatriation of profits from capital. Thus while capital flows to the Caribbean for higher rates of return, labor flows to the United States for higher wages. Theoretically, equilibrium is reached when the rates of return on both imported capital and exported labor are equal. Because in reality the inflow of foreign is affected by the availability of skilled labor, the two flows may not be equilibrating. The Remittance Profile and Duration of Migration Cycle This section develops a remittance profile (based on the analysis in the appendix to this chapter) by estimating the impact of past migration on the current flow of remittances (Palmer, 2007). By observing the behavior of this impact, it is possible to calculate the length of time it takes for immigrants to finance the reunification

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of their households abroad and, therefore, the length of time for a migration circle to collapse. Although numerous studies have examined the flow of remittances over time (Lucas, 2006; Özden and Schiff, 2006; Ratha, 2003), none has looked at the contribution of previous migration to annual remittance flows. This is done using the data for migration from 1965 to 2000 and remittances from 1975 to 2000 for Jamaica. The first major impact of past migration occurs in the fifth year, but the greatest impact occurs in the eighth year. This reflects a combination of the growth of immigrant income and the effort of immigrants to finance the reunification of their household in the host country.9 It is, therefore, reasonable to infer that for many households the migration circle collapses between the fifth and the eighth years. But for any given year, there are likely to be collapsing circles for those immigrants who have been away for this long. The bigger picture of migration that emerges over time is one of a series of collapsing circles (as immigrant households are reunited in the host country) and emerging circles (as migration continues).10 A tighter U.S. immigration policy together with rising unemployment rates in the United States could slow the flow of immigrants and lower the flow of remittances. However, as long as U.S. immigration policy continues to embody the principle of family reunification, some migration will continue. The Remittance Impact of Interest and Exchange Rates Interest Rates Immigrants by their very nature are forward-looking people. It is assumed here that they behave rationally and try to maintain the present value of any future stream of remittances. Therefore, they will react to correct any changes in that present value. Thus if they view a rise in interest rates in their country of origin as reducing the present value of future remittances, they will take corrective action by increasing the current flow of their remittances. While all immigrant groups face the same current interest rate in any given year, each group may react differently, depending upon the relationship of that interest rate to the rate that prevailed in the year of their migration. It follows, therefore, that if there is no gap between

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the current interest rate and the rate in the year of migration, there will be no change in the current flow of remittances. Since nominal interest rates in Jamaica have risen steadily over the period covered by this study, the current interest rate has generally exceeded the interest rate in the year of migration for most immigrants. The results of the regression analysis in the appendix shows that rising interest rates (IR) in the country of origin had a positive impact on the flow of remittances (R).11 Exchange Rates The analysis of the impact of exchange rates on remittances follows the same path as the analysis of interest rates. Again, the assumption is that the immigrant is interested in preserving the present value of a future stream of remittances. Over the period between 1970 and 2000, the exchange rate of the Jamaican dollar fell sharply, meaning that a given amount of remittances in U.S. dollars generated a larger amount of Jamaican dollars. During the same period, the inflation rate rose sharply, reducing the purchasing power of the Jamaican currency. To the extent that the immigrants suffer from money illusion, that is to say, they see only that larger amount of Jamaican currency resulting from depreciation and not the declining purchasing power resulting from inflation, they may reduce the amount of their remittances. If this is true, the depreciation of the currency will have had a negative impact on the flow of remittances. The results of the estimate of the impact of the real exchange rate (ER) on the flow of remittances (R) in the appendix supports this view. It is clear that remittances were negatively impacted by the declining real exchange rate in the first four years after migration. This suggests that immigrants may have been influenced more by the falling exchange rates than by rising inflation. Furthermore, the fact that the remittances of recent immigrants were far more negatively impacted than those of earlier immigrants suggests that the earlier immigrants were better able to assess the role of inflation and adjusted their remittances accordingly. Since the interest rate is not entirely independent of the exchange rate, it is conceivable that the impact of these two rates may have canceled each other out, allowing the flow of remittances to grow.

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The Impact of Remittances on Economic Growth The long-term transformation of remittances from a source of consumption financing for close family members left behind into a source of financing for capital projects that benefit a larger number of people is critical for economic development. When remittances become capital flows, both the immigrants abroad and their country of origin benefit. The return on such capital flows will augment the income of the immigrants, and the capital projects financed will enhance domestic economic growth. Over the three decades between 1970 and 2000, remittances from Jamaican immigrants grew twenty-five-fold, from US$26.9 million to US$679.4 million, while GDP in constant (1990) prices grew by only 28 percent, from J$25.9 billion to J$31.2 billion. When GDP in constant prices is converted from Jamaican dollars into U.S. dollars, there is a sharp decline from US$31.0 billion to US$798 million due to the precipitous decline in the exchange rate of the Jamaican dollar. The small portion of remittances that financed the construction of homes and the establishment of small retail businesses had little impact on gross capital formation and the growth of real GDP.12 While the sending country has no control over U.S. immigration policy and U.S. unemployment rate, it could nevertheless influence capital flows from its nationals abroad by borrowing money from them with special bond issues. The success of such borrowing will depend upon the confidence of the immigrants in the ability of the government to meet its debt obligations. At the same time, the ability of the government to meet these obligations is enhanced by the stability of the flow of traditional remittances. The earmarking of borrowed money for socially desirable projects may arouse in potential lenders a desire to participate in the development of their homeland, a desire that is more narrowly expressed in their traditional remittances. The remittance profile suggests that there is potential for every immigrant who has been away for eight or more years to be a supplier of capital to his home country. However, the transformation of migrant remittances into a flow of capital will not be driven by patriotism alone. First and foremost, the investment must be safe and the rate of return at least as high as that available elsewhere.

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In other words, the cost of borrowing from the Caribbean diaspora is not likely to be any cheaper than the cost of other foreign borrowing. Summing Up The remittance profile of Jamaican immigrants shows that the first major impact of migration on the flow of remittances occurs around the fifth year after migration, with the largest impact occurring in the eighth year. This suggests that it takes each year’s immigrant group that long to establish itself and to raise its income to a level that allows it to send large amounts of money back home, either to finance consumption or to assist with the reunification of the household abroad. It is reasonable to expect that when the number of close family members left behind is reduced to zero either by reunification abroad or by death, the migration circle for that household will collapse. Based upon the assumption that immigrants wish to maintain the present value of the future flow of remittances, changes in country-of-origin interest rate and the exchange rate are shown to have had a positive and negative impact respectively over the period studied. These two influences may well have canceled each other out, leaving other powerful forces such as income growth and family reunification to determine the long-run equilibrium of the flow of remittances. The post-family-reunification period offers great potential for transforming traditional remittances into capital flows. If immigrants can identify attractive opportunities for investing their savings in their country of origin, they would enhance the rate of growth of its economy.13

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Chapter 7

The Travel Economy

T

he travel economy is a variant of the service economy. It depends heavily on foreign exchange generated by tourism and migration. The travel economy may be a single economy or part of an economy, and it is more often located in small countries with few natural resources. The structure of the travel economy cannot support the full employment of its labor force, thus migration, temporary or permanent, is an integral feature. In the travel economy, a high unemployment rate serves two purposes: it keeps wage rates low for the tourist industry and it encourages migration. Although low wage rates improve the profitability of the tourist industry, they create a dichotomous low wage/high profit economy in which labor accounts for a small share of the economic rent extracted from the fixed supply of tourist endowments. In this economy, the growth of per capita income is driven by profits that perpetuate the highly unequal distribution of income. The role of immigrant remittances in this context is to reduce income inequality and any social tension that may arise from it. But immigrant remittances alone cannot do this; it requires government intervention. The big question is this: how does government policy pull the travel economy out of its low wage status? Government can encourage the reinvestment of profits locally with tax concessions that slow the repatriation of profits.1 When tax revenues collected are allocated to human capital development and job creation, the share of income going to labor will rise and the need to migrate will decline. Migration as the second pillar of the travel economy will then be

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replaced by a more growth-inducing pillar—domestic employment at higher wage rates. To understand the travel economy, it is important to recognize that the Caribbean is the fulcrum of a vast and continuing movement of people. Few regions of the world experience the high rate of population emigration and the high rate of inflow of foreign visitors as the Caribbean. Although convention treats these two movements differently, they are tied together by the flow of present and future foreign exchange. Balance-of-payment statistics treat the flow of remittances from immigrants abroad differently from spending by tourists. Remittances are treated as unilateral private transfers, while tourist spending is treated as earnings from the export of services. Over the last few decades, dependence on these sources of foreign exchange has grown as the structure of Caribbean economies has shifted away from primary production. Despite this difference in statistical treatment, they are tied together as the flow of foreign exchange from travel. Table 7.1 shows the flow of foreign exchange from travel as a rising share of exports of goods and services between 1980 and 1999. While countries market their tourism, they do not openly market emigration; although they may implicitly encourage it through their economic policies. Economic policies that lead to high rates of domestic unemployment or foster slow wage growth encourage many who are employed to seek higher wages and better working conditions abroad. The vacancies left by the emigrating employed Table 7.1 Total Foreign Exchange from Tourism and Immigrant Remittances as a Percentage of Exports of Goods and Services for Selected Caribbean Countries, 1980 and 1999 Countries

1980

1999

Jamaica Barbados Trinidad & Tobago Antigua & Barbuda St. Lucia Grenada Dominican Republic

20.5 47.7 4.0 46.3 59.7 78.1 27.1

55.6 57.5 8.2 67.3 72.1 73.5 48.8

Source: International Monetary Fund, Balance of Payments Statistics, 1987, 2000

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worker help to stabilize the rate of unemployment at home. Thus migration becomes a disguised instrument of employment policy. Now, after decades of emigration, remittances from these immigrants have become a major factor in alleviating the poverty effects of unemployment and low wage rates. By its very nature, the pure travel economy is a peripheral economy. Its fortunes are inextricably tied to economic conditions abroad, particularly in the United States, the country that supplies most of the tourists and hosts most of the immigrants. Economic growth in the United States causes more tourists to travel and immigrants to remit more money to their relatives back home. A recession produces the opposite effect. The survival of the travel economy depends on its ability to read the signals coming from the source of its foreign exchange. Governments in these economies will have to become astute predictors of potential external shocks to their vulnerable economies. They will have to set up research centers to act as an early warning system to alert policymakers to the need for preemptive action. When economic conditions abroad are difficult, the travel economy is likely to feel the impact first as the elastic demand for tourism quickly causes foreign exchange earnings to fall. Remittances may also fall if unemployment among the immigrant population rises. The travel economy in the Caribbean is also vulnerable to hurricanes and other natural disasters. Antigua and Barbuda as a Proxy for the Travel Economy The twin nation of Antigua and Barbuda offers a good example of a country evolving toward the status of a travel economy. Services account for 80 percent of its GDP. The diminution of the share of agriculture is the result of deliberate government action to abandon the sugar industry in the 1970s in order to focus on tourism. The minimal share of manufacturing is the result of the failure of lowwage assembly factories to compete with the higher-wage tourist sector for workers. This structural change is even more dramatic when foreign exchange from travel and remittances is calculated as a percentage of merchandise exports. In less than two decades, foreign exchange from tourism and remittances increased almost tenfold compared to a 20 percent increase of merchandise exports.

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The willingness to abandon inefficient alternatives in order to concentrate on the efficient production of other activities is an essential characteristic of the evolution toward a travel economy. The Model In the pure travel economy model, gross foreign exchange from travel in the current period (FEt) is the sum of tourist spending (TSt) and immigrant remittances (REMt). Tourist spending in the current period is a function of the number of tourists (NTt), and immigrant remittances in the current period are a function of current and past migration (M). Thus, TS t = γNTt

(1)

REM t = βM t + β1M t −1 + β2 M t − 2 + … + U t

(2)

If we assume that the impact of migration (M) on remittances diminishes the farther back in time we go, then equation 2 can be rewritten as n

REM t = β∑ λ i M t −1

with

0 ≤ λ < 1.

t =0

Therefore, gross foreign exchange from travel (FE) becomes n

FE t = TS t + REM t = γNTt + β∑ λ i M t −1

(3)

t =0

In equation 3, g is assumed to be the average of all types of tourist spending. The size of g will depend on the composition of tourism. For example, tourism with a large share of visitors who stay in hotels for longer visits will have a larger g than cruise ship tourism. The objective of tourism policy is to raise the size of g through innovations. The extent to which the inflow of foreign exchange influences the growth of the travel economy will ultimately depend upon the share of it going into investment. Available evidence suggests that the propensity to consume out of remittances is generally high because the money remitted to relatives is typically spent on consumption goods, much of it with a high import content. Since consumption is the most important measure of well-being, remittances are generally regarded as an important instrument

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for poverty alleviation, especially in countries where there are few or no institutionalized safety nets. Because of the high propensity to import consumption goods in the small Caribbean economies, a significant share of remittances gets recycled abroad (particularly to the United States). This is also true of foreign exchange from the tourist industry. A significant share of tourist spending goes to finance consumption imports for tourists. Here the challenge for public policy is to encourage more production and consumption of domestic goods. For the purpose of this analysis, it is assumed that the propensity to import consumption goods out of both types of foreign exchange is m. Net foreign exchange (NFE) is, therefore: n

NFE t = (1 − m) (γNTt + β∑ λ i M t −1 )

(4)

t =0

If a portion, a, is used to finance domestic investment, then the amount of domestic investment (I) is: n

I = α(1 − m) (γNTt + β∑ λ i M t −1 )

(5)

t =0

It follows that the share spent on domestic consumption (C) is: n

C = (1 − α) (1 − m) (γNTt + β∑ λ i M t −1 )

(6)

t =0

In the absence of government expenditure and foreign direct investment, aggregate spending is I 1 C. A reduction in the value of m increases both domestic investment and domestic consumption. This reduction could come about through a strategy of applying new technology to transform local raw materials into a wide variety of import substitutes. If we assume that everything that is produced is consumed domestically, then there would be no merchandise exports in the pure travel economy model. Equilibrium would be achieved when expenditure on total domestic production plus imports equals gross foreign exchange. If the monetary authorities treat foreign exchange earnings as monetary reserves, then the money supply could expand by a multiple of the foreign exchange earnings, allowing for greater domestic spending. The schema below shows the path through which foreign exchange may affect economic growth in the travel economy. It also shows that over time

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a stream of immigrants will join the flow of tourists to the travel economy. Some Implications of the Travel Economy The road to the travel economy leads to greater integration into those economies that are the source of tourists and the destination of immigrants, particularly the United States. Because the demand for tourism is highly income elastic, it is vulnerable to external economic fluctuations. It is also vulnerable to social and political shocks at home. A diversified travel economy is in a better position to absorb these shocks. One direction of diversification is in the area of financial services, particularly offshore banking in which Antigua and the Bahamas have made significant gains. The objective here is to integrate offshore banking as a third pillar of the travel economy along with tourism and migration. Although this kind of diversification may offer a buffer against potential competition in tourism, it may be only a temporary buffer. This means that the trade policy of the travel economy will be constantly engaged in crafting new strategies for maintaining a competitive edge. Knowledge centers in the Caribbean must be geared to providing the required skills for the travel economy. At present the University of the West Indies is the chief knowledge center, but over the past few decades several smaller centers in other parts of the Caribbean have emerged in the form of medical schools as well as technology and community colleges. Since a share of the rising demand for the services offered by the travel economy is likely to come also from the emerging economies, the curriculum of Caribbean primary and secondary schools should begin to introduce students to the cultures and economies of these countries. If the travel economy is to be successful, the infrastructure for providing a variety of services must be in place. This includes a legal, educational, transportation, and communications infrastructure compatible with world standards. There should also be in place a fiscal policy that does not burden productive resources with taxation but induces capital to flow into new production, and a monetary policy that preserves the stability of the currency. In addition, there should be a willingness to enhance the stock of human capital

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by importing skills when none is available locally. As the travel economy develops, the propensity to emigrate will weaken, reducing the future flow of remittances from immigrants. Instead of encouraging emigration, rising incomes in the travel economy will induce return migration. The mobility of labor in CARICOM is essential for the survival of the travel economy. Although there is significant temporary migration among the Eastern Caribbean countries, the elimination of legal barriers to labor mobility could trigger an equilibrating movement of labor and income among low- and high-unemployment countries that will benefit the region. But legal barriers are only one obstacle; the cost of transportation and housing is another. Because the region is stretched across the entire Caribbean, the cost of transportation is high. But if wage differentials are sufficiently large, transportation cost may not be a significant hurdle. For the unemployed worker the wage differential is always large. Since the travel economy is characterized as a high-unemployment economy, it becomes a source of unlimited surplus labor. It is surplus labor in the Arthur Lewis2 sense, that is, in their home country their marginal productivity is zero. Thus their migration will have no effect on domestic output. Because the supply of this labor is highly elastic (or even perfectly elastic), wages paid to these migrant workers will be low relative to prevailing wages in the countries demanding such labor. For the travel economy, this is nevertheless a net gain since the remittances from these workers will add to its foreign exchange earnings. Since there is a net inflow of capital to and a net outflow of labor from the travel economy, it is fully interacting with the global economy and the key to that is the employment of its labor force in lowwage jobs at home and abroad.

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Chapter 8

Investment and Consumption

Foreign Investment in Open Economies Foreign direct investment brings with it technology and managerial expertise. It has always played a key role in the traditional export industries. At a time when Caribbean countries are pushing the frontier of nontraditional exports, foreign direct investment has become even more crucial as evidenced by its share in the GDP of several countries in table 8.1. In the simple model presented here, it is implicitly assumed that growth depends on foreign direct investment, which in turn depends on an accommodating investment climate. This climate depends on a combination of exchange rate stability, public safety,1 and tax policy. Public safety is measured as the annual number of reported crimes, tax policy as the share of public debt in GDP, and exchange rate stability as an index of real exchange rates. Greater coordination among these determinants will enhance the investment climate, making it more attractive for foreign direct investment. An improvement in only one determinant can improve the investment climate up to a point. Improvement must occur in all three for maximum effect. For example, the impact of improvement in exchange rate stability on the investment climate can be canceled out by the deterioration of public safety and by a tax policy that encourages excessive indebtedness. Rising crime increases the cost of production and in turn reduces profitability while an excess debt burden reduces the ability of the government to finance infrastructure that would increase the rate of return on private investment. The investment climate may also be gauged by the Corruption Perceptions Index (published by Transparency International) that

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Table 8.1 Share of Net Foreign Direct Investment* in GDP for Selected CARICOM Countries, 1990 and 2003 Countries

1990

2003

Barbados St. Kitts & Nevis Bahamas Trinidad & Tobago Grenada Dominica St. Lucia St. Vincent & The Grenadines Jamaica Guyana Haiti

6.5 30.7 20.6 2.2 5.8 7.7 11.3 3.9 3.0 2.0 0.0

2.2 15.2 2.8 5.9 0.0 0.0 4.6 10.1 8.8 3.5 0.3

* Net inf low of foreign direct investment is defined as the sum of equity capital, reinvestment of earnings, and other long-term and short-term capital Source: United Nations, Human Development Report 2005

shows the rank and the scores for Caribbean countries for 2006. A score of 5.0 is considered the borderline number that distinguishes countries that do have a serious corruption problem from those that do not. All the Caribbean countries except Barbados score below 5.0. The Caribbean countries that have been able to post high rates of growth are the ones that have experienced significant inflows of foreign direct investment. Although high interest rates increase the cost of borrowing for local investors, they do not affect foreign direct investment that does not depend on borrowing locally. In the Dominican Republic, the inflow of foreign investment was enhanced in 1995 by the Foreign Investment Law that put international companies on equal footing with national ones by guaranteeing equal treatment and full repatriation of profits. In addition, a substantial amount of foreign direct investment has been attracted by the government’s capitalization program that was initiated in 1996. Under this program, the government sells a 50 percent share in each of its state-owned companies. Two of the major beneficiaries of this program are the telecommunications and electric power industries. A large share of foreign direct investment also flows into the free trade zones, which produce the majority of the country’s manufactured exports.

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In the final analysis, what separate the high growers from the low growers in the Caribbean are policies that create an accommodating environment for private direct investment. Growth rates in Trinidad, Barbados, and the Dominican Republic have been powered by the inflow of foreign direct investment particularly from the United States. In Trinidad, most of the foreign direct investment has gone into the petrochemical industry in response to the effort by the government to divest state-owned enterprises. The flow of foreign direct investment into Jamaica has been more modest despite the country’s success in recent years in restraining inflation and stabilizing the currency. Part of the reason for this modest impact must be attributed to social problems of crime and violence, which increase the cost of doing business in the country. The government has not been able to get a handle on this problem although it has mounted a massive effort to insulate the tourist industry, its most lucrative foreign exchange earner, from the effects of urban crime and violence. In the Eastern Caribbean, most of the foreign direct investment has gone into the tourist industry, primarily to construct hotels and related infrastructure. The phasing out of preferential treatment for their traditional exports of sugar and bananas in European markets is forcing the Caribbean to rediscover its comparative advantage in tourism and to try to create new avenues in financial services around which future growth is expected to take place. Telecommunications and information technology are also seen as another nodal point for future development. The Dominican Republic has made significant strides in these areas through its capitalization program. Jamaica is hoping to do the same with its nascent information technology centers in Montego Bay and Kingston. Investment and Exchange Rate Stability Countries with high interest rates and high growth rates are trading off direct investment by local investors for portfolio investment by foreign investors. The high cost of local borrowing discourages local investment and increases dependence on foreign short-term portfolio capital.2 But it could be argued that the inflow of short-term

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capital keeps the exchange rate stable, it could also enhance climate for foreign direct investment. The Jamaica government prefers currency stability over devaluation on the grounds that any devaluation will create expectations of further devaluation and raise domestic prices, thereby undermining its effort to reduce inflation. Such outcomes, it believes, will create uncertainty that would negatively affect the flow of investment into the country. Yet despite its achievement of a lower inflation rate and a stable but overvalued currency, the amount of foreign direct investment attracted has not been able to propel economic growth out of its anemic state. Policies to target inflation have received top priority in the Caribbean because of the persistence of excess aggregate demand. A major component of this is food consumption, which in the Caribbean accounts for a much larger share of the household budget than in developed countries. The burden of a high rate of inflation is quickly manifested in reduced living standards. It also distorts the allocation of resources by directing investment into areas investors consider the best inflation hedge but do not always expand the productive capacity of the economy. For example, in recent years, domestic investors have preferred to invest in shopping malls and entertainment centers where profits are higher than in manufacturing and where the emphasis is on consumption rather than production. Furthermore, because government policy has tended to favor lowering import barriers to moderate the rise in food prices, the import content in consumption has grown, increasing the balance of trade deficit. One external connection that appears to have had a positive impact on Caribbean policy is the U.S. dollar. A common feature of the low-inflation Caribbean countries is that their currencies are pegged to the U.S. dollar. In other words, a form of dollarization appears to be an important antidote to inflation. However, no Caribbean country, except Panama, is truly dollarized in the sense that the U.S. dollar is considered legal tender (see the discussion in chapter 11). The low to moderate budget balance to GDP ratio in these countries is a reflection of the fiscal discipline imposed by semiofficial dollarization. A history of foreign trade dependence has molded the character of Caribbean economic institutions. This history has spawned

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a social and economic order that places production for exports at the center of economic activity. As a result, those who produce for export are a favored constituency. Because production for exports has depended on the inflow of foreign direct investment, policymaking has tended to be driven by institutional inertia that reflexively favors measures that attract such investment. One such measure is the use of interest rates to achieve a stable exchange rate. The expectation is that a stable exchange rate will enhance the investment climate and attract the kind of foreign direct investment that will stimulate the growth of the economy and the wellbeing of the population. The downside is that high interest rates discourage domestic investment. Impact of Structural Adjustment Economic policy in many Caribbean countries has been influenced by the requirements of structural adjustment programs as a condition for receiving balance of payments assistance from the International Monetary Fund. The goal is to extricate the affected economies from the grip of persistent stagnation brought on by excessive debt burden and a chronic balance of payments deficit (examples are Jamaica and Guyana). Typically these programs require a reduction of public sector demand and the elimination of price and import controls. They are motivated by the expectation that size reduction of the public sector and its attendant distortions will allow productive resources (labor, capital, etc.) to be more efficiently allocated and encourage the economy to grow faster. The problem with these programs is that they require large segments of the population already suffering from economic deprivation to endure a considerable amount of pain as the reduction of the budget invariably eliminates or scales down some social programs. The lower-income groups that benefit most from these programs usually bear the brunt of the burden. And quite often this burden is made more onerous by uncertainty about the length of the adjustment process and its expected achievements. The principal outcome of the structural adjustment process is the liberalization of markets that brings unequal results, both domestically and externally. Domestically, free markets intensify

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the inequality in the distribution of income because high-income groups are better positioned to take advantage of income-generating opportunities. Externally, Caribbean countries find their inefficient industries swamped by imports from larger and more efficient trading partners, causing a reduction of local production and an increase in unemployment. The Impact of Investment According to a Jamaica Information Service report (2005), “Jamaica has been ranked as the highest maximizing Foreign Direct Investment (FDI) destination in the Caribbean and comes in 20th on a per capita basis in the world.” The report quoted JAMPRO’s3 executive director Mchael McMorris: “During the past decade, we have seen a quadrupling, even five to six times the increments of FDI. We peaked out at US$720 million in 2003 and we have managed to move to the top of the scale where the Caribbean is concerned.” It is not clear what the report meant by “highest maximizing foreign direct investment destination.”4 But judging from the outflow of repatriated profits (US$635 million in 2004), which represented 25 percent of the operating surplus, it could be interpreted to mean that foreign direct investment was highly profitable. Over the ten-year period from 1995 to 2004, real economic growth in Jamaica was anemic, averaging less than 1 percent a year and accompanied by unemployment rates among the highest in the Caribbean. It could be argued that the outflow of profits plus interest payments on the large public debt diminished the domestic impact of foreign domestic investment. In 2006, this debt was 140 percent of GDP, making Jamaica one of the most indebted countries in the world. This indebtedness suggests that more tax revenues could be extracted from company profits. In 1996/97, for example, taxes on company profits represented less than 10 percent of total tax revenues. The dilemma facing many Caribbean countries lies in satisfying both the need for greater tax revenues and the need to forgo tax revenues from profits in order to attract private foreign capital. As a consequence, tax policy now emphasizes indirect taxes on production, consumption, and international trade and direct taxes on individuals. This means shifting the tax burden away from profits to employee compensation. This allows the foreign investor

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to walk away with a large share of the national income. This is particularly reflected in the sharp growth in the flow of property and entrepreneurial income from Jamaica to the rest of the world. This flow tripled between 1995 and 2004, from J$14,408.4 million to J$41,256.7 million, offsetting a significant share of remittances from immigrants abroad. Although it can be argued that the outflow of profits is the result of foreign direct investments, which, unlike remittances, contributed to the local production of goods and services and the creation of local employment, it nevertheless fails to live up to Hans Singer’s dictum that profits should be reinvested to stimulate further growth (Singer, 1950). Profits versus Wage Income The primacy of foreign capital in this environment has altered the distribution of the rewards to labor and capital. The evidence suggests that globalization is benefiting capital more than labor as direct investment tends to move to areas where labor costs are low. In the national accounts for Trinidad, for example, the share of profits in GDP was greater than the share of compensation to employees; the ratio of employee compensation to operating surplus5 declined from 1:1.21 in 2000 to 1:1.76 in 2005. This in large part has been influenced by the capital-intensive nature oil production. In Jamaica, the share of compensation to employees in GDP during the 1970s and early 1980s averaged 50 percent compared to roughly 30 percent for the operating surplus. From 1983 to 1993, the average for employee compensation fell but rose again in the latter half of the 1990s while the share of profits behaved in an opposite manner. These fluctuations correspond roughly to different political regimes in power during that time. During the tenure of the socialist government of the Peoples National Party (PNP) in the 1970s, the share of employee compensation rose and remained high; it declined in the 1980s after the pro-business Jamaica Labor Party (JLP) took power in 1980, and it rose again in the 1990s after the PNP returned to power in 1989. This rough correlation strongly suggests that the policies of each party had a decidedly different impact on business. Over the entire period between 1973 and 1998, compensation to employees averaged 52.4 percent while the operating surplus averaged 34.6 percent. By way of comparison, in the

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United States in 2005 and 2006, these shares were 57 percent and 24.4 percent respectively. While the fluctuations in the shares in Jamaica may be attributed to differences in government policies, the averages for the entire period reflect two things: (1) an ongoing strategy of favorable tax treatment for foreign direct investment and (2) a smaller share of the labor force engaged in wage employment. Given the large share of profits in GDP, per capita GDP overstates the level of income of the employed population. In 1998, for example, the per capita compensation of all employed workers (J$126,835) was 48.2 percent of the per capita GDP (J$263,231). Private Consumption and Wage Income For the period 1973 to 1998, Jamaica’s national accounts show that private consumption expenditure consistently exceeded employee compensation by an average of 50 percent (Statistical Abstract, 1998). This gap represents spending out of profits, employee compensation, informal income, and immigrant remittances. In the Jamaican situation, where the richest 20 percent of the population account for 46 percent of consumption (United Nations, Human Development Report, 2005), it is reasonable to assume that a large share of the consumption of the richest 20 percent comes out of profits while all of the consumption of the remaining 80 percent comes out of employee compensation, informal income, and remittances from immigrants abroad. This means that 54 percent of consumption is financed by these three latter sources. To the extent that remittances from abroad finance consumption, they play an important role in moderating the inequality in the personal distribution of income. Composition of Household Consumption Whatever the share of spending out of the various income sources, the pattern of consumption spending identifies a developing economy. For example, the share of spending on food and beverage in Barbados and Jamaica is three and four times respectively, larger than in the United States, underscoring the fact that as per capita income rises, food and beverage claim a smaller share of the household budget. A rise in the price of food and beverages will, therefore,

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have a much larger impact on the budget of the Caribbean consumer than on that of the American. This means that Caribbean governments are constantly challenged to maintain stable food prices. This challenge can be met by greater investment in domestic food production and/or more food imports, but the difficulty that arises is that these two options are often contradictory since more food imports tend to militate against domestic production. Jamaica, like the rest of the Caribbean, has a high propensity to import food, due in part to the deficiency in available domestic production and in part to a cultural taste for certain imported goods. The following is a small sample of food imports: meat of bovine animal; meat of sheep; meat of goat; backs, necks, and wings of chicken; corned beef; salted codfish; salted mackerel; wheat flour; rice; maize; and soy bean (flour or meal). Salted fish such as cod and mackerel is a throwback to a time when people did not have refrigerators. Over time, these items have entered the culture as integral parts of Jamaica’s iconic national dishes, such as ackee and saltfish6 and mackerel run down. The impact of imports on some domestic food producers has been disastrous. Domestic poultry producers, for example, are unable to compete with imported chicken from such major U.S. producers as Tyson Foods, who are able to export large quantities at low prices. This means that for a small country such as Jamaica, the trade-off is between stable food prices and a declining domestic food industry. The result is a vicious cycle causing people to demand more imported food; food imports have thus grown to more than double the amount of food exports7 in the periods 1957–1966 and 1994–1996. This food deficit underscores Jamaica’s dependence on foreign food suppliers, a situation that is typical in the Caribbean. Altogether, food accounts for over half of all Jamaica’s consumption goods imports and some 16 percent of all its imports. The foreign exchange required to finance this deficit is generated by tourism, remittances from nationals abroad, and a narrow base of commodity exports. As far back as 1944, the historian Eric Williams observed that the “Caribbean economy has concentrated on exported crops and imported food,” creating a systemic food deficit (Frazier and Williams, 2004). With increasing urbanization, this food deficit has grown as export agriculture has declined. But the root cause

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of this deficit may be traced to the colonial system of land tenure that allocated the best farmlands to export agriculture and small plots of less desirable land to the freed slaves in the hinterland. The producers of export agriculture were not in the slightest way concerned with self-sufficiency in domestic food production and neither was the government. Profits were to be made by selling abroad and by distributing imported goods at home. Today the small farms are unable to satisfy domestic food consumption. And the heavy dependence on imports has given rise to a large low-wage distributive sector (wholesale and retail) of merchant capitalists rather than a high-wage manufacturing sector. This situation has frozen into place a wide inequality in the distribution of income. Since consumption is a measure of the standard of living, the link between consumption imports and foreign exchange earnings cannot be broken without serious adverse consequences for the standard of living. Institutions of government have evolved to support this arrangement. Trade concessions have been negotiated to support the price of export agriculture, and marketing boards have been created to stabilize commodity prices farmers receive. In addition, labor unions have protected workers’ wages in export agriculture while governments have won elections with union support. And for a long time the food deficit was supported by an overvalued exchange rate that made imports cheaper. This situation was clearly not sustainable as the downward adjustments in most Caribbean exchange rates over the past 20 years attest. In the latter part of the 1990s, the government of Jamaica was forced to recognize the scale of its food deficit problem. It listed among its goals for agriculture the following: 1. to produce as much food and raw material as is feasible to meet the requirements for i. adequate food and nutritional levels of the population ii. agro-industries iii. export markets 2. to structure production so as to reduce reliance on imports. (Statistical Yearbook of Jamaica, 1997, p. 262) The plan involved the achievement of these goals through a land reform and rural development program designed to let the

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agricultural sector “rise to meet the challenges of the future” (p. 262). Despite its boldness, the plan was a belated attempt to correct an endemic problem, the solution to which has been made more difficult by the decline of rural farmland and the growth of the urban population. This is further complicated by the fact that consumption patterns established during the heyday of export agriculture are hard to break as consumers’ tastes and preferences for imported consumption goods have become hardwired in their minds by exposure to consumption standards in North America through television, radio, and travel. In the end, the institutions that supported export agriculture are incapable of dealing with one of the principal effects of its decline: the long-run depreciation of the exchange rate. Attempts by monetary policymakers to manipulate interest rates to stabilize the exchange rate have been futile. They have tended to generate more costs than benefits, largely through their negative impact on domestic borrowing. While other factors such as foreign direct investment, increased worker productivity, and access to foreign markets influence the exchange rate, their beneficial effects are often eroded by the high propensity to import consumption goods.

Some Institutional Rigidities The lackluster performance of the larger Caribbean economies since the 1970s clearly suggests the existence of certain institutional rigidities that militate against growth. The high propensity to import consumption goods is a case in point. It is institutional not in the sense that it is the creation of law, but in a cultural and economic sense that arises from a persistent food deficit at home and an ingrained historical perception that everything foreign is better. Another institutional rigidity is political; it arises from the fact that political parties are affiliated with labor unions and are beholden to them for votes. This labor union–political party relationship goes back to the beginning of the political parties when they championed the cause of striking workers in the 1930s. Ever since, governments have had to dance on a tight rope to balance the interests of the union worker and that of the larger economy. But

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over the past 20 years the decline in export prices and the rise in import prices have threatened these interests. In the financial sector, institutional inertia slowed the development of certain regulatory institutions. Jamaica’s financial crisis in the 1990s is the result of the willingness of those in government to accommodate the excesses of moneyed class until those excesses threatened the livelihood of the working class. The World Bank (2004) estimates that the fiscal cost of the banking crisis exceeded 40 percent of GDP (p. 880). The challenge for policymakers here is to break out of the grip of institutional inertia. For some countries, this will require a major effort to change the policy paradigm. The thinking embodied in any new paradigm must give primary importance to local investment. While the effort to attract foreign investment must continue, the success of local investment can be the magnet that attracts foreign direct investment. This will require that the exchange rate be allowed to depreciate to improve the competitiveness of exporters, reduce imports for consumption, and eliminate the trade deficit. In this scenario, labor costs in terms of the U.S. dollar would fall and foreign investment would flow in to fuel economic growth, and the dragon of institutional inertia will have been slain or at least caged. The political risk involved in this strategy will be high since wage earners with their high propensity to import will face higher prices, at least in the short term. However, workers will benefit as expanding exports create more jobs and reduce the unemployment rate. Furthermore, higher import prices will induce local and foreign investment into new profitable areas and ultimately encourage consumers to use local products in place of foreign ones. Progress in this direction will not be smooth because of two opposing forces. On the one hand, the wholesale and retail sector (which throughout the Caribbean accounts for a large share of GDP) will want as few restrictions on imports as possible; on the other, wage earners and labor unions will want domestic employment and output to grow. Rational political action will dictate that every effort is made to strike the right balance between output and imports. Central to this strategy is a climate that will attract new capital for economic diversification. A World Bank (2006) report on CARICOM declares that “a good investment climate will include political and macro stability, a

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sound regulatory framework and efficient supporting institutions, and an adequate physical and social infrastructure.” When the climate is right, special government agencies responsible for promoting investment tend to be most effective. But this effectiveness is often undermined by domestic conditions beyond their control, such as a rising crime rate. The experience of Jamaica is apt. The institutions responsible for public safety have been unable to assure a safe environment for businesses and individuals, except when public policy focuses on specific areas where tourists gather. The coordination of policy to maximize a favorable investment climate is essential, but this coordination requires an incentive. The stakeholders must share in the policy goals, as is the case in the Barbados system of social contracts.8 The claim of debt service against export earnings is highest in St. Kitts and Nevis, Belize, and Jamaica, suggesting that a fall in export earnings could present significant hardship for these countries. Debt service indirectly represents a tax on exports since it is a claim against export earnings. This reduces the wealth of the nation. If, however, the money that was borrowed was used for public investment, the reduction in wealth may be offset by future economic growth. In Jamaica in 2003, the repatriation of property and entrepreneurial income represented 8.4 percent of GDP and 20.6 percent of export of goods and services. This outflow plus interest payment of the debt accounted for 18.5 percent of GDP and 42 percent of export of goods and services. Because this outflow increases the deficit on current account, a reduction of reserves or an inflow of capital is required to finance it. This inflow of capital will generate future outflows of interest payments and/or profits. Only accelerated economic growth can take the country off this carousel of deficit and debt. The historical evidence from Jamaica suggests that the rate of outflow of profits and interest payments has been a drag on the growth of the economy.

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Chapter 9

The Role of Government

Government and the Open Economy In the Caribbean, government spending accounts for a high share of GDP, particularly in Guyana where it reached a high of 44 percent over the period 1998–2003. The World Bank (2005) attributes high government expenditures in the Caribbean to a “high level of voice and accountability in government,” which it regards as “characteristic of strong democracies, even compared to countries of comparable per capita income and size” (p. 31). Also of interest is the apparent correlation between the ratios of government spending and public debt to GDP. A high debt/GDP ratio is the cumulative result of borrowing to finance persistent fiscal imbalance. Persistent fiscal imbalance in turn reflects the gap between government willingness to respond to the voice of the people for more spending and the inability of economic growth to generate tax revenues. The larger the share of resources diverted to the public sector consumption the weaker the ability of the economy to grow. This places the government in a dual role. Through its policies it tries to facilitate growth while through its excessive debt it retards growth. It could be argued that the large share of GDP allocated to the public sector is due to their openness. And because openness exposes domestic producers and consumers to external risks, they hold the government accountable for protecting them against those risks. Part of that protection is provided by paying high wages to government workers. In Jamaica, for example, public sector wages grew from 7.9 percent of GDP in 1993–1994 to 11.9 percent in 2001–2004.

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In a 1998 paper, Dani Rodrik documented a “robust association between an economy’s exposure to foreign trade and the size of its government” (Rodrik, 1998, p. 997). His explanation of this relationship is that government expenditures are used to provide social insurance against external risk emanating from turbulence in world markets. The greater the exposure to foreign trade the greater the external risk and, therefore, the greater the need for public expenditures to insure against those risks. This applies to developed as well as developing countries. In terms of foreign trade to GDP ratio, the Caribbean economies are some of the most open economies in the world. If globalization leads to greater openness, then the Rodrik finding would suggest that it is perfectly reasonable for Caribbean populations to demand a high share of government spending in GDP to insulate them from the heightened risks that globalization brings. In this view, government operates like an insurer. But greater openness often reduces the domestic impact of public spending through import leakages. To achieve a given fiscal impact, therefore, requires a larger amount of public spending, hence the tendency for the public spending to GDP ratio to be large in small open economies. Yet structural adjustment in the past was focused on reducing the role of public spending in the economy, the rationale being that such a strategy would release resources for private production and improve competitiveness. Presumably this would ultimately help to eliminate some of the same external risks that public spending was supposed to insure the population against. This adjustment takes time and is often painful with dangerous domestic political repercussions. Furthermore, the outcome is never certain because of the dynamic nature of the external environment and the shocks it periodically produces. The burden of these shocks often falls on workers who are most vulnerable, compelling the government in a democracy to respond with increased spending. Public spending to insure against external risks has cost the Caribbean dearly in the form of excessive indebtedness. If we use the analogy of private insurance firms, it means that premiums (tax revenues) have been inadequate to meet the insurance claims (public programs), some of which, as in the Jamaican case, include debt arising from the financial crisis of the 1990s (World Bank,

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2004, p. 33). One obvious solution is to raise tax revenues. But this is easier said than done for two reasons: (1) trade liberation is gradually eliminating tariffs, which have been an important source of tax revenues for Caribbean countries, and (2) raising other taxes might stifle whatever positive economic growth there is. Public borrowing and the resultant public debt crowd out private investment and impose a drag on economic growth (World Bank, 2004). Furthermore, servicing of the debt diverts resources from investment in infrastructure that is crucial for economic growth. In Jamaica, this diversion occurs by cutting public spending to generate high primary budget surpluses in order to service the debt. The World Bank also notes that “part of the rising debt can be attributed to a deterioration in fiscal management” (World Bank, 2004, footnote 41, p. 33). Changing Tax Structures As the structure of these economies changes in response to globalization, so does the structure of taxation. Between 1980 and 2005, the share of tax revenues from goods and services has grown in many Caribbean countries. In Barbados, for example, these taxes now represent the major source of tax revenues while the share of taxes on international trade has fallen sharply.1 The decline in the share of taxes on international trade and the rise in the share of taxes on goods and services are the results of trade liberalization and the replacement of tariffs on imports with taxes on imported consumption goods. Taxes on income and profits remain the dominant source of revenues for Jamaica and Trinidad and Tobago. These taxes include both corporate and payroll taxes, with corporate taxes being more dominant in Trinidad and Tobago and payroll taxes more dominant in Jamaica. One consequence of trade liberalization has been the rise in imported consumption goods against which domestic producers are unable to compete. This has displaced some domestic production and stifled strategic attempts to diversify domestic output. A case can be made that this rising share of consumer goods in imports has also retarded economic growth by diverting export earnings that would normally finance capital goods imports.

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The effectiveness of tax incentives in attracting direct investment into nontraditional production has become more difficult to achieve in an environment where trade liberalization tends to encourage imports at the expense of domestic production. This does not bode well for the trade deficit and the stability of the exchange rate. Neither does it bode well for the distribution of the tax burden between wage earners, and profit earners and could result in a widening of an already wide gap in the distribution of income. Although this shift in the tax structure toward consumption offers Caribbean governments a powerful instrument to restrain demandpull inflation, its effectiveness will depend upon whether people are more interested in maintaining their real income or the level of their nominal spending. That is to say, if the so-called money illusion exists, the tax restraint could be effective in restraining real consumption. When faced with widening disparities in both tax burden and income, governments have a special obligation to structure their spending to reduce these disparities. For the long term, spending on the development of social capital should receive top priority; for the short term, spending should address the needs of those at the bottom of the income scale. The share of government spending allocated to the three major areas of education, health, and social protection provides some indication of the structure of government priorities. The budgetary priorities for education in the three countries are similar, but the share of spending going to social protection in Trinidad and Tobago ranks second to education and far exceeds that of the other countries (International Monetary Fund, 2007b). One explanation of this difference may lie in the accumulated surplus from oil and gas exports. Excessive Government Intervention The economic history of Jamaica offers a useful illustration of the impact of trade liberalization on the composition of imports and its implications for export earnings in a small open economy. Former Stanford economics professor Donald Harris (1990) referred to the period between 1950 and the early 1970s as “a kind of ‘golden age’ of growth in the Jamaican economy” and the period after that up

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to 1989 as one of decline and stagnation (p. 16). Among the things that puzzled Harris during the latter period was the reversal of the traditional positive relationship between the growth of exports and the growth of GDP: “This indicates that something must have happened to break the strong positive correlation between exports and GDP established in the previous period. It means, certainly that the mechanisms which would normally transmit the impetus from growth of exports to the expansion of GDP were not at work in this period” (p. 18). From this, he concluded that internal factors must have played a crucial role. Although internal factors undoubtedly played a crucial role, external factors were even more important. As indicated above, trade liberalization opened the floodgates for imported consumer goods, thus diverting export earnings away from capital goods imports. This meant that a given value of exports tended to have a weaker impact on economic growth. The massive intervention of the state in the Jamaican economy during the 1970s compounded the problem. It caused domestic and foreign private direct investment to dry up, thereby retarding the growth of the nontraditional exports, the demand for which tends to be income elastic. As a result, export earnings did not benefit fully from the rise in world income. Between 1980 and 2006, the share of manufactured goods (SITC categories 6 and 8) in total exports declined from 3.4 percent to 1.6 percent (Economic and Social Survey of Jamaica, 1981; Bankofjamaica.org). Because most of the nontraditional exports fall into this category, it is reasonable to conclude that this decline contributed to a lower trajectory of economic growth. Harris identified a link between declining exports, declining direct investment, and a sharp rise in the level of government consumption. This rise in government consumption came at the expense of public investment that in turn induced cutbacks in private investment. A study by the World Bank concurs with this view: “Over half of the gains in average growth come from the reduction in government burden— government consumption to GDP being well above regional standards” (World Bank 2006, Executive Summary, paragraph 18). The expectation that the sharp rise in bauxite royalties that the government legislated in 1974 would accelerate economic growth was dashed in the 1980s and the 1990s when the economy stagnated. The income inelastic nature of the demand for traditional

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exports made it difficult for economic growth in the major trading partners to be transmitted to Jamaica through commodity trade. The result was the lower trajectory of domestic growth that puzzled Donald Harris. In the decade between 1962 and 1974, government consumption as a percentage of Jamaica’s GDP was relatively stable, averaging 11.5 percent; in the socialist decade between 1973 and 1983, however, it skyrocketed, averaging 19.6 percent. Other manifestations of government intervention included the proliferation of quasipublic agencies that relegated the market to a peripheral role in the economy. The price distortions that were created by this endeavor encouraged human and financial capital to move out of the country, pushing the economy into decline and forcing a massive devaluation of the currency. In both Jamaica and Guyana, real GDP (measured in 1985 prices) fell. Structural adjustment programs designed to correct the distortions came at a high price for large segments of the population whose consumption pattern had a high public component. Data for the period 1962 to 1990 for Jamaica and Guyana—the two countries in which government intervention was greatest— show an inverse relationship between GDP and the share of government spending in GDP, a clear indication that government spending grew much faster than GDP. Between 1962 and 1967, the share of government in GDP in Jamaica and Guyana averaged 21.1 and 26.1 respectively; between 1985 and 1990, it grew to 39.7 and 90.2 respectively (IMF International Financial Statistical Yearbook, 2002). It is reasonable to conclude then that excessive government intervention in the 1970s discouraged direct investment and reduced the growth of nontraditional exports, which in turn weakened the traditional positive relationship between exports and the growth of GDP. It is also fair to say that excessive government intervention ended the “golden age” of Jamaican economic growth because it came at the expense of private direct investment. In the decade between 1963 and 1973, net direct investment averaged US$84.6 million and in the ensuing decade (1974–1984) it averaged a negative US$4.3 million. It is not surprising, therefore, that the share of nontraditional exports in total exports, which had climbed steadily from 3.8 percent in 1966 to 6.9 percent in 1973, steadily declined throughout the rest of the 1970s.

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The Role of Education As small open Caribbean economies become more integrated into the globalization process, they are constantly being challenged by external events. This challenge becomes more intense as traditional preferential trade arrangements are repealed. To face the challenge, their exports of goods and services must be competitive in international markets.2 The latter requires a more productive workforce, which in turn requires the population to have greater access to education and training. Only when the pool of high-skilled workers has grown can Caribbean countries attract the high volume of capital and technology required to establish their niche in the production of superior nontraditional goods and services with high valueadded. Economic policy, therefore, has the daunting challenge of educating the population to absorb greater domestic and foreign direct investment. But the caution signaled by The Economist (2008) in its discussion of the new members of the European Union has relevance for the Caribbean: “The newcomers face the same problem Spain and Portugal did on entry: relying too heavily of foreign investment to bring technologies and jobs rather than creating indigenous centers of research and development” (May 31–June 6, p. 6). The focus of this section is on the relationship between education and the productivity of workers, using data for Jamaica’s leading export industries. This relationship is important because the standard of living depends largely on the foreign exchange earned by exports. Furthermore, as traditional preferences are eroded, the ability of Caribbean exporters to compete in open markets will depend increasingly on the quality of the labor force they employ. Productivity grows when better trained workers are combined with better capital equipment. The Hecksher-Ohlin international trade theory3 applies well to the Caribbean in general and to Jamaica in particular. It hypothesizes that factor endowments determine the composition of a country’s exports. If a country is endowed with an abundance of cheap labor, then exports are likely to be labor intensive because cheap labor attracts labor-intensive production. When there is an abundance of low-skilled labor the productivity of each worker is usually low.

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The Education Profile The education profile of countries can reflect the extent of investment in education. This profile is shaped by enrollment ratios at the primary, secondary, and tertiary levels. Among the Caribbean and Asian countries listed in table 9.1, Jamaica had the highest percentage of high school-age population enrolled in high school in 1960. But in the next 35 years, this lead was eclipsed as other countries made far more progress, in terms of both education and income. Based upon his empirical analysis of the direct and indirect impact of education on development, Walter W. McMahon (1999) concludes that “the direct effects from the expansion of junior secondary education are the most relevant in Indonesia, India, and Thailand, following the earlier pattern of Japan, South Korea, Taiwan, and others who deliberately created their larger human capital stocks at these levels through active expansion of education, first at junior and then at senior secondary levels. . . . The indirect effects of education affects economic growth primarily through rates of investment in physical capital” (p. 159). Despite the attainment of universal primary education in Jamaica, a World Bank assessment concludes that “education outcomes leave much to be desired—about 30–40 percent of grade 6 leavers are functionally illiterate. Only 30 percent of those Table 9.1 Educational and Income Profile of Selected Caribbean and Asian Countries, 1960–1996 Years Jamaica Malaysia South Korea Singapore Trinidad & Tobago Secondary Enrollment 1960 Ratio (as a percentage 1976 of high school-age 1995 population) Tertiary Enrollment 1960 Ratio (as a percentage 1976 of 20–24-year-old 1995 population) GNP per capita (US$) 1977 1996

43 58 66

19 45 61

27 63 101

32 55 62

22 — 72

2 7 6

1 3 11

5 10 52

6 9 34

1 3 8

1,150 1,600

930 4,370

820 10,610

2,880 30,550

2,380 3,870

Source: World Bank, World Development Reports

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who appear pass the Caribbean CXC mathematics examination in grade 11, lower than most Caribbean countries. Jamaicaneducated workers receive amongst the lowest returns in the U.S. labor market. Poor education outcomes may be one factor limiting productivity gains in Jamaica, both in absolute terms and also as compared to other Latin American countries” (World Bank, 2004, p. 99). This assessment is based on data gathered by Bratsberg and Terrell (2002) for male immigrants in the United States for 1980 and 1990.4 Of the 67 countries shown in the data, five Caribbean countries (Cuba, Dominican Republic, Haiti, Jamaica, and Trinidad and Tobago) had the lowest rates of return, ranging from 2.02 percent for Haiti to 3.75 percent for Trinidad and Tobago. The mean for all 67 countries was 4.92 percent. The study attributes this gap to the disparity in educational quality, one of the principal causes of which is the disproportionate share of education spending going to teachers’ salaries. This, it argues, reduces the amount of funds available for instructional materials and maintenance and for intervention in the early stages of the education cycle. The study recommends that the highest priority be given to early learning by raising the functional literacy target from 80 percent after grade 6 to 100 percent “because without strengthening the foundation, all subsequent interventions are likely to be more costly and ineffective” (World Bank, 2004, p. 112). Education and Output All the Caribbean countries listed in table 9.2 have achieved universal primary education; but beyond primary education, Jamaica lags behind the rest of the Caribbean. The gap is widest at the tertiary level, where the Bahamas is the leader. These profiles correlate with per capita GDP of employed workers in the different countries, clearly indicating that investment in education beyond the primary level pays off in terms of output per worker. Among CARICOM countries, Barbados allocated the largest share of its public expenditure on education to secondary education and the smallest share to primary education. This is due in part to the fact that Barbados has the smallest share of its population under the age of 15 and the highest ratio of secondary enrollment.

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Table 9.2 Caribbean Enrollment Ratios and GDP and Gross Capital Formation per Employed Worker, 1993 Country

Bahamas Barbados Costa Rica* Jamaica Panama Trinidad & Tobago

Primary

Secondary

Tertiary

GDP per Employed Worker (US$)

Gross Capital Formation (GCF) per Employed Worker (US$)

106 101 106 107

93 89 42 62 59

19.5 17.0 26.3 5.9 20.9

25,065 17,254 7,123 6,570 9,108

4,425 2,197 1,373 2,116 2,349

96

84

6.4

11,308

1,910

* Figure for 1995 Source: United Nations, Human Development Report; International Monetary Fund, Statistical Yearbook; Staff Reports

For Jamaica, the sectoral differences in output per worker are sharp, the output per worker and the hourly wage rate in the capitalintensive bauxite and alumina industry being the highest. Countries with greater secondary and tertiary enrollment ratios have higher GDP per employed worker even when the differences in the capital per worker are slight. It is also reasonable to argue that the lower the secondary and tertiary enrollment ratios, the greater the likelihood that a country’s labor force is disproportionately engaged in low-wage employment. This is illustrated in Jamaica where in 1997 the high-wage bauxite industry employed 4,000 workers while the low-wage sugar and wearing apparel industries employed 7,322 and 13,143 respectively (Statistical Institute of Jamaica, 1998). In other words, over 80 percent of the employment in Jamaica’s three leading export industries was in sugar and wearing apparel. Two more things are particularly striking about these numbers. One is that the per capita GDP of all employed workers in the country, J$233,000, was higher than that of the sugar industry and the wearing apparel industry. The other is the relatively small contribution of sugar and wearing apparel exports to GDP, 27.8 and 23.3 percent respectively compared to the 46.5 percent for bauxite/alumina. Despite the relatively high contribution of bauxite/alumina, the industry’s future is uncertain because of worldwide competition from other bauxite producers.

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A Modest Proposal How can Jamaica double its output per employed worker and how long will it take to do so? While investment in better capital equipment is a necessary part of the answer, it is not sufficient. A sufficient answer must include greater access to quality education and training by a larger number of young people. Indeed, it is not possible to increase the tertiary enrollment ratio without first creating greater access to quality secondary schools, which in turn presumes quality preparation at the primary level. Government policy for education should consider the following five approaches. 1. Greater financial incentives to encourage the best people to enter and remain in the teaching profession. Current salaries for primary and secondary teachers are too low. In 1961 when W. Arthur Lewis was vice chancellor of the University of the West Indies, he wrote an article on the relationship between education and development in which he pointed out that the cost of education is higher in developing countries because a teacher’s salary represents a larger share of GDP than is the case in developed countries (Lewis, 1961).5 A 2006 World Bank study says that Caribbean education expenditure as a percentage of GDP is high (5 percent) relative to that for Latin America and the Caribbean put together (4 percent) (World Bank, 2005) and attributes this high GDP share to the high cost of teacher salaries. The study suggests that it may be possible to control teacher salaries without compromising quality. Controlling teacher salaries does not preclude the payment of efficiency wages to induce desired improvement in the quality of education. This will attract better teachers. 2. New ways of financing education should be explored. a. There should be greater participation of the private sector in the financing of education. Historically, education has been funded by the public sector because it is a quasi-public good. It generates social benefits as well as private benefits to the recipients. But businesses today have a special obligation to participate actively in the financing of education, especially at the primary and secondary levels, because they are major consumers of the education product. They should, therefore, be encouraged to contribute a portion of their profits into a special education fund to be administered by an independent body made up of business representatives and people drawn from a cross-section of the society. Such a fund would finance curriculum development, innovative teaching materials, and special incentive programs to reward teacher and student excellence.

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b. The financial sector should be encouraged to provide greater access to funds by parents and adult students through a program of government-guaranteed educational loans. This would provide an important supplement to government financing, particularly at the tertiary level. c. CARICOM countries should impress upon the European Union and the United States that they have an obligation to invest in education in the region to compensate for the loss of trade preferences and to allow the Caribbean to increase its worker productivity over a reasonable transition period.6 3. Businesses should be encouraged to develop ongoing on-thejob training programs. Data from a survey conducted by the Statistical Institute of Jamaica show that 77 percent of the respondents said they had no on-the-job training. One reason for this might well be that the lowskill nature of their employment did not warrant any kind of training. It might also be that no matter what the level of skill, employers may not have wanted to incur the cost of such training. The pace of technological change dictates that retraining and retooling of employees become integral features of the conduct of business and the affairs of government. As new workers become better educated and trained, they are likely to work with more sophisticated capital equipment. In this environment, on-the-job training becomes a necessity simply because mistakes on the job become more costly. 4. The private sector should be encouraged to develop an education industry capable of supplying the increasing demand for a wide range of printed and electronic educational materials. With the right kind incentives, such an industry could in time become a major exporter to the region and beyond of all kinds of English language educational material. 5. Tertiary programs should be expanded. Although the capacity of existing tertiary institutions imposes some constraint on the growth of enrollment, this need not be a serious obstacle if North American universities are encouraged to establish a variety of degree and certificate programs in the Caribbean. A few, such as the medical schools in Grenada and Dominica, already offer programs on a limited basis, but the region needs to make a special effort to establish many more links with major American universities.

If these approaches are followed, a major change in the skill level of the labor force could materialize within ten years. Such a change will attract investment in new production processes, generate greater value-added, and raise the trajectory of growth throughout the Caribbean.

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Increasing the productivity of the workforce will undoubtedly mean higher wage rates. But as long as productivity growth outpaces wage rate growth, the unit cost of production will fall, allowing the export sector to be more competitive in the global marketplace. Attempts to use price controls and exchange rate policy to keep labor costs low are short run strategies that are not sustainable in the long run. A long-run strategy of investment in education will not only increase productive efficiency but improve the balance of payments as well. Returns to Education In a world in which globalization is sweeping away traditional trade preferences, investment in education is the only reliable source of future wealth creation. Some would argue that emigration of educated and trained people to the United States and elsewhere will prevent the region from reaping the full return on its investment. Although this is true in the short run, it is no reason to underinvest in education because the short-run losses can be transformed into long-run gains in the form of immigrant remittances and an expatriate pool of skilled labor that can redound to the benefits of the countries of origin. Evidence suggests that Jamaica has come to depend heavily on the foreign exchange remitted by its nationals abroad for stabilizing the value of its currency and shoring up consumption spending. Nationals abroad also own much financial capital and expertise, some of which is available to the region if it has the right mechanism to tap into it. It has taken Caribbean countries a long time to recognize the importance of this resource while China and other developing countries have been able to benefit from their expatriate population above and beyond the flow of remittances. The late political scientist and pollster Carl Stone (1978) was pessimistic about the need for greater investment in education. In one of his columns in the Gleaner, he wrote the following: The vicious circle of joblessness (out of which education is less and less an escape route) means that try as we may to raise educational levels, the motivation to learn is going to drop even further below the existing very unsatisfactory levels. No fancy curriculum changes or teaching methods are going

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to make any difference. Youth without hope of jobs are going to be even more uninterested than they are at the moment in either vocational or academic pursuits. Pious clichés about the great value of our human resources mean absolutely nothing unless we provide the material motivation for youth to learn and develop skills. What future can any country have if its youth become demoralized by hopelessness? The only beneficiaries are going to be the subculture s of crime, violence, idleness and indiscipline. The growing signs of this trend are already very evident. (p. 11)

In 1978, when Stone wrote those words, Jamaica’s overall official unemployment rate was 25 percent and the unemployment rates for the age groups 14–19 and 20–24 were 55 percent and 39 percent respectively. By 1997, the overall unemployment rate had fallen to 16.5 percent and those for the age groups 14–19 and 20–24 were 48 percent and 27.5 percent respectively. Despite these reductions, unemployment among young people, especially among the 14–19 age group, is still in the crisis stage. Part of the solution to this problem lies in devising programs to delay their entry into the labor force. This may require the involvement of nongovernmental organizations (NGO) and community organizations. But as a 1997 World Bank study of violence and urban poverty in Jamaica pointed out: “No amount of involvement by urban NGOs and community organizations can make up for the need for government to invest more resources in the public education system” (World Bank, 1997). The search for solutions to the current problems resulting from inadequate education in the past should not divert attention from the need for greater investment in education today. For embedded in this investment are the seeds of a new generation of skilled people who will be responsible for the competitiveness of Caribbean exports in the global marketplace of the future. The role of education in the Eastern Caribbean deserves particular emphasis as these small states struggle to free themselves from the shackles of the land. For generations the land had been their livelihood, providing the agricultural exports that sustained their lives. Now a break with the land is occurring but it must be aided by policies that open their economies to capital inflow and the growth of a skilled labor force. Each country must begin to see itself as what Richard Rosecrance (1996) calls the “virtual state” whose economic boundaries stretch beyond its geographic boundaries (Foreign Affairs, July/August).

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Essential to this transformation is a skilled labor force that includes a critical mass of public and private professionals. In the early stages of this transformation, the Eastern Caribbean will itself be part of the productive capacity of other virtual states in an evolving process in which the region becomes an agglomeration of virtual states tied together by the competitiveness of their private sectors. This path to economic integration is contrary to the government-led efforts over the past three decades. Along this path the private sector takes the initiative while the government provides support. Progress is predicated on a diminished preoccupation with national sovereignty but not on the elimination of cultural distinctions. The growth of the virtual state will enable individual countries to better accumulate resources to finance the flowering of their culture. Indeed, it is expected that cultural exports will become an important component in the growth of the virtual state’s export of services. It is interesting to note that in the negotiation of the Economic Partnership Agreement with the European Union, cultural exports occupied a prominent part.

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Chapter 10

Caribbean Economic Integration: Drifting toward a Single Market and Economy

As the Region itself has recognized, pursuing integration and, therein, a common agenda for growth and development is critical. History has taught us that agreeing on a common agenda across so many diverse states is challenging. So we commend the Governments of the region for the courage to move along this path, notwithstanding the divergence of interests at times. Further deepening of the bonds of regionalism will require ongoing and considerable political will and commitment, but the benefits can be considerable. Excerpt from a speech by Graeme Wheeler, deputy managing director of the World Bank at the opening plenary session of the “Conference on the Caribbean: A 2020 Vision,” June 19, 2007, Washington DC.

A

single market and economy has long been the goal of a people whose identities have been forged by centuries of colonialism and insularity. Former Barbados prime minister Owen Arthur sees this goal of economic integration as resting predominantly on the premise of the superior benefits that can be gained from a process of cooperative development. And it prescribes that perhaps the most viable course to any and to all Caribbean economies is to have our resources effectively pooled, and our approaches to their uses efficiently coordinated and harmonized so as to widen the scope and options for development available to any constituent member of the community, and to invest the community with an

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economic potential that is greater than the sum of its constituent parts. (Owen Arthur, 2004, pp. 10–11)

This goal as it is currently configured is a two-step progression: first toward a single market of many economies and then later toward a single economy. The thinking is that the latter, which requires the more difficult decision of sacrificing national sovereignty, can be achieved only when the infrastructure of the former is in place. The issue of national sovereignty goes back to an earlier time when the goal of unity was political rather than economic. The attempt by Great Britain to form a federation of its West Indian colonies in the 1950s was founded upon the belief that that was the best way for these small countries to become politically and economically viable in the post-World War II era. The political experiment failed when Jamaica opted for independence in 1962, followed shortly thereafter by Trinidad and Tobago. However, the search for economic cooperation continued when the Caribbean Free Trade Association (CARIFTA) was created in 1969. And in 1973, the Treaty of Chaguaramas established the Caribbean Community and Common Market (CARICOM) that replaced CARIFTA. Article 3 of the Annex to the Treaty set out the following objectives: ●

The strengthening, coordination and regulation of economic and trade relations among member states in order to promote their accelerated harmonious and balanced development;

●

The sustained expansion and continuing integration of economic activities, the benefits of which shall be equitably shared taking into account the need to provide special opportunities for the Less Developed Countries;

●

The achievement of a greater measure of economic independence and effectiveness of its member states, groups of states and entities of whatever description.

The aim is to improve export competitiveness and stimulate growth by encouraging more efficient use of resources. In the more than three decades since CARICOM was established, Caribbean countries have been directly affected by major changes in the world economic environment and within the region.

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Oil prices rose sharply in the 1970s, favoring Trinidad and Tobago (the only oil-rich CARICOM member) and punishing the rest. The recession that followed in the industrial countries curtailed exports from the Caribbean. And the rise of socialist governments in the region, particularly in Jamaica and Guyana, choked off foreign investment and further crippled economic growth. The region’s major trading partners reacted by offering unilateral trade concessions. The United States established the Caribbean Basin Initiative; Canada created CARIBCAN; and the European Union signed the Lomé Convention. All these programs offered preferential arrangements for Caribbean exports in North American and European markets. The 1990s saw a gradual weakening of the benefits from these preferential arrangements, with the emergence of trade blocs such as NAFTA and CAFTA and a new world trading system under the World Trade Organization. All these developments , in one way or another, diverted the attention of the CARICOM member states away from the integration movement toward their own national interests and delayed progress on a number of steps that would create a single market. One issue was the common external tariff (CET) provided for in Article 31 of the Treaty of Chaguaramas: “Member States agree to establish and maintain a common external tariff in respect of all commodities imported from third countries in accordance with a plan and schedule to be adopted immediately upon entry into force of this Annex.” In 1992, nearly 20 years later, CARICOM countries agreed on a five-year time table during which the CET would be reduced in four stages from a maximum of 35 percent to a maximum of 20 percent. Member countries are still sorting the final stages of the implementation process. To offset lower tax revenues from reduced tariff rates, many governments have imposed a consumption tax on imports while Barbados has replaced its consumption tax with a value-added tax. The consumption tax serves the double purpose of generating tax revenues and protecting local high-cost producers from being driven out of business by a flood of cheap imports. Between 1993 and 2000, nine protocols were signed by the heads of governments to revise the Treaty of Chaguaramas to establish the Caribbean Single Market and Economy (CSME). The expectation is that when all the protocols are ratified by the respective

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governments, the resulting greater mobility of labor and capital will generate greater intraregional trade. The Economist Intelligence Unit (1999) suggests that these protocols could also reduce the high costs of government bureaucracy, which often account for 50 percent of the government budget. Fifteen members now comprise CARICOM: 11 Anglophone Caribbean islands, Belize, Guyana, Suriname, and Haiti. Haiti was reinstated as a full member in 1999 after a two-year suspension that was put in place because CARICOM members were angry about the ouster of President Aristide, who was democratically elected. Not every one agrees that Haiti should be a member of CARICOM. Oliver F. Clarke (2004), chairman and managing director of the Gleaner Company, the publisher of the Gleaner, the largest circulation newspaper in the Commonwealth Caribbean, questions the inclusion of Haiti as a full member: Why would the 15 CARICOM nations include Haiti as a full member (1998)? Haiti has a population of over seven million people and has the lowest per capita income of the region, and a long history of democratic failure. The French-speaking population of Haiti by itself (7.4 million) is greater than the population of all of the other 14 members combined (6.4 million). What does its inclusion in CARICOM add to the other members? It is not clear. Why did CARICOM not just seek a trade agreement as it later did with the Dominican Republic?

Clarke believes that the inclusion of Haiti as a member should be reconsidered. The other 14 members have so many problems of their own that dealing with a civil war in a failed state, wherever geographically located, should not be taking up so much time. It is inappropriate for small countries in the Caribbean to be expected to resolve Haiti’s problems, which are probably unsolvable, when we have so many other issues which go unresolved. (Clarke, 2004)

There is no doubt that the integration of Haiti into CARICOM will present problems. With by far the lowest per capita income and the highest unemployment rate of all the CARICOM countries, Haiti is positioned to attract direct investment in search of cheap unskilled labor away from the rest of the CARICOM countries. Prior to the

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U.S. embargo, Haiti had a thriving garment-manufacturing industry. With the removal of the embargo, it has a chance to recover its comparative advantage—a development that could be beneficial for the rest of CARICOM countries as they accelerate their shift away from labor-intensive manufacturing toward high value-added services. A Common Currency In order for the single economy to operate efficiently, it must also have a single currency. This necessarily means the transfer of national monetary authority to a regional central bank to conduct monetary policy. This erosion of national sovereignty has been a major obstacle to full economic integration of a set of islands and mainland countries scattered across the Caribbean. The question is this: Will these countries with different output and cost structures agree on a common monetary policy? Caribbean central banks are not independent; they fall under the jurisdiction of the Ministry of Finance and are, therefore, obligated to support the aim of government policy. No government is, therefore, anxious to sacrifice its control over monetary policy. All the national currencies of the Caribbean are tied to the U.S. dollar, and for good reason. The United States is the largest trading partner of the Caribbean. Two of the most important items of U.S.Caribbean trade are tourism and petroleum. Petroleum is traded internationally in U.S. dollars, and most tourists to the Caribbean come from the United States. In these tourist-dominated countries, the U.S. dollar is preferred to the local currency. In addition, billions of dollars flow from the United States annually in the form of remittances from immigrants, and Caribbean central banks carry large dollar reserves. In fact it could be argued that the monetary system in the Caribbean is unofficially dollarized. If CARICOM governments made dollarization official, it would eliminate the need and the cost of creating a new currency. A number of Latin American countries, Panama and Argentina among them, have successfully dollarized and are now experiencing robust growth. At the 1984 heads of governments meeting in the Bahamas, CARICOM rejected the concept of a single currency, preferring instead to have each currency pegged to the U.S. dollar at different exchange rates. An Inter-American Development Bank report on CARICOM confirms

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this attitude toward a single currency: “Vulnerability arising from dependence on one or two exports (as in the case of bananas) has made countries hesitant about committing themselves to one set of exchange rate and monetary policies.” Furthermore, the report argues, “the optimality of a single currency area in such a small integration scheme, and especially in the era of dollarization and hemispheric integration, remains in doubt. Hence the goal of monetary union, which should lead the process of convergence as in the EU, does not receive the same priority. The search for a common currency has been deferred; exchange rate stability and convertibility are seen now as more realistic goals” (Inter-American Development Bank, 2002, p. 22). One of the major objections to dollarization is the loss of control over monetary policy (not just within the nation but in the entire region), along with which comes diminution of sovereignty. Dollarization would in effect transfer monetary policy to the Federal Reserve Bank in Washington. Even if it is clear that the benefits of dollarization (more domestic trade and capital flows) exceed the cost (loss of control over monetary policy and the seigniorage that goes with it), the politics of dollarization would remain an obstacle. Despite these objections, the U.S. dollar is acknowledged directly or indirectly as the international unit of account in the Caribbean. The Caribbean Community Secretariat publishes its balance of payments statistics in U.S. dollars and its national account statistics in East Caribbean dollars. But since the EC dollar is fixed to the U.S. dollar, in effect the U.S. dollar becomes the unofficial unit of account for the region. G.M. Wessels (2003) offers the following fifteen features that he regards as essential for considering dollarization as an exchange rate regime: 1. The smaller the country’s size and the more open its economy; 2. A low involvement with international capital markets; 3. A high share of trade with the anchor country to which its country will be pegged; 4. Existing trade concentrated in dollar terms; 5. Similar shocks in the dollarizing country as in the anchor country;

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6. An already high level of liability dollarization (high domestic borrowing levels denominated in terms of the dollar); 7. Volatile capital flows where devaluation is risky and wages and prices are sticky so that the devaluation may have more disadvantages; 8. A willingness to sacrifice monetary independence for its partner’s monetary credibility; 9. A lack of policy credibility and central bank independence; 10. A political and social environment favorable to dollarization; 11. A willingness to abandon local money as part of its national pride and symbols; 12. A history of hyperinflation or continuously high inflation that does not allow an exchange rate—based stabilization policy; 13. Relatively high international reserves; 14. A fragile and crisis-prone internal banking system where a currency crisis easily develops into a banking crisis; and 15. Imperfect and costly market information. Although many of these features are present in the Caribbean, the willingness to sacrifice monetary authority is fraught with political problems because central banks in the Caribbean come under the political supervision of the Ministry of Finance.1 In a single economy, which is the goal of CARICOM, national governments would have to give up their control over monetary policy to a regional central bank with no track record. But if dollarization is an option, then the Federal Reserve Bank would eliminate the need for a regional central bank. This option, Wessels argues, has hidden dangers: “Dollarization can be dangerous because there is not yet sufficient empirical and historical evidence to support it. Many of the so-called benefits are uncertain and may not follow dollarization” (Wessels, 2003, p. 9). Dollarization is not a new phenomenon as Kurt Schuler (2007) points out. There have been several episodes of dollarization around the world dating back to the eighteenth century when Indonesia was dollarized from 1794 to 1807. During the period 1938 to 1951, which covers World War II, most of the British colonies of the eastern Caribbean (Anguilla, Antigua and Barbuda, Dominica, Grenada,

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St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines) were dollarized. In Latin America, Panama has had the longest history of dollarization, from 1903 to the present. Juan Luis MorenoVillalaz (2005) argues that Panama’s “unified currency system eliminates foreign exchange risk, currency mismatches, and speculative attacks so common in other countries with central banks and ‘sovereign’ money. The absence of ‘policy decisions’ regarding monetary or exchange rate affairs reduces risk because less information is needed by outside investors” (p. 128). The success of Panama is attributed not only to full dollarization but also to full integration of the domestic banking system with the international financial system. “Financial integration equalizes Panama’s and world interest rates and implies that capital inflows and outflows arising from banks’ portfolio adjustments are a crucial element in the macroeconomic adjustment process. . . . The system is successful in the microeconomic sense, with large inflows of financial resources, low interest rates, and credit balances of more than 100 percent of gross domestic product” (Moreno-Villalaz, p. 128). Delisle Worrell (1992) argues for a fixed exchange rate regime for CARICOM with a preference for a quasi-currency board arrangement rather than full dollarization: “A quasi-currency board, which ensures stability of the exchange rate by maintaining a supply of foreign exchange reserves for its defense, is the only regimen that has produced a sustainable fixed exchange rate in the CARICOM region. It has advantages over full dollarization: some seigniorage accrues to the domestic monetary, the monetary authority may act as a lender of last resort for domestic banks, and a commitment to a fixed exchange rate lends credibility to appropriate fiscal policies” (p. 30). Worrell’s argument rests largely on the experience of instability in such countries as Jamaica and the Dominican Republic that tried to conduct independent monetary policy. Baele et al. (2004) offer the following definition of financial integration: The market for a given set of financial instruments and/or services is fully integrated if all potential market participants with the same relevant characteristics

1. face a single set of rules when they decide to deal with those financial instruments and/or services;

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2. have equal access to the above-mentioned set of financial instruments and/or services; and 3. are treated equally when they are active in the market. (p. 6) They argue that when these conditions are met, capital will move freely within the region into productive investment; such free mobility will enhance economic growth. However, their definition does allow for frictions as long as the impact of frictions is symmetric in the affected areas. It also “encompasses the law of one price . . . [which] states that if assets have identical risks and returns, then they should be priced identically regardless of where they are transacted . . . If the law of one price does not hold, then there will be room for arbitrage opportunities. However, if the investment of capital in non-discriminatory, then any investors will be free to exploit any arbitrage opportunities, which will then cease to exist, thereby restoring the validity of the law of one price” (p. 7). Testing the validity of this law in the Caribbean would be difficult because it requires that the instruments be listed on the regional stock exchange, which at the moment is in its infancy. A rough measure of the state of financial integration in the Caribbean is indicated in the difference in the interest rates on Treasury bills issued by Jamaica and Trinidad and Tobago in table 10.1. In a single market, funds from Trinidad would flow into Jamaica to equalize the rates or to reduce the spread. Although there may be differences in risk associated with these instruments due to different levels of national indebtedness, the wide gap must also be attributed to factors such as lack of information and differences in currency values that hamper the movement of capital. Table 10.1 Treasury Bill Rates for Jamaica and Trinidad and Tobago, 1991–1996 Year

Jamaica

Trinidad

1991 1992 1993 1994 1995 1996

25.6 34.4 28.9 43.0 27.9 28.8

7.7 9.3 9.5 10.0 8.4 11.6

Source: IMF Staff Country Reports

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To the extent that the banking system in CARICOM countries is not fully integrated with the international financial system, the full benefits of dollarization may not be achieved. Differences between the infrastructure of the domestic banking system and the international financial system may prevent full financial integration. Whether it is through a quasi-currency board mechanism or full dollarization, a single CARICOM market and economy will need a single currency to reduce transaction costs and to facilitate the flow of investment within the country and from abroad. Currently, cross-border borrowing within CARICOM is denominated in U.S. dollars. The fact that all Caribbean currencies are pegged to the U.S. dollar means that Caribbean central banks must accumulate enough reserves to maintain the value of local currencies in the event of a speculative attack, sharp fluctuations in export earnings, or the coming due of large short-term debts. It was speculative attack that triggered the Asian financial crisis in 1997, forcing sharp devaluations in several currencies with disastrous implications for domestic income and prices.2 Even though the affected Asian countries had accumulated large foreign reserves, it was not enough to stem the ebb tide of capital flight. In her address to the 35th anniversary conference of the Central Bank of Barbados, Marion Williams (2007), the governor, cited the Chiang Mai initiative3 that arose from the Asian crisis as relevant for the Caribbean: “Today, a collective response drawing on that regional integration initiative would be possible as opposed to the individual country responses witnessed in 1997. This example of repositioning of South East Asia is of significant import for Central banks in other regional arrangements and other regional groupings are considering the establishment of such pools” (p. 3). It would seem that such pooling would be best handled by a Caribbean central bank serving a single Caribbean economy with a common currency. But Williams sidetracked the notion of a Caribbean central bank; she, however, acknowledged the role that such an institution would have to play: “A common currency necessitates a single set of economic, monetary, financial and fiscal policies which would ensure balance of payments viability for the region. Accordingly, all of the countries in the union would have to fall in line with the currency’s monetary and exchange rate dictates. No agreement has

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been reached on whether the common currency would be fixed or floating. Also, there would need to be harmonized fiscal policies to ensure the success of regional monetary policy” (p. 5). Intraregional Capital Flows A functioning regional stock market will direct capital into areas where there is a shortage of capital. Even in the absence of a functioning stock market, capital tends to move from countries with a trade surplus to those with trade deficits. This has made petroleumrich Trinidad and Tobago the principal intra-Caribbean supplier of capital, as is manifested in the expansion of Trinidad businesses in other parts of the region. In the first half of the first decade of the twenty-first century, Trinidad registered an expanding surplus on its current account, from US$449 million in 2001 to US$3,964 million in 2005. This was the result of the more than doubling of the value of petroleum and petroleum-related exports over the period. Enid Bissember (2004) describes the flow of capital as erratic, with the major share going to Jamaica and Barbados and only a trickle to the rest of the Caribbean. From 1999 to 2003, US$171 million went to Barbados, US$95 million to Jamaica, and US$23 million to the rest. The leading Trinidad investors include such large Trinidad firms as Republic Bank of Trinidad and Tobago, the Republic Bank Limited, and conglomerates such as Neal and Massey, ANSA McAL, and C.L. Financial. Among Trinidad’s investments in Jamaica is the acquisition of the Caribbean Cement Company,4 which is the sole supplier of cement to that country. Other investments have gone into firms in the tourism and banking and finance sectors. Although a functioning regional stock exchange and a common currency would greatly enhance the flow of intraregional capital, the reality is that this flow satisfies only a fraction of the Caribbean demand for capital. Barbados alone had a total capital inflow of US$1.2 billion over the period 1999–2003, an amount that was equivalent to the capital inflow into Jamaica for only two years, 1999 and 2000. The point is that extraregional borrowing will continue to be essential for the Caribbean long after the Single Market and Economy becomes a reality. The same is true of extraregional trade.

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Extraregional Trade The fact is that for these small economies with a narrow export base, the demand for intraregional imports is a function of their earnings from extraregional trade (Palmer and Elliott, 2003). Table 10.2 shows that only a relatively small share of leading exports is sold within CARICOM. In a similar way, external trade in oil and gas enhances Trinidad’s ability to supply capital to the rest of the region. In general, the foreign policy of the region is driven by the twofold goal of opening markets outside of the region and removing barriers within the region. The pace at which the latter occurs is in no small way influenced by the erosion of preferential access to extraregional markets for traditional exports. This makes the intraregional market a complement to rather than a substitute for the extraregional market. With the shift of the Caribbean economies toward tourism and financial services, the extraregional market becomes even more important relative to the regional market because the demand for these services is largely external. The importance of the extraregional market for CAROCOM exports is underscored by the share of leading exports sold within the group. In 1999, this share ranged from 2.43 percent for Jamaica to 32.66 percent for Trinidad and Tobago (Palmer and Elliot, 2003). Success in extraregional trade in a globalized world with no preferential arrangements requires CARICOM exporters to be competitive, a feat made more difficult for manufacturing firms because their relatively small size does not allow them to benefit from economies of scale. Nevertheless, they can still achieve efficiencies if Table 10.2 Share of Leading Exports Sold within CARICOM, 1999 Dominica Barbados Trinidad & Tobago St. Lucia St. Kitts & Nevis Grenada Jamaica

17.18 22.32 32.66 0.54 2.57 22.29 2.43

Source: Information System of External Trade DATAINTAL

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they can keep labor and energy costs down. In this regard, firms in oil-rich Trinidad benefit from locally available plentiful cheap energy and are more likely to be energy intensive. Thus with the combination of low-cost energy and an ample supply of capital, Trinidad and Tobago is positioned to be a powerful force within an evolving Caribbean economy. With a common external tariff, Trinidad’s manufacturing firms are poised to dominate the intra-Caribbean market. This is a different picture from the promising one painted of manufacturing in Jamaica by Mahmood Ali Ayub (1981) in the 1970s, when it was a diversified sector employing 11 percent of the labor force and contributing 18 percent of GDP. Together the oil crisis and the socialist policies of the late 1970s choked off the inflow of foreign capital and frustrated the promise of Jamaican manufacturing. The point is that external shocks have a way of changing the course of Caribbean development, often leaving government policy to react. These are small countries but the process of their reaction is analogous to turning a large ocean liner around. It is not nimble. For over 30 years, Caribbean countries have been reacting to the need for a single market with only modest progress on the essentials for such a market. Part of the problem is that reaction to external shocks has become increasingly complicated, requiring a cadre of skilled public servants. This is particularly acute when negotiating with other countries that are represented by teams of highly skilled negotiators. The problem is aggravated by the fact that an increasing share of the brightest and the best talents are being attracted into higher-paying jobs in the private sector, especially into finance rather than into government. This is aggravated by the fact that large numbers of highly educated people have emigrated. As a consequence it has taken Caribbean governments a longer time to deal with complicated international issues. One solution is to engage the talent in the private sector as members of negotiating teams the way the Americans and Europeans do. Caribbean governments have tended to negotiate trade deals with thin teams of negotiators, many of whom have no business experience. This problem reflects the peculiarities of Caribbean capitalism and its relationship with the state. Caribbean capitalism is characterized by the control of a small group of businessmen, some of them acting as surrogates for

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foreign firms. Quite often they are ideologically to the right. And when a left of center government is in power, as was the case in Jamaica in the 1970s, the divide between the private sector and the state was apparent. In some instances, the relationship was hostile as the masses were encouraged to perceive businessmen as exploiters. As a result of the threatening atmosphere that developed, many businessmen with their capital in hand sought refuge in Miami. The flight of capital to Miami and elsewhere later contributed to the stagnation of the Jamaican economy. In the Caribbean, the Afro-Caribbean population has always regarded political power as its birthright because their ancestors paid their dues as slaves in the sugarcane fields.5 And throughout the short history of the political independence of their countries, the AfroCaribbean population has held political power with the responsibility for negotiating trade concessions on behalf of the minority with economic power. It can be reasonably argued that globalization is not a new phenomenon in the Commonwealth Caribbean. In fact, the system of colonialism had a global structure that pulled raw materials from the colonies to be manufactured into finished goods at the imperial center under preferential arrangements. In this setting the state was dominant. Modern globalization has given preeminence to the role of the productive sector by emphasizing competitiveness and recasting the state into a supporting role. In this role, the Caribbean state needed to develop a new institution to deal with the growing number of actual and potential trade agreements that had to be negotiated. After some faltering steps, the Caribbean Regional Negotiating Machinery (CRNM) was created (Anthony Payne and Paul Sutton, “Repositioning the Caribbean within Globalization,” Caribbean Paper No.1, Centre for Caribbean Governance Innovation, Waterloo, Ontario, Canada). But how useful is this entity in securing trade agreements in the era of globalization? Alan Beattie (2007) writes that “Globalization owes much more to the efforts of the private sector than to increasingly flimsy accords reached between ministers” (p. 11). To illustrate this, Beattie uses the example of the proposal made at the 2007 Asia-Pacific Economic Cooperation (APEC) meeting in Australia for a trade agreement of the Asia-Pacific countries “that would stretch most of the way around the world from St. Petersburg

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to New Foundland.” Beattie quotes Mark Johnson, chairman of APEC’s business advisory council and former deputy chairman of Macquarie Bank, as saying: “Business is well ahead of APEC. Integration is much more market-led and business-led than it is policy-led” (p. 11). Multinational trade negotiations are becoming more difficult because the easy gains from trade liberalization (mostly the reduction of simple percentage tariffs on physical goods) have been reaped. Beattie argues that as trade in highervalue-added goods and services becomes more complex, simple tariff reductions become less important. Other factors such as branding and market positioning become more important and make reaching binding agreements difficult. In the final analysis, Caribbean competitiveness will depend upon the efficiency of Caribbean businesses. A 1996 survey showed that of the ten largest public companies 6 in the Caribbean Community, six were in Jamaica, three in Trinidad and Tobago, and one in Barbados. The largest company by sales and number of employees was Neal & Massy Holdings of Trinidad and Tobago. These ten companies employed 35,000 workers, and had sales and assets of US$2.1 trillion and US$3.5 billion respectively and were largely engaged in trading (wholesale and retail), manufacturing, and financial services. In many respects, these business firms are at the cutting edge of Caribbean integration because they have subsidiaries in several islands where some are listed on the local stock exchanges. Although significant government ownership remains, particularly in the areas of oil and gas (Trinidad and Tobago) and sugar (Jamaica and Guyana), the private sector has grown especially in the distributive and financial services sectors.

The Organization of Eastern Caribbean States (OECS) The OECS and its monetary union, the Eastern Caribbean Currency Union (ECCU), comprise eight Leeward Island countries: Anguilla, Antigua and Barbuda, Dominica, Grenada, Montserrat, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines. The ECCU has a central bank, the Eastern Caribbean Central Bank, and a common currency, the EC dollar, which has a

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fixed relationship (EC$2.7) with the U.S. dollar. The primary purpose of the central bank is to promote balanced growth and development in the member countries by regulating the availability of money and credit and by maintaining monetary stability. The OECS is not yet an economic union; in other words, it is not yet a single economy. In his 2006/2007 annual report, Dwight Venner, the governor of the ECCB, expresses the belief that “an economic union will advance and cement the gains made over the last three decades in economic integration and functional cooperation by the OECS countries” (p. 3). Venner sees a movement toward economic union as facilitating “economies of scale and scope in production, marketing, distribution and public administration; increased negotiating capacity with regard to their countries or groups of countries; and increased capability to mitigate risk by pooling of resources” (p. 3). The evolving OECS envisioned by the governor is one “based on services and high technology which will require a highly skilled and educated work force. It is only in the areas of knowledge and creative and cultural industries that increasing returns to scale will be achieved, which will be the underlying basis for the competitiveness of our economies” (p. 4). Fixing the exchange rate to the U.S. dollar has generated a stable inflation rate. The combination of stable exchange and inflation rates has created a favorable investment climate that has attracted a robust inflow of foreign direct investment, most of which has gone into the tourist industry. Over the period 2001 to 2004, the average annual flow of FDI was US$314 million, equal to Jamaica’s but below that for Trinidad and Tobago (US$754 million). The evolution of the OECS countries toward a service economy will require changes in the education system to prepare both workers and citizens with the appropriate skills. As Venner sees it, these changes will involve a restructuring of curricula and greater emphasis on teacher training, science, information and communication technology, and management skills. One of the major challenges ahead for the OECS countries is their integration into the Caribbean Single Market and Economy in which eventually all obstacles to intraregional trade and the flow of labor and capital will be removed. A fundamental perquisite of

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this process is the common external tariff (CET). The movement toward establishing the CET has been slowed by cost differentials that put the OECS countries at a competitive disadvantage. The Architecture of Global Trade: Multinational and Regional Arrangements The World Trade Organization (WTO) was established on January 1, 1995 to administer the trading regime arising out of the eight-year Uruguay Round of Multinational Trade Negotiations that concluded in 1994. Its main objective is to facilitate world trade by removing tariff and nontariff barriers to trade and to restrain the use of subsidies. The three guiding principles of the trade agreements are nondiscrimination, reciprocity, and transparency. Exemptions to nondiscrimination and reciprocity are embodied in Article XXIV of the GATT, Article V of the GATS, and the Enabling Clause that grants special treatment to trade arrangements among developing countries and between developed and developing countries. Member countries of the WTO are mandated to abide by its rules. Over the preceding three decades, there has been an explosion of regional trade arrangements (RTAs) that complement the work of the WTO. As trade barriers are reduced within each regional group, the WTO seeks to eliminate trade barriers between groups and between countries, ultimately leading to a world without borders. RTAs must conform with the nondiscriminatory and reciprocity principles of the WTO except when the RTA is reported under the Enabling Clause. Up to 1997, totally 14 RTAs were notified under this clause. The Caribbean Community (CARICOM), although an RTA of developing countries, has not reported under the Enabling Clause. Instead, it has been reporting under Article XXIV that provides for arrangements between developed countries and between developed and developing countries. This is because CARICOM was founded by the Treaty of Chaguaramas in 1973 before the 1979 Enabling Clause came into existence. This means that CARICOM is required to meet a higher standard than some of the most advanced developing countries that are members of MERCOSUR and the ASEAN Free Trade Area.

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Trade preferences granted to CARICOM countries under the Lomé Convention and the Caribbean Basin Initiative (CBI) were designed to allow them time to catch up. In accord with the principles of reciprocity and nondiscrimination, these preferences are being phased out. According to CARICOM, “The WTO has failed to recognize ‘small economies’ with their known volatility and vulnerability, due primarily to high commodity concentration, as a special category warranting substantial and transitional treatment different from that accorded to other more advanced developing countries” (Caribbean Trade and Investment Report, 2000, p. 169). The successful challenge to the European Union (EU) banana regime that offered special preferences to the Caribbean is a case in point. In their effort to reduce their vulnerability to external shocks, several CARICOM countries have been encouraged to diversify their economies away from traditional commodity exports into nontraditional services such as offshore banking where they may have comparative advantage. But the recent OECD Report on Harmful Tax Competition has threatened to take punitive action against several Caribbean countries it designates as tax havens if they do not take corrective action, particularly with regard to issues of transparency. Under the Trade-Related Investment Measures (TRIMS) Agreement of the WTO, member countries can no longer include certain performance requirements, such as export and local content ratios, as conditions for granting incentives to foreign investors. This provision severely restricts the ability of the small CARICOM economies to attract foreign direct investment into activities deemed essential for economic development. There is also the fact that few CARCOM members have had enough time to comply with the Trade Related Property Rights (TRIPS) Agreement that required them to amend their national legislation by January 1, 2000. Developments in the CARICOM are not able to keep pace with multilateral agreements. This disconnect has created much discomfort for the CARICOM. Yet the reduction of trade barriers between regional groupings and between countries offers benefits to these export-oriented economies. But the cost of adjustment in the short run is painful and leads to the complaint that “the developing countries are being asked to instantly adjust whereas

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the developed countries have had five decades of successive trade rounds within which to do so” (Caribbean Trade and Investment Report, 2000, p. 169). Globalization and Caribbean Labor Globalization is eliminating preferential trade arrangements, exposing high-cost Caribbean traditional export industries to international competition and putting them at a disadvantage. On the import side, the removal of tariff and other barriers will stimulate imports that will compete with the products of domestic industries. The result is that some domestic industries will be driven out of business, causing the income of workers to decline. Two observations are of interest: (1) against these global forces, labor unions are powerless to arrest the decline in the earnings of their members and (2) the earnings of workers producing nontradable goods and services are less likely to be affected. Against this background, worker dissatisfaction in industries producing tradable goods could become a problem. In Jamaica, the decline in the number of work stoppages relating to “wages and conditions of employment” in the latter half of the 1990s, from 62 in 1994 to 34 in 1998, may be reversed.7 One of the pillars of the Caribbean Single Market and Economy is the free movement of labor. It is expected that this will improve the efficiency of labor and allow the region to adjust more readily to external shocks resulting from globalization. While capital is relatively free to move, labor is not. CARICOM has taken only halting steps toward complete labor mobility. But Owen Arthur (2004), the former Barbados prime minister, is optimistic: “With the improvements in inter-island transportation both in terms of airlift, scheduling and cost, we must be prepared to recognize the evolution of a new type of worker—namely the frontier worker— who will reside in one country and work in another” (p. 41). This phenomenon of the frontier worker is already occurring. As capital mobility spawns investments in many countries, there is a need for professionals to travel to these investment locations. In this sense, the private sector has moved ahead of governments, forcing them to make arrangements to facilitate the movement of

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professional workers. The free movement of the ordinary worker remains a goal. From the perspective of developed countries, globalization has led to the exporting of jobs to developing countries. But labor unions in the developed countries see it as having a negative impact on their membership. As a result, they take the position that developed country labor standards should be part of trade agreements. Although the humanitarian aspect of this is praiseworthy, the effect could raise the cost of labor in developing countries and reduce local employment as well as the cost advantage that makes outsourcing profitable.

Chapter 11

Caribbean External Economic Relations

There is an over-riding need for all of us to recognize the very special circumstances of small developing states and economies, including island-based ones, such as those in the Caribbean. This recognition ought always to command the attention of policy-makers within the region and internationally. It is a consideration of critical importance, especially on matters of trade and development financing. Excerpt from a speech by the Honorable Dr. Ralph E. Gonsalves, prime minister of St. Vincent and the Grenadines and chairman of the Caribbean Community at the “Conference on the Caribbean: A 2020 Vision,” Washington DC, June 19, 2007.

Preferential Treatment Trade between the developed countries and the Caribbean must be seen as a complex of unilateral trade concessions offered to the region by the United States, Canada, and the European Union. Because of the small size of the Caribbean economies, U.S. trade policy has treated the Caribbean as part of a larger group of countries in the Caribbean basin, offering unilateral trade concessions under the Caribbean Economic Recovery Act of 1983, otherwise known as the Caribbean Basin Initiative. This group approach is also used by the European Union under the Lomé Convention and the successor Cotonou Agreement that offers special trade concessions to the imports of goods into Europe from the ACP group, the former African, Caribbean, and Pacific colonies. Under the

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CARIBCAN program, Canada also offers unilateral concessions to the Commonwealth Caribbean. This group preferential treatment eliminates competition among the beneficiaries and reduces their sense of marginalization. More recently, Venezuela has come into the picture with its concessionary oil sales and oil-for-banana barter arrangements that have attracted members of CARICOM suffering from high oil prices and declining banana export markets. As of 2008, Dominica is the only CARICOM country to sign on to the Bolivarian Alternative for the Americas (ALBA), a Venezuelan alliance with Bolivia, Nicaragua, and Cuba. CBERA, CARIBCAN, and the Cotonou Agreement represent the foundation of Caribbean nonreciprocal trade agreements with North America and the European Union. In 2000, the EU signed the Cotonou Agreement with the ACP countries in the capital of Benin, replacing the Lomé Convention that lasted 15 years and three renewals through Lomé IV. The Cotonou Agreement was a watershed agreement because it was a stepping stone to reciprocity. It provided for the negotiation of Economic Partnership Agreements (EPA) with a reciprocity feature that took effect at the start of 2008 and satisfied World Trade Organization (WTO) rules at the same time. In order to allow for regional differences, the 79-member ACP group divided itself into six subgroups,1 of which the Caribbean Forum (CARIFORUM) is one. CARIFORUM includes the 15 CARICOM states and the Dominican Republic. Other developing countries outside of these groups would also have access to similar partnership agreements, thereby removing the special status granted to the member states of the ACP group. Because CBERA and CARIBCAN offer nonreciprocity trade arrangements, the United States and Canada had to request and receive a waiver from the WTO. Upon expiration of the first waiver in 1995, the United States submitted a request to the WTO Council for Trade in Goods, dated September 15, 2003, for a second waiver. In the language of the request, “The United States seeks to continue the centerpiece of the CBI: non-reciprocal, duty-free access for imports into the territory of the United States from eligible Caribbean countries and territories” (WTO, March 2003a, p. 3). The Canadian request for a WTO waiver follows along similar lines. CARIBCAN is the result of a commitment by Canada

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at the Commonwealth Heads of Government meeting in Nassau in October 1985. Its main feature is “the unilateral extension by Canada, beginning June 15, 1986, of duty-free access to the Canadian market for most commodities originating in Commonwealth Caribbean countries” (WTO, November 2003b). In 2002, 97 percent of all imports from CARIBCAN beneficiaries entered Canada duty-free (Statistics Canada, November 2003). The aim of these arrangements is ostensibly to enhance the flow of trade and capital to stimulate Caribbean development. The expectation is that as trade and capital inflows raise the trajectory of economic growth over time, the need for aid will diminish. While evidence suggests that the region has benefited from aid, recurring natural disasters often wipe out the gains in these small vulnerable countries. The prevailing view is that the developed countries should help to put in place infrastructure that would facilitate a rapid response to natural and man-made disasters.2 Although trade undoubtedly is important for growth, it has not been the complete answer for Jamaica, Guyana, and several other non-oil-producing CARICOM member states whose growth has been anemic. Hugo Chavez, the populist president of Venezuela, has seized on this as an opportunity to offer a new vision, called the Bolivarian Alternative for the Americas (ALBA), of regional integration as “an alternative to the neo-liberal model of corporate globalization.” ALBA is based on the writings of the liberator Simon Bolivar and “is grounded in the principles of complementarity (rather than competition), solidarity (instead of domination), cooperation (not exploitation), and respect for sovereignty (instead of corporate rule)” (www.globalexchange.org). The only CARICOM country that has signed on so far is Dominica as part of an arrangement to barter its bananas for oil. Other CARICOM countries have benefited from low-cost loans from Venezuela to purchase oil. In 1991, CARICOM signed a trade and investment agreement with Venezuela in St. Kitts. Article 1 of this agreement states the following: The fundamental objective of this Agreement shall be to strengthen the economic and trade relations between the Parties through:

a. The promotion and expansion of the sale of goods originating in CARICOM through, inter alia, one-way dutyfree access to the Venezuelan market;

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b. The stimulation of investments aimed at taking advantage of the markets of the Parties and strengthening their competitiveness in world trade; c. The facilitation of the creation and operation of regional joint ventures; and d. The encouragement of mechanisms for the promotion and protection of investments by nationals of the Parties. In table 11.1, minerals, fuels, and lubricants (mostly from Trinidad and Tobago) represent the dominant category of CARICOM exports to the United States and the European Union, while inedible crude materials (mostly bauxite and alumina from Jamaica and Guyana) dominate exports to Canada. Manufactured products (mostly apparel) account for only a small share of the total. The skewness in the distribution of exports toward mineral fuels and crude materials reflects American, Canadian, and European investment in minerals, primarily oil in Trinidad and Tobago and bauxite and alumina in Jamaica and Guyana. On the import side, the distribution is different. The dominant categories are manufactured products of all kinds, food, and machinery and transportation equipment. Table 11.1 CARICOM Domestic Exports to the United States, the European Union, and Canada by SITC Sections, 2006 SITC Sections

All Sections US$ Food and Live Animals Chiefly for Food Beverages and Tobacco Crude Materials, Inedible, Except Fuels Mineral Fuels, Lubricants and Related Materials Animal and Vegetable Oils, Fats, and Waxes Chemicals and Related Products, Not Elsewhere Specified Manufactured Goods Classified Chiefly by Material Machinery and Transport Equipment Miscellaneous Manufactured Articles Commodities and Transactions Not Classified Elsewhere Source: Based on data from Caricomstats.org

United States

European Union

Canada

8,859,448 % of Total 2.1 0.7 2.2 75.5 0.0 16.9

2,037,357 % of Total 19.6 2.0 17.8 40.4 0.01 17.7

588,338 % of Total 2.9 4.4 51.1 0.6 0.0 8.6

1.4

1.6

18.7

0.6 0.5 0.01

0.25 0.4 0.02

0.06 0.09 13.5

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131

The Influence of the United States Just about every facet of the Caribbean economy is influenced by the U.S. economy; it is the region’s largest trading partner. Much of this influence flows through capital, trade, communications, and migration. It also flows through the exchange rate. The currencies of Caribbean countries are pegged to the U.S. dollar, most with a fixed peg and others with a soft peg that allows for variations in exchange rates. The chief benefit from this relationship is monetary stability. But as the value of the U.S. dollar falls in relation to world currencies, another benefit is the improvement of the competitiveness of Caribbean exports to non-dollar countries. As the U.S. dollar depreciates against world currencies, so does the Jamaican dollar against the U.S. dollar. Between 1999 and 2005, the Jamaican dollar depreciated against the U.S. dollar, the pound sterling, and the euro by 59, 79, and 86 percent respectively (Council of Economic Advisors, 2006; Bankofjamaica.org). This means that there will be a significant shift in the source of imports from the United Kingdom and the European Union to the United States, further tying Jamaica to the U.S. economy. For CARICOM countries, this shift appears to have been in progress for sometime. Between the first quarter of 1996 and the first quarter of 2007, U.S. exports3 to CARICOM doubled, from US$1,031.9 million to US$2,159 million. But U.S. imports from CARICOM grew even faster, transforming the U.S. trade surplus with the region into a deficit, starting around the fourth quarter of 2002. This was due more to an increase in the U.S. demand for petroleum from Trinidad and Tobago than to changes in the exchange rate since petroleum is traded in U.S. dollars. From the first quarter of 1996 to the first quarter of 2007, 80 percent of U.S. imports from CARICOM came from Trinidad and Tobago. With its trade surplus with the United States reaching 1 trillion U.S. dollars by the first quarter of 2007, Trinidad and Tobago attained a powerful position as a supplier of capital to the rest of the CARICOM. In contrast, the depreciation of the Jamaican dollar worsened the country’s trade balance with the United States. Trinidad and Tobago is among the major recipients of direct investment from the United States, most of which goes into the production of petroleum and natural gas that are exported to the

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United States. Table 11.2 shows that while the trend for U.S. direct investment in the major recipient countries has been upwards, it appears to have moved in the opposite direction in Jamaica since 2004.4 The decline of U.S. investment in Jamaica in 2005 and 2006 is reflected in the number of affiliates, assets, and sales and in the sharp rise in net income, indicating that assets were sold. A similar picture emerged in Trinidad and Tobago when the number of affiliates declined sharply in 2004 while net income rose sharply. It is noteworthy that in both cases the implied sale of assets occurred a year after a sharp fall in net income (U.S. Department of Commerce, Bureau of Economic Analysis). The relationship between net income and compensation to employees reflects the different character of U.S. investment in the two countries. The high ratio of compensation to employees to net income in Jamaica is the opposite of the low ratio in Trinidad and Tobago. The former reflects predominantly labor-intensive (tourism and manufacturing) operations that are less profitable while the latter reflects capital intensive (oil and gas) operations that are profitable. As the most important trading partner of the Caribbean, the United States finds itself in a win-win relationship. U.S. investment in the Caribbean generates imports of U.S. goods and services as Table 11.2 Net Inflows of U.S. Foreign Direct Investment* in the Caribbean, 2002–2006 (US$ millions)

Antigua & Barbuda Bahamas Barbados Belize Grenada Guyana Haiti Jamaica St. Kitts & Nevis St. Lucia St. Vincent & The Grenadines Trinidad & Tobago

2002

2003

2004

2005

2006

93 7,645 1,817 52 7 157 63 3,097 –1 17 6 2,326

30 8,643 984 64 7 165 74 3,406 –1 (D) 6 2,392

26 11,985 3,146 96 7 169 84 3,586 –1 (D) 6 2,450

22 15,659 3,865 102 7 183 (D) 1,006 2 (D) 6 2,833

17 26,130 4,756 95 7 211 154 884 (D) 117 (D) 3,848

(D) Suppressed to avoid disclosure of data of individual companies * Direct investment position on a historical-cost basis Source: Bureau of Economic Analysis, U.S. Department of Commerce

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well as a flow of profits to U.S. investors. U.S. investment in the Caribbean often dictates the direction of Caribbean trade. For example, investment in Trinidad and Tobago’s oil and gas triggers a flow of energy exports to the United States. The same is true of investment in textile and wearing apparel and tourism in other parts of the Caribbean. In 2004, for the Circum-Caribbean, 52 percent of all tourists came from the United States. For CARICOM countries, this share ranged from 87.2 percent for the Bahamas to 21.9 percent for Dominica. For Jamaica, it was 70 percent. It stands to reason that tourism, mining (bauxite), and manufacturing (wearing apparel) industries have been the leading recipients of U.S. foreign direct investment in Jamaica. As a result they are likely to channel the first impact of fluctuations in the U.S. economy. When the source of investment guarantees the market for the output, it eliminates the need for marketing skills in the producing countries. They are essentially transformed by foreign direct investment into export platforms. The platform model encouraged by the CBERA is dependent on semi-finished materials from the United States with value-added done by an army of low-wage local workers. The exports of the producing countries are then inflated by the finished value of the assembled products. Least squares estimates of the income elasticity of U.S. general imports from CARICOM countries (USMC), Jamaica (USMJ), and Trinidad and Tobago (USMTT) for 46 quarters from 1996:1 to 2007:2 are shown below (see data in table A.4). logUSMC 5 221.463 1 3.08 logUSGDP (216.20) (21.54) Adj. R 2 5 0.91 logUSMTT 5 236.61 1 4.66 logUSGDP (218.74) (22.07) Adj. R 2 5 0.91 logUSMJ 5 15.6821.16 logUSGDP (7.28) (25.00) Adj. R 2 5 0.34 t values are in parentheses.

It is clear from these results that the response of U.S imports from Trinidad and Tobago and CARICOM as a whole to changes in

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USGDP has been highly significant and positive. In contrast, the response of U.S. imports from Jamaica to changes in USGDP has been weak and negative, suggesting that Jamaica’s commodity exports over the period did not benefit from U.S. growth due in large part to the decline of the share of manufactured goods in total exports. According to the U.S. International Trade Commission, this decline was due to difficulties in following CBERA/CBTPA rules of origin because of the need to “source increasing amounts of raw materials and inputs from outside the United States and the Caribbean basin region in order to be competitive” (USITC, 2006, pp. 3–21). But it is also due to a combination of other things: the end of textile and apparel quotas in 2005; NAFTA-related trade diversion to Mexico; growing competition from China; the extension of U.S. trade preference to lower-cost Central American countries (CAFTA); high production cost; and the cost of crime. The decline in textile and apparel exports has been steep: from US$300 million in the mid-1990s to US$7.5 million in 2005, causing a number of fabric and garment assembly plants to close (USITC, 2006). The aim of the Caribbean Basin Initiative, which was enacted in 1983 during the Ronald Reagan administration, was to replace aid with trade. By promoting growth and development, a vigorous private sector, it was argued, would be the antidote to the encroachment of socialism in the region. To accomplish this, the CBI provided incentives to American businesses to invest in the Caribbean and guaranteed a market for their exports with duty-free entry for an array of products. With the help of the U.S. government, American capital flowed into industries that could exploit the abundance of cheap Caribbean labor. The textile, apparel, and other assembly industries were the chief beneficiaries and they operated in a forest of tax-free economic processing zones that sprouted throughout the region. In essence, the CBI transformed Caribbean countries into export platforms that operate in isolation from the indigenous economy. The survival of these platforms depends on their profitability, which in turn depends on the persistence of low labor cost relative to that in other countries. Hidden behind the preferential treatment that CBI provides for Caribbean exports are the tax benefits received by U.S. foreign direct investment. The Caribbean provides an array of tax incentives to foreign direct investment, including tax holidays. It also allows for

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the full repatriation of profits. The fact is that the duty-free entry of exports into the United States arising from foreign direct investment benefits the foreign investors more than the Caribbean. Furthermore, a large share of the wage income generated by the employment of local workers is spent on consuming imports from the United States. The bottom line is that unilateral preferential treatment of the Caribbean disguises the true beneficiary of that treatment. Hoekman and Özden (2005), in their review of the literature on preferences for developing countries provide some support for this view. The early debates and arguments that pointed to the potential downsides of SDT [special and differential treatment] proved quite prescient—benefits have been limited, skewed in their distribution, and arguably obtained at high cost to the trading system, donor country consumers and many of the purported beneficiaries. Research has demonstrated that preferences can at best play a marginal role to assist developing countries—what determines and drives performance is not what others do, but what countries do for themselves. (p. 37)

Since the CBERA was enacted in 1983, and following the failure of the proposed Free Trade Area of the Americas, the United States has entered into numerous bilateral trade agreements with individual and groups of countries in the region. NAFTA was signed in 1993. Because it diverted trade away from CBERA countries, the United States amended CBERA in 2000 with the Caribbean Basin Trade Partnership Act (CBTPA) to provide NAFTA parity to countries designated by the U.S. trade representative to be eligible. These include Costa Rica, Dominican Republic, El Salvador, Honduras, Nicaragua, Panama, and five CARICOM countries: Belize, Guyana, Haiti, Jamaica, and Trinidad and Tobago. On August 2, 2005, President Bush signed Public Law 109–053, known as the Central American Free Trade Agreement (DR-CAFTA), which includes the Dominican Republic; negotiations are underway with Colombia for a similar agreement. The CARICOM countries would like a bilateral agreement of their own. While the garment assembly in Jamaica has declined due to higher labor cost, it has grown in Haiti5 where per capita income is the lowest in the Western Hemisphere. This growth has been stimulated by the Hemispheric Opportunity through Partnership

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Encouragement (HOPE) Act of 2006 that grants preferential access to the U.S. market beyond what is offered by CBERA. It has also been supported by a rise in direct investment, mostly from the United States, France, and Canada, which grew from US$6 million in 2002 to US$160 million in 2006. Apparel products represent 90 percent of U.S. imports from Haiti (USITC, 2006). Just as NAFTA reduced the benefits from Jamaica’s apparel trade with the United States under CBERA, so has CAFTA reduced Belize’s apparel trade (mostly of tracksuits) with the United States. As a result, FDI flows from the United States into Belize have moved into other sectors seen to have actual and potential comparative advantage such as tourism, agriculture, telecommunications, and petroleum. The flow of U.S. FDI into Guyana follows a similar pattern, with mining and telecommunications being the preferred destination sectors. In extremely open economies, external developments can be agents of diversification as the CBI was. Yet the picture of U.S.Caribbean economic relations that has emerged since CBI is one in which the diversification of the Caribbean economy confronts two opposing forces. One is the proliferation of bilateral trade agreements between the United States and other countries or groups of countries, a proliferation that has undermined the movement toward diversification that the CBI encouraged. The second is that where diversification is in retreat, FDI flows tend to reinforce this retreat by switching to traditional sectors that are profitable. In some instances, new international developments can override this switch. For example, the rising demand for ethanol in the United States has stimulated Brazilian investment in its production in Jamaica. A Brazilian firm has invested in a dehydration plant to make ethanol from Brazilian hydrous raw material and a distillery to produce ethanol from Jamaican sugarcane. According to the USITC, in 2006, fuel-grade ethanol was the leading U.S. import from Jamaica: 1.9 million barrels valued at US$164.6 million and representing 10.9 percent of all U.S. ethanol imports. Challenges A number of issues challenge U.S.-Caribbean relations, among them drug trafficking, Internet gambling and money laundering,

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security requirements, and the deportation of immigrants with criminal records. In September 2006, President George Bush designated the Bahamas, the Dominican Republic, Haiti, and Jamaica as major drug-producing or drug-transit countries. Jamaica was singled out as the largest marijuana producer and exporter in the Caribbean and St. Vincent and the Grenadines as the largest marijuana producers. The lingering fear is that the declining fortunes of banana, a major export crop, will drive more people into marijuana production and set up a criminal environment that could disrupt civil society (CRS, 2006). U.S. antidrug strategy includes sustained efforts against money laundering—efforts that have been stepped up since the terrorist attacks on September 11, 2001. According to the CRS, “The State Department’s list of major money-laundering countries includes six Caribbean countries —Antigua and Barbuda, the Bahamas, Belize, the Dominican Republic, Haiti, and St. Kitts and Nevis—and one British Caribbean dependency, the Cayman Islands” (CRS, p. 9). The case of Antigua and Barbuda underscores the conflict between the aim of a small country to diversify its economy with Internet gambling and the perception of the United States of that strategy as inimical to its national security. Antigua and Barbuda filed a complaint with the WTO challenging restrictions imposed by the United States on cross-border gambling. In 2005, the WTO backed Antigua and Barbuda’s claim that “the U.S. restrictions violate the United States’ market access commitments under the WTO’s General Agreement on Trade in Services” (CRS, p. 5). Antigua now complains that despite the fact that it has enacted legislation to tighten the regulation of its financial sector, there has been no U.S. action to comply with the WTO ruling. According to the CRS, the State Department maintains that even with this new legislation “the country remains vulnerable to money laundering because the sector is loosely regulated and because of its Internet gaming industry” (CRS, pp. 9–10). Caribbean Tourists and Students in the United States Aside from American tourists and Caribbean immigrants, there is a large movement of other people traveling from the Caribbean

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to the United States. Principal among them are Caribbean tourists, students, and business people. These groups bring with them a flow of foreign exchange to the United States. It is estimated that Caribbean visitors to the United States from CARICOM and nonCARICOM countries spent an average of US$1.5 billion a year over the period 1999–2005 (U.S. Department of Commerce: http://tinet. ita.doc.gov/view/f-2005-151-001/index.html). In 2006, among the 583,959 foreign students in the United States, students from the CARICOM countries represented the seventh largest group. If the average cost of education per student is US$10,000 a year, allowing for scholarships and financial assistance, then the total annual expenditure for 15,811 students would be US$158 million. Although this may represent a small share of the total student spending in the United States, the fact is that these are large outlays of foreign exchange by small countries with persistent deficits in their balance of trade. Over the years, declining Caribbean exchange rates have reduced the number of students studying in the United States. And since 9/11, more stringent visa requirements have kept the numbers down. Among CARICOM countries, by far the largest contingents of foreign students in the United States have come from Jamaica, Trinidad and Tobago, and The Bahamas. Foreign students are an important channel through which the knowledge of management and production technology is transferred when the students return home. But even when they do not return home, they become a part of an expatriate pool of skilled workers that can be tapped by their countries of origin. Ideally, the programs of study chosen by students should match the demand for skills in their home countries. But this is often not the case because students’ view of their job prospects may differ from the needs of their countries. Foreign students who go to the United States to pursue advanced science degrees often don’t return because in their home countries the opportunities for pursuing a career in their field do not exist even though there is a need for local research and development. American immigration policy encourages the retention of such skilled workers in the United States. Consequently many are employed by American corporations. While studying in the United States facilitates the transfer of the knowledge of technological processes, it usually takes foreign

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Table 11.3 Distribution of Patents and Trademarks in the Caribbean: Jamaica, Trinidad and Tobago, Barbados, and Haiti Residents Jamaica Patents Granted, 2002 Trademarks Registered, 2002 Trinidad & Tobago Patents Granted, 2002 Trademarks Registered, 2002 Barbados Patents Granted, 1999 Trademarks Registered, 1999 Haiti Patents Granted, 1999 Trademarks Registered, 1999

Non-residents

Total

3 287

203 1208

206 1495

0 225

17 949

17 1174

0 50

3 701

3 751

0 82

7 812

7 894

Source: http://stat.wto.org/CountryProfile

investment to transfer the process itself.6 But the transfer of technology does not transfer ownership; it merely gives the recipient country permission to use the process at a cost in the form of royalties and fees for patents and trademarks. Table 11.3 shows the overwhelming dominance of patents granted and trademarks registered to foreign entities in selected Caribbean countries. This underscores the dependence of Caribbean businesses on foreign technology. Although it could be reasonably argued that developing countries should invest more in research and development, it makes a great deal more sense for them to use the technology that is on the shelf rather than to waste resources trying to reinvent the wheel. The challenge for these countries is to use available technology to generate wealth and to craft policies to retain enough of that wealth for future growth and development. Foreign Aid Between 2005 and 2006, U.S. aid to the Caribbean averaged $340 million a year. The Congressional Research Service projects that it will reach a total of $1.2 billion in the first decade of the twenty-first century (Congressional Research Service, 2006). This would be a significantly lower figure than in the 1980s when it was $3.2 billion. After its military intervention in Grenada in 1983, the United States

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poured large amounts of aid to restore a friendly government in that country and to support the pro-free enterprise government of Edward Seaga in Jamaica. But after the collapse of the Soviet Union in 1991, American aid began to fall sharply to the point where the Caribbean began to feel ignored. Caribbean socialist political leaders had lost their bargaining chip because they could no longer play off the Soviet Union against the Americans. By then the “trade, not aid” thrust of U.S. foreign policy toward the Caribbean had taken hold, the major beneficiaries of this approach being the foreign investors and their local business partners. Economic growth in the region did not reflect any significant forward thrust, in part because many Caribbean countries were burdened by debt. The Emergence of Reciprocity When globalization eliminates unilateral preferential arrangements, these small countries are forced to become competitive in order to survive.7 Some see the elimination of preferential treatment as replacing social peace with social and political upheaval (Byron, 2000). The consequences are even more troubling because of the uncertainty of the Caribbean’s place in the governance structures of the institutions of globalization. The urgency of this concern is expressed by Byron: Within the WTO, for example, these countries have been reduced to waging guerilla war on the periphery of consultation and decision-making processes between the major actors, the EU and the US. This comes at a time when it is clearly evident that their economies and societies still require an enabling external environment, generated by appropriate international structures and policies, in order to survive. This message therefore has to be preached exhaustively by accomplished diplomats using appropriate coalitions and alliances, in all multilateral fora as well as in bilateral relations. (Byron, 2000, p. 139)

Gonsalves suggests that there is a tendency to see the threats rather than the opportunities in this process, a tendency that he believes “is linked to the fact that these economies depended on above-average protection (relative to other developing countries) in the markets of developed countries under the CBI, Lomé and CARIBCAN”

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(Gonsalves, 2002, p. 300). The opportunities, in Gonsalves’ perspective, lie in removing the barriers to trade liberalization that slow the speed of integration with the global economy. Although trade openness is an important indicator of this speed, it fails to explain the lackluster growth performance of Jamaica and Guyana, compared to other Caribbean countries with less trade openness. The speeds of trade integration and investment integration are often unequal, with the former normally lagging behind the latter. The Asian financial crisis of 1997 suggests that the liberalization of capital movements holds certain dangers for developing countries because of the possibility of sudden flights of capital from countries with an undeveloped financial infrastructure. Indeed one of the major issues in the Doha Round of trade negotiations is the resistance of developing countries to the liberalization of services, including financial services (see Dookeran, 2002). The recently signed Economic Partnership Agreement8 between the CARIFORUM (CARICOM plus the Dominican Republic) and the EU exposes Caribbean countries, starting in 2008, to creeping reciprocity over the next 25 years. This will affect these countries in different ways, depending upon the structure of their tax revenues and the structure of their foreign trade. Reciprocity threatens revenues from tariffs, which account for a large share of tax revenues in most Caribbean countries; it also threatens less efficient domestic production, although the EPA provides some shelter for a share of imports (15 percent) that will continue to be subject to tariffs. The EPA also recognizes that in a situation of reciprocity among unequal actors, a long transition period is necessary for local producers to become efficient enough to compete with imports and to penetrate new markets. As reciprocity drives local producers to seek profits in new areas of comparative advantage, it will spur changes in the structure of industry as well as in the structure of employment. The challenge to governments is to manage the unemployment of low-skilled workers who may bear the brunt of this process. It is important to understand that although artificial trade barriers will be reduced and ultimately eliminated, what Greenaway and Milner (2002) call “natural barriers” will remain. These are dictated by geography and small size that raise the cost of transportation and production. These barriers will tend to distribute the benefits of reciprocity in favor of the larger partner, the European Union.

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Although producers and labor unions may resist reciprocity, consumers will welcome it because it will reduce the price of consumer goods. However, the lower price of consumer goods will come at the expense of employment in those businesses that are driven out by cheaper imports. This will intensify the search for comparative advantage in new areas that will increasingly rely on skilled workers and the application of better technology. This means that investment in education and in research and development will play a larger role in this process. Jamaica and Guyana, the two countries that have suffered slow growth throughout the 1990s and into the twenty-first century, have offered opposing responses to the EPA. Jamaican prime minister Bruce Golding calls it “a good deal” (PressReleases.com), while Guyanese president Bharrat Jagdeo opposes it because he believes that the Caribbean stands to gain little from it (caribbean360.com). Apparently Jagdeo felt that neither he nor the general public was adequately informed about the process leading up to the agreement, implying that the “responsible officials” at the Caribbean Regional Negotiation Machinery (CRNM) were bullied into signing an agreement that would potentially harm Caribbean economies. Jagdeo is joined by a group called Caribbean Concerned Citizens that includes several university academics who do not welcome the arrival of reciprocity.9 In his response to a criticism of the partnership agreement by Prof. Clive Thomas of the University of Guyana, Richard Bernal, the director general of the CRNM, defended the agreement, arguing that all parties to the Cotonou agreement should have expected the arrival of reciprocity because it was specifically provided for in the revised text of that agreement. Moreover, Bernal argues, although “the EPA is not a ‘perfect’ agreement . . . it is a balanced one. As in any negotiation, there had to be compromise and this took place on both sides. It contains safeguards as well as institutional mechanisms for addressing problematic issues that may arise in the course of implementation. It also contains many innovative features that are of benefit to the Caribbean and it is up to us as a region to take full advantage of its provisions” (www.stabroeknews.com/index.pl/article?id=5653894). Those who are opposed to the EPA are suspicious that the compromises were made from a position of weakness in negotiations among unequal partners.

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Taking advantage of the provisions of the EPA will be the real challenge. According to the CRNM, the agreement provides for the liberal entry of CARIFORUM business and entertainment services into the EU. This means that CARIFORUM professionals will be able to enter the EU on a short-term basis and entertainers, artists, and creative people will have unprecedented access to EU markets. The CRNM underscores the asymmetry in the degree of reciprocity: the EU opened more than 90 percent of its service sectors versus the 65 to 75 percent for the CARIFORUM. For the Dominican Republic, the share is more than 90 percent (www.stabroeknews. com/index.pl/article?id=56538478). The rationale for the liberalized CARIFORUM sectors rests upon their potential as conduits through which investment and technology will flow to stimulate development. The disparate government reactions to these provisions in part reflect differences in the potentials of the countries to exploit them. Because the overwhelming emphasis of the agreement is on services, Bruce Golding’s positive reaction suggests that Jamaica’s private sector is well positioned to benefit from new opportunities in this area. But critics are suggesting that a principle has been violated. According to a report by the Inter-American Development Bank, “CARICOM countries have agreed to an approach that emphasizes reciprocity by CARICOM’s MDCs (more developed countries) and non-reciprocity for the LDCs (less developed countries). The principle has been put into practice in trade agreements with Colombia, the Dominican Republic and Cuba” (IDB-INTAL, CARICOM Report No.1, 2002, p. 50). Guyana is one of the MDCs, but in the past two decades its economic growth has stagnated. The structure of the Guyana economy is still state-dominated and heavily weighted toward primary production—agriculture and mining. As a result, it may not be able to respond readily to the incentives offered by the liberalization of the EU market for services. Two scenarios could emerge: Guyana may become a victim of the asymmetry as EU investment and technology flow in to dominate its service sector, leaving the primary sector neglected; or, the modernization of the service sector may spill over into the primary sector to make it more efficient.

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Chapter 12

Epilogue

T

he external economic environment is changing faster than the small Caribbean countries can adjust to it. The technology gap is wider on the supply side than on the demand side as people more readily acquire first-world consumption habits than businesses acquire first-world production practices. Small size has put a crimp on export manufacturing as an instrument of diversification, and the ability to transform primary products into finished products has been limited to the domestic market. This limitation influences not only production efficiency but also the cost of marketing food products and meeting the regulatory standards of developed country markets. In the Caribbean, economic diversification has been an important instrument of development. In recent years the thrust has been toward the production of services. When economic diversification into nontraditional production replaces production in traditional sectors, it is an evolutionary process. However, this diversificationcum-evolutionary process could become circular if it leads back to dependence on a narrow range of output, thus perpetuating vulnerability to external events. Against the impact of external events, the Caribbean seeks the shelter of trade agreements. In the past, these agreements provided nonreciprocal trade concessions. In the age of the WTO, nonreciprocal trade agreements are gradually disappearing and Caribbean economies now face the daunting challenge of opening more sectors of their economies to international competition. This will drive them further into new areas in search of comparative advantage, particularly services, of which tourism is a major component. The

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THE CARIBBEAN ECONOMY AND GLOBALIZATION

irony of this movement is that as the Caribbean abandons the use of land for agriculture, it embraces its use for tourism and for the extraction of minerals. External events include the rise of China and other developing countries that produce a vast supply of goods with large populations of low-cost labor against which Caribbean countries will not be able to compete. However, by virtue of their proximity to the North American market, CARICOM countries could benefit by becoming channels for sending duty-free goods to that market, rules of product origin permitting. They could also benefit if an increase in the Asian demand for agricultural products revives their flagging agricultural sector. The continued rise in the price of oil will shift the center of economic gravity in the Caribbean. Trinidad and Tobago’s trade surplus will continue to grow, enhancing its position as the financial center of the region and as a major supplier of capital. This new power may encourage Trinidad and Tobago to take action independent of CARICOM, slowing the process toward the Caribbean Single Market and Economy. The rise in the price of oil will also focus the attention of the non-oil-producing countries on the need for exploring renewable energy sources such as solar and wind power. Successful exploration of alternative energy sources would alter the composition of trade with developed countries, a trade that currently includes transportation and other equipment hugely dependent on imported oil. Already Brazil, which is at the forefront of alternative energy exploration, is beginning to have an impact on Caribbean trade through its investment in ethanol production in the region. Whatever the configuration of the external alignment of the CARICOM economies in the years ahead, it will require constant reaction to changes in external events. For one thing, business cycles in the developed countries will continue to test the capacity of Caribbean economies to maintain their balance. As these economies evolve into the production of services, the external demand for which is relatively elastic, economic fluctuations abroad will be felt more sharply at home. Prudence suggests that all Caribbean countries should learn the lesson the oil producers learned in an earlier decade: control consumption spending when times are good and channel the savings into a stabilization fund as a buffer against future crises.

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A future crisis might bring with it the declining value of the international currency to which local currencies are pegged. In this situation, the crisis is readily transmitted to the local economy in the form of higher prices for imports from countries with stronger currencies. But it will also have the effect of shifting trade from countries with higher-valued currencies toward those with lowervalued currencies, thereby creating a greater concentration of trade. In other words, the pegged relationship holds countries with pegged currencies hostage to the major currency. Yet Caribbean countries seem to agree that the stability benefits of a pegged currency offset the cost of wide exchange rate fluctuations. As external events accelerate the drive toward a Caribbean Single Market and Economy, they grind away at the independence of the nation state, despite the insistence of some Caribbean countries that regional arrangements should not impinge on national sovereignty. The fragility of these small nation states is symptomatically manifest in their need for trade concessions and other forms of assistance from the developed countries. Their survival has depended on the goodwill of their benefactors as well on their own indefatigable quest for these concessions. Population One important factor that will affect the long-run development of the Caribbean is its population. CARICOM has a young population. Table 12.1 shows that in 2000, the median age was 25.7 compared to 35.3 in the United States. Nearly half (48.8 percent) of the CARICOM population was under 25 compared to 35.4 percent in the United States. With 30 percent of the population under 15, CARICOM countries will have to allocate a large share of their budgetary resources to education. By as early as 2010, those under 15 will expand the ranks of those under 25, forcing governments to allocate a disproportionate share of resources to law enforcement to manage unrest caused by possible unemployment. The rise in crime throughout the region, particularly in Jamaica, is in part a reflection of this problem. The aging American household may provide an escape valve for the unemployed in CARICOM if they have certain skills.

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THE CARIBBEAN ECONOMY AND GLOBALIZATION

Table 12.1 Population Profiles of CARICOM and the United States, 2000

Total (millions) Percent Under 15 Percent Under 25 Percent 15–64 Percent over 64 Median (years)

CARICOM

United States

6.468 30.6 48.8 62.2 6.9 25.7

251.421 21.5 35.4 66.1 12.4 35.3

Source: Caricomstats.org; U.S. Bureau of the Census

Already large numbers of nurses and other medical personnel have migrated to the United States to fill positions in hospitals across the country. This is not the first time that changes in the American household have induced immigration from the Caribbean and other developing countries. In the 1960s when large numbers of American women moved into the labor force, the movement created a demand for caregivers in the home. As a result, a large number of women from the Anglophone Caribbean migrated to work as domestics. Today as the American household ages, it has created an increasing demand for health care. In the face of this demand, the supply of American-born health care workers has lagged, creating a gap that is being filled by health care professionals from the Caribbean, the Philippines, and Africa. This suggests that there is a symbiotic relationship between the condition of the American household and the migration of caregivers from the Caribbean and other developing countries. Since the age disparity between the Caribbean and the United States is likely to last for a long time, the pull force of migration will remain strong. This means that the familiar problem of migration reducing the returns on Caribbean investment in education will persist. As a countermeasure to the outflow of skills, the Caribbean will have to expand its effort to attract foreign capital into employment-creating industries in order to reduce the push force of high unemployment rates and the wide disparity in income distribution. Success will depend on the removal of those barriers that place promising Caribbean industries in the rain shadow of the prevailing flow of foreign capital. Because the volatile mix of income inequality and idle young people offers the potential for social disruption, it becomes a barrier to capital

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149

inflow. In Jamaica, this barrier is evident in soaring crime rates. Governments, therefore, will have to redouble their effort to engage the unemployed in beneficial social activities. The cost of not succeeding in these endeavors could undermine other areas of the economy and spread social and political instability. The United States regards the Caribbean as its third border and, therefore, tends to look at the region through the prism of its own national security. This is not always beneficial for the Caribbean, especially when the cost of that security must be borne by the Caribbean countries with few resources. Security costs for container shipping and air travel impose real burdens on the budgets of small countries. However, Caribbean countries feel obligated to bear this cost because it is the price for keeping the tourists coming and for allowing Caribbean exports to benefit from the access to American markets provided under the Caribbean Basin Initiative. The export options facing the Caribbean are limited, but technology will expand them. The widening of the Panama Canal will allow large ships from Asia to reach Caribbean ports, and new longdistance aircrafts will in time reduce airfares enough to open a new era of Chinese tourism in the Caribbean. Add this to the likelihood that Caribbean countries will develop links with Latin American free trade areas and a new future will emerge with the Caribbean as a hub in a south-south network of trade links. Historically, the Caribbean has always looked north: for its connection with its former imperial masters; for its biggest markets; for the language it speaks; and in recent years, for support from its diaspora. It will need to speak more to its diaspora because the diaspora contains a wealth of untapped assets beyond the flow of remittances. It will also need to speak more to the south. But to do so, it must become multilingual. Yet as an English-speaking group (with the exception of Haiti and Suriname), CARICOM does possess an advantage in this age of technology with the Internet as an important communications link located between two continents. Climate Change One of the biggest threats to the Caribbean is climate change. Regional leaders lament the fact that although the contribution of

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THE CARIBBEAN ECONOMY AND GLOBALIZATION

the Caribbean to this change is minimal, it stands to bear the maximum impact. Maximum in the sense that tourism, it’s most important industry, will take a direct hit as rising sea levels erode beeches and frequent hurricanes destroy vegetation. The process may be gradual but the evidence is visible on the east and south coasts of countries in the path of western- and northern-moving hurricanes. It is not clear what changes in vegetation might occur; what is clear is that as shorelines become inundated, the islands of the archipelago will become smaller. But there is promise in this future. In fact, the Caribbean is well positioned to exploit renewable energy sources such as solar and wind power. The potential is great, but the level of investment in these areas remains small. This will change as the price of oil rises in response to the unquenchable appetite for energy in the fast-growing economies of China and India. For the non-oilproducing Caribbean countries, alternative energy sources can reduce their dependence on Venezuela and Trinidad and Tobago and restore some balance in the distribution of economic power in the region. It might even reduce their cost of production, enabling them to better manage the competitive implications of reciprocity. The infrastructure for alternative energy will be the equivalent of roads and railroads of the past, but its location will not be simple in an age of heightened sensitivity about the environment and in countries where lush vegetation and beautiful scenery are major tourist assets. In the end, the benefits must be demonstrably greater than the costs. Institutions A big question that the Caribbean must wrestle with is this: Are the institutions in place to maximize the benefits of globalization for the region? CARICOM is a work in progress, and over the past two decades a plethora of new regional institutions have been created. The supreme decision-making regional institution is the Heads of Governments, which meets annually; its composition changes over time and so does the fulcrum of power as national economic fortunes change. The negotiation of the Economic Partnership Agreement (EPA) between the CARIFORUM countries (CARICOM plus the Dominican Republic) has exposed fault lines in CARICOM’s

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institutional infrastructure. The fault line runs between the CARICOM Secretariat and the Caribbean Regional Negotiating Machinery (CRNM), a stand-alone entity. As the EPA negotiations highlighted, the bone of contention, as some see it, is that because the CRNM is not an integral part of the CARICOM Secretariat, it is likely to take decisions without full consultation with all the CARICOM member states. The following is the expression of one view: It is apparently felt by many, inside and outside of the integration movement and its institutional arrangements, that the dualheaded system of the CRNM on the one hand, and the CARICOM Secretariat on the other, complicates the harmonization of the necessary sequential tasks of strategizing, policy creation vis-à-vis intended negotiations, the process of negotiations themselves and then review and approval by the policy makers, the political directorate. (Stabroeknews, March 5, 2008)

Of course, there is no guarantee that the integration of the CRNM into the CARICOM Secretariat will enhance the effectiveness of negotiations. It could become hide-bound in bureaucracy with less agility to address complicated negotiating issues. If the lack of adequate consultation with the member states is an institutional defect within the CRNM, then that could be corrected without incorporating it into the Secretariat. If the problem lies in the existence of two regional power centers and the possibility of disharmony between them, then the CRNM should be the negotiating arm of the Secretariat. Many questions are still unresolved, even the location of the CARICOM Secretariat that some think ought to be in a more central place. There are other institutional issues that must be addressed. The old adage that the smaller the country the greater the paperwork holds true for the Caribbean. Much of this is derived from colonial history and the need for the public sector to create jobs. The ports are always cited as a classic example. Yet when technology is applied, it can result in efficient operations (as in the case of container ports). Cuba The future of the CARICOM cannot be adequately assessed without considering the future of Cuba. The U.S. trade embargo will

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THE CARIBBEAN ECONOMY AND GLOBALIZATION

not last forever. Sooner or later it will be lifted and it will alter the shape of Caribbean tourism. This will divert a significant share of the current flow of tourists to Cuban destinations, forcing the rest of the Caribbean to make their tourism product more competitive. It will also divert some foreign investment from the rest of the Caribbean. Already there is some Caribbean investment in the Cuban hotel industry in anticipation of the lifting of the embargo. Aside from forcing the rest of the Caribbean to improve its tourism product, it may also help to accelerate the movement of CARICOM toward its goal of a single market and economy in order to deal more effectively with Cuban competition. Whichever way this scenario plays out, the structure of economic power in the Caribbean will be altered. Globalization and the Preservation of Difference The more globalized the world becomes the blurrier become the cultural boundaries of the nation states. The proximity of the small Caribbean states to the United States means that they must struggle to maintain their cultural identity against the constant assault of U.S. culture. But in this struggle there is also an opportunity because cultural identity expressed in arts and entertainment is exportable and, therefore, capable of generating foreign exchange. The recently signed Economic Partnership Agreement with the European Union includes provisions that facilitate the movement of Caribbean artists and entertainers. The expectation is that the export of art and entertainment will have spillover benefits for Caribbean tourism as well as for the local art and entertainment industry. It will also give Caribbean artists and entertainers greater opportunities to tell the world of the experiences and aspirations of Caribbean people.

Appendix

Chapter 5

Table A.1 Competitiveness Ranking of Caribbean Tourism (Out of 124 Countries) Barbados Jamaica Dominican Trinidad & Guyana Suriname Republic Tobago Overall Index Regulatory Framework Business Environment & Infrastructure Human, Cultural & Natural Resources

29 31

48 49

50 51

85 88

100 96

108 110

36

59

71

65

88

87

17

36

29

104

109

112

Source: United Nations, World Economic Forum, Travel and Tourism Competitiveness Report, 2007

Table A.2 Ranking of Components of Human, Cultural, and Natural Resources (Out of 124 Countries) Barbados

Overall Index Human Resources National Tourism Perception Natural and Cultural Resources

Jamaica Dominican Trinidad & Republic Tobago

Guyana Suriname

17 42 2

36 39 15

29 57 21

104 64 106

109 95 68

112 112 97

68

76

45

111

121

115

Source: United Nations, World Economic Forum, Travel and Tourism Competitiveness Report, 2007

154 APPENDIX Table A.3 Ranking of Components of Regulatory Framework (Out of 124 Countries) Barbados

Overall Index Policy Rules & Regulations Environmental Regulation Safety and Security Health and Hygiene Prioritization of Travel & Tourism

Jamaica Dominican Trinidad & Republic Tobago

Guyana Suriname

31 27

49 3

51 14

88 60

96 79

110 107

42

67

72

100

93

122

35 42 11

111 67 10

102 79 18

121 64 75

124 87 41

84 71 116

Source: United Nations, World Economic Forum, Travel and Tourism Competitive Report, 2007

Chapter 6 Impact of Past Migration on Current Remittance Flows The following distributed lag equation is chosen as the model for the impact of past migration on the current flow of remittances: R = a + bM + λb1M −1 + λ 2 b2 M −2 + … + λ10 b10 M −10 + u

(1)

where R is the annual flow of remittances, M annual migration to the United States, l the weighted impact of migration on remittances, and u the error term.1 The Koyck transformation of this equation reduces the parameters to be estimated to two: R t = a(1 − λ ) + βM t + λR t −1 + u

(2)

where l is assumed to be the diminishing weight of the impact of the independent variable, 0 ≤ l , 1. The parameter b is the impact multiplier that measures the instantaneous impact of a change in migration (M) on remittances (R), and the equilibrium or long-run multiplier (b/12l) measures the change in the equilibrium value of R due to a marginal change in M. Because the remittance profile of immigrants may also be influenced by economic conditions at the destination, the migration data are adjusted for changing unemployment rates in the United States. This is done by dividing the actual migration for each year

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155

by a corresponding index of unemployment for that year. Thus as the U.S. unemployment rate falls, the index falls and the adjusted migration gets larger than the actual. The opposite is true when the unemployment rate rises. A lower U.S. unemployment rate means that a given volume of actual migration will have a larger impact on remittances because of greater opportunities for employment and higher wage rates. The first step is to estimate the value of l in equation 2, where M is unemployment-adjusted migration and R is remittance. The results are as follows: Rt 5 .0748 1 0.001439M 1 0.9910Rt21 (0.27) (9.21) Adj. R 2 5 0.83 t statistics are in parentheses Because l , 1, the remittance impact will diminish marginally as we go further into the past. However, the long-run multiplier (b/12l) is positive. Since the purpose of this section is to develop a profile of the impact of migration over the previous 10 years on the current flow of remittances, the next step is to estimate the coefficients (b) of equation 1. The profile that emerges is depicted by the value of l times the estimated coefficient (lb). The profile shows that the remittance impact of migration is modest in the early years, rising to its first peak five years after migration and a higher peak eight years after. Impact of Interest Rates on Remittance Flows The following regression results show the impact of interest rates: R 5 221.85 1 3.55IR 1 0.932Rt21 (2.052) (1.59) (9.62) Adj. R 2 5 .85 t stats in parentheses. Since b is positive and l , 1, the long-term multiplier impact (b/1–l) of interest rates on remittances is positive. However, when the estimated coefficients of the distributed lag model in equation 1 is multiplied by l, the impact of interest rates diminishes over time.

156 APPENDIX

Impact of Exchange Rates (ER) on Remittance Flows R 5 239.55222.19 ER 1 0.870 Rt21 (2.41) (22.21) (8.52) Adj. R 2 5 0.86 t stats in parentheses. Because the instantaneous multiplier b , 0 and l , 1, the long-run multiplier (b/12l) impact of the exchange rate is negative. Chapter 11 Table A.4 Data for Regression Analysis: USGDP and U.S. Imports from CARICOM, Trinidad & Tobago, and Jamaica, 1996:1 to 2007:1 Quarters

1996:1 1996:2 1996:3 1996:4 1997:1 1997:2 1997:3 1997:4 1998:1 1998:2 1998:3 1998:4 1999:1 1999:2 1999:3 1999:4 2000:1 2000:2 2000:3 2000:4 2001:1 2001:2 2001:3 2001:4 2002:1 2002:2 2002:3 2002:4

U.S. GDP Current Value US$ billion

U.S. Imports from CARICOM US$ million

7624.1 7776.6 7866.2 8000.4 8113.8 8250.4 8381.9 8471.2 8586.7 8657.9 8789.5 8953.8 9066.6 9174.1 9313.5 9519.5 9629.4 9822.8 9862.1 9953.6 10021.5 10128.9 10135.1 10226.3 10333.3 10426.6 10527.4 10591.1

604.1 618.6 650.9 682.2 670.7 632.1 713.5 625.5 624.3 664.8 648.6 622.9 633.4 642.5 827.3 863.5 859.6 926.1 1067.1 1108.3 1127.4 1035.7 990.5 810.6 765.8 932.9 1073.6 1229.8

U.S. Imports from Trinidad & Tobago US$ million 237.1 242.7 241.4 295.3 313.3 258.2 313.9 247.4 233.9 251.8 252.4 232.7 235.1 260.8 387.7 409.9 413.4 507.8 632.7 674.3 757.7 644.6 584.9 393.5 414.4 569.0 646.5 807.2

U.S. Imports from Jamaica US$ million 202.3 198.9 230.0 207.2 171.2 187.1 196.8 182.7 187.3 203.7 185.0 177.2 170.0 152.6 175.5 180.7 177.7 176.1 146.4 147.4 100.8 122.9 116.3 121.1 99.4 91.1 100.0 100.9

Continued

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157

Table A.4 Continued Quarters

2003:1 2003:2 2003:3 2003:4 2004:1 2004:2 2004:3 2004:4 2005:1 2005:2 2005:3 2005:4 2006:1 2006:2 2006:3 2006:4 2007:1 2007:2

U.S. GDP Current Value US$ billion

U.S. Imports from CARICOM US$ million

U.S. Imports from Trinidad & Tobago US$ million

10705.6 10831.8 11086.1 11219.5 11405.5 11610.3 11779.4 11948.5 12154.0 12317.4 12558.8 12705.5 12964.6 13155.0 13266.9 13392.3 13551.9 13768.8

1447.5 1426.5 1616.7 1629.2 1795.1 1746.0 1970.6 2151.2 2103.3 2625.8 2327.6 2875.8 2614.1 2925.6 2429.5 2436.0 2762.7 2858.5

961.4 990.8 1175.2 1204.2 1390.3 1281.8 1522.5 1659.6 1616.5 2048.6 1822.8 2392.4 2101.6 2429.4 1922.0 1916.9 2196.2 2308.9

Source: U.S. International Trade Commission

U.S. Imports from Jamaica US$ million 182.3 99.8 109.0 103.5 73.8 82.8 81.4 82.2 89.5 89.7 87.6 109.9 132.9 132.4 135.9 118.3 198.5 197.5

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Notes

2 The Decline of Traditional Exports 1. The experience of sugar in the state of Louisiana may be a guide to the future for the Caribbean sugar industry. “Across southern Louisiana, cane growers and sugar processors have vastly accelerated mechanization in the fields and automation in the mills, moving toward the end of a paternalistic system of plantation life that dates to the days of slavery.” Keith Schneider, “Thousands of Sugar Workers Reap Bitter Harvest,” The New York Times, June 3, 1988, NYTimes.com. This mechanization thrust has been supported by the Federal Government’s price support program. The downside side of this mechanization is that “thousands of workers, virtually all of them black and many descendants of slaves, have lost their jobs here.”

3 Nontraditional Exports as the Frontier of Caribbean Development 1. To test for trade diversion formally, the export similarity index developed by Finger and Kreinin (1979) is applied. The formula for this index is as follows: S(ab,c) 5 {S Minimum[X i(ac), X i(bc)]}100 It measures the similarity of the export patterns of countries a (Jamaica) and b (Mexico) to market c (United States). X i(ac) is the share of commodity i in Jamaica’s exports to the United States and X i(bc) is the share of commodity i in Mexico’s exports to the United States. If X i(ac) 5 X i(bc), the index is 100 and the exports are identical. If the index is zero, the exports are dissimilar. The following table shows the values for X i(ac) and X i(bc) for 1997. Share of SITC* Categories in Total Exports to the United States, 1997

339 340 632 649

Cotton women’s knit shirts Cotton men’s non-knit shirts Man-made fiber hosiery Man-made fiber brassieres

Jamaica

Mexico

1.12 1.54 5.86 0.75

0.23 0.07 0.08 0.19

* Standard Industrial Trade Classification Source: Calculated from International Monetary Fund, International Financial Statistics Yearbook, 1997

160

NOTES

The index is calculated as follows: S(ab,c) 5 100[ min (1.12, 0.23) 1 min (1.54, .07) 1 min (5.86, .08) 1 min (0.75, 0.19)] 5 .57. This means that in 1997, 57 percent of Jamaica’s exports in these four categories were matched by exports from Mexico, confirming the existence of trade diversion. 2. The least square regression results are as follows: GDP 5 2382 1 4.01 Exports Adj.R 2 5 .93 (17.1) t value in parenthesis.

4 The Service Economy 1. Data from CARICOM Statistics and the Caribbean Tourist Organization. 2. The assumption here is that there is no inconsistency between the corresponding import and export data for the two countries. For a discussion of the problem of consistency, see International Monetary Fund, Direction of Trade Statistics Quarterly, March 2007, pp. xi–xii.

5 The Caribbean Tourist Industry 1. The principal taxes are departure tax (which ranges from US$3.00 in the U.S. Virgin Islands to US$35.00 in the Cayman Islands), cruise passenger tax (which ranges from US$1.00 for the Dominican Republic to US$60.00 for Bermuda), and the hotel room tax (which ranges from US$5.00 in St. Marten to US$12.00 in Cancun) (Caribbean Tourism Organization, 2004). 2. This is also the situation in the financial sector. Lester Henry points out that “outside of Trinidad and Tobago there is a high concentration of foreign ownership of commercial banks, suggesting that sector is relatively open.” Henry singles out Jamaica, citing information from the Bank of Jamaica: “as at September 2002, there were six commercial banks with a network of 121 branches operating throughout the country. All but one of the commercial banks is foreign owned. The lone Jamaican owned commercial bank accounted for a mere 2 percent of all commercial bank assets as at June 2002. This compares with a year earlier when three such entities accounted for 52.0 percent of all commercial bank assets.” Lester Henry, Consulting Economist, “Implications for CARICOM Countries of Negotiations on Financial Services in the FTAA and GATA: Assessment and Strategic Options.” Prepared for the Caribbean Regional Negotiating Machinery, May 2003, p. 2. 3. A credit rating report on one of the largest business corporations in Barbados, Goddard Enterprises Limited, underscores the problem with manufacturing: “The ratings of GEL are also tempered by the lack of competitive advantage for

NOTES 161

manufacturers in Barbados as they are faced with extremely high fuel, electricity, land and labour costs and must depend on imported raw materials.” CariCRIS, Caribbean Information & Credit Rating Services Limited. www. caricris.com 4. Based on data gathered from Central Statistical Offices and National Tourist Offices of individual countries. 5. United Nations Environmental Program (www.uneptie.org/pc/tourism/ sust-tourism.economic.htm).

6 Migration 1. Riccardo Faini has developed a simple model to show that skilled migrants may have a lower propensity to remit because they are more likely to reunite with their close family in the host country. This contradicts they general view that the brain drain may be offset by large flows of remittances from skilled emigrants. “Remittances and the Brain Drain: Do More Skilled Migrants Remit More?” The World Bank Economic Review, 2007 21(2); 177–191. 2. The Gini indices for Jamaica and Trinidad and Tobago are 37.9 and 40.3 respectively, but lower than those in Latin America where Mexico is 54.6 and El Salvador is 53.2. 3. www.nationmaster.com 4. Ransford W. Palmer, Pilgrims from the Sun: West Indian Migration to America. New York: Twayne Publishers, 1995, p. 13; The Labour Force, The Statistical Institute of Jamaica, several issues. 5. Congresswoman Shirley Chisholm was the first woman to run for president of the United States. More recently, another woman of Caribbean ancestry, Yvette Clarke, won a seat in the House of Representatives for the Brooklyn constituency in New York. 6. www.investjamaica.com/sectors/tourism/stats.php 7. Remittances are defined as private current transfers for the purpose of this paper. Dilip Ratha has pointed out that current transfers as presented in the balance of payments underestimate the total flow of remittances because it excludes food, clothing, and other supplies sent home by immigrants and the wages and salaries of nonresident workers. Since this study focuses on permanent residents, remittances are regarded as a portion of their wages and salaries. “Workers’ Remittances: An Important and Stable Source of External Development Finance,” Global Development Finance 2003, pp. 157–175. It is recognized, however, that temporary migrants also remit funds. However, in the Jamaican case, their share in total migration is small. 8. For the purpose of this study, immigrants are permanent residents. They are recorded as immigrants upon receipt of their immigrant visa. This means that many may have physically left their home country years before having received their visa. During this time, many will have been able to work with a special work visa. These include students and workers with special skills.

162

NOTES

9. Between 1998 and 2003, immediate relatives of U.S. citizens accounted for 54 percent of Jamaican immigrants and 47 percent of immigrants from the Dominican Republic (Immigration Statistics, U.S. Department of Homeland Security). It usually takes five to seven years for an immigrant to gain citizenship. 10. In times of natural disaster, such as a devastating hurricane, immigrants usually respond generously even if their household is reunited abroad. 11. It could be argued that the flow of remittances is influenced by the difference in interest rates between destination and origin countries. Such an argument would be reasonable if remittances were treated as investment. The fact is that most of the remittances go to finance consumption. 12 (i) Real GDP 5 26151.64 1 9.43 R (46.23) (5.12) Adj. R-squared 5 0.46 (ii) GCF/GDP 5 20.61 1 0.0159 R (16.17) (3.83) Adj. R-squared 5 0.32 t statistics are in parentheses In both equations, the impact of remittances (R) is statistically significant but very small. In equation ii, remittances worth US$1 million added only .01 to the share of gross capital formation in GDP. 13. A classic example of this type of immigrant is the Jamaican-born Michael Lee-Chin who settled in Canada after his university education there and established a financial empire called Portland Holdings, which he chairs. Portland Holdings acquired the National Commercial Bank (NCB) Ltd., one of Jamaica’s largest banks, and its subsidiaries. It also acquired controlling stake in United General Insurance Company (Jamaica’s largest automobile insurer) and CVM Communications (which includes radio and television stations and newspapers). Portland Holdings has also made acquisitions in the tourist sector (Trident Villas and Spa, Reggae Beach, and Blue Lagoon) and the health sector (Medical Associates Limited, a privately held hospital in Kingston).

7 The Travel Economy 1. Repatriation of profits and other incentives offered to foreign investment liken the tourist industry to an Export Processing Zone (EPZ) in the manufacturing sector. “In the case of the EPZs, the broad conclusions from worldwide experience are that they succeed in generating foreign exchange and employment, and may yield important positive externalities as well. Chief among the positive externalities are (i) building human capital through explicit training and learning-by-doing, including both workers and managers; and (ii) the provision of catalyst and demonstration effects for other entrepreneurs in the economy.” John Dixon et al., Tourism and the Environment in the Caribbean: An Economic Framework (Washington DC: The World Bank, March 2001, p. 23). 2. W. Arthur Lewis, Theory of Economic Growth.

NOTES 163

8 Investment and Consumption 1. In its discussion of the high incidence of crime in Jamaica and its impact on business, the World Bank cites three negative effects: It has a negative impact on the investment climate and can deter or delay both domestic and foreign investment, and hence growth because it increases the cost of doing business and leads to loss of current and future output when violence injures workers and curtails economic activity in some areas. It erodes the development of human and social capital, thereby reducing potential growth. It encourages the emigration of skilled people who seek safer living and working environments. It diverts public resources excessively away from productive uses to such areas as police, justice, and the medical system to deal with the consequences of crime and violence. (World Bank, The Road to Sustained Growth in Jamaica, 2004, pp. 115–116) In the better residential areas of Kingston, Jamaica, people surround their homes with ironwork fences and often secure their entrances with two sets of ironwork doors. 2. The case of Walkerswood (a small Jamaican company that bottles authentic Jamaican jerk spice) is instructive. The World Bank reports that “one of Walkerswood’s biggest and ongoing challenges to its growth and competitiveness is the high cost of capital, especially given that some of its competitors have access to cheaper capital. The company has had to depend on retained earnings and borrow on less than favorable terms from different sources for investments. However, its success has begun to attract foreign investment” (World Bank, A Time to Choose: Caribbean Development in the 21st Century, April 2005, p. 57). 3. JAMPRO is an investment promotion agency of the Jamaica government. 4. A World Bank survey revealed that “for information on investment in the Caribbean, most investors rely on their own companies’ internal reports and analysis, and personal visits. By contrast, traditional investment promotion, such as trade missions and promotional campaigns by destination country officials, has not been widely used as sources of information. This suggests that the investment promotion agencies in the Caribbean have not been very effective in reaching potential investors. In the case of the Dominican republic, Grenada and Jamaica, no investors cited investment promotion activities as useful sources of information” (World Bank, A Time to Choose, p. 61). 5. This is what is left after all factor costs are met. 6. Ackee is a bright red fruit that grows on the ackee tree. When the fruit is ripe it reveals pods of yellow edible ackee, each with a black seed. Ackee is usually prepared with salted cod and onions. Bacon can be substituted for the salted cod. Its flavor and texture are like those of scrambled eggs. 7. Food exports consist primarily of agricultural products such as sugar and bananas.

164

NOTES

8. In 1991, Barbados introduced a prices and incomes policy that involved a tripartite social partnership, patterned after the Irish model, between the government and representatives of workers and employers. According to Wayne Charles-Soverall and Jamal Khan, “these three entities were designated as ‘Social Partners’ who acknowledged that Barbados’ national success was largely due to its peaceful and harmonious labour-management relations and that the tripartite approach was the most effective strategy for achieving national development and cooperation.” The following objectives were identified: (1) Safeguarding the existing parity of the dollar; (2) Securing economic growth through competitiveness; (3) restraining wage; (4) restructuring the economy; (5) promoting of productivity (Wayne Charles-Soverall and Jamal Khan, “Social Partnership: New Public Management Practice in Barbados,” AJPAM, Vol. 15, No. 1, January 2004, p. 26).

9 The Role of Government 1. A regression analysis of Barbados data for the three major tax categories—taxes on goods and services (TGS), taxes on income and property (TIP), and taxes on international trade (TIT)—produced the following elasticities with respect to GDP over the 25-year period from 1980 to 2004: LogTGS 5 29.75 1 1.916 LogGDP Adj. R 2 5 0.97 (0.54) (28.45) LogTIP 5 23.66 1 1.155 LogGDP Adj. R 2 5 0.91 (.59) (15.73) LogTIT 5 0.78 1 0.48 LogGDP Adj. R 2 5 0.48 (0.91) (4.28) t values are in parentheses. The elasticity of taxes on goods and services was the highest, 1.9, compared to 1.1 for taxes on income and property, and 0.48 for taxes on international trade. If the trend continues, the gap between taxes on goods and services and taxes on international trade will widen considerably as GDP grows. 2. Owen Arthur, the former prime minister of Barbados laments “the virtual death of development economics” as a “massive intellectual tragedy” because “the imperatives of development which should have more to do with economic and social transformation, have been miniaturized to focus on programs of competitiveness, the application of policies to promote macro-economic stability, and the broadening of the scope of the workings of the market and the private sector.” Owen Arthur, “The Economic Partnership Agreement between the Cariforum and the European Union and the Building of a Post-Colonial Economy in the Caribbean,” public lecture given at the University of the West Indies Cave Hill Campus, March 11, 2008. 3. See The New Palgrave Dictionary of Economics, Vol. 2, New York: Palgrave. 4. Bratsberg and Terrell explain their sample selection as follows: “To avoid including immigrants who undertook some of their schooling in the United

NOTES 165

States, the sample excludes individuals whose birth year plus six plus years of schooling exceeds the year of immigration. The regression samples also exclude persons younger than 25 or older than 64 and those currently enrolled in school.” Bernt Bratsberg and Dek Terrell, “School Quality and Returns to Education of U.S. Immigrants,” Economic Enquiry, 40(2), April 2002, 179. 5. Teachers’ salaries in OECD countries averaged 125 percent of GDP per person in 2005. In South Korea and Turkey, they were 234 percent and 254 percent respectively (The Economist, September 29–October 5, 2007, p. 105). 6. On July 31, 2007, the United States House of Representative passed The Shirley A. Chisholm United States—Caribbean Educational Exchange Act of 2007 to support the development of education in the Caribbean. See appendix for the details of the bill.

10 Caribbean Economic Integration: Drifting toward a Single Market and Economy 1. As part of its manifesto for the 2007 national elections, the Jamaica labor Party has proposed to grant institutional independence to the central bank, the Bank of Jamaica (The Jamaica Gleaner, “Manifestos lack solution to grow Jamaica’s economy,” August 19, 2007, http://jamaicagleaner.com/gleaner/20070819/ business6.html ). 2. See Financial Times commentary, July 2, 2007. 3. The Chiang Mai Initiative is a regional financial arrangement that was signed at Chiang Mai, Thailand, in May 2000 by 14 South East Asian countries—the ASEAN countries plus China, Japan, and Korea. The objective of the CMI is to provide liquidity support, through a network of bilateral swap agreements, to countries experiencing balance of payment difficulties (See Seok-Dong and Lene Andersen, “Regional Financial Cooperation in East Asia: The Chiang Mai Initiative and Beyond,” Bulletin on Asia-Pacific Perspectives 2002/03, pp. 89–99). In a letter to the Financial Times, July 10, 2007, Yeomin Yoon of Seton Hall University in New Jersey argues that “Perhaps the single most irresponsible action in the whole crisis was capital account liberalization without a framework of regulation.” 4. The Caribbean Cement Company is a subsidiary of Trinidad Cement Limited. Several members of the Corporate Governance Committee of the Caribbean Cement Company also serve on the Trinidad Cement Limited Corporate Governance Committee (Caribbean Cement Company Annual Report, 2007). 5. In Trinidad and Guyana, the population of Indian ancestry may beg to differ. 6. Neal & Massy Holdings (Trinidad & Tobago), Jamaica Producers Group, Ltd. (Jamaica), National Commercial Bank Group, Ltd. (Jamaica), Telecommunications of Jamaica (Jamaica), Ansa McAl (Trinidad & Tobago), Industrial Commercial Developments (Jamaica), Barbados Shipping and Trading (Barbados), Grace Kennedy (Jamaica), Royal Bank of T&T (Trinidad & Tobago), and Desnoes & Geddes (Jamaica) (Top 100, Barbados: Caribbean Communications, Inc., 1996). 7. Statistical Institute of Jamaica, Statistical Abstract, 1998.

166

NOTES

11

Caribbean External Economic Relations

1. Some critics say they were divided by the European Commission in order to better manipulate them. The other five subgroups are: The West African Economic and Monetary Union; the Southern African Development Community; the Central African Economic and Monetary Community; the East African Community; and the Pacific region. 2. The Caribbean Disaster Emergency Agency (CADERA) based in Barbados has been in the forefront of advancing disaster preparedness in the region with the help of funding from international agencies. www.cdera.org/home.htm 3. Free alongside ship (fas). 4. According to the Economic Commission for Latin America and the Caribbean, “the Latin American and Caribbean region continues to receive a shrinking proportion of global FDI flows. The region took in 12% of global inflows in the 1980s, compared with 10% in the 1990s. Since 2000, it has received just over 8% worldwide FDI. This could indicate that the region is being gradually sidelined from FDI in the current pattern of globalization” (ECLAC, Foreign Investment in Latin America and the Caribbean, 2005, p. 23). 5. Particularly in the production of cotton T-shirts and sweaters. 6. Sociologist James Petras dismisses the notion that foreign investment transfers technology: “The experience with foreign investment and technological transfers is largely negative: over 80% of research and development is carried out in the main office. The ‘transfers of technology’ is the rental or sale of techniques developed elsewhere, rather than local design. The multinationals usually charge subsidiaries excess royalty fees, service and management costs, to artificially or fraudulently lower profits and taxes to local governments” (Six Myths about the Benefits of Foreign Investment: The Pretensions of Neoliberalism, Global Policy Forum, July 2, 2005, p. 1 [www.globalpolicy.org/ socecon]) 7. The fear for their economic survival was behind the historic visit of fifteen heads of Caribbean governments to Washington DC to meet with the President of the United States in June 2007. 8. Article 1 of the EPA deals with “trade partnership for sustainable development” and the objectives of the agreement are as follows: Contributing to the reduction and eventual eradication of poverty through the establishment of a trade partnership consistent with the objective of sustainable development, the Millennium Development Goals and the Cotonou Agreement; Promoting regional integration, economic cooperation and good governance thus establishing and implementing an effective, predictable and transparent regulatory framework for trade and investment between the Parties and in the CARIFORUM region; Promoting the gradual integration of the CARIFORUM States into the world economy, in conformity with their political choices and development priorities;

NOTES 167

Improving the CARIFORUM States’ capacity in trade policy and trade related issues; Supporting the conditions for increasing investment and private sector initiative and enhancing supply capacity, competitiveness and economic growth in the CARIFORUM region; Strengthening the existing relations between the Parties on the basis of solidarity and mutual interest. To this end, taking into account their respective levels of development and consistent with WTO obligations, the Agreement shall enhance commercial and economic relations, support a new trading dynamic between the Parties by means of the progressive, asymmetrical liberalisation of trade between them and reinforce, broaden and deepen cooperation in all areas relevant to trade and investment. 9. It is noteworthy that several economists at the UWI campus in Jamaica have historically had philosophical differences with the Jamaica Labor Party

Appendix 1. For a discussion of distributed lags, see M. Dutta, Economteric Methods. Cincinnati: South-Western Publishing Co., 1975.

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Index

Ackee and saltfish, 85, 163 Acker, C. Edward, 38 Africa, 148 African, Caribbean and Pacific (ACP) countries, 9, 13, 16, 17, 127 African Americans, 58 Air transportation, 37–39 Aluminum Company of America (ALCOA), 19 Aluminum smelter, 19 American citizenship, 60 Anglophone Caribbean, 7 Anguilla, 113 Antigua and Barbuda, 6, 10, 31, 32, 33, 71–72, 113, 137 Apostolopoulos and Sãnmez, 44 Apparel industry, 25 Arawak Indians, 1 Argentina, 111 Arthur, Owen, 107, 125, 164 ASEAN Free Trade Area, 123, 165 Asian financial crisis, 141 Asia-Pacific Economic Cooperation (APEC), 120 Association of Caribbean States (ACS), 9 Australia, 17 Ayub, Mahmood Ali, 119 Baele, Lieven, 114 Bahamas, 1, 6, 32, 111 Balance of payments deficit, 81 Bananas, 3, 17–19 Baptiste, Fitzroy A., 46 Barbados, 1, 7, 24, 28, 46, 47–48, 49, 50, 53, 57 Corruptions index, 78 Foreign direct investment, 79 Prices and incomes policy, 164

Social contract, 89 Taxes, 109, 164 Barbados Shipping and Trading, 165 Bauxite and alumina, 19, 95 Beattie, Alan, 120 Belize, 7, 18, 32, 136 Bermuda, 36 Bernal, Richard, 142 Bhattacharya, Anandya, 34 Bissember, Enid, 117 Bolivar, Simon, 129 Bolivarian Alternatives for the Americas (ALBA), 128–129 Bolivia, 128 Bratzberg, Bernt, 99, 164 Brazil, 17, 136, 146 Bric countries (Brazil, Russia, India, and China), 9 Brooklyn, 58, 60, 161 Byron, Jessica, 140 CAFTA, 109 Canada, 29 Capital, flight of, 120 Capital intensive industries, 6 Capital intensive industries, oil and gas, 19 Carare, Alina, 43 Caribbean, Commonwealth, 120, 128 Caribbean Basin Economic Recovery Act (CBERA), 24, 29, 127–128 Caribbean Basin Initiative (CBI), 9, 29, 30, 109, 124, 134 Caribbean Basin Trade Partnership Act, 30, 135 Caribbean capitalism, 45, 119 Caribbean Cement Company, 117, 165 Caribbean central banks, 111

176

INDEX

Caribbean Diaspora, 67, 149 Caribbean Disaster Emergency Agency, 166 Caribbean Free Trade Association (CARIFTA), 108 Caribbean integration, 9, 121 Caribbean labor, 125–126 Caribbean Regional Negotiating Machinery (CRNM), 120, 142–143, 151 Caribbean Single Market and Economy (CSME), 107–126, 146–147 Caribbean Tourist Organization, 47, 160 CARIBCAN, 109, 128 CARICOM, 1, 2, 4, 6, 9, 19, 33, 48, 108, 110–111 Evolution toward services, 8 Mobility of labor, 75 Secretariat, 112 CariCRIS, 161 CARIFORUM, 128, 141, 143, 150 Carnival celebrations, 60 Cayman Islands, 33, 34 Central African Economic and Monetary Community, 166 Central American Free Trade Agreement (CAFTA), 135 Central Bank of Barbados, 116 Charles-Soverall, Wayne, 164 Chavez, Hugo, 129 Chen-Young, Paul, 46 Chiang Mai Initiative, 165 China, 146 Chisholm, Shirley, 161, 165 Chiswick, Barry, 59 Clarke, Oliver, 110 Clarke, Yvette, 161 Climate Change, 149–150 Columbia, 25 Commanding heights, 3 Commercial bank lending rate, 27 Common currency, 116–117 Common external tariff (CET), 109, 123 Consumption expenditure, source and composition, 84–85 Consumption goods, propensity to import, 73, 80, 85, 87, 93 Corruptions Perceptions Index, 77

Costa Rica, 25 Cotonou Agreement, 127–128 Cuba, 53, 128, 151–152 Cultural exports, 105, 153 Davies, Omar, 37 Debt service, 89 Desnoes & Geddes, 165 Distributive sector, low wage, 86 Diversification, 18 Dixon, John, 162 Dollarization, 80, 111–114, 116 Dominica, 6, 12, 17, 113, 128–129 Dominican Republic, 23, 28, 29, 58 CARIFORUM, 128 Foreign investment, 78–79 Telecommunications and information technology, 79 Douglas, Denzil, 31 Drug trafficking, 136–137 Dutch disease, 20 Dutta, M., 167 East African Community, 166 Eastern Caribbean, 79, 113 Central Bank (ECCB), 121 Currency Union (ECCU), 121 Economic Commission for Latin America and the Caribbean (ECLAC), 166 Economic integration, 107–126 Economic Partnership Agreements, 13, 17, 105, 128, 141, 150, 166–167 Economies of scale, 28 Economist Intelligence Unit, 110 Education, investment in, 25, 28–29, 30, 97–105 Country profile, 98–99 Enrollment ratios, 98, 100 As an industry, 102 Job training programs; links with American universities, 102 Private sector financing, 101–102 Returns to, 99 Teachers, 101 Worker productivity, 97, 100 Employment, agriculture, 7 employee compensation, 84

INDEX

labor intensive offshore industries, 23 Energy, alternative, 150 Ethanol, 136, 146 European Commission, 166 European Union, 13, 16, 109, 112, 124 Evolution of the Caribbean economies, 9, 10, 20, 145 Exchange rates, 22, 65–66 Stability, 77, 80–81, 86–87 Expatriate populations, 27 Export Development and Agricultural Diversification Unit (EDADU), 26 Export processing zones, 21, 162 Export promotion agencies, 26 Extra-regional trade, 118–121 Faini, Riccardo, 161 Federal Reserve Bank, 112–113 Federation, West Indies, 3, 11, 108 Financial services, 79, 160 Financial Times, 16 Finger, Michael J., 159 Florida, 57 Foreign aid, 139–140 Foreign direct investment, 77–81 Foreign exchange, 70 Foreign trade dependence, 80 Free Trade Area of the Americas, 135 Free Trade Zones, 23, 78 Freeman, Carla, 24 Garvey, Marcus, 58 General Agreement on Tariffs and Trade (GATT), 123 General Agreement on Trade in Services (GATS), 123, 137 Gibraltar, 36 Girvan, Norman, 46 Gleaner, 110 Globalization, 8, 9, 11, 49, 120 Impact on the distribution of income, 83 Labor unions, 126 Goddard Enterprises Limited, 160–161 Golding, Bruce, 142–143 Gonsalves, Ralph E., 127, 140

177

Government, 91–105 Share of GDP, 91, 96 Grace Kennedy, 165 Greenaway, David, 141 Grenada, 32, 113, 139 Guernsey, 36 Guyana, 1, 4, 7, 13, 14, 15, 17, 19, 32, 57 Booker Tate Company, 15 Cooperative Republic, 5 Guyana Sugar Company, 14–15 Haiti, 1, 7, 110, 111, 135–136 Harlem, New York City, 58 Harris, Donald, 94–96 Heads of Government meeting, 129, 150 Health care, 62, 148 Hecksher-Ohlin international trade theory, 97 Hemispheric Opportunity through Partnership Encouragement (HOPE) Act, 135–136 Henke, Holge, 46 Henry, Lester, 160 Hoekman, B., 135 Honduras, 53 Household budget, 80 Hudson, Michael, 33 Human capital, 28 Hurricanes, 71 Immigration and Nationality Act of 1965, 54 Import substitution, 22 Income, distribution of, 84, 86, 94 Compensation to employees, 132 Incomes policy, 164 Indebtedness, 82, 92 Indentured servants, 53 India, 150 Indigenous raw material, 26 Industrial Commercial Developments, 165 Inflation, 80 Information and communications technology, 28, 36, 79 Institutional inertia, 81, 87–88 Inter-American Development Bank, 111

178

INDEX

Interest payments, 82, 89 Interest rates, 64–65 International Business Corporation Act, 33 International Labor Organization, 6 International Monetary Fund, 5, 23, 25, 160 Balance of payments assistance from, 81 Staff Reports, 8 Internet gambling, 136–137 Investment climate, 77, 88–89 Investment promotion, 163 Ireland, 56, 57 Isle of Man, 36 Jagdeo, Bharrat, 142 Jamaica, 4, 5, 7, 10, 11, 13, 14, 15, 18, 19, 23, 24, 25, 27, 29, 31, 47–48, 49, 53, 57, 64 Banking crisis, 88, 92 Crime, 89, 149, 163 Dollar, depreciation of, 131 Education profile, 98–99 Food deficit, 85–86 Foreign investment, 79, 82 Golden age of growth, 94, 96 Indebtedness, 82, 92–93 Information technology, 79 Profit outflow, 83 Public sector wages, 91 Socialist decade, 96 Trade liberalization, 94–95 Jamaica Labor Party (JLP), 83 Jamaica Producers Group, Ltd., 165 JAMPRO, 82, 163 Japanese investments, 5 Jersey, 36 Johnson, Mark, 121

Lewis, W. Arthur, 10, 75 Lomé Convention, 109, 124, 127 Mackerel run down, 85 Mandelson, Peter, 17 Manhattan, 58 Maritime transportation, 39–40 Marketing boards, 86 Marshall, Don D., 46 McMahon, Walter W., 98 McMorris, Michael, 82 Merchant capitalists, 86 MERCOSUR, 123 Mexico, 26, 29, 30 Migration, 51–67 To Canada, 51–52 To Great Britain, 54 Migration circles, 55–56 Return to country of origin, 60–62 To the United States, 51–52, 55–56 Milner, Chris, 141 Minerals, 130 exports, 32 Money illusion, 94 Money laundering, 137 Montserrat, 121 Mounsey, Allister, 36 Mullings, Beverly, 28 Myers, Garth, 26

Khan, Jamal, 164 Khanna, Parag, 9 Klak, Thomas, 26 Kreinin, M. E., 159

NAFTA, 29, 109, 135 National accounts, measurement of tourism, 7 National Commercial Bank, 165 National Gas Company, 19 National sovereignty, 108, 111 Neal & Massy Holdings of Trinidad and Tobago, 121, 165 New York, 57 Nicaraqua, 128 Niche markets, 27 Nontraditional exports, 21–30, 31, 159–160 Financing, 27

Labor unions, 86–88 Land tenure, 86 Lee-Chin, Michael, 162

Occupational downgrading, 59 OECD countries, 28, 124 Offshore assembly, 25

INDEX

Offshore banking, 33–36, 74 Offshore production, 21 Oil and gas, 19, 20 Organization of Eastern Caribbean States (OECS), 4, 26, 33, 121–123 Eastern Caribbean Central Bank (ECCB), 122 Eastern Caribbean Currency Union (ECCU), 122 Özden, C., 135 Pacific region, 166 Palmer, 61, 161 Panama, 80, 111 Panama Canal, 53, 149 Parris, Ronald G., 46 Patents, 139 Peoples National Party (PNP), 83 Petras, James, 166 Petrochemical industry, 79 Philippines, 63, 148 Piccinini, Janice, 26–27 Political power, 120 Population, 147–149 Portland Holdings, 162 Preferential treatment, 3, 9, 11, 13, 17, 18, 31, 50, 86, 109, 120, 127–130, 135, 140 Profit outflow, 82–83, 89 Public safety, 77, 79, 89

179

Saint Kitts and Nevis, 32, 114, 129 Saint Lucia, 17, 32 Saint Vincent and the Grenadines, 5, 7, 17, 114 Schneider, Keith, 159 Schuler, Kurt, 113 Seaga, Edward, 140 Security, 149 September 11, 37 Services, 7, 160 Share in GDP, 7 Singapore, 4, 5, 28 Singer, Hans, W., 83 Single market, 115 Slave trade, 1, 52–53 Small Island Voice Global Forum, 45 Socialist development strategy, 5 Socialist governments, 109 South Korea, 4, 5, 165 Southern African Development Community, 166 Soviet Union, 140 Stewart, Gordon “Butch,” 37 Stock market, regional, 117 Stone, Carl, 103 Structural adjustment, 5, 81–82, 92 Sugar industry, 7, 13–17, 18–19, 32, 52–53, 159 Sural Group of Venezuela, 19 Suriname, 6, 32, 47

Queens, New York City, 58 Ratha, Dilip, 161 Reagan, Ronald, 134 Reciprocity, 140–143 Regional trade arrangements (RTAs), 123 Remittances, 55–56, 63–67, 70, 103, 154–156 Repatriation of profits, 56 Rice, 19 Rodrik, Dani, 92 Rosecrance, Richard, 104 Royal Bank of Trinidad and Tobago, 165 Royalties, 139 Russian oligarchs, 34

Tax incentives, 94 Tax policy, 77, 82 Tax revenues, 93 Telecommunications, 136, 165 Terrell, Dek, 99, 164 Thomas, Clive, 142 Thompson, Mel, 54 Tourism, 7, 32, 41–51 Competitiveness, 47–48 Crime and violence, 79 Cruise ship, 49 Demand for, 74 Eastern Caribbean, 79 Exploiting the endowments of nature, 8, 43–44 Foreign exchange, 42, 50, 70

180

INDEX

Tourism—Continued Hotel efficiency, 42 Impact of, 41, 43, 47 Negative externalities, 44–45 Private foreign investment, 41, 45 Taxes, 160 Traa, Bob, 43 Trade openness, 11, 12, 92, 145 Trademarks, 139 Travel economy, 69–75 Treaty of Chaguaramas, 108 Trinidad and Tobago, 1, 4, 7, 10, 11, 12, 19, 32 Crude oil exports, 19 Financial institutions, 117 Foreign direct investment, 79, 131 Intra-regional supplier of capital, 117, 146 Oil boom, 5 Share of profits in GDP, 83 Spending on social protection, 94 Turkey, 165 Turks and Caicos Islands, 33 Tyson Foods, 85 United Nations Environmental Program, 161 United Nations Human Development Report, 1, 2, 4 United States, 9, 17, 19, 33, 84 Bureau of the Census, 58 Caribbean immigrants in, 55–56, 137. See also Migration Caribbean students in, 138 Caribbean tourists in, 137–138 Caribbean trade with, 111, 133 Civil rights movement, 54

Department of Commerce, 48 Direct investment by, 132–136 Impact on tourism, 48, 71, 133 Influence of, 131–136 International Trade Commission, 134 Third border, 149 United Kingdom, 33 University of the West Indies, 74, 167 Venezuela, 128, 150 Venner, Dwight, 122 Virgin Islands, British, 33, 36 Virtual state, 104 Walkerswood, 163 Ward, Natasha, 36 Wessels, G. M., 112 West African Economic and Monetary Union, 166 West Indians, 58 Wheeler, Graeme, 107 Williams, Eric, 11, 85 Williams, Marion, 116 Wilmore, Larry, 22 World Bank, 28–29, 88, 91, 95 World Development Report, 4 World Economic Forum, 47 World Trade Organization (WTO), 3, 13, 16, 46, 109, 123, 128, 145 Trade Related Measures (TRIMS), 124 Trade Related Property Rights (TRIPS), 124 World War II, 53–54 Worrell, Delisle, 114 Yoon, Yeomin, 165