Paul Hay: CARICOM and Caribbean Economic Development

By: Caribbean Journal Staff - July 24, 2013

By Paul Hay
CJ Contributor

In 1963, the Centre for Developing-Area Studies (CDAS) was established at the McGill University in Canada. William G. Demas – then Head of the Economic Planning Division of the Government of Trinidad and Tobago, served as its first research fellow in 1964.  Under its auspices, Demas delivered a four-lecture series on economic development of small countries, the substance of which was reproduced in 1965 as a book titled The Economics of Development in Small Countries, with Special Reference to the Caribbean.

In the Preface to the first edition, Demas wrote: “In the course of my work in the field of economic planning in Trinidad, I was led to question the relevance to small countries of much of the accepted doctrine on economic development. I came to the conclusion that a somewhat different approach was necessary for small countries, such as the Caribbean.”

In the Introduction to the later edition, Sir Hilary Beckles, pro Vice-Chancellor, Principal and Professor of Economic and Social History at the University of the West Indies, Cave Hill, Barbados, remarked that “This brilliant text emerged from the intensity of his contributions to development ideas within the regional integration movement.”

In 1965, several former British colonies in the Caribbean also formed the Caribbean Free Trade Association (CARIFTA), an agreement between member states to eliminate trade barriers. These former British colonies then formed the Caribbean Common Market (CARICOM) in 1973, which involved the introduction of a common external tariff and free movement of labour and services.

On CARICOM’s fortieth anniversary, Jamaican manufacturers complain of Trinidad’s large trade surplus with Jamaica; that Trinidad maintains non-tariff barriers; and how energy subsidies to Trinidadian manufacturers give them an unfair competitive advantage.

However, these Jamaican manufacturers have not sought a ruling in the Caribbean Court of Justice (CCJ), neither has any serious petition been made to CARICOM to establish a policy on the use of subsidies. Yet, there are calls for Jamaica to withdraw from CARICOM, even temporarily.

But, Demas stated that “… economic regionalism offers one important avenue for many small underdeveloped countries to achieve the possibility of a more fully self-sustained pattern of growth,” and “… at least some regional cooperation or some limited measure of economic integration maybe better than none at all, and any move towards regionalism will be a step in the right direction.” Could Demas’ conclusions have been relevant only to Trinidad and Tobago?  Certainly not!

The fact is that Jamaican manufacturers could raise the same objections to trade with the United States.  But, no one is even suggesting that Jamaica cease trading with the US, even temporarily. Demas stated that there are two “essential characteristics of self-sustained growth”: one, savings and investment, and the other he termed “transformation of the structure of production,” noting that “development really means a structural transformation of the economy.” It is my contention that CARICOM has not facilitated this transformation expeditiously, which has led to unbalanced development and discontent with CARICOM itself.

Demas postulated “seven basic elements” of this second characteristic, which are:

  • Capacity to transform;
  • Unification of the national markets for goods and services;
  • Shift of production and labour between sectors of the economy;
  • Interdependence between domestic industries and activities;
  • Changes in the importance and composition of foreign trade;
  • Reduction of dualism; and
  • Development of appropriate institutions.

From CARIFTA through to the CARICOM Single Market and Economy (CSME) in 1993, the focus has been on the element “unification of the national markets”, and more so for goods than services. So, a country like Trinidad which has 59% of its Gross Domestic Product (GDP) derived from production of goods would have benefited much more than Jamaica, which has 30 percent of its GDP derived from production of goods.

Most Caribbean service-producing countries also depend on tourism which has been shown to be an enclave sector, that is, one in which a large proportion of their inputs are imported from outside the region, even though they may be available regionally.

Therefore, “Interdependence between domestic industries and activities” also needs to be addressed in these service-producing countries and, Demas cautions that “… an enclave economy – even one which yields a high level of per capita income and consumption to its inhabitants – cannot be considered truly developed.”

It was previously stated that the Jamaican manufacturers could take their case to the CCJ. The CCJ is one of the institutions falling under the element “Development of appropriate institutions”. However, the CCJ came into being long after Jamaica first started protesting about Trinidad’s trading practices, and as such, its late establishment would have effectively denied affected parties any means of redress.  Capital and other financial institutions are other relatively new additions to CARICOM, even though Demas first highlighted their importance forty-eight years ago. Other important institutions involved are education and training, public and business administration, land tenure, agrarian systems, and an “appropriate structure of incentives”.

Another issue, raised by other commentators, is Jamaica’s comparatively low productivity to Trinidad.  This is what Demas refers to as “dualism”— in this case, both regional dualism and dualism between economic sectors are involved.  In this regard, Demas notes that “… development of a national economy really means that all sectors – whether goods-producing or service-producing – and all regions become technically progressive, although not necessarily at the same rate.”

Here, Demas recommends that sector-dualism be addressed in the initial stages of development, followed by regional dualism.  However, we have already established that the goods-producing and service-producing sectors were never handled in a balanced manner.

The productivity of Jamaica, as a predominantly service-producing economy, has declined over the past 30 years.

One of the reasons given for Jamaica’s fall in productivity is the unresponsive nature of its labour costs to productivity.

This shows poor “capacity to transform,” which is essentially the ability to respond to price and market conditions, especially those outside the local market. Jamaica also has a large proportion of unskilled labour, which means shifting “labour between economic sectors” will be problematic, if not impossible.  CARICOM is yet to guarantee the free movement of labour, but these categories of workers will understandably not be in high demand elsewhere by CARICOM member states.  CARICOM will not be able to offer Jamaica a “quick-fix” to these problems.

However, “changes in the importance and composition of foreign trade” are a potential threat to regional trade itself, and by extension regional integration; if transformation issues are not addressed better than they are now.

When a nation’s economy transforms, Demas states that the proportion of its trade to GDP may be unchanged, but the composition of its imports shifts away from consumer goods towards intermediate and capital goods.

Unless regional partners also start producing more intermediate and capital goods, they will therefore experience a trade surplus with a more developed partner.

CARICOM really needs to do a better job than it is presently. It needs to address these transformation issues expeditiously. Institutions like the CCJ and integration of capital markets need to become fully functional in short order.

Dualism between the goods and service sectors needs urgent attention; and, an effort needs to be made to integrate the region’s industries and activities.

CARICOM cannot afford to be preoccupied with unification of the mercantile markets at the detriment of all else.

It needs to decisively address Caribbean economic development. But, it cannot rectify all the deficiencies alone. So, member states must not renege on their own responsibilities to achieve self-sustained growth.

Paul Hay is the founder and manager of Paul Hay Capital Projects.

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