Friday 21 February 2014

Political independence and Economic Development in the Caribbean

In 2003, Alvin G. Wint – former head of the Department of Management Studies at the University of West Indies, Mona Campus – noted in his book Competitiveness in Small Developing Economies: Insights from the Caribbean that dependent territories in the Caribbean typically have the smallest economies but the highest per capita incomes.
Early in the 1960’s when most Caribbean countries were either dependent or newly independent, territories which would later form the Caribbean Community (CARICOM) could be listed from the highest to lowest per capita income as: Trinidad and Tobago, Jamaica, Barbados, Guyana, the Leeward and Windward islands.
Twenty years later, seven territories of the Leeward and Windward Islands formed a monetary union called the Organization of Eastern Caribbean States (OECS). Wint states that: while they “are politically independent, their monetary policy independence is constrained by their membership in this regional economic union”.
Later, the 2000/2001 World Development Report (WDR) classified Trinidad and Tobago, Barbados and most member states of OECS as having upper middle incomes, while the other CARICOM states had lower middle incomes. But, the Bahamas and dependent Caribbean territories were classified as having high incomes.
The dependent territories attributed their success to the global perception that they had lower political and economic risks. While many CARICOM member states were approaching 40 years of political independence at that time, this certainly seemed to have been the case.

Independent states adopted independent exchange rates in the 1970’s
Besides falling in ranks from the 1960’s per capita listing, Jamaica and Guyana both have flexible exchange rates. With the exception of Trinidad and Tobago, other Caribbean countries use fixed exchange rates. According to Wint, “movement away from fixed exchange rates in the 1970’s gave developing countries the opportunity to adopt independent exchange rates for the first time…”.
The fact that Trinidad and Tobago did not share the same fate is instructive. Changes in exchange rates increased after 1973; and, “most non-oil producing developing countries experienced significant budgetary imbalances as a result of the quadrupling of oil prices in 1973”. Trinidad and Tobago, being an oil-producing state, would have been spared this experience.
Non-oil producing countries of the Caribbean typically use a significant portion of their export earnings for oil imports. Devaluation of the Jamaican and Guyanese currencies therefore inflated the value of their imports over their exports: thus making a bad situation worse. 
According to Wint, “The advantage of fixed exchange regimes, on the other hand, tends to be the financial discipline they impose on governments”. With regard to OECS, it was stated that: the union “had forced on all the countries a degree of macro-economic discipline…”.

Caribbean Community agreed to establish a monetary union in 1992
In the mid 1970’s, CARICOM formulated a compensation facility utilizing currencies of its member-states. The objectives of this facility were two-fold: to facilitate monetary stability, and to encourage trade. This was initially a bi-lateral facility, but in 1977 became a multilateral facility referred to as the CARICOM Multilateral Clearing Facility (CMCF).
CMCF’s objectives included the promotion of regional cooperation within the banking sector and also cooperation between member states. CMCF succeeded until the early 1980’s, when Guyana defaulted on its debts and Barbados was unable to extend more favourable payment terms.
Recently, the CARICOM Secretariat in conjunction with the Guyana Bureau of Statistics hosted a seminar on the community’s trade performance, and it was stated that the intra-regional exports from 1973 – 1981 averaged 9% of total exports. Also, there was a decline in the 1980’s because of a debt crisis.
Nevertheless, the CARICOM Single Market and Economy (CSME) was conceptualized in July 1989 by then CARICOM heads of government at Grand Anse, Grenada. In 1992, the heads of government agreed to establish this monetary union. But, CSME was only a part of CARICOM’s development strategy in the midst of globalization: where size and strength were becoming increasingly important.

Caribbean Single Market and Economy stalls in 1993
CSME’s primary objectives are price and exchange stability, and reduction of transaction costs of regional trade. The secondary objectives are the stimulation of capital flows from intra-regional trade and investment, improvement of balance of payments, and increased growth and employment.
CARICOM member states were grouped into one of two classifications. States in category A were already compliant with the 1992 CSME criteria, and were only required to maintain monetary stability. States in category A were the Bahamas, Belize and the OECS: OECS having already been established as a monetary union.
States in category B had to make adjustments to become compliant. States in category B were initially Trinidad and Tobago, Barbados, Jamaica, and Guyana; but Suriname and Haiti were added later. The strength of regional currencies suggested a monetary union would have been straightforward, but this has proved otherwise.
A 3-phase implementation schedule was proposed. A Council of CARICOM Central Governors should have been established in phase 1. This phase included Trinidad and Tobago, Barbados, Belize and OECS. But, phase 1 stalled in 1993 when Trinidad and Tobago floated their currency; and, efforts to proceed without them failed.

Non-compliant states stalled the CSME
This failure was founded in the 1980’s, between the end of CMCF and conceptualization of the CSME. Paradoxically, it was due to issues of trade and monetary instability. The Barbadian government engaged in deficit spending in the run-up to the 1981 election. While, Trinidad developed a programme to diversify its exports to non-oil markets in response to a slump in oil prices in 1982.
By the mid 1990’s, Trinidad had substantially increased its non-oil exports, “particularly to the Jamaican market”. But, when Jamaica liberalized its exchange system in 1991, Trinidad followed suit in 1992 floating its currency to provide incentives for its exporters.
Trinidad’s trade policy began with protectionism, which led to reduced earnings for Barbados. Coupled with that government’s fiscal relaxation in 1986, this gave rise to a financial crisis in 1991: where Barbados’ net international reserves dropped to three weeks of imports. 

Economic development in CARICOM improved after 2002
In an article titled “Jamaica and the Caribbean Community” published in the Jamaican Gleaner of 24 November 2013, Byron Blake – former assistant secretary general of the CARICOM Secretariat - wrote that the Bahamas, which was one of the compliant states, “was not prepared to join the CSME” and could have been excluded from CARICOM were it not for a “special pact” signed between themselves and CARICOM.
Nevertheless, there was exceptional growth in intra-regional trade from 2002 – 2008, and the CARICOM Single Market was established in 2006. Growth in trade contracted as a result of the global economic and financial crisis. But, intra-regional trade is now 17.2% of total exports. This is almost double the rate in 1981: Trinidad and Tobago being the dominant exporter to the region.
WDR 2012 indicates that Trinidad and Tobago, and Barbados had joined the Bahamas as high income economies. Data for both were not included in WDR 2014, so it is uncertain whether this was sustained. However, the report indicated that OECS states of Antigua and Barbuda, as well as St. Kitts and Nevis had high incomes.
This seems to indicate the initial set-back associated with political independence has now been overcome. Now, the real threat to economic development is the misuse of political independence, particularly with regard to macro-economic stability. The example of Barbados is instructive in this regard: as a non-oil producing state.

Barbados restored macroeconomic stability without devaluation
In 1973, mercantile exports of many developing countries, including Barbados, increased. Barbados exercised fiscal conservatism by off-setting increased expenditure on oil with increased inflows from exports, and created a surplus fund.
Barbadian policy makers were cognizant of the negative impact devaluation had on its CARICOM colleagues: Jamaica and Guyana. According to Wint, these “policy makers illustrated that the macroeconomic stability of which the exchange rate was a symbol would be supported by prudent economic policy and fiscal conservatism”.
This approach was taken to deal with its deficit spending of 1981, and “fiscal correction was so comprehensive that it allowed Barbados to negotiate a standby agreement with the IMF without requiring any discussion on exchange rate adjustments”. This approach was again successfully applied in dealing with its 1991 crisis.
The Barbadian example shows that “…a fixed exchange rate as a nominal anchor does not necessarily reduce the temptation to resort to fiscal impudence and a corresponding inflation tax, but it does induce a rapid return to fiscal propriety if the anchor is not to be lost”.

Conclusion: Political independence requires fiscal propriety
It is therefore incomprehensible that a reputable financial institution such as Moody’s could recommend that OECS be dismantled and the Eastern Caribbean Dollar devalued. It could also be inferred from this recommendation that CARICOM should abandon CSME and the use of a common currency.
But, the facts support the response of Sir Dwight Venner - Governor of the Eastern Caribbean Central Bank – that “Evidence to the contrary suggest that the stability of the deposits in the banking system have been anchors on which the stability of our economies and financial system has been built over the last three decades…”
Macroeconomic stability is essential for growth in two dominant service industries in the Caribbean: international financial services and tourism. Macroeconomic stability is necessary for the full implementation of CSME. It is not necessary for OECS or CARICOM to change course.
A Caribbean Monetary Authority (CMA) is proposed to be established in phase 2 of the CSME, which will be accountable to a Council of Finance Ministers. Then, a common currency will be issued to settle regional transactions. Finally, Guyana and Jamaica will be admitted, on becoming compliant. Phase 3 requires all states to enter the monetary union as well as CMA membership.
The revised Treaty of Chaguaramas, which was concluded in 2001, has the objectives of improving administration of trade, increasing the scope of trade to include services, and facilitating regional investment. International concerns should not be allowed to derail the progress made. Otherwise, political independence in the Caribbean will truly have been at the expense of economic development.


Paul Hay is a Jamaican national, founder of PAUL HAY Capital Projects: a consultancy, based in Kingston Jamaica, with a vision of providing strategic planning and implementation services to organizations for non-residential facilities in the Caribbean.

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CARICOM and Caribbean Economic Development
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Wednesday 19 February 2014

Singapore: Example to the Caribbean in Doing Business

In the Competitiveness of Small Nations: What matters?, Densil Williams and Beverly Morgan analyze the competitive performance of Singapore, Barbados, Jamaica, Trinidad and Tobago under the “Global Competitiveness Report” over a period spanning 2004/5 to 2010/11. Singapore consistently outperformed the Caribbean nations.  Smallness is typically seen as a disadvantage to competitiveness, but Singapore shows that this can be overcomed.  Since 2007/8, it has ranked in the top five most competitive nations in the world.  But with a per capita income rivaling western European nations, one could argue that this is an unfair comparison.  However, Williams et al explain that all these countries had similar economic structures, history, and institutions during the 1960’s: Singapore has just attained a greater level of development.

In “Doing Business 2013” – the Global Competitiveness Report for the period 2011/12 – Singapore was ranked the most competitive nation of the 185 nations examined.  Puerto Rico was the highest ranked Caribbean nation at 41.  Trinidad and Tobago was highest Caribbean nation studied by Williams et al, at 69, overtaking the usually more competitive Barbados, which was ranked 88; just ahead of Jamaica, at 90.  An article in Jamaica’s Daily Observer of 5 April 2013 read: “Gov’t to improve Jamaica’s Ratings for Doing Business – GG”.  The Jamaican government plans to improve  on laws, procurement procedures, use of information and communication technology, risk management, government services and macroeconomic management.

The Global Competitiveness Report analyses ten criteria across four stages of the business cycle, namely: start-up, expansion, operation, and insolvency.  In the interest of time, I shall focus on the operation stage, which involves four criteria: dealing with construction permits, getting electricity, paying taxes, and trading across borders.  Since my expertise is primarily in the Real Estate and Construction Industries, I will further narrow the scope of this discussion to the criterion “dealing with construction permits”.

For this criterion, rankings of the Caribbean nations are significantly different from the overall ranking, but Singapore still excels, with a rank of 2.  There construction permits undergo eleven procedures; this lasts 26 days, and costs 16.7% of the per capita income.  Jamaica ranks next highest in the group at 50: requiring eight procedures, 145 days and costing 212% of per capita income.  Barbados follows closely with 53: requiring ten procedures, 416 days and 83% of per capita income; followed by Trinidad and Tobago at 101: requiring 17 procedures, 297 days and 5.3% of per capita income.

For this criterion, St. Vincent and the Grenadines ranked 5th and Grenada 10th.  So, these could be case studies for the larger Caribbean islands considered here.  But, it is unacceptable for Jamaica to issue a construction permit in the time it takes Singapore to issue five; or, Barbados to issue a construction permit in the time it takes Singapore to issue sixteen.  It should now be obvious how Singapore has developed more than its Caribbean counterparts since the 1960’s. 

In fact, Singapore had less than 2% unemployment in the third quarter of 2012.  It had a budget surplus of o.7% of gross domestic product in 2011.  And, its construction industry grew by 11.6% from 2007 – 2011, by which time it was worth £14.6 billion: this industry is also projected to grow by approximately 5% per each year up to 2016.Technology is used to advantage by Singapore.  According to Williams et al. “The state of technological readiness in any country will impact on its ability to increase productivity, for technology helps to drive greater efficiency and thus improves output and performance”; and “technology as an enabler to improved competitiveness in the Caribbean is clearly an area that needs much attention”.

As early as 1995, Singapore’s Ministry of National Development implemented a project called CORENET: which stands for COnstruction and Real Estate NETwork.  Its objective was to re-engineer processes in the construction industry to achieve faster turn-around times, as well as increasing productivity and quality.  CORENET was implemented by the Singapore Building and Construction Authority in collaboration with other public and private organizations.  An IT infrastructure was developed to facilitate integration of processes in a building’s lifecycle, namely: design, procurement, construction and maintenance.

The current effort provides information services to speed up business planning and decision making; electronic building plan submission, checking and approval; as well as IT standards for communication between involved parties.  The benefits involve provision of one-stop convenience for private and public sectors alike; one-stop submission of plans to multiple agencies from any location at any time; online access to check submission status; and single billboard for approving authorities to post submission status.

While our Caribbean nations are still submitting paper-based drawings, which to a large extent are hand-drawn, Singapore has for almost two decades developed a digital one-step process of dealing with construction permits.  The moral of this story is that development takes foresight, planning, and diligent implementation of our plans. We have to acknowledge that Caribbean nations are uncompetitive, be willing to change, and apply bold and innovative solutions.  We cannot expect to improve our competitiveness by doing the same thing day in and day out.    Fortunately the global competitive report allows us to benchmark our performance against competing nations.  Low growth results from a lack of competitiveness.  Competitiveness results from using resources more productively, and “when productivity is high, economic growth is high”.

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CARICOM and Caribbean Economic Development

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 goods 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% 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 thirty 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 a Jamaican national, founder of PAUL HAY Capital Projects: a consultancy, based in Kingston Jamaica, with a vision of providing strategic planning and implementation services to organizations for non-residential facilities in the Caribbean.

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Political independence and Economic Development in the Caribbean
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