Towards an Alternative Industrial and Trade Profile for Caribbean Economies
The Challenge of the Developmental State Approach
Nikolaos Karagiannis, Debbie A. Mohammed and Jessica M. Bailey
Summary
Chapter 2 assesses the industrial and trade performance of Caribbean economies since the 1950s. Available evidence reveals that the industrial and trade performance of Caribbean territories has been weak and highly unstable. Looking for realistic solutions while mitigating policy failures, the authors advance a developmental state argument as a solid framework capable of supporting selected growth industries in the region while leaving space for stimulating further social and political development.
Introduction
The political economy of development in the Caribbean is a complex and multilayered environment. It is characterized by trade relations that take place in a highly monopolized global market; policy issues that serve the interests of transnational corporations; influences emanating from multilateral agencies; a lack of focus and clear direction; and “pork barrel” policies and interference by the political directorates. Foreign capital controls the islands’ productive structures, and particularly the most dynamic sectors of their economies. A high volume of profits is repatriated, and the benefits to the islands are funneled into very narrow sectors and activities. Technological-industrial dependence has been consolidated, and export production has been determined by demand from the main hegemonic centers. Foreign financing has become necessary for two reasons: to cover the existing deficits, and to support development by means of loans. Caribbean economies encounter unyielding domestic obstacles to their self-determined, self-sustained growth, which leads to the accumulation of deficits.
Against this general background, the tourism industry has been seen not just as an economic activity capable of creating income and jobs for the islands’ inhabitants and as a means of earning important foreign exchange, but as one of the most promising sectors for future growth. However, tourism has further subjected Caribbean nations to outside dependence. The result of this excessive dependence makes Caribbean economies vulnerable and more susceptible to external shocks, as well as more dependent on foreign exchange (Higgins 1994, 5).
Despite challenges and limitations, it is assumed here that: 1. the scope of government action is not weakened by the scale of globalization; and 2. although the fierce international competitive environment has put pressures on Caribbean nations, developmental intervention can be positive in pursuing national purpose priorities, harnessing national resources, directing incentives through a distinctive policy-making process, and bolstering the quality and competitiveness of Caribbean firms in the global markets. The main conclusion is that institutional policy intervention, as the central piece of the development puzzle, ought to be an important positive force within a context of market-driven globalization. The specification of strategic requirements and policy arenas for the sustainable growth of targeted industrial sectors in the Caribbean is the major task of this chapter.
The Caribbean Agro-industrial and Trade Profile
In a real sense, Caribbean countries are still grappling with the dilemmas of the 1950s, which include dualism, disparities, unemployment, low productivity and rates of domestic savings, inadequate productive investments, and weak entrepreneurship. Added to these are the challenges of the new millennium—the astonishing pace of technological innovation and change, liberalization alongside protectionism, the heavy hands of transnational and multinational corporations and multilateral institutions, and the apparent shift of economic power from the Atlantic to the Pacific (Lalta and Freckleton 1993, 1). Added to these are the two-pronged threats stemming from climate change—the threat of diminished supply as the Caribbean’s natural assets may suffer damage, and the threat of lessened demand as tourism is affected by climate policies in source countries (Birch and Simpson 2011; CARICOM Secretariat 2015).
In most Caribbean islands, there has been a significant decline in the proportionate importance of local primary production over the last three decades. The primary sector struggles to maintain output and, at the same time, common with worldwide trends, has become less labor-intensive. Demographic trends in the agricultural sector (mainly the advancing age of farmers and labour scarcity as more labor gravitate to either government-funded social intervention programs, or into more profitable sectors); coupled with sluggish growth in productivity, have led to an increase in food imports, and most countries in the region are now net food importers (Inter-American Institute for Cooperation on Agriculture [various years]; CARICOM’s Selected Economic Indicators 2013). For 2015, it is estimated that the region will import in excess of US$5.5 billion in food, while its food exports will amount to just US$1.5 billion (Kaieteur News 2014, 2015).
Additionally, the type of the economy as well as agriculture’s diminishing contribution to employment and gross domestic product are reflective of the region’s continued inability, or possibly indifference to development and implementation of dynamic policies to get agriculture and local manufacturing back on track (Tables 2.1 and 2.2). This sector’s contribution to GDP has declined by more than 50 percent in the last decade, from 6.3 percent in 1997 to 3.2 percent in 2006 (FAOSTAT), due in part to the transition of the OECS countries from agriculture to service-based economies.
Table 2.1 Characteristics of Caribbean countries—total area and type of economy
Table 2.2 Agriculture employment as percentage of labor force—selected Caribbean countries, 1981–2014
Yet, only a few Caribbean countries have achieved some success in transforming their economic structures from primary production lines to service and/or industry-led production (Karagiannis 2002). Efforts to revive declining production of traditional export crops and to introduce and promote nontraditional export crops through the commercialization and modernization of the sector were pursued during the 1980s, but performance was inconsistent throughout the 1990s, a trend which continues today. Problems were experienced in the main export sectors, and there was a general stagnation as well in the other economic subsectors among and within Caribbean countries. Exports have struggled in the face of the recent global crisis, and the inability to meet increasingly onerous sanitary and phytosanitary measures associated with food-related exports to developed markets (Anyanwu 2013). For those Caribbean economies reporting favorable, albeit low, average growth rates, this may be attributed to improved production techniques in the major export sectors and relatively good performance in local food production (Inter-American Institute for Cooperation on Agriculture [various years]; CARICOM’s Selected Economic Indicators 2013). Those Caribbean countries which have recorded robust growth over the last three years, have been primarily focused on commodity exports. Belize, Guyana, Suriname, and Trinidad and Tobago as a group experienced an increase in real GDP from 2.4 percent in 2011 to 3.4 percent in 2012 and 3.6 percent in 2013 (Central Bank of Trinidad and Tobago Economic Bulletin, July 2013). This performance may be attributable to demand driven largely by China (Mohammed and Anyanwu 2013, 152–153). Of the five countries considered by the CDB to be major commodity exporters,1 only Belize (3.6 percent), Guyana (3.8 percent), and Suriname (3.3 percent) registered growth in excess of 3 percent in 2014 (CDB 2015). With the beginning of 2015 seeing a dramatic slowdown of the Chinese economy, plummeting oil prices, and the predictable contraction of markets globally in response to these developments, the 2015 growth outlook for both CARICOM’s commodity exporters and service economies appears bleak.
While sugar cane production and sugar cane exports were main economic activities of the Caribbean during the eighteenth, nineteenth, and twentieth centuries, by the first decade of the twenty-first century, there was a decline in the production and export of sugar. One of the reasons for this decline was Trinidad and Tobago’s withdrawal from the Sugar Association of the Caribbean. A second contributing factor was the climatic condition of persistent rain which led to crop declines in Guyana, Belize, Barbados, and Jamaica in 2008. Third, as Brazilian energy companies dominated the sugar industry of the Caribbean, increased reliance was placed on ethanol and similar products (Jamaica Gleaner 2008).
By 2011, sugar production in the Caribbean was led by Jamaica and Belize. World sugar production was feeling the surge of competition from Brazil and India (Ferrari 2011). World production for 2011–2012 was forecast at 177.3 million tons, making the Caribbean’s share of less than 25,000 tons insignificant. Other producers who have experienced adverse climatic conditions are Pakistan, Thailand, and China (International Institute for Environment and Development 2011).
Similarly, the nations of the Caribbean remain only minor players in the global textile industry, which is dominated by the countries of Asia, in particular China and India. Though the region benefited from inclusion in the regulations of NAFTA during the 1990s and the elimination of textile quotas in 2005, they have been dwarfed by the increasingly dominant exports of China, which holds 47.1 percent of the world market (McCann 2011).
The manufacturing sector within the Caribbean has had very mixed fortunes over the last four decades. Many of the manufacturing units in the region are little more than “enclave” operations of larger extra-regional firms. As such, these firms tend to transfer only limited skills to the region. Because the region is perceived to be vulnerable to recession, arm’s-length manufacturing units are preferred because they are easier to close down than those closer to the home base. History has shown that the Caribbean is vulnerable to just this sort of action. The result is a widening gap between transnational firms which typically reside in Caribbean countries, and which are integrating at a faster pace with the global economy, and other indigenous firms in the slower-integrating Caribbean economies (Karagiannis 2002).
Growth and structural change in the manufacturing sector have been characterized by a reduction in the number of “early industries” catering to local demand (bakeries, soft drink factories, handicraft industries). While there was a focus on light manufacturing of consumer-oriented goods, there was little emphasis on capital goods industries, with the exception of Trinidad and Tobago. In addition, during this time of growth in specific industries, there were only weak intersectoral/intrasectoral linkages, primarily because of the high import content of many manufactured goods. The manufacturing sector, overall, is dominated by small establishments with fewer than 25 employees. Enclave firms have developed in Jamaica, Barbados and St. Lucia, encouraging the processing of exports (Downes 2004, 14).
Enclave companies are engaged in offshore data processing and in the assembly and manufacture of garments, footwear, electrical and electronic equipment, toys, and other goods, which are then exported (Willmore 1994, 1995). These companies are largely foreign-owned (mainly by U.S. nationals) and take advantage of special trade provisions (Caribbean Basin Initiative [CBI], the Jamaica Export Industry Encouragement Act and the Special Access Program 807A/9802A). The local value-add of their final product is generally low because the activities of the enclaves tend to emphasize mixing, bottling, and assembly. They often do little to link their various sectors into the domestic economy. Moreover, although small establishments are dominant and contribute to the diversity of production in the manufacturing sector, they account for a relatively small proportion of industrial output. Medium and large firms account for most of the output that tends to be export-oriented (Downes 2004, 15–17).
In general, three types of industries have developed in the Caribbean over the last half century.
1. Import-substituting industries: These were first established in the 1960s and provide such goods as beverages, tobacco, textiles/garments, furniture, and paper products. Some of the enterprises in these industries have been able to export some of their goods to other Caribbean countries, while a few of the larger, more successful indigenous firms have been able to penetrate the extra regional market.2
2. Export-processing industries: These take on two forms: (a) those which process local raw materials—handicrafts, agro-products (food products, juices, soap), and (b) those which have enclave status—garments, electronic components, office machinery and information processing.
3. Heavy processing industries: These include alumina in Jamaica and Guyana, and petro-refining and energy-based industries in Trinidad and Tobago.
In the past, the agricultural and industrial sectors in the Caribbean have been seen as not providing sufficient employment opportunities. The region is not regarded as an attractive location for industrial investment due to the lack of developed infrastructure and other factors of economic growth and competitiveness. Part of the reason for this is the inappropriate policy environment that exists in Caribbean countries. Many of these nations have low overall capabilities in planning, evaluation, and implementation of agricultural, industrial, and trade policies. Indeed, many Caribbean states either do not understand or do not fully appreciate the need to develop agricultural, industrial, and trade policies as part of an integrated national development strategy. This is reflected in inherent weaknesses in the mechanisms to encourage and strengthen linkages among agriculture, manufacturing, and tourism sectors, and has resulted in incoherent national and regional development planning systems. Institutional deficiencies are manifest by poor service, inadequate infrastructure, and subpar transportation facilities, which the government has difficulty maintaining. Overall, there is weak structural support for the agriculture and manufacturing industries, a problem that is common to most Caribbean countries.
Caribbean economies are exhibiting declining productivity and competitiveness, especially in the main economic sectors of agriculture, manufacturing, and, to a lesser extent, tourism. There is a wide variety in natural resource bases, economic infrastructure, and levels of development among Caribbean countries that affect the efficiency of many firms and industries. There are low and highly variable output volumes, and poor production and operations quality among these nations because of low levels of human capital and skills, slow adaptation to technology, and underutilization of capital stock. Evidently, there has been a significant decline in the proportionate importance of local primary production during the past two decades (IICA 1998: Tables 1 and 18; UNCTAD [various years]). As a result, most countries in the region are net food importers, and only a few Caribbean countries have achieved some success in transforming their economies from a primary production to a service and/or industry-led economy (IICA 1998: chapter 4). Besides, there is a high reliance on imported inputs, especially in agrochemical, machinery and equipment industries, contributing to the absence of intersectoral linkages. The region also has inadequate local research capabilities, with low levels of expenditure (domestic and foreign, public and private) on R&D. This results in a lack of productivity-enhancing production methods and techniques, and inadequate transportation facilities and marketing.
The ups and downs in the performance of both the agricultural and agro-industrial sectors in the 1990s and 2000s were due, in large measure, to the problems experienced in the main export sectors and the general stagnation in the other economic subsectors among and within Caribbean countries. For those local economies reporting favorable, albeit low, average growth rates, this may be attributed to improved production techniques in the major export sectors and relatively good performance in domestic food production (IICA 1998: Table 18 and Annex: Statistical Tables; CARICOM 2000; ECLAC [various years]).
Overall, the situation is exacerbated by a range of constraining factors which may be summarized as follows:
1. Inappropriate policy environment
2. Weak institutional framework
3. Declining productivity and competitiveness
On the other hand, estimates show that tourism is the only sector of regional GDP that has consistently increased its share of total income since the 1980s. Indeed, allowing for some fluctuations, the tourism industry has been the only major sector that has grown steadily in importance during the last 25 years or so in the Caribbean region (CTO [various years]; PIOJ [various years]). In addition, the sector has given Caribbean countries employment for a sizable proportion of their population. Despite this advantage, tourism has further subjected Caribbean economies to outside dependence, making them highly vulnerable to external multinationals. The result of this dependence makes the Caribbean more susceptible to external shocks and more dependent on foreign exchange. This dependence exacerbates the region’s instability in employment and national income levels (Higgins 1994, 5).
In addition, the growth of tourism (and other related services) has had negligible effects on the development of the manufacturing industry. Indeed, the benefits from tourism growth have been inadequately exploited because of insufficient linkages with commodity production sectors, and failure to upgrade complementary and related service industries like information services, communication, and banking. As a consequence, there are few linkages between the local sectors of Caribbean economies as well as a serious lack of diversification in production.
Not surprisingly, therefore, there has been much talk of the poor endogenous competency of Caribbean islands, although an increasing number of commentators now seem to be becoming increasingly nervous about this, with the trade account of the balance of payments of Caribbean economies in substantial deficit—due to the low levels of exports and high levels of imports—and the slowdown in economic activity causing concern. Indeed, most of the economic activity in the region has slowed down considerably in the last two decades and growth has been uneven and relatively weak (Table 2.3) even though the slowdown in economic activity has not been uniform across all the Caribbean countries. The central element of these discussions to which people refer is the continuous increase in the total national debt, with Jamaica, Barbados, and several of the OECS countries registering significantly high debt-to-GDP ratios over the period 2010 to 2014 (Table 2.4). The questions that arise are: What are the sources of this economic performance? Can it be sustained under existing policies?
Table 2.3 Real GDP growth rates, Caribbean 2011–2014
Table 2.4 Selected Caribbean countries Debt/GDP (%) 2010–2014
In the Caribbean, it can be argued that monetary and fiscal policies during the last few years have attempted to provide an environment conducive to attracting foreign investments while holding down real wages, and supporting the growth of a dual economy. A better performance in the near future cannot be expected under present policies because the real base of economic dynamism has been neglected. That neglect will undoubtedly hold back the growth of Caribbean economies. It is clear that, in today’s circumstances, neoliberal policies cause substantial balance of payments, and other economic and social problems. The fundamentals of Caribbean economies are anchored on a foundation that many characterize as an illusion. Their much vaunted “Western-style” modernization and laissez-faire antidotes are increasingly seen to be detrimental overall.
Towards a New Development Paradigm
Socio-Cultural and Politico-Institutional Aspects
The socio-economic challenges which Caribbean countries face as a direct consequence of the unrelenting pace and pervasiveness of globalization, has prompted some academicians and practitioners to call for a renewed focus on the merits and scope of developmental state action in the Caribbean context. Such a developmental state approach assumes better government action, and would require an efficient and competent administrative machine, as would any strategy capable of overcoming barriers and laying down the basis for endogenous growth in any developing economy. As governments in the Caribbean make efforts to obtain and maintain stability, legitimacy, and accountability for economic development, the functional relationship between the government and the private sectors must be improved. Caribbean governments have been effectively captured by powerful interests, and are therefore unable to decisively promote structural changes and economic reforms. The politicization of most decisions, in conjunction with the weakness of the civil service, means that there are major constraints on the pursuit of developmental policies.
First of all, developmental state strategies and policies by Caribbean governments require a strong commitment to meaningfully change the methods and scope of development. Strong ambition must take root. This ambition, which has been referred to as “the nationalist incitement to development” (Johnson 1982) and the “moral ambition” (Loriaux 1999), would allow for the development of a genuine complementarity between public and private goals, the enhancement of the operation of markets, and the creation of opportunities which would not otherwise exist. In addition, strong institutional structures with a substantial measure of operational autonomy would develop in order to manage the critical interactions between state and industry.
Looking for pragmatic remedies capable of mitigating pork barrel politics and patronage in the Caribbean would require challenging the common desire of many politicians to exercise a high, though often informal, level of control of institutions. To be effective, these institutions would have to be embedded in productive networks with key sectors of industry, banks, universities, and other wealth-generating hubs. This would encourage the mutual exchange of information, and enhance bureaucratic integrity and an appropriate level of autonomy, a combination that would improve policy quality and relevance, but one that is often difficult to attain (Cowling 1990, 24–25). This combination of bureaucratic autonomy and social connectedness, called “embedded autonomy” (Evans 1995), can provide the institutional basis for more effective, transparent, and accountable state involvement in Caribbean economies, while being independent of short-term political and societal pressures and vested interests (Ahrens 1997, 125). The issue of effective, transparent, and accountable actions which “embedded autonomy” may foster, should also include another level of public involvement in the form of civil society engagement. This engagement would provide an important layer of insulation to deflect or minimize issues of corruption and perceptions of collusion between public agencies and wealth-generating institutions.
Caribbean government bureaucracies are largely focused on day-to-day management and control, requiring little conception of strategy, and rarely undertaking any serious forward planning. Though strategy of any kind would be considered “political,” any government intervention must be strategic in nature (Hughes 1998, 149). Stronger institutions with a clear strategic planning role are a necessary part of any attempt to introduce greater competence and a more long-term perspective to development policy in the Caribbean, a combination that will be much more favorable to productive investments and production-oriented sustained economic growth (Cowling 1990, 32). This would allow the state to take a genuinely proactive role, harnessing market forces to deliver the goals set by government at the national and local levels.
Strategic planning plays the role of focusing on desired goals rather than operational details. It gives direction and purpose to public organizations; without this underlying strategy, policy making is often without coherent direction. The planning process is often more important than the plan itself, since the use of long-term parameters allows public institutions to develop a shared vision for the future (Cowling 1990, 16–17). Additionally, developmental state action requires that strategic planning clearly articulates and integrates a more complimentary role for indigenous private sector in the national development agenda, since the state’s role as principal employer is unsustainable in the long run.
A unique system of accountability is still required by Caribbean governments; it is a combination of political and managerial accountability, which are closely related. As Hughes puts it, “The system of accountability is what ties the administrative part of government with the political part and ultimately to the public itself” (Hughes 1998, 225).
In the traditional bureaucratic administration, accountability relies upon the formal links provided through the hierarchical structure. It is accountability for avoiding errors rather than achieving outcomes (Hughes 1998, 233). Therefore, improving the idea of accountability by relating it to the achievement of actual goals should be a specific aim of the move towards more effective developmental intervention. The relevant institutions would then be responsible for the effective execution of strategic plans and monitoring the progress of these plans. In fact, by formalizing the commitment to developmental strategies in structures, procedures and personnel, commitments cannot be easily reversed. In the past, Caribbean nations created new institutions, but failed to give them teeth. The result was fragile organizations because of a fragile commitment to development. With clearly defined goals and determination to pursue them, stronger institutions should emerge in the Caribbean (Cowling 1990).
The effectiveness of this approach would depend on the coherence of government policies and the degree to which institutions can remain autonomous from the surrounding social and political pressure. It is clearly going to be difficult to attain effectiveness when important parts of the state are wedded to pork barrel politics and beholden to specific interests (Wade 1990, 375).
In the course of a fundamental policy redirection, it is very unlikely that simply matching developmental state actions to existing political institutions will work. In fact, it would probably be counterproductive because it would lack the generalized commitment needed from a variety of institutions in order to ensure continuity and consistency. Consequently, any such change would require a deep commitment to fundamental improvements in policy making, while the institutional structures would have to generate value by committing to the direction and pace of endogenous development (Ahrens 1997, 119 and 126). Without such commitments, effectiveness, competence, capacity, and professionalism, developmental state policy making will probably flounder on short-term expedients; the power of transnational and domestic interests; conservatism, ineffectiveness, and inefficiency of the civil service; or resistance by the people (Cowling 1990, 23).
All too often, public sector reforms and capacity-building programs have been introduced in many Caribbean countries without the benefit of systematic and disciplined diagnoses of institutional capacities. This has resulted in wasted investments, inadequate levels of skill and competence, ineffectiveness, and performance shortcomings. In contrast, the economic success of Japan and newly industrialized countries (NICs) could not have been achieved without the decisive role of their competent “technostructures” (or “pilot agencies”) in economic and social planning. Indeed, an important feature of these technocracies has been their technical competence. Many of the top officials of Japan and East Asian countries who orchestrated their economic and social planning received advanced training abroad.
There are several kinds of institution-building measures, which comprise intellectual, managerial, and fiscal resources. Strategic human resource management and planning, coupled with investments in human resource development (i.e., high quality and timely education, training, and the continuous development of scientific manpower), should be strongly linked to conscious modernization efforts by Caribbean governments and institutions towards better and more effective state action. Furthermore, competitive wages for well-educated, well-trained technocrats, based on meritocracy, can attract more talented individuals and can increase capacity, integrity, and professionalism (Wade 1990, 371). It is essential, however, that Caribbean governments also eliminate political patronage so that key posts are not filled with party loyalists or political allies who lack necessary qualifications.
Lastly, if Caribbean economies are to develop growth-oriented, learning-based, productive activities, it may be necessary to adopt a number of measures to remodel their key social, economic, and institutional factors that will be required to underpin them. Appropriate and supportive political, economic, and other social institutions must be in place for the effective pursuit of developmental policies and strategies.
Economic and Developmental Aspects
Economic growth, by definition, must come from either the higher utilization of existing productive capacities or the creation of new productive capabilities. In the case of Caribbean nations, prospects for future growth in the region have been lowered significantly by underutilization and foreign exploitation of existing resources, exacerbated by the difficulties Caribbean economies have repeatedly faced with their balance of payments. The underutilization of part of their capacity is proof of this considerable growth potential (Karagiannis 2002). Thus, the first requirement of any endogenous growth strategy is that aggregate demand is sufficient to stimulate production up to the adequate rate of existing capacity utilization or new capacity creation. Besides, growth of domestic production of Caribbean economies must go hand in hand with special consideration of their external trade. This, logically, would place emphasis on the competitiveness of Caribbean nations (Lopez 1998, 6; Mohammed 2011).
In order to expand industrial production and employment in the Caribbean, firms must have the financial means to invest in the necessary machinery, capital equipment, and all the “modern factors of competitiveness.” Short-term bottlenecks caused by a shortage of financial resources that prevent a fuller utilization of capacity, have to be taken care of. Hence, the second requirement of a national developmental state strategy is the implementation of short-run selective fiscal and monetary policies. Equally important, selective economic policies should provide the resources and stimuli to carry out the investment in both working and fixed capital, infrastructure, and the “modern factors” necessary to raise output and to improve the production and commercial conditions of firms at national and international levels (Lopez 1998, 11–12).
The proposed developmental state framework would tend to correct the recurrent tendency of Caribbean economies towards external disequilibrium and high dependency on foreign economic activity. In addition, given the recovery of production of Caribbean industries and the improvement of competitiveness, a larger part of the additional goods produced would be devoted to exports. Consequently, Caribbean economies would make a greater and better use of their productive resources and capacity, while at the same time easing the constraints on their balance of payments. This seems a fairly sensible and realistic way to confront the future. Devising the necessary measures to stimulate endogenous growth and industrial regeneration, while giving priority to investments necessary to allow a fuller and more efficient utilization of existing resources in local economies, seems to be a better option for the development of Caribbean countries than a frantic search for accelerated “Western-style” modernization and laissez-faire antidotes (Lopez 1998, 19).
The current economic difficulties—and fiscal pressures in particular—are making Caribbean governments more prepared to tackle difficult institutional issues than would have otherwise been the case. The nations which do best in the global arena are those which manage change competently, while protecting their national economies from disorder (Tyson 1992; Chang 1994 and 2010; Singh 1995 and 1998; Boyer and Drache 1996; Karagiannis and Madjd-Sadjadi 2007). Therefore, Caribbean governments still have to find ways to ensure that the best business practices are adopted, and require firms to invest in new production facilities, skills training and upgrading, and critical science and technology initiatives.
Industrial Development Policy Considerations
Industrial policy has not been seen to be pivotal to most Caribbean economies and has not, therefore, been developed as an important and necessary part of their governments’ approach to endogenous development policy making. Liberalization, privatization, and deregulation appear to have been the central routes to modern economic “solutions” for these countries. The remedy proposed and implemented by neoliberal policy makers has been the extension of market forces into almost every area of production.
Government interventions in the Caribbean have usually been of a regulatory type and the policies which flow from these interventions appear to run counter to the developmental state approach and to be consonant with the “market failure” analysis. Most Caribbean governments have often used their power to promote particular interests (“pork barrel” politics) and the general concept of a developmental role for the state is rather alien to their general economic and political culture.
There are serious doubts, however, about whether this neoliberal policy making has been translated into significant industrial expansion, endogenous development, desirable economic performance, and competitiveness. Although appropriate fiscal, monetary, and exchange rate policies can contribute much towards enhancing the performance of Caribbean economies, a much sharper focus on strategic industrial policy needs to be established. Such supply-side strategies are seen to be necessary to resolve the deeper structural problems of these countries. Seeking to satisfy Caribbean nations’ urgent demands for endogenous development, especially during this challenging era of neoliberal globalism, requires some developmental state-based policy considerations.
Appropriate Macroeconomic Policies
As macroeconomic management is very important, a government could institute a number of policy measures to facilitate conscious development efforts. Appropriate macroeconomic policies should pay particular attention to:
• a faster, non-inflationary growth of domestic demand;
• the efficiency and effectiveness of government spending and taxation;
• sound government finances/investments;
• the role of foreign direct investments, as well as the management of the national debt, which should be designed in the context of the long-term strategy for overall development;
• competitiveness (the role of imports/exports and the growth of exports);
• the relationship between the financial sector and the productive sector; and
• the social and political environment.
In the Caribbean region, the general instability in employment and national income levels as well as a lack of diversification has led a number of people to seek job security in the public sector. As a result, government institutions and public sector bodies have been absorbing as much labor as possible, and recurrent government expenditure levels in the Caribbean are under continuous upward pressure. It is noticeable that very large percentages of (re)current government expenditure of Caribbean fiscal budgets have been dedicated to wages and salaries and debt repayments throughout the 1980s, 1990s, and 2000s, while both the levels and the shares of government capital expenditure and social expenditure were very low.
On the revenue side, an important feature of Caribbean states’ public finance is the high dependence on international trade taxes (mainly import duties) as a percentage of government revenue. Faced with the difficult realities of budgetary stress, a proactive fiscal policy would emphasize prudent government expenditure management and planning (i.e., long-term productive investments in human capital formation, skills, technological capacity, R&D, information, and innovation) and would consider other alternative sources of government revenue (e.g., Tobin tax). Therefore, fiscal expenditure should finance and guide long-term productive investments (private investments in the modern factors of competitiveness are also desirable and most welcome).
The objectives of development-boosting monetary policy, on the other hand, ought to provide a stable financial framework for the successful implementation of government policy, and to reduce “capital flight” and speculation. The monetary policy should also maintain an interest rate policy that allows for small firms to acquire capital at internationally competitive rates and provide further incentives for productive investment in targeted sectors through selective credit cost-reduction policies. Banks would have to be adequately supervised to ensure that these objectives are met (Clayton 2001, 16; Karagiannis 2002). Regulators must also ensure that the financial sector is well-managed, well-capitalized, and has a time horizon that extends beyond the next quarter.
The consumption patterns of the household sector of Caribbean islands, due to their proximity to the large North American markets, are more reflective of a developed rather than a developing economy. Local demand has been created for products and services in advance of the domestic economies’ productive capacity to deliver these items (Higgins 1994, 1). The direct result is an endemically exaggerated propensity to import throughout the region, coupled with low actual levels of national savings. This low rate of savings is inadequate to finance higher levels of investment expenditure. In this case, higher levels of output and income ensuing from a higher degree of capacity utilization and better utilization of equipment can be the source of higher levels of savings required to match higher levels of investment. Building confidence in the economy through sound macroeconomic management is also important to encourage greater investment by indigenous firms and to increase the available quantum of local savings which is often held in foreign currencies either within or outside the Caribbean. More savings and investment will bring about further increases in output and income levels.
Moreover, to the general domination of Caribbean economies by foreign activity and foreign interests, as well as development problems and limitations associated with the structure of Caribbean economies, must be added the weak capability of their real sector; the inevitable result is low levels of exports and high levels of imports, i.e., trade deficits, balance-of-payments constraints. Therefore, thorough development efforts for Caribbean countries must seek to strengthen their national capabilities first, if these economies are to improve their ability to compete internationally. In other words, strong domestic platforms should consolidate local production lines in the first instance, with export promotion coming as an extension of this.
The Need for Thorough National Strategies
Contrary to popular belief, it is not necessarily the case that free trade imposes beneficial discipline in a world of dominant transnational corporations. In addition, financial institutions, under siege by dominant transnational corporations and the forces of free trade, usually adopt particularly short-term perspectives with regard to investment, which they can impose on firms and industries, especially the small ones. It is these tendencies within modern economies that highlight the need for national strategic planning to achieve efficiency in the allocation and utilization of national resources.
The rationale for such thorough strategic planning is twofold. First, transnationalism is characterized by asymmetry of power between large transnational corporations and national/local communities; strategic planning can address this asymmetry. Second, short-termism of the market system impedes the growth potential of firms, and is hardly conducive to the rational planning of the long-term future of the industrial base. Strategic planning can reinstate long-term issues and, ultimately, strengthen local industries. Yet, strategic planning should not be limited to providing space for indigenous firms that are often crowded out by transnationals but should encourage a higher level of entrepreneurship amongst local firms, whatever their size, particularly in terms of investing in targeted industries with growth potential. For these reasons, within the Caribbean market economies, there is a need to establish institutional structures to plan for the future and monitor transnational power, in addition to addressing the short-term perspective of financial institutions.
Furthermore, it would not be sufficient to establish small, technologically modern export sectors without a clear plan for aligning finance with the industrial targets and using them to upgrade the accelerators of industrial advancement and growth in the future. For instance, renewable energy and energy efficiency, agriculture and food security, economic infrastructural upgrade, human resource development, and private sector development have been identified as key areas for project funding by the Caribbean Development Bank in 2015 (CDB 2015, 16–25).
However, it is also argued here that under modern conditions, and perhaps more generally, comprehensive or centralized planning is both unfeasible and undesirable. Today, a coherent national strategic planning system should be an essential element of any efficient economic system within the region. In fact, Caribbean economies need broad development strategies, which should be designed to elicit areas where policy actions are most likely to make a difference and would involve conscious attempts by government to coordinate public policies more rationally in order to reach, more fully and rapidly, the desirable ends for future development, competitiveness, and efficiency. Such technically proficient strategies should be imposed, but the market system should be left to do things that it is good at doing: looking after the myriad, incremental changes which are required within these broad strategies, and, of course, running those sectors which do not require strategic intervention. Therefore, the case for selective strategic interventions is set out here on the grounds of major systematic and structural deficiencies within Caribbean economies, while considering issues of scale and scope.
Contrary to the orthodox analysis, a more tenable formulation would be a synergistic connection between a developmental state and dynamic enterprises of high potential. This government-private cooperation will allow Caribbean states to develop realistic national goals, and to translate these broad national goals into effective policy action. Strategic partnerships between firms and the state, and cooperation among firms in areas that are normally subject to strong competition, are of great importance in Caribbean economies, and may counterbalance the rules of foreign-dominated markets and shape productive investment strategies.
On the other hand, Caribbean industries need to grow and mature, and Caribbean countries must trade successfully if their economies are to be prosperous. This mixture of inward- and outward-oriented development, defined in terms of intensive economic growth, higher productivity, competency upgrading, and overall competitiveness improvement should constitute the foremost priority of state action. The pursuit of thorough developmental state policies can be self-defeating, however, in the absence of political and institutional conditions and reforms required for their effective implementation.
Industrial Targeting—Sectoral Strategies
Given the relative weakness of most Caribbean governments today, it would be sensible to limit strategic action to those parts of Caribbean economies where policy intervention could have the greatest positive impact on dynamism and economic growth. The criteria are clearly “dynamic” and “forward looking,” and seek the rigorous identification and development of targeted industries and sectors. Thus, the long-term goal should be to bring about an overall improvement in the competency and efficiency of distinctively Caribbean firms, in the level of technological infrastructure they rely on, and in the quality of workmanship and service so that more activities can become increasingly competitive.
Proactive developmental state action would give priority to those industries and sectors which are viable, warranted, advantageous, and strategically important in the long-term, but which are vulnerable in the short- or medium-term without significant intervention. Proactive government guidance should take the form of industrial targeting—support and repositioning of propulsive dynamic sectors whose rapid growth would have substantial, long-term effects on the local development and competency of Caribbean economies. Such industries require nurturing and have to be provided with the resources and commitment to allow them to grow and mature (Karagiannis 2002; Mohammed 2014).
Some sectors in the region can be considered as “strategic” because of their weight in local economies, calling for a deep reorganization of traditional and modern industries. These sectors require significant investment, renaissance, and repositioning, and have to address a number of serious economic, social, institutional, and environmental issues simultaneously. Despite the inherent difficulties, all of these problems can be solved by effectively addressing immediate challenges. So long as the immediate challenges are effectively addressed, the targeted sectors are clearly capable of considerable further expansion.
As identified also in the CDB Annual Report 2014, solar energy, renewable energy, solid waste recycling solutions, food and beverage processing, and organic farming are sectors of high potential, given the history of the Caribbean, its current state of development, and the future prospects of the sectors (Caribbean Development Bank 2015).3 Consequently, incentives can be established and possibilities opened up for a variety of reasons, as follows.
1. There is an increasing demand for a range of local food products, particularly processed products, not currently produced in the Caribbean. This increasing demand4 is for covering domestic needs in the first instance with export promotion, say to the U.S. and Canada, coming as an extension.
2. Planned productive investments and visionary policies would significantly enhance local production capabilities and reduce the food import bill. In addition, these incentives would allow the local capture of a high percentage of value-added, and thus generate profits and contribute to the process of capital accumulation. They would also encourage the reinvestment of profits in local economies.
3. Caribbean countries have significant competitive advantages in the aforementioned industries. A higher capability to compete internationally would be responsible for endogenous growth, thereby establishing an expanding market share and improving the balance of payments (and foreign exchange earnings). The targeted sectors would better utilize local resources and offer solutions to the problems in the traditional sectors of Caribbean islands. In other words, industrial growth would be accompanied by a higher degree of local resource utilization as well as a higher ability to compete internationally.5
4. These targeted sectors would give a great boost to the structural transformation and diversification options of Caribbean countries, and would create and promote stronger intersectoral linkages, with multiple short, and especially long-run, productive effects resulting from investments in infrastructure and the “accelerators.” In addition, the targeted/propulsive industries, in conjunction with the entire service industry, would enhance the development of local and regional entrepreneurship, and would create managerial and entrepreneurial talents. A modern business culture of small enterprises, especially as it relates to the export market, would be introduced. As the human capital and a pool of expertise to meet the demands of the new era are developed, the local skill/knowledge base would also increase and technological progress, knowhow, R&D, and innovation would be stimulated, increasing productivity and, in turn, imparting the momentum for “economic takeoff.”
5. The growth process is expected to lead to a widening of the local markets which, in turn, would result in better transportation and communications systems. Advances in supply chain and logistics technology would be inevitable. After resources have been developed and put into use, industrial advancement would broaden the local production base, provide sufficient stimulus for the mobilization of resources and investments, and would bring about a net addition to the effective use of resources.
6. This is clearly a realistic and feasible approach for the increase of endogenous competency and overall development of Caribbean economies. Such an approach can be successful because it does not require much. It requires employment of existing resources in different ways, making “wiser” public finance choices, and supporting better state policy options.
Moreover, “growth poles” or industrial clusters include dynamic sectors and/or specific propulsive industries of high potential. As a result, governments can support them because they are capable of spilling their expansionary forces into depressed neighboring areas within the region. The encouragement of growth poles and industrial clusters seeks to counterbalance the power and interests of multinational or transnational corporations. In other words, growth poles would create greater external economies and economies of scale, thereby dealing with issues of scale and scope. The existence of these external economies would make the growth poles more attractive for new industrial development, and would create conditions and opportunities conducive to faster growth of existing and incoming industry in the Caribbean.
The proposed framework takes into account the relationships among a number of factors such as domestic resources, capital, social structure, the level of skills and technology, scale, and transformation. Such a pragmatic approach can successfully contribute to long-term, supply-side initiatives by creating or promoting particular sectors and productive activities. The result is to create external economies and economies of scale, conditions and opportunities, which are conducive to faster growth of existing and incoming firms, i.e., a “big push.”
Economies of scale and learning would bring about multiple effects on, and changes in, the structure of Caribbean economies. Crucial objectives would be to increase value-add to local industrial activities and strengthen the degree of interdependence between different firms, which would then be capable of spilling their expansionary forces into other economic sectors and activities. Obvious benefits would include the support and development of indigenous resources, firms, and industries; the maximum utilization of productive investments; the removal of bottlenecks on the demand side which are imposed by both the narrow size of the local markets and their poor manufacturing base; and an improvement in the range of key services (for example, transportation, information, communication) likely to be available to people and to industry. More long-term advantages would include the exploitation of spillover effects; the application of modern industrial methods and techniques; diversification, restructuring, transformation, and repositioning of Caribbean economic sectors; and the capacity to correct the tendency of the region towards external disequilibrium and excessive dependency on foreign activities. Such a strategic approach would also empower Caribbean nations to resist the effects of future structural changes and the vagaries of the international environment.
Planned Investments in the Accelerators
In the past, investments in the Caribbean have been inadequate in providing sufficient resources for future production or in bringing about the full utilization of existing resources. Foreign corporations have developed an appetite for quick returns and short-run gains, and the developmental needs of local economies have taken a subordinate position. Financial institutions have been a highly complicating impediment, as many of them have significantly encouraged endemic short-termism and speculative ventures. These factors, in conjunction with weak or absent government supervision, fostered a “casino economy” mindset and a dysfunctional business culture in which insider trading, conflicts of interest, and more direct forms of corruption became increasingly common (Clayton 2001, 16).
With particular reference to policy making in the Caribbean, policy interventions have usually been of a microeconomic type at a horizontal level, taking the form of ad hoc responses to pressing problems based on short-run, often highly partial, considerations. Governments have been seen to support industries, to attempt to correct their micro-imperfections, and to offer, more or less, protection to them (e.g., by using trade restrictions like tariffs and quotas). “Market failure” has usually been the rationale for subsidies, loans, and other forms of financial assistance to industries and firms. These traditional incentive policies offered only marginal solutions and often recommended some temporary assistance without getting at the root of the problems.
Further, neoliberals argue that the high total cost of local economic activities is a serious barrier which discourages productive investments. The answer to this argument is twofold. First, special emphasis must be placed on capital accumulation and investment guidance. Investments in knowledge, technological innovation, training, and research must support the prioritized sectors and activities mentioned earlier, resulting in an increase in skills and expertise, and improved attitudes toward work; and a boost in endogenous competency and overall competitiveness of Caribbean economies. The key issue here is that investment responsibilities should be closely tailored to the needs of the business sector with a view to loosening the fetters and accelerating the pace of private investment. This would result in private sector spending on the accelerators of local development and an increase in competitiveness, which is essential.
Second, selective incentives should be offered to key favored dynamic firms, and disincentives given to disfavored industries and services (Karagiannis and Madjd-Sadjadi 2007). Selective incentives and disincentives provide important benefits and should be considered as a tool in the industrial policy arsenal. Disincentives to disfavored and unsuccessful businesses or services, such as imposition of higher licensing fees or the phasing out of various tax waivers used to support politically-favored companies, can release much-needed capital for industrial expansion—either through revenue enhancement or by channeling investment into targeted sectors. In addition, selective disincentives are somewhat impervious to challenge, in that they confer no perceivable unfair advantage to the country utilizing them. This has the additional benefit of simultaneously adding sectors that are being emphasized. Therefore, discouragement of disfavored businesses and services accelerates the process of moving capital out of them and into the more favored ones. More importantly, in the face of trade agreements and competition among nation-states, this option enables policy makers to justify the gradual ratcheting down of incentives to force disfavored and unsuccessful businesses or services to stop “suckling the mother’s milk of subsidies” (Karagiannis and Madjd-Sadjadi 2007).
Clearly, increasing and improving capital equipment and infrastructure, improving human capital and R&D status, or pursuing restructuring strategies in the Caribbean would take a long time. The effectiveness of such comprehensive policies would be evident in the long term. Such knowledge-based strategies could be spawned and nurtured by the University of the West Indies,6 and would place emphasis on infrastructural development, machinery and capital equipment, technical change, technology generation and transfer, and technology acquisition. Applying knowhow from abroad (where necessary), the University can achieve a higher level of education, research, continuous development of scientific manpower, training courses, and learning-by-doing (i.e., “accelerators” or “modern factors”). Simply put, targeting and supporting those sectors identified above would require the quantity (how much)7 and quality (what type) of accelerators needed by these sectors, so that the quantitative and qualitative parameters of planned industrial investment are thoroughly taken care of. It is this thoroughness and proficiency that can make national development goals and strategic industrial policy successful.
Quality and Market Development
Quality goods and services and quality management are strategically important to both firms and countries, and may serve as key indicators of successful competitive transitions for Caribbean firms. It is a well-known fact that quality production is the hallmark of successful international competitiveness, especially in this technological age. Routinely, firms realize that the quality emphasis must be placed on the entire supply chain, from the garnering of raw materials throughout the production process to transportation and delivery to the final customer. This includes such aspects as equipment layout, purchasing, installation, and use of proper equipment and machinery, layout strategy, facility location and expansion, infrastructural development, products technology training, maintenance training, suppliers of packed material, implementation of quality control programs, scheduling, and other just-in-time decisions (Heizer and Render 1996, 79–80).
All of the above-mentioned activities that reinforce the quality dimensions of production are resource-dependent. It has already been noted that resources (natural, human, and technological) of Caribbean nations remain, basically, underdeveloped. Indeed, this lack of resources constrains the technological capacity and the international competitiveness of Caribbean nations when compared to the capabilities of mature and emerging nations, such as the United States, Germany, Japan, and China. No opportunities exist for Caribbean nations to compete head-to-head against those economies that possess superior capabilities in the production of mass-produced items, due to their existing economies of scale, superior infrastructure, larger and better educated workforces, and advanced distribution capabilities, resulting from multinational locations.
The question then becomes: How can Caribbean firms compete and gain an advantage via the developmental state approach? The quality advantage can come only in the case of specialized “clusters” in areas of highly creative production that could be perceived as unique to the Caribbean region. This would entail state support and long- and short-term development of industries that could reinforce a reputation of quality and uniqueness in global markets. This would be analogous to the worldwide reputation of South African diamonds, Iranian carpets and pistachios, Russian caviar, French wine, and Swiss chocolates and watches, just to name a few. A differentiation strategy emphasizing local culture, cuisine, or unique products or services would also allow Caribbean territories to strengthen their market power in the tourism sector vis-à-vis other world destinations.
Prime prospects for government support can be various specialized foods and alcoholic beverages, as well as health-related products.8 Such high-end products can be linked to the thriving tourist industry, thus spreading the desire for these specialized products more rapidly beyond the immediate region of the Caribbean. Regional cooperation could facilitate discovery of ideal locations, processing, packaging, storage, and distribution of these products, supported by government policies.
Focused cultivation of proven quality techniques could refine the products, processes, and related services over time. Meanwhile, the use of sophisticated marketing—such as international advertising, participation in competitions, celebrity endorsements, and labelling—could establish these products as unique and desirable in world markets.9 The ever-evolving use of social media and other electronic methods of communication can only accelerate the growth of these products and services, provided the government invests in the development of such technologies. As a long-term strategy, sophisticated social marketing, supported by the government, would increase demand and export promotion.
Final Remarks
This chapter has sought to analyze agro-industrial and trade problems in the Caribbean, based on the region’s structural dependence and the inefficiencies of its market system. After explaining the issues surrounding these problems, the chapter looked at the role of the state as a catalyst for development. Regional disparities persist for long periods of time and have harmful economic, political, and social effects. There is no reason to believe that there is an “invisible hand” that will promote balanced regional growth and endogenous competency. It is evident that the process of cumulative causation, coupled with intense exploitation, is largely responsible for the creation of winners and losers, development and underdevelopment.
An important question concerns the lesson to be drawn from the successful East Asian development experience that subsequently can be generalized to, and applied in Caribbean economies. The available evidence shows quite conclusively that the East Asian developmental state model is the product of specific historical circumstances, with the logical corollary that major constraints may exist on its transferability to, or replicability in different or alternative national contexts. In fact, Caribbean countries are characterized by different historical and cultural circumstances and different socio-political characteristics. What is important to learn from the East Asian success story, however, is how to approach development problems, i.e., the strategic approach. In general, key aspects of the proposed approach are:
• A strong ambition to develop
• Priority being given to sustained economic growth
• State guidance and support to targeted sectors
• An economic policy bureaucracy within a political network which offers sufficient space for initiative-taking and effective operation
• A “pilot agency” with professional and competent elites as the brains for carrying out developmental intervention
• An underlying framework supported by increased productivity and improved attitudes to work; meticulous oversight of targeted sector development projects to minimize corruption which may sidetrack useful initiatives and lead to misallocation of resources
Looking for realistic solutions capable of dealing with the dismal legacy of colonialism and dependency while mitigating policy failures, the developmental state argument is advanced as a necessary framework for support of selected growth industries in the Caribbean while leaving space for stimulating social and political development.
Notes
1. The five commodity exporters Belize, Guyana, Haiti, Suriname, and Trinidad and Tobago are so categorized because commodity exports account for over 25 percent of output.
2. These include Grace-Kennedy Ltd. (Jamaica) and S. M. Jaleel, Associated Brands and Sasha Cosmetics (Trinidad & Tobago) which have market presence in North America, Europe, and some Central American countries.
3. What is proposed here, however, is rather more profound: Caribbean nations should look to develop knowledge-based, growth-oriented activities across all major sectors in order to restructure and transform their economies. Organic farming, and solar and alternative forms of energy, for example, have a rigorous basis in science and should be seriously considered.
4. Besides, stopover tourists significantly expand the size of local markets.
5. The commodities should have a high value-to-weight ratio in order to overcome the problem of the high transport costs associated with island production.
6. For example, the Caribbean Agriculture Research & Development Institute (CARDI), the Caribbean Industrial Research Institute (CARIRI), etc.
7. Of course, there is the crucial question of financing productive investment expenditure. A number of options may be considered: (1) strategic partnerships between local, regional, and international financial institutions; (2) an appropriate redistribution of existing funds from government consumption to government investment; (3) a more effective collection of tax revenues; (4) higher levels of savings generated by higher levels of income; (5) the use of government bonds; (6) available pension funds; (7) a higher degree of capacity utilization; and (8) “functional finance,” which could increase output and employment substantially.
8. This is being done in some Caribbean countries, e.g., OECS state support for coconut-based spa products. In Trinidad & Tobago (TT), the state is looking to revive the cocoa industry since TT is one of only seven countries worldwide that produces fine quality cocoa beans. It is expected that a rejuvenated cocoa industry will provide the inputs for production of top quality chocolates also using local fruits, and export of high quality cocoa beans.
9. This is being done, to some extent, across the Caribbean. The Barbados Food and Rum Festival showcases the country’s unique foods and rums to a global audience through celebrity chefs and personalities who are invited to the event. Similarly, the Angostura Cocktail Competition involves bartenders from around the world creating cocktails using Angostura bitters and rums. The finalists compete in Trinidad.
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