GT22D - POLITICS IN THE CARIBBEAN
GOVERNMENT AND ECONOMY
Topic Seven
Lectures 20-22
Robert Buddan
March 30-April 6, 2000
Introduction.
Caribbean political economy is primarily concerned about the respective roles and performance of the government/ state and market/economy in the development of the society. It involves determining (a) the respective roles of states and markets and (b) creating the conditions and following policies and strategies by which an economy can best perform.
Studies of Caribbean economies, especially by Caribbean economists, have mainly used a political economy approach. Such approaches are defined as, “approaches which view the economy as socially and politically embedded and as structured by power relations.”1
There are two sides to these economies. On the one hand, they have performed creditably in terms of human and material progress when compared to other Third World regions. On the other, they have failed to transform themselves by mismanaging their resources and they remain uncompetitive, dependent and lacking sufficient internal dynamism.2
State and market roles.
Both state and market have contested the sphere of the other on the grounds of the modernising mission of the state and the liberalising mission of the market. Since the rise of modern parties and independent states, arguments favouring a dominant role for the state in the economy were based on the grounds that the state was critical in modernising society because it was guided by:
- a nationalist, progressive mission of nation-building;
- democratic support from the masses through their political parties and trade unions;
- promotion of education, welfare and equity to correct the past ills of slavery,
and that markets were:
- controlled by a backward-looking planter elite;
- motivated by race and class prejudices;
- concentrating in unproductive enterprises such as plantation agriculture and import trading.3
The new paradigm of development since the 1980's now suggest that the modernising of society by nationalist states and political forces have reached a point of diminishing returns and must give way to the liberating forces of modern markets. The state is now charged with being:
- wasteful;
- bureaucratic;
- political;
- indebted,
while markets can liberate society through free enterprise led by a new generation of entrepreneurs, stronger market institutions and a new middle class. For this markets must be freed from state control through:
- privatisation of state industries and transfer of their ownership to the private sector;
- deregulation of markets so that more players can enter ( such as monopolies in transportation, telecommunications, agriculture);
- liberalisation of import tariffs to make domestic industry more competitive.
The current thinking is that both states and markets must operate as partners, each recognising its legitimate role. The state must play its role more effectively along the lines of good governance. Private sectors too must themselves practice good corporate governance towards their shareholders, workers and society showing a greater sense of social responsibility.4
The conditions for economic performance.
Studies of Caribbean political economy concentrate on what makes Caribbean economies different and what special strategies or policies might be necessary for them to grow.
These studies have established that Caribbean economies have a history of dependency. That dependency has been the greatest obstacle to development.5
However, economist Alister McIntyre made an important distinction structural dependence and functional dependence. Structural dependence refers to factors that are more or less fixed and could not be changed. If these structures determined dependence and underdevelopment then that would be the fate of the Caribbean.
Functional dependence refers to the functions that Caribbean economies can perform which were changeable and to that extent these economies could change and develop by adopting new functions guided by more productive strategies and policies.
A good example of a structural condition is that of size. Small economies are prone to dependency and suffer from many impediments to sustained growth such as few resources and little global economic power. Left at this the prognosis would be that high levels of development are not possible for them.
The functional perspective however would say that development and underdevelopment are determined by the functions that economies are given to perform. If economies function inefficiently or concentrate on raw material production without much value-added then they will not develop. However, new production strategies and the right political policies could change that in spite of small size.
Small economies therefore need to develop their own niche and take advantage of any special competitive advantages they might have and they need not imitate large economies with different competitive advantages.
It is now the popular view that Caribbean economies can take advantage of their functional competitive advantages and achieve higher and more sustained levels of development.
What might some of these areas of competitive advantage be:
- location and proximity to the largest market in the world, that of the United States;
- climate and island beaches suitable for tourism;
- relatively stable democracies, especially in the Anglo-Caribbean;
- relatively good educational standards and human resource potential;
- open trading economies with low tariff levels and favourable laws for foreign investments;
- liberalised foreign exchange systems and freedom for investors to repatriate their profits, and established banking systems;
- an Anglo-American culture, language and system of laws which make them compatible for business with major trading partners like the US and the UK, or with South America and continental Europe in the case of the Latin Caribbean;
- large Caribbean populations abroad who constitute economic and cultural markets for Caribbean products;
- unique cultural products in music, sports, entertainment, fashions, foods etc., attractive to foreigners;
- moral grounds for special or preferential treatment due to small size, their colonial past or on terms of good neighbourly relations;
- mutual benefits to gain from supporting these, emerging markets, democracies, and policies against drug trafficking;
- competitive wage levels;
- globalism and the technology of transport and communication that help to overcome the distances of space and the physical limits of size;
- growing regionalism that helps to reduce economic isolation and the potential of common currencies, tariffs, and regulatory laws that would help to reduce the costs of transactions such as those involved in the conversion of currencies or of different tariff rates.
The idea of competitive advantage used here is one by which a country or region might receive special or preferential economic advantage over others by virtue of favourable social, cultural, political or economic conditions. In this sense, the region’s, size and location, culture and history which are in many ways parts of its disadvantages, seen in a different way, can be converted into strategic advantages.
Together these add up to new conditions that were not in existence in earlier periods and which give Caribbean economies functional opportunities to develop inspite of its structural conditions. For instance:
- raw material prices ( such as for sugar and bananas) have steadily declined while the demand for leisure and entertainment activities for increasingly affluent populations of the developed countries has made tourism the top service industry in the world. It makes strategic sense therefore to reduce emphasis on traditional agriculture and increase emphasis on tourism;
- the continuous growth of Caribbean populations abroad where many of these people are in higher income jobs which mean that more people constitute a cultural market for earning foreign exchange compared to the past;
- the developments in technology that have led to globalism help small economies to integrate into the world economy on higher technological terms as against lower raw material producing terms.
It is true that there are still constraints of small size and globalism has its dark side but functional analysis suggests that development is possible with the right mix of policies and productive strategies by states and markets working in partnership.
The impact of these new conditions have led to the development of new Caribbean economies, significantly different from those of before.
New Caribbean Political Economies.
Past studies in political economy stressed the common features of the economies of the region and the older perspectives that explained underdevelopment - small size; insularity; plantation histories; monocrop, raw material production; foreign economic domination; cheap labour; import dependence; trading.
In more recent times Caribbean economies have taken different paths as they pursue different strategies of development. But the economies of the region have developed some common features.
For instance, Cuba for years was a major sugar producer but has now transformed itself into a major tourism destination. Cuba earns US$2 billion from tourism making it the largest foreign exchange earner. Trinidad has spoken about becoming the financial centre of the Caribbean and has the conditions to become one. Jamaica has identified services such as tourism, electronics and telecommunications as the leading sectors of the future. The service sector accounts for 57% of Jamaica’s GDP.
Industries such as these are more modern and global than the traditional industries and so form the basis for creating new Caribbean economies. They require more modern management skills and practices, higher paying jobs, and more progressive labour relations. They integrate the Caribbean into the global economy and introduce new technology into production methods, including educational technology and even electronic methods of governance ( electronic voting and internet conferencing with government officials, ministerial information on the net etc).
In addition, the service sector can fuel development of other sectors. The tourism industry has important linkages with domestic agriculture (food for the tourism sector); transportation (air, sea and land); finance (foreign exchange) and construction (hotels, roads,).
On a global scale the service sector is the largest and fastest growing and its development in the Caribbean is consistent with what is happening in the major economies.
Money laundering and the narco-economies also thrive on the new electronic technology and financial globalism. Much of this money is thought to support the wealthy asset base of many banks and insurance companies, especially in those countries that depend on off-shore banking. In addition, laundered money finds its way through unregulated internet games such as internet gambling. Money laundering also occurs via regional stock exchanges.
The growth of this industry is a global phenomenon. The United Nations says that whereas in 1992, US$500 billion was laundered around the world, by 1997 this had grown to US$4 trillion. The OECD says it loses US$200 billion each year due to money laundering and tax evasion facilitated by off-shore banking centres including those of the Caribbean.
Jamaican police have detected 10 internet transactions involved in drug tarfficking, arms trafficking and fraud. Regulatory laws have not yet caught up with this new practice as the information intercepted in these transmissions is not admissible as evidence in court. Government intends to introduce a bill in the year 2000 to rectify this.
This form of trade is also linked to the formal sector where established importers rely on informal traders to bring in goods for them. The informal trade is also linked to the trafficking of drug money. Some importers are believed to take out drug money to drug suppliers overseas. Officials notice that in some cases, informal traders travel with much more US dollars than the value of the goods they return with.
At the same time governments have retreated from ownership in the economies. A prime example is Guyana where the state was most dominant in the economy. Since the mid-1980's Guyana has reduced the number of state agencies from 40 to 8, and reduced state holding in financial institutions from seven to two. Similarly Jamaica has reduced state control in banks, telephone, hotels, land, sugar factories. States play a lesser role in producing goods but still play an important role in producing services.
Varieties of Caribbean economies.
In spite of these broad similarities, Caribbean economies have taken different paths to development where the roles of states and markets are different. We can differentiate between:
Bear in mind that in each of these there is usually a mixture of main industries and that a common leading industry with a few exceptions is tourism.
Cuba’s political economy is the most state-dominant but some measure of economic liberalisation has resulted in the emergence of a market.
- The state runs some 2,500 enterprises of which about 300 are in sugar and agriculture. It is also mainly responsible for social security which is its item of largest expenditure;
- There are some 330 companies with foreign participation, usually in partnership with the state in the form of joint ventures where foreign ownership is limited to under 50%. The main foreign investors come from Mexico, Canada and Spain.
- There is a private domestic market of some 200,000 self-employed persons in small business such as agriculture, restaurants, taxi operations, retail. The economy is a mixture of state, foreign investors and small self-employed business. The leading foreign exchange sector is tourism, nickel, tobacco and sugar with foreign remittances accounting for a significant US$800 million-US$1, billion.
Cuba’s economic market is restricted by state bureaucracy (such as the length of time required to process applications to start a business); the freedom to use foreign exchange, especially the US dollar; restrictions to the US market; restrictions on obtain foreign loans because of its US$11 billion foreign debt, the largest in the Caribbean; dependency on oil and high energy costs;
On the other hand, Cuba’s strength lies in its basic needs provision for health, education, training and social discipline which lead to an environment of social stability (low crime rates, low levels of delinquency, low unemployment) and high levels of education, skills and work ethic. These characteristics are attractive to foreign investors and for tourism which is slated to be the leading industry in the future.
Caribbean countries like the Cayman islands, the Bahamas, the British Virgin Islands, the Turks and Caicos islands, Anguilla and Antigua/Barbuda practice an off-shore financial economic model. This group is of very small islands, mainly political dependencies and with a weak history of nationalism and state involvement in the economy. They had brief or no history of slavery and therefore governments do not have the problems of correcting the social inequalities that larger territories have and issues of race and foreign domination of the economy are not as salient. Off-shore economies developed as an economic necessity.
Off-shore economies are those that primarily do business for clients abroad (off-shore) mainly by providing tax havens, that is, operating banks according to secrecy laws and minimum regulation to attract savings from persons who wish to avoid taxes or government policies and inflation that might devalue their savings in their own countries. Caribbean off-shore centres developed from the 1960's.
The funds that enter these centres are for:
tax avoidance;
tax evasion;
money laundering.
The first is legal and these centres were set up for this purpose. These centres, however, have become notorious for the latter two illegal functions.
Developed countries say that they lose US$200 billion a year to off-shore banks and Caribbean research shows that US$60 billion enter Caribbean off-shore banks each year. This wealth allows off-shore economies to have higher per capita GDP than other Caribbean countries. For example, the GDP per capita for the Cayman islands in 1997 was US$32,900 while for Barbados it was US$8,200.
The state plays a role that develops bank secrecy laws, only loosely regulates financial institutions and inspection of banks is at a minimum. The state resists attempts at disclosure, and provides a socially stable environment by carefully selecting who enters these islands as temporary workers (educators, nurses) and for how long. The state, in other words, play a minimal role and its main focus is facilitating off-shore financial activity.
Some Caribbean economies remain primarily agricultural. In Dominica, the agricultural sector contributes 30% of GDP, 45% of employment and banana exports earn 70% of foreign exchange. In Grenada, agriculture mainly banana, is the main foreign exchange earner, contributor to GDP and principal employer. In St. Vincent agriculture is the main foreign exchange earner and employs over 50% of the labour force. Banana makes up 60% of agricultural earnings. The problem with these economies is that one crop like banana dominates agriculture and that crop depends on European preferential treatment for viability.
The larger countries like Guyana and Belize have more agricultural potential. Sugar and timber dominate the Belizean economy and Belize has the potential to become self-sufficient in food. Agriculture, mainly sugar, contributes about 65% of foreign exchange and employs about 30% of the labour force.
Guyana too is dominated by sugar and timber along with rice. Forests cover 72% of Guyana’s land area. In fact, it is the only Caribbean country self-sufficient in rice. Guyana is the most agricultural of the Caribbean economies. Agriculture contributes about 45% of GDP. Guyana has the potential of producing to fill the cereal needs of the entire region.
The economies of Jamaica, Trinidad and Barbados are more mixed in terms of the variety of industries that are important and the roles of the state and the market. Jamaica’s economy for instance is dominated by mining (bauxite/alumina), services (tourism and finance), agriculture (sugar, banana, coffee) and manufacturing.
Trinidad’s economy is dominated by oil refining and petroleum products, manufacturing, services (not tourism) and sugar. Barbados has tourism, sugar and manufacturing.
Trinidad’s economy is quite different from the typical Caribbean economy in that neither tourism nor agriculture play a significant part. Rather, the economy is best understood as an energy-based economy because it is the only one with significant oil resources. The energy sector contributes about 25% of GDP, oil contributes some 30% of government revenue and oil and petroleum products account for about 70% of export earnings. Trinidad’s susceptibility to oil prices is seen where between the mid-1980's and mid-1990's the economy contracted sharply as there were some eight years of negative growth when world oil prices were low. The economy rebounded when oil prices recovered. The energy-based economy also helps the competitiveness of manufacturing since the country can benefit from low electricity and transportation costs. As a result, Trinidad’s manufacturing sector is able to compete strongly in the CARICOM market and Trinidad is the most dominant trading country in CARICOM.
Conclusion.
The role of government in Caribbean economies is to develop, nurture and promote the necessary consensus among social partners - Government, Business and Labour about what policies and economic strategies to employ and to provide direction and support where necessary to facilitate the creation of an environment conducive to investments and job creation.
Governments and economies interact in very different ways in the region. Cuba has a state-dominant economy with a limited market. The off-shore countries have very limited states with dominant financial market sectors. The agricultural and mixed economies have varying degrees of state-market interaction. One must not forget that being small and lacking resources, Caribbean political economies remain dependent on multinational companies for investments, management, marketing and distribution to a high degree and that foreign governments often have to be lobbied to employ trading and investment policies that favour the region’s products.
This makes the role of states vital in international negotiations and in foreign economic policy. Economies do not operate independently of the politics and policies of Caribbean states and those of other states and economies with which the region does business.