Ransford W. Palmer-The Caribbean Economy in The Age of Globalization-Palgrave Macmillan (2009)

The Caribbean Economy in
the Age of Globalization

Previous Publications
US-Caribbean Relations: Their Impact on Peoples and Culture (1998)

The Repositioning of US-Caribbean Relations in the New World Order (1997)
Pilgrims from the Sun: West Indian Migration to America (1995)
In Search of a Better Life: Perspectives on Migration from the Caribbean (1990)
Problems of Development in Beautiful Countries (1984)
Caribbean Dependence on the United States Economy (1979)
Guyana (coauthor) (1969)
The Jamaican Economy (1968)
The Caribbean Economy in
the Age of Globalization
Ransford W. Palmer
THE CARIBBEAN ECONOMY IN THE AGE OF GLOBALIZATION
Copyright © Ransford W. Palmer, 2009.
All rights reserved.
First published in 2009 by
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ISBN-13: 978–0–230–60380–6
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To My Grandchildren Andrew and Elizabeth
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Contents
List of Tables ix
Preface xi
1 The Caribbean Economy: An Overview 1

2 The Decline of Traditional Exports 13
3 Nontraditional Exports as the Frontier of
Caribbean Development 21
4 The Service Economy 31
5 The Caribbean Tourist Industry 41
6 Migration 51
7 The Travel Economy 69
8 Investment and Consumption 77
9 The Role of Government 91
10 Caribbean Economic Integration: Drifting toward
a Single Market and Economy 107
11 Caribbean External Economic Relations 127
12 Epilogue 145
Appendix 153
Notes 159
References 169
Index 175
Tables
1.1 Profile of the Caribbean Community and

Common Market (CARICOM) 2
1.2 Comparison of Per Capita Income Growth
among Selected Countries, 1973 and 2003 (US$) 4
1.3 Percentage Distribution of Employment
among the Main Industrial Sectors for
Selected CARICOM Countries 6
1.4 Percentage Contribution of the Main Sectors to
Gross Domestic Product for Selected
CARICOM economies, 2000 8
1.5 The Evolution of the Economies of Jamaica and
Antigua and Barbuda; Share of Main Sectors in
GDP at Current Factor Cost, 1960, 1970, 1980,
1991, and 2000 10
2.1 European Union Import Price and
Free Market Price of Sugar (US cents per pound) 16
4.1 The Ratio of Service Exports to
Merchandise Exports, 1992 and 2004 32
4.2 The Offshore Financial Services Sector in
Selected Caribbean Countries 35
5.1 Travel as a Percentage of Total Receipts from
Services, 2000, 2005 42
6.1 CARICOM Immigrants Admitted into
the United States by Country of Birth,
1991–2000 and 2005 52
6.2 Permanent Residents in Canada from
Top Caribbean Source Countries, 1997–2006 52
7.1 Total Foreign Exchange from Tourism and
Immigrant Remittances as a Percentage of
Exports of Goods and Services for Selected
x LIST OF TABLES
Caribbean Countries, 1980 and 1999 70

8.1 Share of Net Foreign Direct Investment in GDP for
Selected CARICOM Countries, 1990 and 2003 78
9.1 Educational and Income Profile of Selected
Caribbean and Asian Countries, 1960–1996 98
9.2 Caribbean Enrollment Ratios and GDP and
Gross Capital Formation per Employed Worker, 1993 100
10.1 Treasury Bill Rates for Jamaica and Trinidad and
Tobago, 1991–1996 115
10.2 Share of Leading Caribbean Exports Sold within
CARICOM, 1999 118
11.1 CARICOM Domestic Exports to the United States, the
European Union, and Canada by SITC Sections, 2006 130
11.2 Net Inflows of U.S. Foreign Direct Investment* in the
Caribbean, 2002–2006 (US$ millions) 132
11.3 Distribution of Patents and Trademarks in
the Caribbean: Jamaica, Trinidad and Tobago,
Barbados, and Haiti 139
12.1 Population Profiles of CARICOM and
the United States, 2000 148
A.1 Competitiveness Ranking of Caribbean
Tourism (Out of 124 Countries) 153
A.2 Ranking of Components of Human, Cultural, and
Natural Resources (Out of 124 Countries) 153
A.3 Ranking of Components of Regulatory Framework
(Out of 124 Countries) 154
A.4 Data for Regression Analysis: USGDP and
U.S. Imports from CARICOM, Trinidad and
Tobago, and Jamaica. 1961:1 to 2007:1 156
Preface
T his book looks at the Caribbean Community and Common

Market (CARICOM) as a single economy by focusing on
the common features of its disparate parts. The book relies on
data from international institutions such as the World Bank, the
International Monetary Fund, the United Nations, and the Inter-
American Development Bank, as well as data from national statis-
tical agencies. Available data from particular countries are used
when they better illustrate the larger Caribbean condition. The
underlying thrust of the analysis is that Caribbean economies are
evolving toward becoming service economies.
Chapter 1 provides an overview of this changing structure and
positions each national economy along the evolutionary path.
Chapter 2 examines the decline of traditional exports sugar and
bananas as engines of growth and attributes this decline to their
inability to compete as preferential treatment in European markets
is eroded. Chapter 3 looks at the struggle to develop nontraditional
exports, and the failure of the export platform manufacturing
model as an engine of growth. Chapter 4 examines the role of ser-
vices in the evolving Caribbean economy, focusing on off-shore
financial services, information technology, and air transportation.
Chapter 5 analyzes the most important part of the service econ-
omy, the tourist industry. It discusses the nature of ownership, the
negative externalities, and the competitiveness of the industry.
Chapter 6 looks at the benefits and cost of migration as integral
to the Caribbean economy, the nature of the migration cycle, and
the dilemma migration poses for local investment in human capi-
tal. Chapter 7 constructs a model of the travel economy on the two
pillars of tourism and migration, using Antigua and Barbuda as the
prototype of such an economy. Chapter 8 underscores the role of
foreign direct investment in the Caribbean and its implications for
xii PREFACE
the distribution of income between labor and capital. Chapter 9 dis-

cusses the critical role of government in influencing the climate for
foreign investment and its implications for the tax structure and the
public debt. It also discusses the role of education in advancing com-
petitiveness and presents some recommendations toward that end.
Chapter 10 examines the slow process of Caribbean integra-
tion, the issue of a common currency, and the mobility of capital
and labor. Chapter 11 breaks the Caribbean external economic
relations into its important elements and assesses the impact of
the U.S. economy on Caribbean economic growth. The epilogue
in Chapter 12 explores the implications of the ever changing
external environment and the realignment of economic powers
in the world for the Caribbean.
Chapter 1
The Caribbean Economy:

An Overview
T he United Nations Human Development Report (2007/2008)

lists the countries of the Caribbean Community and Common
Market (CARICOM) as having medium to high human develop-
ment with their human development index (HDI) ranging from 31
for Barbados to 146 for Haiti out of a total of 177 countries. The
range in per capita gross domestic product (GDP) is just as wide,
from $500 for Haiti to $17,497 for the Bahamas (table 1.1). Despite
the wide variations in the level of development, the region has many
common characteristics. Among them are small domestic mar-
kets, dependence on foreign trade and foreign capital, and a nar-
row export base. They also share a common history as European
colonies, with Haiti having the distinction of being the first slave
colony to fight and win its independence from its colonial master,
France.
The Caribbean was peopled by Arawak Indians before Columbus
stumbled on it in search of the spice of the Indies. Later in the age
of mercantilism, sugar and enslaved workers from Africa pro-
vided a lucrative source of wealth for the colonial powers. And for
over 200 years this represented the order of international trade in
human beings and products. It enriched Great Britain and helped
to finance the settlement of America. The slave trade ended in 1807
in the Caribbean, and slavery in 1838, opening the way for British
planters to petition the Crown for indentured servants from India
to work the sugar fields. This history is reflected acutely in the cur-
rent ethnic mix of the populations in Guyana as well as in Trinidad
and Tobago where the social and political divisions remain sharp.
Table 1.1 Profile of the Caribbean Community and Common Market (CARICOM)
Countries Human Development Annual Growth Rate of Annual Growth Rate of Per Capita Population
Index (HDI) Rank GDP Per capita GDP Per capita GDP US$ (million)
2005 1975–2005 1990–2005 2005
Antigua & Barbuda 57 3.7 1.5 10,578 0.1

Bahamas 49 1.3 0.4 17,497 0.1
Barbados 31 1.3 1.5 11,465 0.3
Belize 80 3.1 2.3 3,786 0.3
Dominica 71 3.1 1.2 3,938 0.1
Grenada 82 3.4 1.3 4,451 0.1
Guyana 97 0.9 3.2 1,048 0.7
Haiti 146 –2.2 –2.0 500 9.3
Jamaica 101 1.0 0.7 3,607 2.7
St. Kitts & Nevis 54 4.9 2.9 9,438 0.04
St. Lucia 72 3.6 0.9 5,007 0.2
St. Vincent & The Grenadines 03 3.2 1.6 3,612 0.1
Suriname 85 –0.5 1.1 2,986 0.5
Trinidad & Tobago 59 0.6 4.3 11,000 1.3
Source: United Nations, Human Development Report 2007/2008

THE CARIBBEAN ECONOMY 3
The economic prospect for the Caribbean colonies with their nar-
row range of export agriculture was not considered bright when the
sugar industry lost its monopoly position in European markets in
the nineteenth century. So bananas were later introduced to diver-
sify agriculture, but even this product had to depend on preferen-
tial treatment in European markets for its survival.
Preferential treatment of the main export crops of sugar and
bananas is the recurring story in the annals of Caribbean inter-
national trade. In the discussion of political independence in the
1950s and 1960s, the big question was this: how would these small
economies fare on their own without the continuation of pref-
erential treatment? The British answer was to bring the colonies
together into a federation with a central political bureaucracy. But
this experiment quickly failed because the economic disparity
among island economies was too large at the time. The result was a
parade of independent countries with small populations, few nat-
ural resources, and extremely foreign-trade-dependent economies.
Now as World Trade Organization (WTO) rules are bringing the
long period of unilateral preferential treatment for their exports to
a close, the economic viability of these small countries will increas-
ingly depend on their ability to compete in external markets.
Preferential treatment has not prepared them to compete because
it has not encouraged technological advancement in production.
As a consequence, exposure to global competition is putting added
pressure on governments to seek new beneficial trade arrange-
ments with their major trading partners. More than ever, govern-
ments in the Caribbean are preoccupied with negotiating the right
trade arrangements that would allow private sector producers to
prosper. This is a far more complex undertaking than when the
role of government was seen through the prism of socialism in the
1970s as capturing the “commanding heights” of their economies.
This military metaphor implied a war against the foreign capital-
ists who controlled the most productive assets in their economies.
Since the commanding heights were usually mineral resources, the
strategy had the flavor of natural resource nationalism. Socialist
governments in the Caribbean expanded the role of the state and
in the process reduced the ability of their economies to generate
tax revenues. The disaster that this economic philosophy brought
on the Caribbean is evident even today in the form of excessive
4 THE CARIBBEAN ECONOMY AND GLOBALIZATION
government indebtedness. The two countries that exemplify this

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

among Selected Countries 1973 and 2003 (US$)
Countries 1973 2003
Jamaica 763 3,083

Malaysia 395 4,187
Rep. of Korea 302 12,634
Panama 785 4,319
Chile 672 4,591
Trinidad & Tobago 882 8,007
Singapore 1,252 21,492
Source: United Nations, Human Development Report, 2005; World

Bank, World Development Report, 1980
One is that early authoritarian leadership directed resources into

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

struggling to find new sources of growth in services as the elim-
ination of preferential treatment exposes their inefficient banana
production to intense competition from Latin America.
Aside from oil and gas in Trinidad and bauxite in Jamaica,
Guyana, and Suriname, there is a dearth of commercially exploit-
able mineral deposits in the region. The major contribution of these
capital-intensive industries to the economy is measured more in
the royalties earned from the minerals mined than in value-added
locally. In general, the amount of local value-added is important
for growth. But in the case of bauxite, the mineral is processed into
aluminum in the United States and elsewhere where cheap electric
power is available. As a result, the multiplier impact of investment
in mining on the local economy is modest.
Another view of the structure of Caribbean economies is through
the prism of employment. From table 1.3, it is clear that the over-
whelming share of employment is in a wide range of service indus-
tries, including government. The Bahamas tops the list in service
employment followed closely by Antigua and Barbuda. The two
countries with the largest share of employment in manufacturing,
Table 1.3 Percentage Distribution of Employment among the Main Industrial

Sectors for Selected CARICOM Countries
Countries and Years Agriculture* Mining ** Manufacturing Services***
Antigua & Barbuda, 2001 2.6 0.3 4.3 92.8

The Bahamas, 2006 0.6 4.4 95.0
Barbados, 2004 3.3 5.8 90.9
Belize, 2005 20.2 0.2 10.0 69.6
Dominica, 2001 21.0 0.6 7.8 70.6
Grenada, 1998 13.8 0.2 7.4 78.6
Guyana, 2002 21.3 4.0 12.8 61.9
Jamaica, 2006 18.2 0.6 6.5 74.7
St. Lucia, 2004 14.8 7.5 77.7
Suriname, 2004 8.0 5.9 7.0 79.1
Trinidad & Tobago, 2005 4.3 3.6 9.7 82.4
*
Includes fishing and forestry
**
Includes quarrying
***
Includes transport, storage and communications; finance and real estate; government; education,
health, and other social and personal services; wholesale and retail trade; hotel and restaurants; con-
struction; and the public utilities
Source: International Labor Organization
Belize and Guyana, are also the two countries with the largest share
of employment in agriculture. Sugarcane growing and reaping
account for a large share of agriculture and the processing of sugar
accounts for the most important component of manufacturing. But
even in these two countries with the greatest potential for achiev-
ing economies of scale, the sugar industry is threatened by interna-
tional competition.
The Changing Shape of the Caribbean Economy
Caribbean economies are undergoing a kind of metamorphosis as

they struggle to break free from their ties to the land to become
service economies. This process is reflected in the declining
contribution of traditional exports to GDP and the rising con-
tribution of services. Caribbean national accounts suffer from a
serious deficiency of not being able to measure definitively the
contribution of its most important service industry—tourism. In
the Jamaican national income and product accounts, for example,
the most extensive of the Anglophone Caribbean, the contribu-
tion of tourism is either hidden under “miscellaneous services”
or combined with “wholesale and retail, hotel and restaurant
services,” which in 2004 accounted for 26 percent of both GDP
and the employed labor force. Because of the pervasiveness of the
impact of the tourist dollar, the industry cries out for more accu-
rate national accounting. Until this is done, a useful gauge of the
contribution of the tourist sector is provided in the balance of
payments where tourist travel is by far the leading contributor to
foreign exchange earnings.
In terms of the share of services in GDP, table 1.4 shows that
the twin island country of Antigua and Barbuda leads the pack,
followed by Barbados, St. Vincent and the Grenadines, Jamaica,
Trinidad and Tobago, Guyana and Haiti. Each of these economies
can be depicted visually as having a certain shape reflecting the
stage of its evolution. None of the Caribbean economies in table 1.4
has a structure that is symmetrical, where each sector contributes
an equal share of GDP. Most of them exhibit a pronounced drift
toward services, combined with varying proportions of minerals,
agriculture, and manufacturing.
Table 1.4 Percentage Contribution of the Main Sectors to Gross Domestic

Product for Selected CARICOM Economies, 2000
Countries Mining Agriculture Manufacturing Services*
Barbados 0.9 6.3 9.0 83.8

Guyana 13.6 32.8 10.4 43.2
Jamaica 4.6 6.9 14.4 74.1
Trinidad & Tobago 31.3 1.3 7.1 61.3
Antigua & Barbuda 1.7 3.9 2.3 92.1
St. Vincent & The Grenadines 0.2 10.8 6.0 83.0
Haiti** 25.6*** 7.8 66.6
*
GDP minus agriculture, mining, and manufacturing
**
Average for 2002–2006
***
Represents the share for the primary sector which is treated as agriculture because there is no mining
activity
Source: International Monetary Fund Staff Reports
Because tourism is the dominant service industry in the

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

But the process of adapting is disruptive; it ruins some expecta-
tions and brightens others. Usually those whose expectations are
brightened are the ones who are better prepared educationally and,
therefore, better positioned to take advantage of new opportuni-
ties. As a result, the evolutionary process is one of rising inequality
that presents difficult challenges to national governments. It also
presents moral challenges to the international community that has
a vested interest in poverty reduction and political stability.
The evolution of the Caribbean economies is occurring within the
evolution of the larger world. The emergence of Brazil, Russia, India,
and China, the so-called Bric countries, is presenting the Caribbean
with new opportunities for international trade and new sources of
direct investment. Their emergence will make the foreign policy of
the Caribbean more challenging and international trade negotiations
more complex. But it may also bring well-needed acceleration to the
slow pace of Caribbean integration.
The United States sees the Caribbean as part of a basin, as in
the Caribbean Basin Initiative, and the European Union sees
the Caribbean as part of former African, Caribbean, and Pacific
(ACP) colonies. But the Caribbean Community (CARICOM) also
sees itself as part of a larger regional grouping, the Association of
Caribbean States. The fact is that numbers count and they affect
the bargaining power of small countries in the international arena.
While CARICOM’s share of international trade is tiny, it accounts
for a large share of their GDP. Therefore, small changes in external
events can have a large impact on its populations. The levers in the
hands of Caribbean policymakers are often inadequate to address
the domestic consequences of external events, thus Caribbean for-
eign policy has always tried to make the case on both moral and
economic grounds for special treatment. But as Parag Khanna
(2008) reminds us, “Globalization apologizes to no one; we must
stay on top or become its victim.” However, this sink or swim sce-
nario need not be played out for small vulnerable economies such
as those in the Caribbean if they pin their future to larger groups,
be they traditional trading partners or emerging ones. This means
that the practical scenario of the future is more likely to be one
of swimming along rather than of choosing between sinking or
swimming.
Table 1.5 The Evolution of the Economies of Jamaican and Antigua and
Barbuda; Share of Main Sectors in GDP at Current Factor Cost, 1960, 1970, 1980,
1991, and 2000
1960 1970 1980 1991 2000
Jamaica
Agriculture 12.0 7.8 8.2 6.8 4.6
Mining 9.6 15.9 14.3 10.6 6.9
Manufacturing 13.6 13.2 16.2 18.6 14.4
Services* 64.8 63.1 61.3 63.7 74.1
Antigua and Barbuda
Agriculture 26.9 3.0 6.7 6.7 5.6**
Mining
Manufacturing 1.9 10.2 6.9 6.0 2.3
Services* 71.2 86.8 86.5 87.3 92.1
* Represents GDP minus agriculture, mining, and manufacturing

** Includes mining
Source: World Bank; Statistical Institute of Jamaica; IMF Staff Reports
The evolution into services is an extension of the W. Arthur

Lewis (1963) theory of unlimited supply of labor. The rural-urban
migration that the theory posited has already happened. Now the
children and grandchildren of those migrants are mostly employed
in services. With fewer farmers left to produce food crops and
with the taste of urban workers shifted away from primary food
products, the propensity to import consumption goods has grown
sharply. And this in turn has fed the growth of the wholesale and
retail trade sector where most people are employed. The weak-
ness in this scenario is that the trade deficit must be financed by a
steady inflow of foreign investment. External events can intervene,
causing the system to breakdown. The evolution of the structure of
the Caribbean economy from agriculture toward services over the
period 1970 to 2000 is clearly illustrated in the data for Jamaica and
Antigua and Barbuda in table 1.5.
The Emergence of Trinidad and Tobago
Jamaica has twice the population of Trinidad and Tobago and is

the largest Anglophone Caribbean country. But since their political
independence in 1962, both countries have intermittently shared the
title of the largest economy when GDP is measured in U.S. dollars.
During the 1970s and the 1980s, rising oil prices propelled the
Trinidad and Tobago economy ahead of the Jamaican economy. In
the latter half of the 1990s, declining exchange rates pushed a slug-
gish Trinidad and Tobago economy into second place. But in the first
decade of the twenty-first century, rising oil prices moved Trinidad
and Tobago back into the leading position, and with it came a higher
per capita GDP.
Trinidad and Tobago has accumulated a large balance of trade
surplus from its oil exports and has attracted large inflows of for-
eign investment into its oil and gas industry. Mindful of the fact
that its oil and gas deposits will not last forever, it has developed a
strong financial sector and is actively diversifying into other ser-
vices. In 1961, when Jamaica was the largest economy, it withdrew
from the ten-member West Indies Federation. Trinidad followed
when Prime Minister Eric Williams issued his famous mathemati-
cal justification: one from ten is zero. As the largest economy in the
Anglophone Caribbean, Trinidad and Tobago now finds itself in a
leadership position to accelerate the slow pace of regional economic
integration through trade and capital investments.
The Caribbean as Small Open Economies
One of the principal indicators of globalization is trade openness,

measured by the share of foreign trade (the sum of exports and
imports of goods and services) in GDP. The Caribbean has always
had a high degree of trade openness, dictated by their small domes-
tic markets as well as by a past colonial experience that limited
domestic production to a few primary products for export. As a
result, these exports invariably represent a large share of total out-
put. Globalization has made the Caribbean economies even more
open as trade liberalization eliminates tariff barriers.
Openness reflects the vulnerability to external developments
that are quickly transmitted through the price of imports and
exports. Historically, Caribbean governments have insulated their
economies from external fluctuations through preferential trade
agreements with major trading partners. As will be discussed
later, these arrangements are giving way to new agreements that
mandate reciprocity. Despite the growth of trade in services, the
common balance of payments experience of Caribbean economies

is a persistent deficit on current account. Trinidad and Tobago with
its petroleum and gas deposits is the exception. In 2005, it had a
positive current account balance equal to 24 percent of GDP (IMF,
World Economic Outlook Data Base, October 2007).
In the literature, trade openness has been found to be positively
related to the growth of income (Billmeier and Nannicini, 2007;
Sachs and Warner, 1995; Dollar, 1992). The theoretical foundation
is the Ricardian view that trade generates gains when countries
specialize in producing those goods and services in which they
have a comparative advantage. The resulting growth in income is
made possible by participating in a larger market. If trade openness
is positively related to growth, then the high degree of trade open-
ness in the Caribbean should generate a high rate of growth and a
high living standard. Although it is true that per capita income in
the Caribbean is higher than that in most developing countries, the
distribution of income is highly uneven. A large share of the gains
from trade is siphoned off by foreign investors with the rest going
into paying the wages of the labor force. A major share of this wage
income goes to pay for consumption and capital goods imports.
When most of the gains from trade get recycled abroad, the impact
of trade openness on growth is diminished. This large leakage
reflects the high dependence of the region on foreign investment.
It also indicates that the impact of foreign investment on the local
economy is much smaller than it could be. An extreme example
is Dominica where there has been a net outflow of investment in
recent years.
Chapter 2
The Decline of
Traditional Exports
T he export agricultural sector remains a major employer in many

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

Government ownership aims to maintain, at least for a while.
In the national accounts, the sugar industry appears twice: in the
agriculture sector (as sugarcane production) and in the manufactur-
ing sector (as sugar, molasses, and rum production). Data from the
Statistical Institute of Jamaica show that Jamaica’s sugarcane pro-
duction fell from 3.7 million tons in 1974 to 1.9 million tons in 2004,
and for the same period its sugar production fell from 366,000 to
181,000 tons. This means that the ratio of sugarcane to sugar pro-
duction rose from 10.3 to 10.6, reflecting a decline in the yield of
sugarcane. The role of sugar in exports has also declined. The cate-
gory “sugar, sugar preparations and honey” fell from 20 percent of
total exports in 1974 to 7.5 percent in 1998. All in all, the trend of
the sugar industry is downward, which means that in its traditional
operation it is not an engine of future growth.
Yet the decline of the industry could be arrested by the applica-
tion of technology and capital equipment to the growing, reaping,
and manufacturing processes. But mechanization reduces employ-
ment in countries where thousands still depend on the industry
for a livelihood. Nevertheless, the application of new technology at
the manufacturing stage offers the promise of both reducing cost
and introducing new by-products for both the domestic and export
markets. Unfortunately, the willingness and the ability of govern-
ments to invest in new technology and to explore new products are
limited by the claims of a burgeoning public debt against available
tax revenues.
Overall, the contribution of Jamaica’s agricultural sector (which
includes forestry and fishing) has declined from 9 percent of GDP
in 1995 to 5.5 percent in 2004. Yet the share of the sector in total
employment has fallen only marginally, from 22.6 percent in 1996
to 21.6 percent in 2000, suggesting that the value of output per
worker has also fallen.
Guyana is the largest sugar producer in the Caribbean. Sugar
(growing, reaping, and manufacturing) accounts for 19 percent
of GDP and 26 percent of exports. It is a major employer of labor,
accounting for half the employment in the extensive public sec-
tor that includes not only the central government but also a large
number of government-owned companies. The sugar industry
was nationalized during the 1970s as the Guyana Sugar Company
THE DECLINE OF TRADITIONAL EXPORTS 15
(GUYSUCO), part of a wave of nationalizations by the Cooperative

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

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

Price of Sugar (US cents per pound)
Years EU Import Price Free Market Price
1995 31.2 13.3

1996 31.2 12.0
1997 28.4 11.4
1998 27.1 8.9
1999 26.8 6.3
2000 25.2 8.1
2001 23.9 8.2
2002 24.9 6.2
2003 27.1 6.9
2004 30.4 7.5
2005 30.2 10.1
2006 30.6 14.8
Source: International Monetary Fund, International Financial Statistics

Yearbook, 2007
Caribbean sugar producers. Brazil and Australia can produce sugar

for less than 7 U.S. cents per pound, while Guyana’s most efficient
factories can produce sugar at 18 U.S. cents per pound. In Jamaica’s
state-owned factories, costs are as high as 40 cents per pound (p. 9).
In place of the abolished unilateral preferential trade arrange-
ments, the European Union has negotiated new reciprocal agree-
ments called Economic Partnership Agreements with the ACP
countries that took effect on December 31, 2007. According to
Peter Mandelson (2007), the European commissioner for trade,
“Reciprocal ACP tariff liberalization will be partial and gradual,
with sensitive agriculture and industry products excluded or liber-
alized over very long periods of up to 25 years. Reform and adjust-
ment will be assisted in ACP countries by €23bn over the next seven
years” (Letter to FT, December 12, 2007, p. 10).
A small share of Caribbean sugar is exported to the United
States under the U.S. sugar quota at prices averaging 17 to 18 cents
a pound in 1996. At these prices, the most efficient Caribbean
producers can barely break even, and several producers have been
unable to meet their quotas.
Bananas
In the small eastern Caribbean islands of Dominica, St. Lucia, and

St. Vincent and the Grenadines, trade in bananas account for a large
share of output and employment. Production in these countries
suffers from the problem of small size and high cost, but producers
hope that consumers will differentiate the higher quality of their
fruit from that of their competitors. The fact is that the consumer
is unlikely to recognize this kind of product differentiation. The
end result is that as price takers in a competitive market these small
producers will remain vulnerable to price changes in the worldwide
industry.
Vulnerability is not a function of size alone; it is also a function
of lack of diversification. Banana growers in the Eastern Caribbean
often make the argument that soil conditions do not allow for the
profitable growing of alternative crops. Despite the fact that hurri-
canes frequently destroy entire crops with devastating effect on for-
eign exchange earnings, farmers feel obligated to replant because
they see no viable agricultural alternative. But diversification within

agriculture is only one aspect of the problem; diversification out-
side of agriculture is another. The latter is often difficult because
it requires a different kind of labor force with different kinds of
skills that in turn require investment in education and training. In
the absence of these skills, it is difficult to attract foreign invest-
ment to generate alternative employment. Although there is always
some short-run social cost of replacing or scaling down traditional
industries, the Caribbean is now discovering that the long-run cost
of perpetuating the dependence of inefficient industries on prefer-
ential arrangements is much greater. The safety net that these pref-
erential arrangements provide is analogous to the welfare safety net
provided in developed countries for their less fortunate population.
Its rationale is more moral than economic.
In banana production, timing is of the essence. The fruit must
be reaped at the right time and shipped shortly thereafter in refrig-
erated freighters. Therefore, the coordination between production
and shipping is crucial. It is not unusual to have the shipping done
in ships owned by large producers. The biggest economic impact
of the industry comes when bananas are reaped and shipped. On
banana day, as it is called in some places, local merchants see their
sales rise sharply.
The larger Latin American sugar producers have greater yields
per hectare in both sugar and bananas than the Anglo-Caribbean
producers. This is reflected in the difference in export unit value per
ton. The higher the yield in both crops the lower the producer price.
In open competition, Belize and Jamaica would be at a competitive
disadvantage were it not for preferential treatment.
The removal of subsidies will have a significant impact on
high-cost producers such as Jamaica and Belize. Because size is an
important determinant of production cost, these small producers
will have to seek efficiencies elsewhere, such as in transforming pri-
mary products into a variety of finished products. Accomplishing
this will require the application of a new combination of capital,
technology, and skilled workers.1
The transformation of molasses into rum and liqueurs has
met with some success but these products represent only a small
share of the value of sugar exports. The fact that in 2000 Jamaica
exported 2 million tons of raw sugar and imported 490,000 tons of
refined sugar suggests a large potential for domestic refining. The

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

vices is to some extent controlled by the share of minerals in their
total output. As oil and gas prices rise, that share is likely to rise.
Moreover, a sustained rise in the price of oil could cause the coun-
try to suffer from Dutch disease as a rising exchange rate reduces
the competitiveness of non-oil exports.
Chapter 3
Nontraditional Exports
as the Frontier of
Caribbean Development
T he definition of nontraditional exports is fuzzy and may

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

economy is changing. The cooperation of government and the pri-
vate sector on this frontier is essential for the creation of a new
economy. To begin with, government must provide the right kind
of macroeconomic framework that is conducive to the development
of nontraditional exports. Exchange rates must be stable and inter-
est rates low. Quite often, a stable exchange rate is achieved by peg-
ging the local currency to the U.S. dollar as is the case in most of
Caribbean countries. The combination of pegged exchange rates
with dependence on offshore assembly production further ties
these countries to the U.S. economy.
The significance of exchange rates for export promotion is illus-
trated in the Central American experience. Wilmore (1997) points out
that under a strategy of import substitution, “protection encourages
Central American producers to substitute imports from the rest of
the world.” Protection also discourages exports “because of the higher
prices of protected intermediate goods and because of overvaluation
of local currencies compared to free trade exchange rates.” Wilmore
lists three measures undertaken by Central American governments
to address the problem, starting in the mid-1980s: (1) they sharply
reduced import tariffs; (2) they gave exporters access to intermediate
goods at international prices by allowing them to operate in free trade
zones or under a temporary import regime; and (3) they set the offi-
cial rate of exchange at, or near, a market-clearing rate, and eventually
removed exchange controls altogether, at least for exporters (p. 195).
The importance of nontraditional exports for the Caribbean arose
out of the need to replace import substitution as a development strat-
egy in the debt-ridden1980s with an export promotion strategy that
could generate foreign exchange to meet debt obligations. This strat-
egy was encouraged by the conditions imposed by the International
Monetary Fund for its balance of payments assistance. But it was
also encouraged by the impending erosion of trade preferences for
traditional exports that would reduce their ability to generate future
foreign exchange earnings. As a result, the exploration of nontradi-
tional export markets became a development imperative.
While the immediate objective was to meet foreign debt obliga-
tions, the long-term objective was to accelerate the real growth of the
economy. The long-run impact of nontraditional exports on growth
NONTRADITIONAL EXPORTS AS THE FRONTIER 23
may be visualized as a three-stage growth curve with GDP growth

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

In her ethnographic study, Carla Freeman (2000) describes the sit-
uation of these women in Barbados:
On the data entry floor of this offshore information processing facility,

a hundred women sit in clustered computer stations, entering data from
three hundred thousand ticket stubs for one airline’s two thousand daily
flights. One floor below, an equal number of women work as “approv-
ers” entering data from medical claims sent for processing by one of the
largest insurance companies in the United States. This expanding com-
pany alone has close to one thousand workers, almost all of whom are
women. As fingers fly, the frenetic clicking of keys filling the vast and
chilly room where Walkman-clad women work eight-hour shifts at video
display terminals, constantly monitored for productivity and accuracy,
and typing to the latest dub, calypso, or “easy listening” music. The muf-
fled clatter of keys creates a sort of white noise. Against the green glow
of a sea of computer screens, it lends an Orwellian aura to this unusual
workplace set in a nation better known as an upscale tourist destination.
(pp. 1–2)
There is no question that the income earned by women will

improve their level of living and that of their families. However, the
extent to which their employment increases net foreign exchange
earnings will depend on the impact of their incomes on the import
of consumption goods.
Nontraditional Exports and U.S. Policy
The United States is a major player in the offshore assembly of

nontraditional exports. U.S. trade policy promulgated under the
Caribbean Basin Economic Recovery Act (CBERA), combined
with the eagerness of Caribbean countries to create employment
opportunities for their people and to diversify their economies,
has encouraged the development of the offshore assembly indus-
tries that rely on a large share of U.S. content. These industries also
include electronics and low-level information technology services.
The U.S. content is as high as 91 percent in apparel (U.S. International
Trade Commission, Publication 3102, 1998). If the 91 percent U.S.
content is applied to Jamaica, then the net value of U.S. imports of
textile and apparel from that country would be only 9 percent of
the nominal value of US$472 million in 1997, representing roughly

0.8 percent of Jamaica’s GDP. To create this less than 1 percent contri-
bution to GDP, the industry employed a little over 15,000 workers or
1.5 percent of the employed labor force. This would place the apparel
industry in the first phase of the aforementioned growth curve for
Jamaica. Furthermore, because of the large share of U.S. content,
offshore assembly production offers little opportunity for backward
linkage. Thus, although it increases the demand for labor, it does not
increase the demand for domestic intermediate inputs and, therefore,
does not encourage development in other sectors.
The Competitiveness of the Offshore Assembly Industry
Offshore assembly firms tend to be notoriously footloose because

they have little sunk capital and are, therefore, able to move read-
ily to other destinations where labor is cheaper and tax incentives
and subsidies more attractive. In the short run, this footloose char-
acteristic imposes an obligation on macroeconomic policy to keep
wage rates low and often requires governments to reach negotiated
agreements with labor unions. The long-run solution, however, lies
in greater investment in education and training that will raise the
quality of the workforce and move Caribbean countries up from
the cheap labor offshore production phase of export development.
Because the marketing of the finished product is done by the
parent firm abroad, the offshore assembly industry does not require
local people to have marketing skills. All that the local economy
is required to supply, aside from tax incentives and subsidies, are
utilities and cheap labor. The value added to the imported raw
material is, therefore, largely the contribution of cheap labor. But
labor is cheap only relative to labor in competing countries. The
International Monetary Fund points out that the textile industry in
Jamaica “typically ranked near the top compared to other countries
in various components of the costs of production. . . . [O]f the ten
countries studied, only Costa Rica and Columbia had higher total
offshore assembly costs than Jamaica” (IMF 2000a, pp. 26–27).
The IMF attributes this in part to high managerial costs and high
interest rates. But an overvalued currency may have a part to play
as well. These conditions have stimulated an exodus of apparel
assembly firms to more attractive destinations in Mexico and

Central America, thereby contributing to the decline in real output
in the textile and apparel sub-sector in Jamaica.
Indigenous Nontraditional Exports
From a development perspective, the perfect nontraditional export

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

processed products once the processor demonstrates the ability to
produce quality and quantity for the export market” (p. 16). But
even when markets are identified, transportation remains a major
obstacle. As Piccinini puts it, agro-processors are constrained not
only by marketing experience but also by “lack of sea cargo trans-
portation, and/or affordable air transportation” (p. 16). The cost
and availability of transportation impose serious limitations on the
export of perishable products.
The challenge facing Caribbean exporters of indigenous nontra-
ditional products, therefore, is to get the product to the market in
order to exploit available niches. Many Caribbean countries rely on
their large expatriate populations to create niche markets for food
products. And because many of these countries depend heavily on
tourism, niches are often created by introducing the product to the
tourist in the hope of creating a demand for it later. But niches are
never permanent because taste and preferences change over time
and there is always the threat of competition. A small country must,
therefore, maintain its competitiveness in order to sustain its niche.
Marketing agencies must be on constant alert for new niches as old
ones disappear. The prospect of niche hopping is in contrast to the
virtually fixed markets for traditional exports.
Financing Indigenous Nontraditional Exports
Access to credit puts indigenous nontraditional exports at a dis-

advantage to exports based on U.S. content. The latter is typically
financed by direct investment from abroad while the former must
raise funds at home. Special government agencies have been set up
to provide limited financing because access to commercial bank
financing is negligible. From the small share of loans going to agri-
culture as a whole, it is reasonable to infer that the sub-sector of
agriculture-based indigenous nontraditional exports gets little
financing from commercial banks. The less than 1 percent received
by textiles/footwear is to be expected since most of the financ-
ing comes from abroad. Even when domestic credit is available,
it comes at a high cost. For example, over the period 1995–1999,
the commercial bank lending rate in Jamaica averaged 48 percent
(Bank of Jamaica, Statistical Digest).
Export of Services
Because of the limited potential of both indigenous and assembly-

type nontraditional exports to accelerate economic growth, some
Caribbean countries are turning their attention to telecommuni-
cations and information technology. The Dominican Republic has
made the most progress in this area by privatizing the industry
and attracting substantial foreign direct investment. Jamaica has
also taken steps to develop an information-processing center in
Montego Bay. But all is not well with this effort. Beverly Mullings,
in her assessment of this effort, argues that “Unlike Barbados,
where the image is one of an efficient service, the Jamaican indus-
try is increasingly being viewed as one that is cheap but not effi-
cient” (Klak, 1998, p. 151).
Yet the production of services in these small countries has an
important advantage over manufacturing. Efficiency in manufactur-
ing firms is influenced by economies of scale. The larger the firm
the lower its unit cost of production is likely to be. To be successful
in international competition, the typical manufacturing firm must
be big enough to enjoy at least some economies of scale. This is one
reason why domestic manufacturing firms in the Caribbean have
historically sought tariff protection against larger and more effi-
cient competitors abroad. Efficiency in the production of services
does not depend on size. A small firm can be as efficient as a large
one. A small hotel can be just as efficient as a large hotel. And since
the small firm requires a smaller amount of capital to get started, it
also encourages participation of a larger number of entrepreneurs.
This suggests that the production of services is particularly appro-
priate in small countries where capital is relatively scarce.
There is, however, one relatively scarce factor that inhibits the
growth of the production of high-value-added services—and that
factor is human capital. Although the Caribbean, in comparison
to developing countries elsewhere, has a high level of literacy, the
supply of skills for the development of information technology ser-
vices is limited. A World Bank report points out that “If secondary
completion is used as a yardstick for assessing competitiveness of
the labor force, based on household surveys, less than 20% boast
this attainment, compared with 70% in the OECD countries, and
over 60% in Singapore. An increase in the number of persons with
secondary qualifications is clearly imperative” (World Bank, 1993,

p. 4). It is important to point out that within the Caribbean there
are variations in education attainment. For example, the second-
ary enrollment ratio in Jamaica is 66 percent compared to over
90 percent for Barbados. Perhaps this disparity underlies Beverly
Mullings’ comparison of the performances of the information
technology industry in the two countries cited earlier.
The Impact of NAFTA on the Caribbean Basin Initiative
The Caribbean Basin Economic Recovery Act of 1983, otherwise

known as the Caribbean Basin Initiative (CBI), was a unilateral
effort by the United States to stimulate U.S.-Caribbean trade and
to encourage U.S. investment in the Caribbean. In 1993, NAFTA
was created to expand the flow of trade among the United States,
Canada, and Mexico. One of the industries directly affected was
wearing apparel. A comparison of pre- and post-NAFTA economic
performance of 11 Caribbean countries shows that of the two
major wearing apparel producers—Jamaica and the Dominican
Republic—Jamaica had a negative post-NAFTA growth rate (U.S.
International Trade Commission, Publications 2541, 2853, and
3102). Although a number of factors may have contributed to this,
it is useful to examine what role NAFTA may have played.
NAFTA placed Jamaica’s apparel exports to the United States
in direct competition with apparel from Mexico. This resulted
in trade diversion. In the post-NAFTA period between 1995 and
1997, there was a dramatic decline in the principal SITC categories
of wearing apparel, mirrored by a sharp increase in their imports
from Mexico.1
The price advantage that NAFTA provides Mexico, as reflected
in the price per square meter equivalent of U.S. apparel imports,
was lower in all categories for Mexico in 1997. While the tar-
iff reduction is a major factor here, the differential behavior of
Mexican and Jamaican exchange rates also contributed to Mexico’s
price advantage. There was a sharp depreciation of the peso in
December 1994 from 3.1 to 7.8 to the U.S. dollar, while through-
out the three post-NAFTA years the value of the Jamaican dollar
remained relatively stable. Trade diversion was also aided by lower
labor and transportation costs that made investment in Mexico

more profitable.
As is expected in an extremely trade-dependent economy, an
estimate of the impact of exports on Jamaica’s real GDP over the
period 1976 to 1996 confirms a positive and significant relation-
ship.2 A US$1.00 change in exports changed GDP by US$4.00. In
the post-NAFTA period from 1994 to 1996, the U.S. dollar value
(in 1990 prices) of GDP fell from 953 million to 868 million, while
exports fell from 351.2 million to 202 million respectively. To the
extent that NAFTA diverted a significant share of U.S. apparel trade
from Jamaica to Mexico, it had a negative impact on Jamaica’s eco-
nomic growth.
Assessment
It is clear that nontraditional exports are driven by the offshore

wearing apparel industry. In a region jealous of its sovereignty,
the offshore assembly is where globalization trumps national sov-
ereignty by providing employment, especially for women. When
this is coupled with the traditional practice of pegging the local
currency to the U.S. dollar, the destiny of the region becomes even
more closely tied to the economic fortunes of America.
The Caribbean Basin Trade Partnership Act of 2000 widened
the access of Caribbean apparel to the U.S. market and provided
NAFTA-equivalent tariff treatment for certain items previously
excluded from duty-free treatment under the CBI program. But in
order for economic development in the Caribbean to benefit fully
from this wider market access, Caribbean countries must improve
the productivity of their workforce and encourage the development
of nontraditional exports that draw on indigenous resources. U.S.
economic policy toward the region should encourage the flow of
investment not only into offshore operations but into education
and indigenous nontraditional exports as well.
Chapter 4
The Service Economy
In the area of Expanding Economic Opportunities, there is now

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

and the anemic performance of nontraditional exports sug-
gest that the road to the future goes through tourism and financial
services. The smaller Caribbean economies, having abandoned
their agriculture and having failed at nontraditional manufactur-
ing, are gravitating toward information technology and financial
services as the hope of the future.
This chapter focuses on certain features of the Caribbean ser-
vice economy as conduits through which globalization is chan-
neled. In the national accounts, when agriculture, mining, and
manufacturing are excluded, the rest of the GDP consists of ser-
vices. In Jamaica, this means that 75 percent of the GDP is made up
of services and that in the smaller islands of Antigua and Barbuda
and St. Kitts and Nevis the share is in excess of 80 percent. This
means that the impact of globalization is more likely to be chan-
neled through services than through the other sectors. The leading
contributors to the service sector are Government, wholesale and
retail, finance and insurance, and communication and transpor-
tation. In most of these economies, tourism is the major industry,
although in the national accounts its contribution is only partially
reflected under miscellaneous services as hotels, restaurants, and
clubs. However, in the balance of payments, receipts from tourism
are recorded as travel and they account for the major share of ser-
vice exports. A full discussion of tourism is in chapter 5. Table 4.1
shows the ratio of service exports to merchandise exports, which
is another indicator of the relative importance of services in the
CARICOM economies.
The four countries that show consistently high ratios are Antigua
and Barbuda, The Bahamas, Barbados, and Grenada. In 2004,
despite a decline in St. Kitts and Nevis and St. Lucia, all the Eastern
Caribbean islands had high ratios, reflecting the decline in agricul-
tural exports. Belize, Guyana, Suriname, and Trinidad and Tobago
had extremely low ratios, reflecting the dominance of mineral and
sugar exports.
Table 4.1 The Ratio of Service Exports to Merchandise Exports,

1992 and 2004
Countries 1992 2004
% %
Antigua and Barbuda 527 1619

The Bahamas 641 431
Barbados 326 369
Belize 101 35
Dominica 81 148
Grenada 325 353
Guyana 27 7
Jamaica 98 92
St. Kitts and Nevis 239 187
St. Lucia 153 75
St. Vincent & The Grenadines 75 274
Suriname 6 0.3
Trinidad & Tobago 74 8
Source: International Monetary Fund, Balance of Payments Yearbook 2000;

Caricomstats.org
THE SERVICE ECONOMY 33
Offshore Banking
Against the background of declining traditional exports, the finan-

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

responsibility of foreign depositors to pay taxes in their home
countries and not the responsibility of the centers. Therefore, it is
perfectly legitimate to accept their deposits, providing that they
are not the result of criminal activity. But it is hard to ignore the
fact that the very existence of these centers encourages tax avoid-
ance. No matter how vigilant the supervisory authority in the host
countries may be, it may not always be able to determine whether
the sources of the offshore deposits are legitimate. Things get com-
plicated when the source is a fraudulent transfer pricing scheme
in which a company overprices its export of crude material to a
foreign buyer and arranges to receive actual payment at a much
lower price with the difference deposited in an offshore bank. The
effect is to deprive the exporting country of tax revenues. Russian
oligarchs are reported to have used a similar scheme to amass a
great deal of offshore wealth in a short time.
The money deposited in Caribbean offshore banks is not avail-
able for investment in these small countries. The money is simply
being warehoused. In most cases, the banks are not really brick and
mortar banks but a mail box or a brass plate with a bank name on
it. The host country of these offshore entities benefits from the fees
and taxes collected, wages paid to employees, and other local oper-
ating expenses. According to Anandya Bhattacharya, “the average
annual wages of a bookkeeper in the Bahamas are a meager $6,000
and the annual fee for an offshore banking (Category B) license
in the Cayman Islands is only $6,098. The total cost of operating
a branch in these islands is much lower than in the primary cen-
ters of Eurocurrency operations” (Bhattacharya, 1980, p. 41). Often
there are no taxes at all except those imposed on the wages of the
local employees.
The benefits in fees, taxes, and wages that accrue to countries
with offshore banking centers cost the foreign countries pre-
cious tax revenues. Hudson sees the loss of tax revenues in these
countries as forcing “individual tax payers to bear the fiscal bur-
den through wage withholding for Social Security, Medicare and
pension-fund contributions. Consumers also bear a rising burden
through the sales tax and other local taxes” (www.counterpunch.
org/schaefer03252004.html).
Table 4.2 The Offshore Financial Services Sector in Selected Caribbean Countries
Country/Jurisdiction Contrib. to IBCs* Banks Insurance Mutual Trust Company Service
GDP (%) Companies Funds Companies Providers
Anguilla n.a. 3,000 7 20 n.a. 12 29

Antigua & Barbuda n.a. 8,000 22 0 0 n.a. 6
Aruba n.a. 5,000 7 29 0 0 16
The Bahamas n.a. 47,000 212 n.a. 706 107 165
Barbados 7 4,000 63 199 10 8 30
Belize n.a. 15,000 9 18 n.a. n.a. 40
Bermuda 27 12,000 4 1,650 1,590 29 n.a.
British V.I. 40 350,000 11 293 2,606 188 89
Cayman Islands n.a. 45,000 427 542 3,648 346 n.a.
Dominica n.a. 8,000 5 2 0 5 22
Grenada n.a. 3,000 15 6 0 11 11
Montserrat n.a. 50 13 2 0 n.a. n.a.
Netherlands Antilles n.a. 20,000 45 48 600 n.a. 190
Panama n.a. n.a. 80 24 n.a. 46 n.a.
St. Kitts & Nevis n.a. 23,000 1 0 0 n.a. 46
St. Lucia n.a. n.a. 1 0 0 n.a. 10
St. Vincent & Grenadines n.a. 10,000 20 1 4 n.a. 33
Turks & Caicos n.a. 16,000 8 2,572 10 n.a. 35
* International Business Companies

n.a.: not available
Source: International Monetary Fund
Because a relatively few skilled workers can handle a large vol-

ume of assets, the offshore banking sector is not a large employ-
ment generator. As a result its economic impact is greatest in small
economies with small populations. Because of the secretive nature
of offshore banking, data are not available regarding its economic
impact. However, table 4.2 shows that the contribution of offshore
financial services to GDP in Bermuda and the British Virgin Islands
is quite large, 27 percent and 40 percent respectively. Not shown in
this table is the even larger contribution of offshore financial ser-
vices of other British dependencies in Europe: Gibraltar, Guernsey,
Isle of Man, and Jersey.
Some of the characteristics of offshore banking centers may also
be found in the tourist industry, to the extent that many hotels in the
Caribbean are foreign-owned and serve almost exclusively a nonres-
ident population (See chapter 5). If industries with offshore charac-
teristics were eliminated, many Caribbean economies would shrink
considerably. Where there is a symbiotic relationship between the
offshore and indigenous industries, success of the former usually
drives activity in the latter.
Information and Communications Technology (ICT)
An adequate ICT infrastructure is a prerequisite for successful off-

shore economic activity, but it also facilitates the production and
delivery of goods and services in the domestic economy. Natasha
Ward (2002) sees development in the telecommunications indus-
try as essential for the transition of the Caribbean into high value-
added production. This development will require the evolution of
the industry from its traditional monopolistic ownership structure
to one that is competitive.
Allister Mounsey (2002) believes that the Internet has created
new possibilities for the Caribbean to benefit from globalization.
But in order for the region to exploit this technology success-
fully, it must deal with impediments from the old economy such
as: retention of skilled personnel; the relatively high cost of factors
of production versus the productivity of those factors; high taxa-
tion; and administrative and bureaucratic impediments to business
development
Air Transportation
Air transportation is the life blood of Caribbean tourism but the

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

sell it as soon as it is possible to do so” (http://news.airwise.com/
stories/2004/12/1103829568.html). The new Jamaica Labor Party
government that took power in 2007 is expected to take a serious
look at the condition of the airline and propose action to stop the
hemorrhaging of the country’s resources.
British West Indian Airways, once the largest Caribbean airline,
went out of business in December 2006 after operating for 60 years.
Based in Port of Spain, Trinidad and Tobago, it carried 1.4 million
passengers every year to Caribbean and international destinations
on 70 daily flights. But it was not profitable; it needed continuous
injection of funds from the Government of Trinidad and Tobago,
which owned 75 percent of the stock. In 1995, the airline was priva-
tized and a majority of the common stock was turned over to a pri-
vate group of U.S. and Caribbean investors. According to Baptiste
(1998),
In 1995 the Government of Trinidad and Tobago virtually deliv-

ered BWIA to a U.S. private group known as the Acker Group in
a domestically-controversial “privatization.” Why controversial?
C Edward Acker, one of the chief American negotiators of the
“privatization” on behalf of U.S. interests such as Acker’s own
Atlantic Coast Airline, and the first Chief Executive Officer of the
new BWIA, Arcadian Partners, had a history of stripping airlines
such as PAA [Pan American Airlines]. Faced with adverse public
opinion in Trinidad and Tobago, the government, while taking a
minority share portfolio of 34.5 percent in the new Acker Group
BWIA, negotiated what is called a “Golden Share” veto power over
certain eventualities. (p. 27)
In 2007, it ended operations and was replaced by a new car-

rier: Caribbean Airlines. Intra-Caribbean air transportation in
the Leeward Islands is provided by LIAT (Leeward Islands Air
Transport); this has not been a profitable operation and is now
badly in need of an infusion of capital to modernize its operations
and to improve its punctuality.
The lesson from the experience of these airlines is that privat-
ization has not been successful because of the large losses incurred
and the constant need for an infusion of capital. This has led to the
view that air transportation, especially intra-Caribbean air trans-

portation, is a public utility and should be subsidized by govern-
ments. The geography of the region requires air transportation to
facilitate the movement of people and goods among the islands. It
also requires that people have confidence that such sustainability
of service is possible only through subsidy. This view is also fearful
of total dependence on extra-regional carriers on the grounds that
they may abandon a route if it ceases to be profitable.
The justification for subsidy is also fed by the economic situation
in the worldwide airline industry. Since deregulation of the indus-
try in the 1980s, competition has intensified. This, coupled with
the rising price of oil, has driven many large American carriers into
bankruptcy, some returning only after radical debt restructuring.
Against this background, the losses of Caribbean-owned air carri-
ers do not appear exceptional. The fact, however, is that the cost to
the Caribbean is higher because of the small size of the economies.
If air transportation provides the link that facilitates the integra-
tion of the Caribbean Single Market and Economy, then it would
assume a role akin to that played by railroads in uniting continen-
tal America in the nineteenth century.
Maritime Transportation
Just as air transportation is the life blood of the tourist industry,

maritime transportation is the life blood of international trade for
these extremely foreign trade–dependent economies. With the rise
in the popularity of cruise tourism, maritime transportation has
also become crucial to the growth of Caribbean tourism. Since
1980, the ratio of cruise passengers to total tourist arrivals in the
Caribbean grew from 1:1.8 to 1:1.1. In 2005, there were over 22 million
stay-over visitors compared to19 million cruise passengers. Despite
the rise of cruise tourism, 90 percent of tourist spending is done by
those who arrive by air.1
Caribbean importers face a higher per unit freight cost than their
U.S. counterparts because the U.S. imports from the Caribbean are
mostly primary goods while the Caribbean imports from the United
States are mostly manufactured goods. Manufactured goods have
more value per ton and, therefore, cost more to ship than primary
goods, which are normally shipped in bulk. Other factors such as
the use of smaller ships, multiple port calls for a limited amount of
cargo, little or no competition in shipping services, and the high per-
centage of returning empty containers contribute to higher freight
costs (Palmer, 2004). They also contribute to the disparity in the rel-
ative freight and insurance costs as illustrated by Jamaican imports
from the United States and U.S. imports from Jamaica.2 The freight
and insurance charge on U.S. imports is 3.78 percent compared to
the 16.3 percent for Jamaican imports. When trade between the two
countries is done in U.S. ships, the payments for freight on Jamaican
imports flow to the United States. Thus U.S. export of goods to
Jamaica is accompanied by the export of shipping services. When
the United States imports goods from Jamaica in its own ships, there
is no corresponding flow of payment for freight to Jamaica; those
payments flow to the United States. In both cases the U.S. benefits.
According to International Monetary Fund balance of payments
data for the period 1992 to 1999, sea freight averaged 11.2 percent
and 15.1 percent of the imports (f.o.b.) for Barbados and Jamaica
respectively (International Monetary Fund, 2000a).
Chapter 5
The Caribbean Tourist

Industry
T ourism is the most important industry in the Caribbean. In

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

Receipts from Services, 2000, 2005
2000 2005
The Bahamas 88.1 83.2

Barbados 66.3 61.5
Guyana 44.4 23.9
Jamaica 65.8 66.3
Suriname 17.4 —
Trinidad & Tobago 38.4 50.5
Belize 73.5 70.9
Antigua & Barbuda 69.9 68.6
Dominica 53.7 66.7
Grenada 60.5 61.2
Montserrat 55.6 60.8
St. Kitts & Nevis 59.3 74.6
St. Lucia 86.5 86.8
St. Vincent & the Grenadines 64.5 66.2
Average 58.8 64.7
Source: Calculated from Caricomstats.org
Caribbean governments seem to embrace the circuitous logic that

by taxing wage income more heavily than profits they will ensure a
high rate of return on foreign investment, a return that will encour-
age future capital inflows. By this logic, growth is seen to rely not so
much on the reinvestment of profits by existing investors as on new
capital from new investors. This poses a perpetual challenge to the
government agencies that promote foreign investment.
The Supply and Demand of Tourist Services
The central unit of production in the tourist industry is the hotel.

It is the hub that is connected to an array of activities such as labor,
transportation, and supplies that sustain it. The hotel is the chief gen-
erator of foreign exchange and, therefore, its ability to attract paying
customers is far more crucial to the success of the industry than is
cruise tourism. The hotel takes many forms and produces differ-
entiated products ranging from small bed-and-breakfast operations
to full-service, all-inclusive establishments. In this labor-intensive
service industry, efficiency may not necessarily depend on size since
a small hotel can operate just as efficiently as a large one by person-
alizing its service. The large hotel, however, does have certain cost
advantages arising from the quantity of supplies that it buys.
THE CARIBBEAN TOURIST INDUSTRY 43
While the demand for tourism is influenced by the growth

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

and if the projections of the climatologists are correct, global warm-
ing will make these hurricanes stronger and more frequent. It will
also raise sea level and inundate some of the treasured beach assets.
Although this scenario may be exaggerated, planning for the integ-
rity of the environment has acquired a heightened level of impor-
tance. This includes strict monitoring of land use and pollution.
Countries seeking to diversify away from tourism must now weigh
the environmental costs and benefits of new industries.
Negative Externalities
Some observers are concerned about a raft of other negative external-

ities generated by the tourist industry. Apostolopoulos and Sãnmez
(2002), for example, see the Caribbean tourist industry “as a major
threat to the region’s socioeconomic and public health sustainabil-
ity. These include spatial and socioeconomic polarization, uneven
development, ecological degradation, domination of regional polit-
ical economies, management repatriation, rising alienation among
locals, and structural under-development” (p. 1). Although these
are legitimate concerns, they cannot all be attributed to the tourist
industry. Socioeconomic polarization and uneven development in
the Caribbean have their roots in the region’s long history of slavery
and colonialism. Furthermore, the unevenness of development also
reflects differences in natural endowments.
Apostolopoulos and Sãnmez paint a stark picture of the health
implications of global tourism: “The global leisure revolution,
ongoing improvements in transport media, and movement between
diverse climate zones (exemplified by global warming and climate
change) have exacerbated the vulnerability of travelers to infectious
diseases. Beyond the illnesses induced by travel itself, the exposure
to unfamiliar infectious agents and demonstration of risky behav-
iors heightened by the vacation setting and culture, have the poten-
tial to cause enormous strains on the parties involved” (p. 2). This
gloomy assessment is joined by a Congressional Research Service
Report (2006) that links tourism to the rise in HIV infection rates
in some Caribbean countries. According to the report, “Officials in
Trinidad and Tobago have expressed concern about the growth of
sex tourism, the so-called ‘beach bum’ phenomenon, and the link to
the spread of AIDS. In Jamaica, the resort town of Montego Bay has
the highest HIV infection rates in the country. In the Dominican
Republic, AIDS activists are concerned about child prostitution in
resort areas and the spread of HIV” (p. 18).
Yet many tourists travel to improve their health in countries such
as Costa Rica and Mexico where medical tourism is a thriving busi-
ness and in parts of the Caribbean where wellness centers are emerg-
ing. While no government policy can eliminate the health risks
associated with travel, vigilance can go a long way to reduce them.
Ownership
One enduring feature of the Caribbean tourism industry is the expa-

triate character of its ownership.2 This naturally follows from the
dependence of the industry on foreign capital. In the 1970s, when
a new international economic order was in vogue, leftist academics
were fond of attacking the industry as a symbol of economic colo-
nialism. Although, generally speaking, neoliberal economic think-
ing has won the day, there is still an undertone of concern about the
expatriate character of ownership. The Small Islands Voice Global
Forum (SIVGF) offers this view of the Dominican Republic:
Most of the hotel chains are foreign-owned, and they are the ones who gen-
erate almost all the money. Local chains usually go bankrupt when they
face foreign competition or, if not, they are eventually bought by foreign
competition. It is true that foreign investment is positive because it allows
the entry of foreign currency, it modernizes infrastructure and it gener-
ates a lot of work. However, the jobs set aside for the local population are
mainly minimum wage positions, whilst the foreign personnel is awarded
the better positions and wages. If we think about it foreign companies only
see us as a country of opportunities. They exploit our tourism areas and
obtain very cheap labor. (http://www.sivglobal.org)
Beyond the expatriate character of ownership is the racial and

ethnic concentration of ownership. Caribbean capitalism is char-
acterized by the dominance of minority ethnic groups in business.
This is ostensibly due to their greater access to capital and willing-
ness to take risk. SIVGF sees the racial divide in the ownership of
Caribbean tourism as “a problem that dare not speak its name. It

creates discomfort among many of the expatriate hotel owners and
managers, and governments are fearful of dealing with it” (www.
sivglobal.org). It suggests pessimistically that the problem of the
racial divide between ownership and management on the one hand
and workers on the other is likely to worsen if it is not addressed
now, because new WTO rules will make it easier for developed
countries to invest in the Caribbean tourist industry. This view sees
the industry as turning into a case not unlike the old sugar planta-
tions. In the same vein, Fitzroy A. Baptiste (1998) speaks of employ-
ment stratification of the Caribbean tourism industry that mirrors
the race/color of the slave plantation: “The ‘new slaves’ include the
nattily-dressed, poorly-paid, and mainly black waiters, waitresses,
taxi drivers and security guards. The beaches of the Caribbean are
filled with macho, black ‘beach bums’ who are ready to commod-
itize sex to white female tourists. They and others are also ready to
commoditize other highs such as marijuana and cocaine” (p. 29).
Norman Girvan (2002) has addressed an even more fundamen-
tal divide, especially as it relates to Jamaica: “On the one side there
is the parasitic ruling class depending on policies of structural
adjustment and liberalization. This class was consolidated out of
the remnants of the old plantation-mercantile system in Jamaica
together with a new brown and black bourgeoisie emerging out
financial liberalization and privatization. On the other hand there
is the majority black population experiencing varying degrees of
social and economic exclusion” (p. 22).
Back in the 1970s, a similar discussion was triggered by a report
on foreign investment in Barbados by Paul Chen-Young (1973). It
claimed that Black Barbadians were indifferent about whether enter-
prises were foreign or locally owned and attributed this indiffer-
ence to the conservative and cautious nature of the Barbadian. In a
follow-up survey, Ronald G. Parris (1975) reported that “a positive
attitude toward the unlimited admission of foreign capital is held
by a greater proportion of white businessmen than non-white busi-
nessmen in Barbados (p. 101). But Henke and Marshall (2003) are
not hopeful about “the low-risk predilections of the wealthy, planter-
merchant elite” in Barbados. They contend that this elite group’s
“conscious ‘opt out’ strategy on the question of manufacturing diver-
sity3 has made for a quite conservative enterprise culture indeed.”
Further, they argue that “merchant capitalist societies like Barbados
and others in the Eastern Caribbean, insufficiently display the socio-

cultural attributes required for the creation of high-level services:
innovation-mediated risk research and development competencies,
and affinities to industrial processes and networks” (p. 149).
Tourism as a Maturing Industry
The Caribbean tourist industry is maturing and is now facing

increasing competition from other destinations offering different
types of tourism experience. Improvements in air and sea trans-
portation technology have brought many more exotic destinations
within reach at reduced cost, with many of these destinations offer-
ing packages that appeal not only to the tourists’ desire for sun and
sand but also to their intellectual and cultural curiosity.
What tourism as a maturing industry has contributed to growth
has been steadily declining as the industry’s ability to attract new
capital has become weaker due to narrowing profit margins. Between
1980 and 2004, the number of rooms in tourist accommodations in
the Commonwealth Caribbean grew at an average rate of 2.7 percent,
but the growth rate over the last five years of that period declined
to a mere 0.4 percent (Caribbean Tourist Organization, 2004). The
benefits from past innovations in the industry, such as all-inclusive
hotels, are dissipating and a new wave of innovation is required to
put the industry on a higher growth trajectory. According to data
from the Caribbean Tourist Organization, US$21.6 billion was spent
by tourists in all of the Caribbean in 2004.4 Much of this spend-
ing occurred through travel agents and airlines reservation agents
before the tourist arrived at their destinations.
Competitiveness
Of the 124 countries listed in the 2007 Travel and Tourism

Competitiveness Index published by the World Economic Forum
(2007), the ranks for the CARICOM countries listed range from 29
for Barbados to 108 for Suriname. Jamaica is ranked at 48 (table A.1).
The rankings for Barbados and Jamaica are explained as follows:
Barbados is ranked 2nd overall in national tourism perception, with

a positive attitude toward tourists and toward the value of tourism in
the country [table A.2]. The government is prioritizing the sector to
a very high degree (ranked 2nd), spending a high percentage of GDP

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

on tourist arrivals in Jamaica for the simple reason that 75 percent
of Jamaica’s stay-over tourists come from the United States. Two
regressions were run using data from the U.S. Department of
Commerce and CARICOM Statistics to estimate this response of
stay-over tourist arrivals (SOTA) and cruise ship arrivals (CTA) to
changes in USGDP. All the variables were converted to indices with
2000 as the base year. The results are as follows:
CTA 5 271.60 1 1.714 USGDP

(24.47) (9.79) R 2 5 0.86
SOTA 5 20.147 1 0.975 USGDP
(20.14) (26.65) R 2 5 0.97
t values are in parentheses.
Both types of tourism are strongly explained by changes in

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

special preferential treatment for its agricultural exports. Because
the scale of agriculture in most Caribbean countries is small, the
removal of special treatment for their exports puts them at a com-
petitive disadvantage and stifles attempts to diversify into other
areas such as poultry. Hotels seeking a reliable supply of high-
quality and competitively priced food products to satisfy the taste
of their tourists from developed countries easily turn to foreign
suppliers. Further, many of the tourist-dependent countries of the
Caribbean have abandoned agriculture, making it necessary for the
industry to import food. In some cases, the foreign multinationals
that own the hotels may also have financial interests in the foreign
firms that supply food and equipment.
Conclusions
The dominance of the tourist industry in the Caribbean is accom-

panied by a large permanent leakage from the spending of stay-over
tourists. A major part of this leakage is represented by imports and
the outflow of profits. The freedom of foreign investors to repatriate
profits is a prerequisite for investment in an industry dependent on
foreign capital that typically flows in with concessions that consid-
erably reduce and sometimes eliminate taxes on profits. From this
perspective, foreign investors in the Caribbean tourist industry and
their foreign suppliers of food, equipment, and services appear to
benefit far more than the local economy. The major benefits for the
local economy derive from the wage income generated by direct and
indirect employment of the local workforce and the taxes paid by the
industry. Given the concessions to capital, it is not surprising that in
many Caribbean countries the tax burden has shifted away from
direct taxes on property and income to indirect taxes on goods and
services. Evidence of this shift is found in Barbados (Palmer, 1993), a
shift that indirectly places a greater tax burden on wage income.
Chapter 6
Migration
The Caribbean person is truly the first transnational figure who

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

the Caribbean. One of the favorite pastimes of Caribbean
people is to wave goodbye to their friends and relatives at the air-
port. In recent times, new airport architecture and security con-
cerns have put a crimp on this practice. But the flow of emigrants
continues as both an effect as well as a cause of the evolution of
the Caribbean economy. In the contemporary Caribbean setting,
migration represents a loss of skills as well as a future source of
foreign exchange. Since 1965, the principal destination of the
emigrants has been the United States. Table 6.1 shows the num-
ber of immigrants admitted to the United States for the periods
1991–2000 and 2005.
There is also a steady flow of English- and French-speaking
Caribbean immigrants to Canada and Dutch-speaking Surinamese
to Holland. Table 6.2 shows migration to Canada from the leading
Caribbean source countries.
Table 6.1 CARICOM Immigrants Admitted into the United States by Country
of Birth, 1991–2000 and 2005
Countries 1991–2000 2005
Anguilla 308 35
Antigua & Barbuda 4,908 440
The Bahamas 6,737 698
Barbados 9,452 846
Dominica 5,533 198
Grenada 7,343 840
Haiti 181,698 14,529
Jamaica 173,413 18,346
Montserrat 912 50
St. Kitts & Nevis 4,831 342
St. Lucia 5,656 832
St. Vincent & the Grenadines 5,564 625
Trinidad & Tobago 63,180 6,568
Belize 9,120 876
Guyana 73,849 9,318
Suriname 1,972 300
Source: U.S. Bureau of the Census
Table 6.2 Permanent Residents in Canada from Top Caribbean Source

Countries, 1997–2006
Countries 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Jamaica 2835 2235 2346 2463 2775 2457 1983 2130 1880 1686
Haiti 1621 1283 1429 1653 2484 2218 1945 1657 1719 1651
Guyana 1760 1193 1323 1274 1665 1432 1394 1321 1176 1263
Trinidad & Tobago 1787 1199 1164 896 916 937 693 724 844 804
Source: Citizenship and Immigration Canada
Historical Overview
Any history of Caribbean migration must begin with sugar and

slavery. Unlike modern globalization where production goes in
search of cheaper labor, the slave trade brought the cheap labor
involuntarily to the production process, in particular the produc-
tion of sugar. It was slave labor that the made the sugar industry
profitable. The profitability of sugar made the Caribbean colonies
the most prized among European colonies in the seventeenth and
eighteenth centuries, so much so that wars were fought among the
European powers to acquire Caribbean territory.
MIGRATION 53
When slavery was abolished in the British Caribbean in 1838,

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

mostly temporary workers. This was so because of the restric-
tive American immigration policy of the time. Whatever perma-
nent migration there was came under the quotas of their colonial
masters.
The end of World War II triggered mass migration from the
Caribbean colonies to Great Britain. These migrants held British
passports and considered themselves British citizens. The first wave
arrived on June 22, 1948 on the S.S. Empire Windrush with 492
Jamaicans aboard. As Mel Thompson points out, this was the begin-
ning of a new racial experience for these British subjects (Palmer,
1990, pp. 41–45). Later, in 1962, when the Caribbean colonies were
granted independence, Britain restricted the flow of immigrants
with legislation. A rise in migration to the United States was to pro-
vide a new escape valve (Palmer, 1995).
Two events signaled this rise. One was the arrival of indepen-
dence in the early 1960s for the British colonies that removed them
from the British quota. And the other was the Immigration and
Nationality Act of 1965, which was a by-product of the civil rights
movement in the United States of the 1960s. The act eliminated the
quota system that favored European immigrants. It established an
overall quota of 120,000 (later increased to 170,000) for all of the
Western Hemisphere and within this quota an annual maximum
of 20,000 for each country. Under the guiding principle of fam-
ily reunification, the act allowed unlimited immigration of imme-
diate relatives of U.S. citizens. Since its implementation in 1968,
Caribbean immigration to the United States has grown sharply.
The Economics of Caribbean Migration
The economics of contemporary Caribbean migration revolves

around the need to improve the economic condition of the
migrant’s household. Migrants are pushed out by high unemploy-
ment and slow wage growth in the Caribbean and pulled in by bet-
ter opportunities for employment and better working conditions in
the United States. Response to these push and pull factors is con-
trolled by the number of visas issued. Because the principle guiding
the supply of visas is the reunification of families, more than half
MIGRATION 55
of those receiving immigrant visas are close relatives of American

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

that every year some circles are collapsing as families are reunited.
The circle may collapse also if the migrant returns home for
good. In some Gulf countries that rely heavily on immigrant labor,
the migration circle is more likely to collapse when the migrant
returns home because there is little or no family reunification in
the host countries. How long it takes for a migration circle to col-
lapse in the case of Caribbean migration to the United States will
be examined later in this chapter by developing a remittance profile
of the immigrant.
Remittances benefit the recipient country because they stim-
ulate consumption spending, but there is little evidence that
they stimulate capital formation. Billions of dollars flow to the
Caribbean each year, mostly from the United States. Because they
are what economists call transfer payments, no domestic output is
produced at the time of receipt. Therefore, the multiplier impact
on output is less than that of an equivalent amount of wages.
Furthermore, because remittances do not finance capital forma-
tion, they tend to have little impact on economic growth in the
long run.
This raises an important question: if remittances have little or
no impact on the growth of the country, would that country have
been better off if the immigrants had remained at home? For a
long time, Ireland was a net exporter of people because it was one
of the poorest countries in Europe. Since it joined the European
Union, it has benefited from the inflow of capital and has become
the fastest growing economy in Europe and a net importer of
workers. The point here is that growth and economic diversifi-
cation attract immigrants while economic stagnation encourages
emigrants.
The Caribbean has one of the highest emigration rates in the
world, yet the region is classified in World Bank data as middle
income. As a net exporter of labor and a net importer of capital, it
experiences opposing flows of remittances: one flows from immi-
grants abroad and another flows (profits) to investors abroad. The
sustainability of these opposing flows is dependent on quite differ-
ent things. The repatriation of profits depends on the volume and
profitability of foreign investment, while the flow of remittances
depends upon the growth of the immigrant population abroad
MIGRATION 57
and the level of their income. One depends on industrial policy

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

the Atlantic coast with heavy concentrations in New York and
Florida. Early in the twentieth century, New York City became the
favorite destination because the banana boats connected the city

to the banana exporting Caribbean. Today, immigrants from the
Dominican Republic are concentrated on the island of Manhattan
and immigrants from the English-speaking Caribbean are concen-
trated in the boroughs of Brooklyn and Queens.
Prior to World War II, most West Indian immigrants settled in
the Harlem section of New York City. Many became leading figures
in their communities. Prominent among them was Marcus Garvey
who promoted a back-to-Africa movement (to Liberia), arguing that
blacks could not survive in a country dominated by whites. The
movement failed and Garvey was eventually convicted and impris-
oned for fraud, but he demonstrated a rare sense of black identity
and leadership that was ahead of his time. He engaged thousands of
black people with the notion that they could achieve a better life.
The prominence of this kind of West Indian leadership was
eclipsed by the massive migration of American blacks to the indus-
trial centers of the North-East and Midwest. In New York, Harlem
was their main destination. The influx of greater numbers meant
greater African American political clout. As time passed, new West
Indian migration began to focus on the borough of Brooklyn, a
demographic shift that was a boon to the borough because the West
Indians revitalized some of its most run-down areas.
The movement of West Indians into Brooklyn was also influ-
enced by the low cost of housing. As the white population moved
out to the suburbs, lower-cost housing became available to the
newcomers. These areas of immigrant concentration tended to
be racially homogeneous but they provided a comfort zone that
allowed newcomers an easy transition into the realities of day-to-
day American life. As is the pattern in American life, some will
later move out into more fashionable areas as their incomes rise.
The U.S. Bureau of the Census data show that the median
income of Caribbean households is roughly equal to that of
American households, but this definition of “Caribbean house-
hold” includes people of Caribbean ancestry who were born in the
United States. When broken down by generation, some evidence
shows that the average income of first generation immigrants falls
below the national average, while that of the second generation
exceeds the national average, and by the third generation the dif-
ference disappears.
MIGRATION 59
Part of the reason for the below average income of the first gen-
eration can be attributed to their weaker bargaining power in the
American labor market and to some occupational downgrading.
This has led Barry Chiswick (1980) to assign a U shape to the immi-
grant occupational profile. In the initial years after arrival, many
professional immigrants experience occupational downgrading
in the sense that the qualifications they bring with them do not
immediately allow them to get jobs equivalent to the ones they
held in their country of origin. Medical doctors, for example, must
pass an examination to get a medical license to practice medicine.
While they are preparing for this examination, they need to feed
their families; therefore, they must find some other type of work,
quite often in a subordinate position in their profession . In New
York City and Washington DC, many professional immigrants
are known to drive taxi cabs as a temporary way to earn income.
When they have acquired the necessary qualifications and licenses,
their incomes rise as they move up on the right hand side of the U.
Ultimately, how far incomes rise will depend upon the elasticity of
the supply of skills. A highly elastic supply may predispose immi-
grants to accept wages lower than the national average but consid-
erably higher than wages in their countries of origin.
Because of the selectivity of the migration process, the share of
skilled people in the immigrant population is higher than that in
the labor force of their countries of origin. For example, in the case
of Jamaica, the combined percentage of immigrants classified as
“professional and technical workers” and “executive, administra-
tive, and managerial workers” in the total migration to the United
States has averaged around 19 percent compared to 14 percent in
the Jamaican labor force.4 This brings up the complex issue of brain
drain. If skilled people are unemployed at home and they migrate
to another country where they can increase their productivity and
income and send money back home, does their migration repre-
sent a loss of output? Students from developing countries who pur-
sue advanced degrees in the sciences, for example, often opt for
employment in developed countries where the jobs are and where
the infrastructure is already in place. Yet the experience acquired
by these immigrants could eventually benefit their country of ori-
gin if there are programs in place to induce them to return, even for
short visits, to teach young people.
Culture and Politics
Immigrants bring with them their culture and their cuisine, creating a
market for the exports of their countries of origin. Caribbean food and
drink now occupy shelf space in many U.S. supermarkets and grocery
stores, and music stores have special sections for Caribbean music. As
the stock of immigrants has grown so has the market for these goods,
reinforced in no small way by the large number of tourists who return
to the United States with a taste for things Caribbean.
West Indians bring their carnival celebrations to Toronto, New York,
and Miami, where the carnival is transformed from its pre-Lenten
roots into a summer festival. The largest celebration occurs in
Brooklyn on Labor Day (the first Monday in September). It is a dem-
onstration of West Indian cultural and political presence in New York
City and it attracts leading local politicians to the parade.
Despite this overt display of ethnicity, the political power of
Caribbean immigrants is limited because they have a tendency to
delay the acquisition of American citizenship. Without citizenship
they cannot vote and without a vote politicians are not likely to lis-
ten to their concerns. The fact is that those immigrants who are not
citizens have traded their political enfranchisement at home for eco-
nomic opportunities and political disenfranchisement in their host
country. From their point of view, economic opportunities trump
political enfranchisement. This means that although Caribbean
immigrants have achieved a measure of economic success, they
have been slow to translate it into national political influence.5 This
requires political activism that in turn requires citizenship.
Because first generation immigrants are preoccupied with
improving their economic condition and that of their children, the
role of political activism is left largely to their children. The second
generation has been socialized and educated in the American sys-
tem and is, therefore, more adept at maneuvering its way through
it. It does not send money home as the first generation does, but it
does have a greater potential to engage in political action.
Return Migration
By virtue of the proximity of the Caribbean to the United States,

Caribbean immigrants tend to return frequently to their countries
MIGRATION 61
of origin for short visits. Between 2002 and 2006, nonresident

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

grant when his income is at or near its peak that the opportunity to
transform traditional remittances into capital flows is likely to be
at its greatest. It is the time when the immigrant becomes a foreign
investor and begins to receive a flow of profits in return.
The Caribbean Dilemma
As globalization exposes Caribbean industries to more compe-

tition, the need for a better educated labor force to develop new
industries becomes paramount. But the Caribbean faces a dilemma.
As it invests more in education, it loses a large share of its gradu-
ates to the United States. Nowhere is this more evident than in the
health sector where there is growing demand for health care by an
aging American population. Graduates from nursing and medical
schools in the Caribbean have no difficulty finding employment in
the United States.
On the micro level, migration offers an opportunity for individ-
uals and households to maximize their income; but on the macro
level, this may not necessarily contribute to the growth of output.
The Caribbean has traditionally depended largely on the export
of agricultural commodities but as globalization erodes the pref-
erential arrangements that gave these exports their competitive
advantage, the Caribbean must turn to its human capital to cre-
ate higher-valued output from these traditional exports. As migra-
tion drains away a large share of this human capital, no amount of
remittance sent back by immigrants can effect the transformation
required. In other words, although recipients of remittances may
increase their level of consumption, there may be no increase in the
capacity of the economy to sustain it. To sustain this level of con-
sumption, one of two things must happen: there must be a sustained
inflow of remittances (which implies that the recipients do not join
their benefactors abroad) or a way must be found to divert a large
portion of the remittances into capacity-creating investment.
The Caribbean also faces the predicament of loosing a large por-
tion of its human capital at a time when it is trying to attract foreign
direct investment into service industries that require skilled human
resources. This means that because of emigration the return on the
national investment in education and training is often less than it
MIGRATION 63
ought to be. The demand for these skills by the large American
economy and the inability of Caribbean economies to offer equiv-
alent wage rates and working environments suggest that the por-
tion of the wages earned abroad that is likely to be remitted to the
Caribbean should be factored into the return on investment in edu-
cation. The Philippines has apparently done that, therefore, expect-
ing many of its skilled workers to emigrate in order to earn foreign
exchange.
The Significance of Remittances
Remittances7 from immigrants8 abroad account for a signifi-

cant share of foreign exchange for Caribbean countries. By 2000,
the flow of remittances had become the second largest share of
Jamaica’s foreign exchange earnings, behind receipts from tour-
ism. The size and dependability of this inflow have improved the
credit rating of the government in international capital markets.
In the broader context of the movement of capital and labor,
Jamaica, like most Caribbean countries, is a net exporter of labor
and a net importer of capital. Just as remittances flow back from
migrating labor, investment income flows from foreign invest-
ments in the Caribbean to the United States and other countries.
Throughout the 1990s, much of the inflow of remittances from
Jamaican immigrants was offset by the repatriation of profits
from capital. Thus while capital flows to the Caribbean for higher
rates of return, labor flows to the United States for higher wages.
Theoretically, equilibrium is reached when the rates of return on
both imported capital and exported labor are equal. Because in
reality the inflow of foreign is affected by the availability of skilled
labor, the two flows may not be equilibrating.
The Remittance Profile and Duration of Migration Cycle
This section develops a remittance profile (based on the analysis

in the appendix to this chapter) by estimating the impact of past
migration on the current flow of remittances (Palmer, 2007). By
observing the behavior of this impact, it is possible to calculate the
length of time it takes for immigrants to finance the reunification
of their households abroad and, therefore, the length of time for

a migration circle to collapse. Although numerous studies have
examined the flow of remittances over time (Lucas, 2006; Özden
and Schiff, 2006; Ratha, 2003), none has looked at the contribu-
tion of previous migration to annual remittance flows. This is done
using the data for migration from 1965 to 2000 and remittances
from 1975 to 2000 for Jamaica.
The first major impact of past migration occurs in the fifth year,
but the greatest impact occurs in the eighth year. This reflects a
combination of the growth of immigrant income and the effort
of immigrants to finance the reunification of their household in
the host country.9 It is, therefore, reasonable to infer that for many
households the migration circle collapses between the fifth and the
eighth years. But for any given year, there are likely to be collapsing
circles for those immigrants who have been away for this long. The
bigger picture of migration that emerges over time is one of a series
of collapsing circles (as immigrant households are reunited in the
host country) and emerging circles (as migration continues).10 A
tighter U.S. immigration policy together with rising unemploy-
ment rates in the United States could slow the flow of immigrants
and lower the flow of remittances. However, as long as U.S. immi-
gration policy continues to embody the principle of family reunifi-
cation, some migration will continue.
The Remittance Impact of Interest and Exchange Rates
Interest Rates
Immigrants by their very nature are forward-looking people. It is

assumed here that they behave rationally and try to maintain the
present value of any future stream of remittances. Therefore, they
will react to correct any changes in that present value. Thus if they
view a rise in interest rates in their country of origin as reducing
the present value of future remittances, they will take corrective
action by increasing the current flow of their remittances. While all
immigrant groups face the same current interest rate in any given
year, each group may react differently, depending upon the rela-
tionship of that interest rate to the rate that prevailed in the year of
their migration. It follows, therefore, that if there is no gap between
MIGRATION 65
the current interest rate and the rate in the year of migration, there
will be no change in the current flow of remittances. Since nominal
interest rates in Jamaica have risen steadily over the period cov-
ered by this study, the current interest rate has generally exceeded
the interest rate in the year of migration for most immigrants. The
results of the regression analysis in the appendix shows that rising
interest rates (IR) in the country of origin had a positive impact on
the flow of remittances (R).11
Exchange Rates
The analysis of the impact of exchange rates on remittances fol-

lows the same path as the analysis of interest rates. Again, the
assumption is that the immigrant is interested in preserving the
present value of a future stream of remittances. Over the period
between 1970 and 2000, the exchange rate of the Jamaican dollar
fell sharply, meaning that a given amount of remittances in U.S.
dollars generated a larger amount of Jamaican dollars. During the
same period, the inflation rate rose sharply, reducing the purchas-
ing power of the Jamaican currency. To the extent that the immi-
grants suffer from money illusion, that is to say, they see only that
larger amount of Jamaican currency resulting from depreciation
and not the declining purchasing power resulting from inflation,
they may reduce the amount of their remittances. If this is true, the
depreciation of the currency will have had a negative impact on the
flow of remittances. The results of the estimate of the impact of the
real exchange rate (ER) on the flow of remittances (R) in the appen-
dix supports this view.
It is clear that remittances were negatively impacted by the
declining real exchange rate in the first four years after migration.
This suggests that immigrants may have been influenced more by
the falling exchange rates than by rising inflation. Furthermore,
the fact that the remittances of recent immigrants were far more
negatively impacted than those of earlier immigrants suggests that
the earlier immigrants were better able to assess the role of inflation
and adjusted their remittances accordingly. Since the interest rate is
not entirely independent of the exchange rate, it is conceivable that
the impact of these two rates may have canceled each other out,
allowing the flow of remittances to grow.
The Impact of Remittances on Economic Growth
The long-term transformation of remittances from a source of con-

sumption financing for close family members left behind into a
source of financing for capital projects that benefit a larger number
of people is critical for economic development. When remittances
become capital flows, both the immigrants abroad and their coun-
try of origin benefit. The return on such capital flows will augment
the income of the immigrants, and the capital projects financed will
enhance domestic economic growth.
Over the three decades between 1970 and 2000, remittances from
Jamaican immigrants grew twenty-five-fold, from US$26.9 million
to US$679.4 million, while GDP in constant (1990) prices grew by
only 28 percent, from J$25.9 billion to J$31.2 billion. When GDP in
constant prices is converted from Jamaican dollars into U.S. dollars,
there is a sharp decline from US$31.0 billion to US$798 million
due to the precipitous decline in the exchange rate of the Jamaican
dollar. The small portion of remittances that financed the con-
struction of homes and the establishment of small retail businesses
had little impact on gross capital formation and the growth of real
GDP.12
While the sending country has no control over U.S. immigration
policy and U.S. unemployment rate, it could nevertheless influence
capital flows from its nationals abroad by borrowing money from
them with special bond issues. The success of such borrowing will
depend upon the confidence of the immigrants in the ability of
the government to meet its debt obligations. At the same time, the
ability of the government to meet these obligations is enhanced by
the stability of the flow of traditional remittances. The earmark-
ing of borrowed money for socially desirable projects may arouse
in potential lenders a desire to participate in the development of
their homeland, a desire that is more narrowly expressed in their
traditional remittances.
The remittance profile suggests that there is potential for every
immigrant who has been away for eight or more years to be a sup-
plier of capital to his home country. However, the transformation
of migrant remittances into a flow of capital will not be driven by
patriotism alone. First and foremost, the investment must be safe
and the rate of return at least as high as that available elsewhere.
MIGRATION 67
In other words, the cost of borrowing from the Caribbean dias-

pora is not likely to be any cheaper than the cost of other foreign
borrowing.
Summing Up
The remittance profile of Jamaican immigrants shows that the first

major impact of migration on the flow of remittances occurs around
the fifth year after migration, with the largest impact occurring in
the eighth year. This suggests that it takes each year’s immigrant
group that long to establish itself and to raise its income to a level
that allows it to send large amounts of money back home, either
to finance consumption or to assist with the reunification of the
household abroad. It is reasonable to expect that when the num-
ber of close family members left behind is reduced to zero either
by reunification abroad or by death, the migration circle for that
household will collapse.
Based upon the assumption that immigrants wish to main-
tain the present value of the future flow of remittances, changes
in country-of-origin interest rate and the exchange rate are shown
to have had a positive and negative impact respectively over the
period studied. These two influences may well have canceled each
other out, leaving other powerful forces such as income growth
and family reunification to determine the long-run equilibrium
of the flow of remittances. The post-family-reunification period
offers great potential for transforming traditional remittances into
capital flows. If immigrants can identify attractive opportunities
for investing their savings in their country of origin, they would
enhance the rate of growth of its economy.13
Chapter 7
The Travel Economy
T he travel economy is a variant of the service economy. It

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

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

Immigrant Remittances as a Percentage of Exports of
Goods and Services for Selected Caribbean Countries,
1980 and 1999
Countries 1980 1999
Jamaica 20.5 55.6

Barbados 47.7 57.5
Antigua & Barbuda 46.3 67.3
St. Lucia 59.7 72.1
Grenada 78.1 73.5
Dominican Republic 27.1 48.8
Source: International Monetary Fund, Balance of Payments Statistics,

1987, 2000
THE TRAVEL ECONOMY 71
worker help to stabilize the rate of unemployment at home. Thus

migration becomes a disguised instrument of employment policy.
Now, after decades of emigration, remittances from these immi-
grants have become a major factor in alleviating the poverty effects
of unemployment and low wage rates.
By its very nature, the pure travel economy is a peripheral econ-
omy. Its fortunes are inextricably tied to economic conditions
abroad, particularly in the United States, the country that supplies
most of the tourists and hosts most of the immigrants. Economic
growth in the United States causes more tourists to travel and
immigrants to remit more money to their relatives back home. A
recession produces the opposite effect. The survival of the travel
economy depends on its ability to read the signals coming from the
source of its foreign exchange. Governments in these economies
will have to become astute predictors of potential external shocks to
their vulnerable economies. They will have to set up research cen-
ters to act as an early warning system to alert policymakers to the
need for preemptive action. When economic conditions abroad are
difficult, the travel economy is likely to feel the impact first as the
elastic demand for tourism quickly causes foreign exchange earn-
ings to fall. Remittances may also fall if unemployment among the
immigrant population rises. The travel economy in the Caribbean
is also vulnerable to hurricanes and other natural disasters.
Antigua and Barbuda as a Proxy for the Travel Economy
The twin nation of Antigua and Barbuda offers a good example of

a country evolving toward the status of a travel economy. Services
account for 80 percent of its GDP. The diminution of the share of
agriculture is the result of deliberate government action to abandon
the sugar industry in the 1970s in order to focus on tourism. The
minimal share of manufacturing is the result of the failure of low-
wage assembly factories to compete with the higher-wage tourist
sector for workers. This structural change is even more dramatic
when foreign exchange from travel and remittances is calculated
as a percentage of merchandise exports. In less than two decades,
foreign exchange from tourism and remittances increased almost
tenfold compared to a 20 percent increase of merchandise exports.
The willingness to abandon inefficient alternatives in order to con-

centrate on the efficient production of other activities is an essen-
tial characteristic of the evolution toward a travel economy.
The Model
In the pure travel economy model, gross foreign exchange from

travel in the current period (FEt) is the sum of tourist spending
(TSt) and immigrant remittances (REMt). Tourist spending in the
current period is a function of the number of tourists (NTt), and
immigrant remittances in the current period are a function of cur-
rent and past migration (M). Thus,
TS t = γNTt (1)
REM t = βM t + β1M t −1 + β2 M t − 2 + … + U t (2)
If we assume that the impact of migration (M) on remittances
diminishes the farther back in time we go, then equation 2 can be
rewritten as
n
REM t = β∑ λ i M t −1 with 0 ≤ λ < 1.
t =0
Therefore, gross foreign exchange from travel (FE) becomes

n
FE t = TS t + REM t = γNTt + β∑ λ i M t −1 (3)
t =0
In equation 3, g is assumed to be the average of all types of tourist

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

or no institutionalized safety nets. Because of the high propensity
to import consumption goods in the small Caribbean economies,
a significant share of remittances gets recycled abroad (particu-
larly to the United States). This is also true of foreign exchange
from the tourist industry. A significant share of tourist spending
goes to finance consumption imports for tourists. Here the chal-
lenge for public policy is to encourage more production and con-
sumption of domestic goods. For the purpose of this analysis, it is
assumed that the propensity to import consumption goods out of
both types of foreign exchange is m. Net foreign exchange (NFE)
is, therefore:
n
NFE t = (1 − m) (γNTt + β∑ λ i M t −1 ) (4)
t =0
If a portion, a, is used to finance domestic investment, then the

amount of domestic investment (I) is:
n
I = α(1 − m) (γNTt + β∑ λ i M t −1 ) (5)
t =0
It follows that the share spent on domestic consumption (C) is:

n
C = (1 − α) (1 − m) (γNTt + β∑ λ i M t −1 ) (6)
t =0
In the absence of government expenditure and foreign direct invest-

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

economy.
Some Implications of the Travel Economy
The road to the travel economy leads to greater integration into

those economies that are the source of tourists and the destina-
tion of immigrants, particularly the United States. Because the
demand for tourism is highly income elastic, it is vulnerable to
external economic fluctuations. It is also vulnerable to social and
political shocks at home. A diversified travel economy is in a better
position to absorb these shocks. One direction of diversification is
in the area of financial services, particularly offshore banking in
which Antigua and the Bahamas have made significant gains. The
objective here is to integrate offshore banking as a third pillar of
the travel economy along with tourism and migration. Although
this kind of diversification may offer a buffer against potential
competition in tourism, it may be only a temporary buffer. This
means that the trade policy of the travel economy will be con-
stantly engaged in crafting new strategies for maintaining a com-
petitive edge.
Knowledge centers in the Caribbean must be geared to providing
the required skills for the travel economy. At present the University
of the West Indies is the chief knowledge center, but over the past
few decades several smaller centers in other parts of the Caribbean
have emerged in the form of medical schools as well as technology
and community colleges. Since a share of the rising demand for the
services offered by the travel economy is likely to come also from
the emerging economies, the curriculum of Caribbean primary
and secondary schools should begin to introduce students to the
cultures and economies of these countries.
If the travel economy is to be successful, the infrastructure for
providing a variety of services must be in place. This includes a
legal, educational, transportation, and communications infrastruc-
ture compatible with world standards. There should also be in place
a fiscal policy that does not burden productive resources with tax-
ation but induces capital to flow into new production, and a mone-
tary policy that preserves the stability of the currency. In addition,
there should be a willingness to enhance the stock of human capital
by importing skills when none is available locally. As the travel

economy develops, the propensity to emigrate will weaken, reduc-
ing the future flow of remittances from immigrants. Instead of
encouraging emigration, rising incomes in the travel economy will
induce return migration.
The mobility of labor in CARICOM is essential for the survival of
the travel economy. Although there is significant temporary migra-
tion among the Eastern Caribbean countries, the elimination of
legal barriers to labor mobility could trigger an equilibrating move-
ment of labor and income among low- and high-unemployment
countries that will benefit the region. But legal barriers are only
one obstacle; the cost of transportation and housing is another.
Because the region is stretched across the entire Caribbean, the cost
of transportation is high. But if wage differentials are sufficiently
large, transportation cost may not be a significant hurdle. For the
unemployed worker the wage differential is always large. Since the
travel economy is characterized as a high-unemployment economy,
it becomes a source of unlimited surplus labor. It is surplus labor in
the Arthur Lewis2 sense, that is, in their home country their mar-
ginal productivity is zero. Thus their migration will have no effect
on domestic output. Because the supply of this labor is highly elas-
tic (or even perfectly elastic), wages paid to these migrant workers
will be low relative to prevailing wages in the countries demand-
ing such labor. For the travel economy, this is nevertheless a net
gain since the remittances from these workers will add to its foreign
exchange earnings.
Since there is a net inflow of capital to and a net outflow of labor
from the travel economy, it is fully interacting with the global econ-
omy and the key to that is the employment of its labor force in low-
wage jobs at home and abroad.
Chapter 8
Investment and Consumption
Foreign Investment in Open Economies
Foreign direct investment brings with it technology and managerial

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

Selected CARICOM Countries, 1990 and 2003
Countries 1990 2003
Barbados 6.5 2.2

St. Kitts & Nevis 30.7 15.2
Bahamas 20.6 2.8
Grenada 5.8 0.0
Dominica 7.7 0.0
St. Lucia 11.3 4.6
St. Vincent & The Grenadines 3.9 10.1
Jamaica 3.0 8.8
Guyana 2.0 3.5
Haiti 0.0 0.3
* Net inf low of foreign direct investment is defined as the sum of equity capital,
reinvestment of earnings, and other long-term and short-term capital
Source: United Nations, Human Development Report 2005
shows the rank and the scores for Caribbean countries for 2006. A
score of 5.0 is considered the borderline number that distinguishes
countries that do have a serious corruption problem from those
that do not. All the Caribbean countries except Barbados score
below 5.0.
The Caribbean countries that have been able to post high rates
of growth are the ones that have experienced significant inflows
of foreign direct investment. Although high interest rates increase
the cost of borrowing for local investors, they do not affect for-
eign direct investment that does not depend on borrowing locally.
In the Dominican Republic, the inflow of foreign investment was
enhanced in 1995 by the Foreign Investment Law that put interna-
tional companies on equal footing with national ones by guarantee-
ing equal treatment and full repatriation of profits. In addition, a
substantial amount of foreign direct investment has been attracted
by the government’s capitalization program that was initiated in
1996. Under this program, the government sells a 50 percent share
in each of its state-owned companies. Two of the major beneficia-
ries of this program are the telecommunications and electric power
industries. A large share of foreign direct investment also flows
into the free trade zones, which produce the majority of the coun-
try’s manufactured exports.
INVESTMENT AND CONSUMPTION 79
In the final analysis, what separate the high growers from the
low growers in the Caribbean are policies that create an accommo-
dating environment for private direct investment. Growth rates in
Trinidad, Barbados, and the Dominican Republic have been pow-
ered by the inflow of foreign direct investment particularly from
the United States. In Trinidad, most of the foreign direct invest-
ment has gone into the petrochemical industry in response to the
effort by the government to divest state-owned enterprises. The
flow of foreign direct investment into Jamaica has been more mod-
est despite the country’s success in recent years in restraining infla-
tion and stabilizing the currency. Part of the reason for this modest
impact must be attributed to social problems of crime and violence,
which increase the cost of doing business in the country. The gov-
ernment has not been able to get a handle on this problem although
it has mounted a massive effort to insulate the tourist industry, its
most lucrative foreign exchange earner, from the effects of urban
crime and violence.
In the Eastern Caribbean, most of the foreign direct invest-
ment has gone into the tourist industry, primarily to construct
hotels and related infrastructure. The phasing out of preferential
treatment for their traditional exports of sugar and bananas in
European markets is forcing the Caribbean to rediscover its com-
parative advantage in tourism and to try to create new avenues
in financial services around which future growth is expected to
take place. Telecommunications and information technology are
also seen as another nodal point for future development. The
Dominican Republic has made significant strides in these areas
through its capitalization program. Jamaica is hoping to do the
same with its nascent information technology centers in Montego
Bay and Kingston.
Investment and Exchange Rate Stability
Countries with high interest rates and high growth rates are trading
off direct investment by local investors for portfolio investment by
foreign investors. The high cost of local borrowing discourages local
investment and increases dependence on foreign short-term port-
folio capital.2 But it could be argued that the inflow of short-term
capital keeps the exchange rate stable, it could also enhance climate
for foreign direct investment.
The Jamaica government prefers currency stability over devalu-
ation on the grounds that any devaluation will create expectations
of further devaluation and raise domestic prices, thereby under-
mining its effort to reduce inflation. Such outcomes, it believes,
will create uncertainty that would negatively affect the flow of
investment into the country. Yet despite its achievement of a lower
inflation rate and a stable but overvalued currency, the amount of
foreign direct investment attracted has not been able to propel eco-
nomic growth out of its anemic state.
Policies to target inflation have received top priority in the
Caribbean because of the persistence of excess aggregate demand.
A major component of this is food consumption, which in the
Caribbean accounts for a much larger share of the household budget
than in developed countries. The burden of a high rate of inflation
is quickly manifested in reduced living standards. It also distorts
the allocation of resources by directing investment into areas inves-
tors consider the best inflation hedge but do not always expand the
productive capacity of the economy. For example, in recent years,
domestic investors have preferred to invest in shopping malls and
entertainment centers where profits are higher than in manufactur-
ing and where the emphasis is on consumption rather than produc-
tion. Furthermore, because government policy has tended to favor
lowering import barriers to moderate the rise in food prices, the
import content in consumption has grown, increasing the balance
of trade deficit.
One external connection that appears to have had a positive
impact on Caribbean policy is the U.S. dollar. A common feature
of the low-inflation Caribbean countries is that their currencies
are pegged to the U.S. dollar. In other words, a form of dollariza-
tion appears to be an important antidote to inflation. However, no
Caribbean country, except Panama, is truly dollarized in the sense
that the U.S. dollar is considered legal tender (see the discussion in
chapter 11). The low to moderate budget balance to GDP ratio in
these countries is a reflection of the fiscal discipline imposed by
semiofficial dollarization.
A history of foreign trade dependence has molded the charac-
ter of Caribbean economic institutions. This history has spawned
a social and economic order that places production for exports at

the center of economic activity. As a result, those who produce
for export are a favored constituency. Because production for
exports has depended on the inflow of foreign direct investment,
policymaking has tended to be driven by institutional inertia that
reflexively favors measures that attract such investment. One such
measure is the use of interest rates to achieve a stable exchange
rate. The expectation is that a stable exchange rate will enhance
the investment climate and attract the kind of foreign direct invest-
ment that will stimulate the growth of the economy and the well-
being of the population. The downside is that high interest rates
discourage domestic investment.
Impact of Structural Adjustment
Economic policy in many Caribbean countries has been influ-

enced by the requirements of structural adjustment programs as
a condition for receiving balance of payments assistance from the
International Monetary Fund. The goal is to extricate the affected
economies from the grip of persistent stagnation brought on by
excessive debt burden and a chronic balance of payments defi-
cit (examples are Jamaica and Guyana). Typically these programs
require a reduction of public sector demand and the elimination of
price and import controls. They are motivated by the expectation
that size reduction of the public sector and its attendant distortions
will allow productive resources (labor, capital, etc.) to be more effi-
ciently allocated and encourage the economy to grow faster.
The problem with these programs is that they require large seg-
ments of the population already suffering from economic depriva-
tion to endure a considerable amount of pain as the reduction of the
budget invariably eliminates or scales down some social programs.
The lower-income groups that benefit most from these programs
usually bear the brunt of the burden. And quite often this burden is
made more onerous by uncertainty about the length of the adjust-
ment process and its expected achievements.
The principal outcome of the structural adjustment process
is the liberalization of markets that brings unequal results, both
domestically and externally. Domestically, free markets intensify
the inequality in the distribution of income because high-income

groups are better positioned to take advantage of income-generating
opportunities. Externally, Caribbean countries find their inefficient
industries swamped by imports from larger and more efficient trad-
ing partners, causing a reduction of local production and an increase
in unemployment.
The Impact of Investment
According to a Jamaica Information Service report (2005), “Jamaica

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

particularly reflected in the sharp growth in the flow of property
and entrepreneurial income from Jamaica to the rest of the world.
This flow tripled between 1995 and 2004, from J$14,408.4 million
to J$41,256.7 million, offsetting a significant share of remittances
from immigrants abroad. Although it can be argued that the out-
flow of profits is the result of foreign direct investments, which,
unlike remittances, contributed to the local production of goods
and services and the creation of local employment, it nevertheless
fails to live up to Hans Singer’s dictum that profits should be rein-
vested to stimulate further growth (Singer, 1950).
Profits versus Wage Income
The primacy of foreign capital in this environment has altered

the distribution of the rewards to labor and capital. The evidence
suggests that globalization is benefiting capital more than labor
as direct investment tends to move to areas where labor costs are
low. In the national accounts for Trinidad, for example, the share
of profits in GDP was greater than the share of compensation to
employees; the ratio of employee compensation to operating sur-
plus5 declined from 1:1.21 in 2000 to 1:1.76 in 2005. This in large
part has been influenced by the capital-intensive nature oil pro-
duction. In Jamaica, the share of compensation to employees in
GDP during the 1970s and early 1980s averaged 50 percent com-
pared to roughly 30 percent for the operating surplus. From 1983 to
1993, the average for employee compensation fell but rose again in
the latter half of the 1990s while the share of profits behaved in an
opposite manner. These fluctuations correspond roughly to differ-
ent political regimes in power during that time. During the tenure
of the socialist government of the Peoples National Party (PNP) in
the 1970s, the share of employee compensation rose and remained
high; it declined in the 1980s after the pro-business Jamaica Labor
Party (JLP) took power in 1980, and it rose again in the 1990s after
the PNP returned to power in 1989. This rough correlation strongly
suggests that the policies of each party had a decidedly different
impact on business. Over the entire period between 1973 and 1998,
compensation to employees averaged 52.4 percent while the oper-
ating surplus averaged 34.6 percent. By way of comparison, in the
United States in 2005 and 2006, these shares were 57 percent and
24.4 percent respectively. While the fluctuations in the shares in
Jamaica may be attributed to differences in government policies,
the averages for the entire period reflect two things: (1) an ongo-
ing strategy of favorable tax treatment for foreign direct investment
and (2) a smaller share of the labor force engaged in wage employ-
ment. Given the large share of profits in GDP, per capita GDP
overstates the level of income of the employed population. In 1998,
for example, the per capita compensation of all employed workers
(J$126,835) was 48.2 percent of the per capita GDP (J$263,231).
Private Consumption and Wage Income
For the period 1973 to 1998, Jamaica’s national accounts show that
private consumption expenditure consistently exceeded employee
compensation by an average of 50 percent (Statistical Abstract, 1998).
This gap represents spending out of profits, employee compensa-
tion, informal income, and immigrant remittances. In the Jamaican
situation, where the richest 20 percent of the population account for
46 percent of consumption (United Nations, Human Development
Report, 2005), it is reasonable to assume that a large share of the
consumption of the richest 20 percent comes out of profits while
all of the consumption of the remaining 80 percent comes out of
employee compensation, informal income, and remittances from
immigrants abroad. This means that 54 percent of consumption is
financed by these three latter sources. To the extent that remittances
from abroad finance consumption, they play an important role in
moderating the inequality in the personal distribution of income.
Composition of Household Consumption
Whatever the share of spending out of the various income sources,

the pattern of consumption spending identifies a developing econ-
omy. For example, the share of spending on food and beverage in
Barbados and Jamaica is three and four times respectively, larger
than in the United States, underscoring the fact that as per capita
income rises, food and beverage claim a smaller share of the house-
hold budget. A rise in the price of food and beverages will, therefore,
have a much larger impact on the budget of the Caribbean con-

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

that allocated the best farmlands to export agriculture and small
plots of less desirable land to the freed slaves in the hinterland. The
producers of export agriculture were not in the slightest way con-
cerned with self-sufficiency in domestic food production and nei-
ther was the government. Profits were to be made by selling abroad
and by distributing imported goods at home. Today the small farms
are unable to satisfy domestic food consumption. And the heavy
dependence on imports has given rise to a large low-wage distribu-
tive sector (wholesale and retail) of merchant capitalists rather than
a high-wage manufacturing sector. This situation has frozen into
place a wide inequality in the distribution of income.
Since consumption is a measure of the standard of living, the
link between consumption imports and foreign exchange earn-
ings cannot be broken without serious adverse consequences for
the standard of living. Institutions of government have evolved to
support this arrangement. Trade concessions have been negotiated
to support the price of export agriculture, and marketing boards
have been created to stabilize commodity prices farmers receive.
In addition, labor unions have protected workers’ wages in export
agriculture while governments have won elections with union sup-
port. And for a long time the food deficit was supported by an over-
valued exchange rate that made imports cheaper. This situation
was clearly not sustainable as the downward adjustments in most
Caribbean exchange rates over the past 20 years attest.
In the latter part of the 1990s, the government of Jamaica was
forced to recognize the scale of its food deficit problem. It listed
among its goals for agriculture the following:
1. to produce as much food and raw material as is feasible to

meet the requirements for
i. adequate food and nutritional levels of the population
ii. agro-industries
iii. export markets
2. to structure production so as to reduce reliance on imports.
(Statistical Yearbook of Jamaica, 1997, p. 262)
The plan involved the achievement of these goals through a

land reform and rural development program designed to let the
agricultural sector “rise to meet the challenges of the future”

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

since the 1970s clearly suggests the existence of certain institu-
tional rigidities that militate against growth. The high propensity
to import consumption goods is a case in point. It is institutional
not in the sense that it is the creation of law, but in a cultural and
economic sense that arises from a persistent food deficit at home
and an ingrained historical perception that everything foreign is
better. Another institutional rigidity is political; it arises from the
fact that political parties are affiliated with labor unions and are
beholden to them for votes. This labor union–political party rela-
tionship goes back to the beginning of the political parties when
they championed the cause of striking workers in the 1930s. Ever
since, governments have had to dance on a tight rope to balance the
interests of the union worker and that of the larger economy. But
over the past 20 years the decline in export prices and the rise in
import prices have threatened these interests.
In the financial sector, institutional inertia slowed the develop-
ment of certain regulatory institutions. Jamaica’s financial crisis in
the 1990s is the result of the willingness of those in government to
accommodate the excesses of moneyed class until those excesses
threatened the livelihood of the working class. The World Bank
(2004) estimates that the fiscal cost of the banking crisis exceeded
40 percent of GDP (p. 880).
The challenge for policymakers here is to break out of the grip of
institutional inertia. For some countries, this will require a major
effort to change the policy paradigm. The thinking embodied in
any new paradigm must give primary importance to local invest-
ment. While the effort to attract foreign investment must continue,
the success of local investment can be the magnet that attracts for-
eign direct investment. This will require that the exchange rate be
allowed to depreciate to improve the competitiveness of exporters,
reduce imports for consumption, and eliminate the trade deficit. In
this scenario, labor costs in terms of the U.S. dollar would fall and
foreign investment would flow in to fuel economic growth, and the
dragon of institutional inertia will have been slain or at least caged.
The political risk involved in this strategy will be high since
wage earners with their high propensity to import will face higher
prices, at least in the short term. However, workers will benefit as
expanding exports create more jobs and reduce the unemployment
rate. Furthermore, higher import prices will induce local and for-
eign investment into new profitable areas and ultimately encourage
consumers to use local products in place of foreign ones.
Progress in this direction will not be smooth because of two
opposing forces. On the one hand, the wholesale and retail sec-
tor (which throughout the Caribbean accounts for a large share of
GDP) will want as few restrictions on imports as possible; on the
other, wage earners and labor unions will want domestic employ-
ment and output to grow. Rational political action will dictate that
every effort is made to strike the right balance between output and
imports. Central to this strategy is a climate that will attract new
capital for economic diversification.
A World Bank (2006) report on CARICOM declares that “a good
investment climate will include political and macro stability, a
sound regulatory framework and efficient supporting institutions,

and an adequate physical and social infrastructure.” When the cli-
mate is right, special government agencies responsible for promot-
ing investment tend to be most effective. But this effectiveness is
often undermined by domestic conditions beyond their control,
such as a rising crime rate. The experience of Jamaica is apt. The
institutions responsible for public safety have been unable to assure
a safe environment for businesses and individuals, except when
public policy focuses on specific areas where tourists gather. The
coordination of policy to maximize a favorable investment climate
is essential, but this coordination requires an incentive. The stake-
holders must share in the policy goals, as is the case in the Barbados
system of social contracts.8
The claim of debt service against export earnings is highest
in St. Kitts and Nevis, Belize, and Jamaica, suggesting that a fall
in export earnings could present significant hardship for these
countries. Debt service indirectly represents a tax on exports since
it is a claim against export earnings. This reduces the wealth of
the nation. If, however, the money that was borrowed was used for
public investment, the reduction in wealth may be offset by future
economic growth. In Jamaica in 2003, the repatriation of property
and entrepreneurial income represented 8.4 percent of GDP and
20.6 percent of export of goods and services. This outflow plus
interest payment of the debt accounted for 18.5 percent of GDP and
42 percent of export of goods and services. Because this outflow
increases the deficit on current account, a reduction of reserves or
an inflow of capital is required to finance it. This inflow of capital
will generate future outflows of interest payments and/or profits.
Only accelerated economic growth can take the country off this
carousel of deficit and debt. The historical evidence from Jamaica
suggests that the rate of outflow of profits and interest payments
has been a drag on the growth of the economy.
Chapter 9
The Role of Government
Government and the Open Economy
In the Caribbean, government spending accounts for a high

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

between an economy’s exposure to foreign trade and the size of its
government” (Rodrik, 1998, p. 997). His explanation of this rela-
tionship is that government expenditures are used to provide social
insurance against external risk emanating from turbulence in world
markets. The greater the exposure to foreign trade the greater the
external risk and, therefore, the greater the need for public expen-
ditures to insure against those risks. This applies to developed as
well as developing countries.
In terms of foreign trade to GDP ratio, the Caribbean economies
are some of the most open economies in the world. If globalization
leads to greater openness, then the Rodrik finding would suggest
that it is perfectly reasonable for Caribbean populations to demand
a high share of government spending in GDP to insulate them
from the heightened risks that globalization brings. In this view,
government operates like an insurer. But greater openness often
reduces the domestic impact of public spending through import
leakages. To achieve a given fiscal impact, therefore, requires a
larger amount of public spending, hence the tendency for the pub-
lic spending to GDP ratio to be large in small open economies.
Yet structural adjustment in the past was focused on reducing
the role of public spending in the economy, the rationale being that
such a strategy would release resources for private production and
improve competitiveness. Presumably this would ultimately help
to eliminate some of the same external risks that public spending
was supposed to insure the population against. This adjustment
takes time and is often painful with dangerous domestic political
repercussions. Furthermore, the outcome is never certain because
of the dynamic nature of the external environment and the shocks
it periodically produces. The burden of these shocks often falls on
workers who are most vulnerable, compelling the government in a
democracy to respond with increased spending.
Public spending to insure against external risks has cost the
Caribbean dearly in the form of excessive indebtedness. If we use
the analogy of private insurance firms, it means that premiums
(tax revenues) have been inadequate to meet the insurance claims
(public programs), some of which, as in the Jamaican case, include
debt arising from the financial crisis of the 1990s (World Bank,
THE ROLE OF GOVERNMENT 93
2004, p. 33). One obvious solution is to raise tax revenues. But this
is easier said than done for two reasons: (1) trade liberation is grad-
ually eliminating tariffs, which have been an important source of
tax revenues for Caribbean countries, and (2) raising other taxes
might stifle whatever positive economic growth there is.
Public borrowing and the resultant public debt crowd out private
investment and impose a drag on economic growth (World Bank,
2004). Furthermore, servicing of the debt diverts resources from
investment in infrastructure that is crucial for economic growth. In
Jamaica, this diversion occurs by cutting public spending to gener-
ate high primary budget surpluses in order to service the debt. The
World Bank also notes that “part of the rising debt can be attrib-
uted to a deterioration in fiscal management” (World Bank, 2004,
footnote 41, p. 33).
Changing Tax Structures
As the structure of these economies changes in response to global-

ization, so does the structure of taxation. Between 1980 and 2005,
the share of tax revenues from goods and services has grown in
many Caribbean countries. In Barbados, for example, these taxes
now represent the major source of tax revenues while the share of
taxes on international trade has fallen sharply.1 The decline in the
share of taxes on international trade and the rise in the share of
taxes on goods and services are the results of trade liberalization
and the replacement of tariffs on imports with taxes on imported
consumption goods. Taxes on income and profits remain the dom-
inant source of revenues for Jamaica and Trinidad and Tobago.
These taxes include both corporate and payroll taxes, with corpo-
rate taxes being more dominant in Trinidad and Tobago and pay-
roll taxes more dominant in Jamaica.
One consequence of trade liberalization has been the rise in
imported consumption goods against which domestic producers
are unable to compete. This has displaced some domestic produc-
tion and stifled strategic attempts to diversify domestic output.
A case can be made that this rising share of consumer goods in
imports has also retarded economic growth by diverting export
earnings that would normally finance capital goods imports.
The effectiveness of tax incentives in attracting direct invest-

ment into nontraditional production has become more difficult
to achieve in an environment where trade liberalization tends to
encourage imports at the expense of domestic production. This does
not bode well for the trade deficit and the stability of the exchange
rate. Neither does it bode well for the distribution of the tax bur-
den between wage earners, and profit earners and could result in
a widening of an already wide gap in the distribution of income.
Although this shift in the tax structure toward consumption offers
Caribbean governments a powerful instrument to restrain demand-
pull inflation, its effectiveness will depend upon whether people
are more interested in maintaining their real income or the level of
their nominal spending. That is to say, if the so-called money illu-
sion exists, the tax restraint could be effective in restraining real
consumption.
When faced with widening disparities in both tax burden and
income, governments have a special obligation to structure their
spending to reduce these disparities. For the long term, spending
on the development of social capital should receive top priority;
for the short term, spending should address the needs of those at
the bottom of the income scale. The share of government spending
allocated to the three major areas of education, health, and social
protection provides some indication of the structure of govern-
ment priorities. The budgetary priorities for education in the three
countries are similar, but the share of spending going to social pro-
tection in Trinidad and Tobago ranks second to education and far
exceeds that of the other countries (International Monetary Fund,
2007b). One explanation of this difference may lie in the accumu-
lated surplus from oil and gas exports.
Excessive Government Intervention
The economic history of Jamaica offers a useful illustration of the

impact of trade liberalization on the composition of imports and its
implications for export earnings in a small open economy. Former
Stanford economics professor Donald Harris (1990) referred to the
period between 1950 and the early 1970s as “a kind of ‘golden age’
of growth in the Jamaican economy” and the period after that up
to 1989 as one of decline and stagnation (p. 16). Among the things
that puzzled Harris during the latter period was the reversal of the
traditional positive relationship between the growth of exports and
the growth of GDP: “This indicates that something must have hap-
pened to break the strong positive correlation between exports and
GDP established in the previous period. It means, certainly that
the mechanisms which would normally transmit the impetus from
growth of exports to the expansion of GDP were not at work in this
period” (p. 18). From this, he concluded that internal factors must
have played a crucial role.
Although internal factors undoubtedly played a crucial role,
external factors were even more important. As indicated above, trade
liberalization opened the floodgates for imported consumer goods,
thus diverting export earnings away from capital goods imports.
This meant that a given value of exports tended to have a weaker
impact on economic growth. The massive intervention of the state
in the Jamaican economy during the 1970s compounded the prob-
lem. It caused domestic and foreign private direct investment to dry
up, thereby retarding the growth of the nontraditional exports, the
demand for which tends to be income elastic. As a result, export
earnings did not benefit fully from the rise in world income.
Between 1980 and 2006, the share of manufactured goods (SITC
categories 6 and 8) in total exports declined from 3.4 percent
to 1.6 percent (Economic and Social Survey of Jamaica, 1981;
Bankofjamaica.org). Because most of the nontraditional exports
fall into this category, it is reasonable to conclude that this decline
contributed to a lower trajectory of economic growth. Harris iden-
tified a link between declining exports, declining direct investment,
and a sharp rise in the level of government consumption. This rise
in government consumption came at the expense of public invest-
ment that in turn induced cutbacks in private investment. A study
by the World Bank concurs with this view: “Over half of the gains in
average growth come from the reduction in government burden—
government consumption to GDP being well above regional stan-
dards” (World Bank 2006, Executive Summary, paragraph 18).
The expectation that the sharp rise in bauxite royalties that the
government legislated in 1974 would accelerate economic growth
was dashed in the 1980s and the 1990s when the economy stag-
nated. The income inelastic nature of the demand for traditional
exports made it difficult for economic growth in the major trading

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

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

ment in education. This profile is shaped by enrollment ratios at the
primary, secondary, and tertiary levels. Among the Caribbean and
Asian countries listed in table 9.1, Jamaica had the highest percent-
age of high school-age population enrolled in high school in 1960.
But in the next 35 years, this lead was eclipsed as other countries
made far more progress, in terms of both education and income.
Based upon his empirical analysis of the direct and indirect impact
of education on development, Walter W. McMahon (1999) con-
cludes that “the direct effects from the expansion of junior sec-
ondary education are the most relevant in Indonesia, India, and
Thailand, following the earlier pattern of Japan, South Korea,
Taiwan, and others who deliberately created their larger human
capital stocks at these levels through active expansion of education,
first at junior and then at senior secondary levels. . . . The indirect
effects of education affects economic growth primarily through
rates of investment in physical capital” (p. 159).
Despite the attainment of universal primary education in
Jamaica, a World Bank assessment concludes that “education out-
comes leave much to be desired—about 30–40 percent of grade
6 leavers are functionally illiterate. Only 30 percent of those
Table 9.1 Educational and Income Profile of Selected Caribbean and Asian
Countries, 1960–1996
Years Jamaica Malaysia South Korea Singapore Trinidad
&
Tobago
Secondary Enrollment 1960 43 19 27 32 22

Ratio (as a percentage 1976 58 45 63 55 —
of high school-age 1995 66 61 101 62 72
population)
Tertiary Enrollment 1960 2 1 5 6 1
Ratio (as a percentage 1976 7 3 10 9 3
of 20–24-year-old 1995 6 11 52 34 8
population)
GNP per capita (US$) 1977 1,150 930 820 2,880 2,380
1996 1,600 4,370 10,610 30,550 3,870
Source: World Bank, World Development Reports
who appear pass the Caribbean CXC mathematics examination

in grade 11, lower than most Caribbean countries. Jamaican-
educated workers receive amongst the lowest returns in the U.S.
labor market. Poor education outcomes may be one factor limiting
productivity gains in Jamaica, both in absolute terms and also as
compared to other Latin American countries” (World Bank, 2004,
p. 99). This assessment is based on data gathered by Bratsberg and
Terrell (2002) for male immigrants in the United States for 1980
and 1990.4 Of the 67 countries shown in the data, five Caribbean
countries (Cuba, Dominican Republic, Haiti, Jamaica, and
Trinidad and Tobago) had the lowest rates of return, ranging from
2.02 percent for Haiti to 3.75 percent for Trinidad and Tobago. The
mean for all 67 countries was 4.92 percent. The study attributes
this gap to the disparity in educational quality, one of the principal
causes of which is the disproportionate share of education spend-
ing going to teachers’ salaries. This, it argues, reduces the amount
of funds available for instructional materials and maintenance and
for intervention in the early stages of the education cycle. The study
recommends that the highest priority be given to early learning by
raising the functional literacy target from 80 percent after grade 6
to 100 percent “because without strengthening the foundation, all
subsequent interventions are likely to be more costly and ineffec-
tive” (World Bank, 2004, p. 112).
Education and Output
All the Caribbean countries listed in table 9.2 have achieved uni-
versal primary education; but beyond primary education, Jamaica
lags behind the rest of the Caribbean. The gap is widest at the ter-
tiary level, where the Bahamas is the leader. These profiles cor-
relate with per capita GDP of employed workers in the different
countries, clearly indicating that investment in education beyond
the primary level pays off in terms of output per worker. Among
CARICOM countries, Barbados allocated the largest share of its
public expenditure on education to secondary education and the
smallest share to primary education. This is due in part to the fact
that Barbados has the smallest share of its population under the
age of 15 and the highest ratio of secondary enrollment.
Table 9.2 Caribbean Enrollment Ratios and GDP and Gross Capital Formation
per Employed Worker, 1993
Country Primary Secondary Tertiary GDP Gross Capital
per Employed Formation (GCF)
Worker (US$) per Employed
Worker (US$)
Bahamas 93 19.5 25,065 4,425

Barbados 106 89 17.0 17,254 2,197
Costa Rica* 101 42 26.3 7,123 1,373
Jamaica 106 62 5.9 6,570 2,116
Panama 107 59 20.9 9,108 2,349
Trinidad &
Tobago 96 84 6.4 11,308 1,910
* Figure for 1995

Source: United Nations, Human Development Report; International Monetary Fund, Statistical
Yearbook; Staff Reports
For Jamaica, the sectoral differences in output per worker are

sharp, the output per worker and the hourly wage rate in the capital-
intensive bauxite and alumina industry being the highest. Countries
with greater secondary and tertiary enrollment ratios have higher
GDP per employed worker even when the differences in the capital
per worker are slight. It is also reasonable to argue that the lower
the secondary and tertiary enrollment ratios, the greater the likeli-
hood that a country’s labor force is disproportionately engaged in
low-wage employment. This is illustrated in Jamaica where in 1997
the high-wage bauxite industry employed 4,000 workers while the
low-wage sugar and wearing apparel industries employed 7,322 and
13,143 respectively (Statistical Institute of Jamaica, 1998). In other
words, over 80 percent of the employment in Jamaica’s three lead-
ing export industries was in sugar and wearing apparel. Two more
things are particularly striking about these numbers. One is that the
per capita GDP of all employed workers in the country, J$233,000,
was higher than that of the sugar industry and the wearing apparel
industry. The other is the relatively small contribution of sugar and
wearing apparel exports to GDP, 27.8 and 23.3 percent respectively
compared to the 46.5 percent for bauxite/alumina. Despite the rel-
atively high contribution of bauxite/alumina, the industry’s future
is uncertain because of worldwide competition from other bauxite
producers.
A Modest Proposal
How can Jamaica double its output per employed worker and how
long will it take to do so? While investment in better capital equip-
ment is a necessary part of the answer, it is not sufficient. A suffi-
cient answer must include greater access to quality education and
training by a larger number of young people. Indeed, it is not pos-
sible to increase the tertiary enrollment ratio without first creating
greater access to quality secondary schools, which in turn pre-
sumes quality preparation at the primary level. Government policy
for education should consider the following five approaches.
1. Greater financial incentives to encourage the best people to enter

and remain in the teaching profession. Current salaries for primary and
secondary teachers are too low. In 1961 when W. Arthur Lewis was vice
chancellor of the University of the West Indies, he wrote an article on the
relationship between education and development in which he pointed out
that the cost of education is higher in developing countries because a teach-
er’s salary represents a larger share of GDP than is the case in developed
countries (Lewis, 1961).5 A 2006 World Bank study says that Caribbean
education expenditure as a percentage of GDP is high (5 percent) relative to
that for Latin America and the Caribbean put together (4 percent) (World
Bank, 2005) and attributes this high GDP share to the high cost of teacher
salaries. The study suggests that it may be possible to control teacher sal-
aries without compromising quality. Controlling teacher salaries does not
preclude the payment of efficiency wages to induce desired improvement
in the quality of education. This will attract better teachers.
2. New ways of financing education should be explored.
a. There should be greater participation of the private sector in the
financing of education. Historically, education has been funded by the
public sector because it is a quasi-public good. It generates social ben-
efits as well as private benefits to the recipients. But businesses today
have a special obligation to participate actively in the financing of edu-
cation, especially at the primary and secondary levels, because they
are major consumers of the education product. They should, therefore,
be encouraged to contribute a portion of their profits into a special
education fund to be administered by an independent body made up
of business representatives and people drawn from a cross-section of
the society. Such a fund would finance curriculum development, inno-
vative teaching materials, and special incentive programs to reward
teacher and student excellence.
b. The financial sector should be encouraged to provide greater

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

of the labor force could materialize within ten years. Such a change
will attract investment in new production processes, generate
greater value-added, and raise the trajectory of growth throughout
the Caribbean.
Increasing the productivity of the workforce will undoubtedly

mean higher wage rates. But as long as productivity growth outpaces
wage rate growth, the unit cost of production will fall, allowing
the export sector to be more competitive in the global marketplace.
Attempts to use price controls and exchange rate policy to keep
labor costs low are short run strategies that are not sustainable in
the long run. A long-run strategy of investment in education will
not only increase productive efficiency but improve the balance of
payments as well.
Returns to Education
In a world in which globalization is sweeping away traditional trade

preferences, investment in education is the only reliable source of
future wealth creation. Some would argue that emigration of edu-
cated and trained people to the United States and elsewhere will
prevent the region from reaping the full return on its investment.
Although this is true in the short run, it is no reason to underin-
vest in education because the short-run losses can be transformed
into long-run gains in the form of immigrant remittances and an
expatriate pool of skilled labor that can redound to the benefits of
the countries of origin. Evidence suggests that Jamaica has come
to depend heavily on the foreign exchange remitted by its nation-
als abroad for stabilizing the value of its currency and shoring up
consumption spending. Nationals abroad also own much financial
capital and expertise, some of which is available to the region if
it has the right mechanism to tap into it. It has taken Caribbean
countries a long time to recognize the importance of this resource
while China and other developing countries have been able to ben-
efit from their expatriate population above and beyond the flow of
remittances.
The late political scientist and pollster Carl Stone (1978) was pes-
simistic about the need for greater investment in education. In one
of his columns in the Gleaner, he wrote the following:
The vicious circle of joblessness (out of which education is less and less an
escape route) means that try as we may to raise educational levels, the moti-
vation to learn is going to drop even further below the existing very unsatis-
factory levels. No fancy curriculum changes or teaching methods are going
to make any difference. Youth without hope of jobs are going to be even
more uninterested than they are at the moment in either vocational or aca-
demic pursuits. Pious clichés about the great value of our human resources
mean absolutely nothing unless we provide the material motivation for
youth to learn and develop skills. What future can any country have if its
youth become demoralized by hopelessness? The only beneficiaries are
going to be the subculture s of crime, violence, idleness and indiscipline.
The growing signs of this trend are already very evident. (p. 11)
In 1978, when Stone wrote those words, Jamaica’s overall official

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

includes a critical mass of public and private professionals. In the
early stages of this transformation, the Eastern Caribbean will
itself be part of the productive capacity of other virtual states in
an evolving process in which the region becomes an agglomera-
tion of virtual states tied together by the competitiveness of their
private sectors. This path to economic integration is contrary to
the government-led efforts over the past three decades. Along this
path the private sector takes the initiative while the government
provides support.
Progress is predicated on a diminished preoccupation with
national sovereignty but not on the elimination of cultural distinc-
tions. The growth of the virtual state will enable individual coun-
tries to better accumulate resources to finance the flowering of their
culture. Indeed, it is expected that cultural exports will become an
important component in the growth of the virtual state’s export
of services. It is interesting to note that in the negotiation of the
Economic Partnership Agreement with the European Union, cul-
tural exports occupied a prominent part.
Chapter 10
Caribbean Economic
Integration: Drifting toward a
Single Market and Economy
As the Region itself has recognized, pursuing integration and,

therein, a common agenda for growth and development is crit-
ical. History has taught us that agreeing on a common agenda
across so many diverse states is challenging. So we commend
the Governments of the region for the courage to move along
this path, notwithstanding the divergence of interests at times.
Further deepening of the bonds of regionalism will require
ongoing and considerable political will and commitment, but
the benefits can be considerable.
Excerpt from a speech by Graeme Wheeler, deputy managing
director of the World Bank at the opening plenary session of
the “Conference on the Caribbean: A 2020 Vision,”
June 19, 2007, Washington DC.
A single market and economy has long been the goal of a people
whose identities have been forged by centuries of colonial-
ism and insularity. Former Barbados prime minister Owen Arthur
sees this goal of economic integration as resting
predominantly on the premise of the superior benefits that can be

gained from a process of cooperative development. And it prescribes
that perhaps the most viable course to any and to all Caribbean econ-
omies is to have our resources effectively pooled, and our approaches
to their uses efficiently coordinated and harmonized so as to widen
the scope and options for development available to any constituent
member of the community, and to invest the community with an
economic potential that is greater than the sum of its constituent

parts. (Owen Arthur, 2004, pp. 10–11)
This goal as it is currently configured is a two-step progression: first

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

and trade relations among member states in order to promote
their accelerated harmonious and balanced development;
● The sustained expansion and continuing integration of economic
activities, the benefits of which shall be equitably shared taking
into account the need to provide special opportunities for the Less
Developed Countries;
● The achievement of a greater measure of economic indepen-
dence and effectiveness of its member states, groups of states
and entities of whatever description.
The aim is to improve export competitiveness and stimulate growth

by encouraging more efficient use of resources.
In the more than three decades since CARICOM was estab-
lished, Caribbean countries have been directly affected by major
changes in the world economic environment and within the region.
CARIBBEAN ECONOMIC INTEGRATION 109
Oil prices rose sharply in the 1970s, favoring Trinidad and Tobago
(the only oil-rich CARICOM member) and punishing the rest. The
recession that followed in the industrial countries curtailed exports
from the Caribbean. And the rise of socialist governments in the
region, particularly in Jamaica and Guyana, choked off foreign
investment and further crippled economic growth. The region’s
major trading partners reacted by offering unilateral trade conces-
sions. The United States established the Caribbean Basin Initiative;
Canada created CARIBCAN; and the European Union signed the
Lomé Convention. All these programs offered preferential arrange-
ments for Caribbean exports in North American and European
markets. The 1990s saw a gradual weakening of the benefits from
these preferential arrangements, with the emergence of trade blocs
such as NAFTA and CAFTA and a new world trading system under
the World Trade Organization. All these developments , in one way
or another, diverted the attention of the CARICOM member states
away from the integration movement toward their own national
interests and delayed progress on a number of steps that would cre-
ate a single market.
One issue was the common external tariff (CET) provided for in
Article 31 of the Treaty of Chaguaramas: “Member States agree to
establish and maintain a common external tariff in respect of all
commodities imported from third countries in accordance with
a plan and schedule to be adopted immediately upon entry into
force of this Annex.” In 1992, nearly 20 years later, CARICOM
countries agreed on a five-year time table during which the CET
would be reduced in four stages from a maximum of 35 percent to
a maximum of 20 percent. Member countries are still sorting the
final stages of the implementation process. To offset lower tax rev-
enues from reduced tariff rates, many governments have imposed
a consumption tax on imports while Barbados has replaced its
consumption tax with a value-added tax. The consumption tax
serves the double purpose of generating tax revenues and protect-
ing local high-cost producers from being driven out of business by
a flood of cheap imports.
Between 1993 and 2000, nine protocols were signed by the heads
of governments to revise the Treaty of Chaguaramas to establish
the Caribbean Single Market and Economy (CSME). The expec-
tation is that when all the protocols are ratified by the respective
governments, the resulting greater mobility of labor and capital will

generate greater intraregional trade. The Economist Intelligence Unit
(1999) suggests that these protocols could also reduce the high costs
of government bureaucracy, which often account for 50 percent of
the government budget.
Fifteen members now comprise CARICOM: 11 Anglophone
Caribbean islands, Belize, Guyana, Suriname, and Haiti. Haiti was
reinstated as a full member in 1999 after a two-year suspension that
was put in place because CARICOM members were angry about
the ouster of President Aristide, who was democratically elected.
Not every one agrees that Haiti should be a member of CARICOM.
Oliver F. Clarke (2004), chairman and managing director of the
Gleaner Company, the publisher of the Gleaner, the largest circu-
lation newspaper in the Commonwealth Caribbean, questions the
inclusion of Haiti as a full member:
Why would the 15 CARICOM nations include Haiti as a full mem-

ber (1998)? Haiti has a population of over seven million people and
has the lowest per capita income of the region, and a long history
of democratic failure. The French-speaking population of Haiti
by itself (7.4 million) is greater than the population of all of the
other 14 members combined (6.4 million). What does its inclusion
in CARICOM add to the other members? It is not clear. Why did
CARICOM not just seek a trade agreement as it later did with the
Dominican Republic?
Clarke believes that the inclusion of Haiti as a member should be

reconsidered.
The other 14 members have so many problems of their own that

dealing with a civil war in a failed state, wherever geographically
located, should not be taking up so much time. It is inappropri-
ate for small countries in the Caribbean to be expected to resolve
Haiti’s problems, which are probably unsolvable, when we have so
many other issues which go unresolved. (Clarke, 2004)
There is no doubt that the integration of Haiti into CARICOM will

present problems. With by far the lowest per capita income and the
highest unemployment rate of all the CARICOM countries, Haiti is
positioned to attract direct investment in search of cheap unskilled
labor away from the rest of the CARICOM countries. Prior to the
U.S. embargo, Haiti had a thriving garment-manufacturing industry.

With the removal of the embargo, it has a chance to recover its com-
parative advantage—a development that could be beneficial for the
rest of CARICOM countries as they accelerate their shift away from
labor-intensive manufacturing toward high value-added services.
A Common Currency
In order for the single economy to operate efficiently, it must also

have a single currency. This necessarily means the transfer of
national monetary authority to a regional central bank to conduct
monetary policy. This erosion of national sovereignty has been a
major obstacle to full economic integration of a set of islands and
mainland countries scattered across the Caribbean. The question is
this: Will these countries with different output and cost structures
agree on a common monetary policy? Caribbean central banks are
not independent; they fall under the jurisdiction of the Ministry of
Finance and are, therefore, obligated to support the aim of govern-
ment policy. No government is, therefore, anxious to sacrifice its
control over monetary policy.
All the national currencies of the Caribbean are tied to the U.S.
dollar, and for good reason. The United States is the largest trading
partner of the Caribbean. Two of the most important items of U.S.-
Caribbean trade are tourism and petroleum. Petroleum is traded
internationally in U.S. dollars, and most tourists to the Caribbean
come from the United States. In these tourist-dominated countries,
the U.S. dollar is preferred to the local currency. In addition, billions
of dollars flow from the United States annually in the form of remit-
tances from immigrants, and Caribbean central banks carry large
dollar reserves. In fact it could be argued that the monetary system
in the Caribbean is unofficially dollarized. If CARICOM govern-
ments made dollarization official, it would eliminate the need and
the cost of creating a new currency. A number of Latin American
countries, Panama and Argentina among them, have successfully
dollarized and are now experiencing robust growth. At the 1984
heads of governments meeting in the Bahamas, CARICOM rejected
the concept of a single currency, preferring instead to have each
currency pegged to the U.S. dollar at different exchange rates. An
Inter-American Development Bank report on CARICOM confirms
this attitude toward a single currency: “Vulnerability arising from

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

tic borrowing levels denominated in terms of the dollar);
7. Volatile capital flows where devaluation is risky and wages
and prices are sticky so that the devaluation may have more
disadvantages;
8. A willingness to sacrifice monetary independence for its
partner’s monetary credibility;
9. A lack of policy credibility and central bank independence;
10. A political and social environment favorable to
dollarization;
11. A willingness to abandon local money as part of its national
pride and symbols;
12. A history of hyperinflation or continuously high inflation
that does not allow an exchange rate—based stabilization
policy;
13. Relatively high international reserves;
14. A fragile and crisis-prone internal banking system where a
currency crisis easily develops into a banking crisis; and
15. Imperfect and costly market information.
Although many of these features are present in the Caribbean,

the willingness to sacrifice monetary authority is fraught with
political problems because central banks in the Caribbean come
under the political supervision of the Ministry of Finance.1 In a
single economy, which is the goal of CARICOM, national govern-
ments would have to give up their control over monetary policy to
a regional central bank with no track record. But if dollarization is
an option, then the Federal Reserve Bank would eliminate the need
for a regional central bank. This option, Wessels argues, has hidden
dangers: “Dollarization can be dangerous because there is not yet
sufficient empirical and historical evidence to support it. Many of
the so-called benefits are uncertain and may not follow dollariza-
tion” (Wessels, 2003, p. 9).
Dollarization is not a new phenomenon as Kurt Schuler (2007)
points out. There have been several episodes of dollarization around
the world dating back to the eighteenth century when Indonesia was
dollarized from 1794 to 1807. During the period 1938 to 1951, which
covers World War II, most of the British colonies of the eastern
Caribbean (Anguilla, Antigua and Barbuda, Dominica, Grenada,
St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines)
were dollarized. In Latin America, Panama has had the longest his-
tory of dollarization, from 1903 to the present. Juan Luis Moreno-
Villalaz (2005) argues that Panama’s “unified currency system
eliminates foreign exchange risk, currency mismatches, and spec-
ulative attacks so common in other countries with central banks
and ‘sovereign’ money. The absence of ‘policy decisions’ regarding
monetary or exchange rate affairs reduces risk because less informa-
tion is needed by outside investors” (p. 128). The success of Panama
is attributed not only to full dollarization but also to full integra-
tion of the domestic banking system with the international finan-
cial system. “Financial integration equalizes Panama’s and world
interest rates and implies that capital inflows and outflows arising
from banks’ portfolio adjustments are a crucial element in the mac-
roeconomic adjustment process. . . . The system is successful in the
microeconomic sense, with large inflows of financial resources, low
interest rates, and credit balances of more than 100 percent of gross
domestic product” (Moreno-Villalaz, p. 128).
Delisle Worrell (1992) argues for a fixed exchange rate regime for
CARICOM with a preference for a quasi-currency board arrange-
ment rather than full dollarization: “A quasi-currency board, which
ensures stability of the exchange rate by maintaining a supply of
foreign exchange reserves for its defense, is the only regimen that
has produced a sustainable fixed exchange rate in the CARICOM
region. It has advantages over full dollarization: some seigniorage
accrues to the domestic monetary, the monetary authority may act
as a lender of last resort for domestic banks, and a commitment to a
fixed exchange rate lends credibility to appropriate fiscal policies”
(p. 30). Worrell’s argument rests largely on the experience of insta-
bility in such countries as Jamaica and the Dominican Republic
that tried to conduct independent monetary policy.
Baele et al. (2004) offer the following definition of financial
integration:
The market for a given set of financial instruments and/or services

is fully integrated if all potential market participants with the same
relevant characteristics
1. face a single set of rules when they decide to deal with
those financial instruments and/or services;
2. have equal access to the above-mentioned set of finan-

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

Trinidad and Tobago, 1991–1996
Year Jamaica Trinidad
1991 25.6 7.7

1992 34.4 9.3
1993 28.9 9.5
1994 43.0 10.0
1995 27.9 8.4
1996 28.8 11.6
Source: IMF Staff Country Reports

To the extent that the banking system in CARICOM countries

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

floating. Also, there would need to be harmonized fiscal policies to
ensure the success of regional monetary policy” (p. 5).
Intraregional Capital Flows
A functioning regional stock market will direct capital into areas

where there is a shortage of capital. Even in the absence of a func-
tioning stock market, capital tends to move from countries with a
trade surplus to those with trade deficits. This has made petroleum-
rich Trinidad and Tobago the principal intra-Caribbean supplier of
capital, as is manifested in the expansion of Trinidad businesses in
other parts of the region.
In the first half of the first decade of the twenty-first century,
Trinidad registered an expanding surplus on its current account,
from US$449 million in 2001 to US$3,964 million in 2005. This
was the result of the more than doubling of the value of petroleum
and petroleum-related exports over the period. Enid Bissember
(2004) describes the flow of capital as erratic, with the major share
going to Jamaica and Barbados and only a trickle to the rest of the
Caribbean. From 1999 to 2003, US$171 million went to Barbados,
US$95 million to Jamaica, and US$23 million to the rest. The lead-
ing Trinidad investors include such large Trinidad firms as Republic
Bank of Trinidad and Tobago, the Republic Bank Limited, and
conglomerates such as Neal and Massey, ANSA McAL, and C.L.
Financial. Among Trinidad’s investments in Jamaica is the acquisi-
tion of the Caribbean Cement Company,4 which is the sole supplier
of cement to that country. Other investments have gone into firms
in the tourism and banking and finance sectors.
Although a functioning regional stock exchange and a common
currency would greatly enhance the flow of intraregional capital,
the reality is that this flow satisfies only a fraction of the Caribbean
demand for capital. Barbados alone had a total capital inflow of
US$1.2 billion over the period 1999–2003, an amount that was equiv-
alent to the capital inflow into Jamaica for only two years, 1999 and
2000. The point is that extraregional borrowing will continue to be
essential for the Caribbean long after the Single Market and Economy
becomes a reality. The same is true of extraregional trade.
Extraregional Trade
The fact is that for these small economies with a narrow export base,
the demand for intraregional imports is a function of their earn-
ings from extraregional trade (Palmer and Elliott, 2003). Table 10.2
shows that only a relatively small share of leading exports is sold
within CARICOM.
In a similar way, external trade in oil and gas enhances Trinidad’s
ability to supply capital to the rest of the region. In general, the
foreign policy of the region is driven by the twofold goal of open-
ing markets outside of the region and removing barriers within the
region. The pace at which the latter occurs is in no small way influ-
enced by the erosion of preferential access to extraregional mar-
kets for traditional exports. This makes the intraregional market a
complement to rather than a substitute for the extraregional mar-
ket. With the shift of the Caribbean economies toward tourism and
financial services, the extraregional market becomes even more
important relative to the regional market because the demand for
these services is largely external.
The importance of the extraregional market for CAROCOM
exports is underscored by the share of leading exports sold within
the group. In 1999, this share ranged from 2.43 percent for Jamaica
to 32.66 percent for Trinidad and Tobago (Palmer and Elliot, 2003).
Success in extraregional trade in a globalized world with no prefer-
ential arrangements requires CARICOM exporters to be compet-
itive, a feat made more difficult for manufacturing firms because
their relatively small size does not allow them to benefit from econ-
omies of scale. Nevertheless, they can still achieve efficiencies if
Table 10.2 Share of Leading Exports

Sold within CARICOM, 1999
Dominica 17.18
Barbados 22.32
Trinidad & Tobago 32.66
St. Lucia 0.54
St. Kitts & Nevis 2.57
Grenada 22.29
Jamaica 2.43
Source: Information System of External Trade

DATAINTAL
they can keep labor and energy costs down. In this regard, firms
in oil-rich Trinidad benefit from locally available plentiful cheap
energy and are more likely to be energy intensive. Thus with the
combination of low-cost energy and an ample supply of capital,
Trinidad and Tobago is positioned to be a powerful force within an
evolving Caribbean economy.
With a common external tariff, Trinidad’s manufacturing
firms are poised to dominate the intra-Caribbean market. This is
a different picture from the promising one painted of manufactur-
ing in Jamaica by Mahmood Ali Ayub (1981) in the 1970s, when
it was a diversified sector employing 11 percent of the labor force
and contributing 18 percent of GDP. Together the oil crisis and the
socialist policies of the late 1970s choked off the inflow of foreign
capital and frustrated the promise of Jamaican manufacturing. The
point is that external shocks have a way of changing the course of
Caribbean development, often leaving government policy to react.
These are small countries but the process of their reaction is anal-
ogous to turning a large ocean liner around. It is not nimble.
For over 30 years, Caribbean countries have been reacting to the
need for a single market with only modest progress on the essentials
for such a market. Part of the problem is that reaction to external
shocks has become increasingly complicated, requiring a cadre of
skilled public servants. This is particularly acute when negotiating
with other countries that are represented by teams of highly skilled
negotiators. The problem is aggravated by the fact that an increas-
ing share of the brightest and the best talents are being attracted
into higher-paying jobs in the private sector, especially into finance
rather than into government. This is aggravated by the fact that
large numbers of highly educated people have emigrated. As a con-
sequence it has taken Caribbean governments a longer time to deal
with complicated international issues.
One solution is to engage the talent in the private sector as mem-
bers of negotiating teams the way the Americans and Europeans
do. Caribbean governments have tended to negotiate trade deals
with thin teams of negotiators, many of whom have no business
experience. This problem reflects the peculiarities of Caribbean
capitalism and its relationship with the state.
Caribbean capitalism is characterized by the control of a small
group of businessmen, some of them acting as surrogates for
foreign firms. Quite often they are ideologically to the right. And
when a left of center government is in power, as was the case in
Jamaica in the 1970s, the divide between the private sector and
the state was apparent. In some instances, the relationship was
hostile as the masses were encouraged to perceive businessmen as
exploiters. As a result of the threatening atmosphere that devel-
oped, many businessmen with their capital in hand sought ref-
uge in Miami. The flight of capital to Miami and elsewhere later
contributed to the stagnation of the Jamaican economy. In the
Caribbean, the Afro-Caribbean population has always regarded
political power as its birthright because their ancestors paid their
dues as slaves in the sugarcane fields.5 And throughout the short
history of the political independence of their countries, the Afro-
Caribbean population has held political power with the responsi-
bility for negotiating trade concessions on behalf of the minority
with economic power.
It can be reasonably argued that globalization is not a new phe-
nomenon in the Commonwealth Caribbean. In fact, the system of
colonialism had a global structure that pulled raw materials from
the colonies to be manufactured into finished goods at the impe-
rial center under preferential arrangements. In this setting the
state was dominant. Modern globalization has given preeminence
to the role of the productive sector by emphasizing competitive-
ness and recasting the state into a supporting role. In this role, the
Caribbean state needed to develop a new institution to deal with
the growing number of actual and potential trade agreements that
had to be negotiated. After some faltering steps, the Caribbean
Regional Negotiating Machinery (CRNM) was created (Anthony
Payne and Paul Sutton, “Repositioning the Caribbean within
Globalization,” Caribbean Paper No.1, Centre for Caribbean
Governance Innovation, Waterloo, Ontario, Canada). But how
useful is this entity in securing trade agreements in the era of
globalization? Alan Beattie (2007) writes that “Globalization owes
much more to the efforts of the private sector than to increasingly
flimsy accords reached between ministers” (p. 11). To illustrate
this, Beattie uses the example of the proposal made at the 2007
Asia-Pacific Economic Cooperation (APEC) meeting in Australia
for a trade agreement of the Asia-Pacific countries “that would
stretch most of the way around the world from St. Petersburg
to New Foundland.” Beattie quotes Mark Johnson, chairman of

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

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

toward establishing the CET has been slowed by cost differentials
that put the OECS countries at a competitive disadvantage.
The Architecture of Global Trade: Multinational and

Regional Arrangements
The World Trade Organization (WTO) was established on January 1,

1995 to administer the trading regime arising out of the eight-year
Uruguay Round of Multinational Trade Negotiations that concluded
in 1994. Its main objective is to facilitate world trade by removing
tariff and nontariff barriers to trade and to restrain the use of sub-
sidies. The three guiding principles of the trade agreements are
nondiscrimination, reciprocity, and transparency. Exemptions to
nondiscrimination and reciprocity are embodied in Article XXIV
of the GATT, Article V of the GATS, and the Enabling Clause that
grants special treatment to trade arrangements among develop-
ing countries and between developed and developing countries.
Member countries of the WTO are mandated to abide by its rules.
Over the preceding three decades, there has been an explosion
of regional trade arrangements (RTAs) that complement the work
of the WTO. As trade barriers are reduced within each regional
group, the WTO seeks to eliminate trade barriers between groups
and between countries, ultimately leading to a world without bor-
ders. RTAs must conform with the nondiscriminatory and reci-
procity principles of the WTO except when the RTA is reported
under the Enabling Clause. Up to 1997, totally 14 RTAs were noti-
fied under this clause. The Caribbean Community (CARICOM),
although an RTA of developing countries, has not reported under
the Enabling Clause. Instead, it has been reporting under Article
XXIV that provides for arrangements between developed countries
and between developed and developing countries. This is because
CARICOM was founded by the Treaty of Chaguaramas in 1973
before the 1979 Enabling Clause came into existence. This means
that CARICOM is required to meet a higher standard than some
of the most advanced developing countries that are members of
MERCOSUR and the ASEAN Free Trade Area.
Trade preferences granted to CARICOM countries under the

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

rounds within which to do so” (Caribbean Trade and Investment
Report, 2000, p. 169).
Globalization and Caribbean Labor
Globalization is eliminating preferential trade arrangements,

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

remains a goal.
From the perspective of developed countries, globalization has
led to the exporting of jobs to developing countries. But labor
unions in the developed countries see it as having a negative impact
on their membership. As a result, they take the position that devel-
oped country labor standards should be part of trade agreements.
Although the humanitarian aspect of this is praiseworthy, the effect
could raise the cost of labor in developing countries and reduce
local employment as well as the cost advantage that makes out-
sourcing profitable.
Chapter 11
Caribbean External
Economic Relations
There is an over-riding need for all of us to recognize the very

special circumstances of small developing states and economies,
including island-based ones, such as those in the Caribbean.
This recognition ought always to command the attention of
policy-makers within the region and internationally. It is a con-
sideration of critical importance, especially on matters of trade
and development financing.
Excerpt from a speech by the Honorable Dr. Ralph E. Gonsalves,
prime minister of St. Vincent and the Grenadines and chair-
man of the Caribbean Community at the “Conference on the
Caribbean: A 2020 Vision,” Washington DC, June 19, 2007.
Preferential Treatment
Trade between the developed countries and the Caribbean must

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

the Commonwealth Caribbean. This group preferential treatment
eliminates competition among the beneficiaries and reduces their
sense of marginalization.
More recently, Venezuela has come into the picture with its con-
cessionary oil sales and oil-for-banana barter arrangements that
have attracted members of CARICOM suffering from high oil
prices and declining banana export markets. As of 2008, Dominica
is the only CARICOM country to sign on to the Bolivarian
Alternative for the Americas (ALBA), a Venezuelan alliance with
Bolivia, Nicaragua, and Cuba.
CBERA, CARIBCAN, and the Cotonou Agreement represent
the foundation of Caribbean nonreciprocal trade agreements with
North America and the European Union. In 2000, the EU signed
the Cotonou Agreement with the ACP countries in the capital of
Benin, replacing the Lomé Convention that lasted 15 years and
three renewals through Lomé IV. The Cotonou Agreement was
a watershed agreement because it was a stepping stone to reci-
procity. It provided for the negotiation of Economic Partnership
Agreements (EPA) with a reciprocity feature that took effect at the
start of 2008 and satisfied World Trade Organization (WTO) rules
at the same time. In order to allow for regional differences, the
79-member ACP group divided itself into six subgroups,1 of which
the Caribbean Forum (CARIFORUM) is one. CARIFORUM
includes the 15 CARICOM states and the Dominican Republic.
Other developing countries outside of these groups would also
have access to similar partnership agreements, thereby removing
the special status granted to the member states of the ACP group.
Because CBERA and CARIBCAN offer nonreciprocity trade
arrangements, the United States and Canada had to request and
receive a waiver from the WTO. Upon expiration of the first waiver
in 1995, the United States submitted a request to the WTO Council
for Trade in Goods, dated September 15, 2003, for a second waiver.
In the language of the request, “The United States seeks to con-
tinue the centerpiece of the CBI: non-reciprocal, duty-free access
for imports into the territory of the United States from eligible
Caribbean countries and territories” (WTO, March 2003a, p. 3).
The Canadian request for a WTO waiver follows along sim-
ilar lines. CARIBCAN is the result of a commitment by Canada
CARIBBEAN EXTERNAL ECONOMIC RELATIONS 129
at the Commonwealth Heads of Government meeting in Nassau

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

the economic and trade relations between the Parties through:
a. The promotion and expansion of the sale of goods orig-
inating in CARICOM through, inter alia, one-way duty-
free access to the Venezuelan market;
b. The stimulation of investments aimed at taking advantage

of the markets of the Parties and strengthening their com-
petitiveness in world trade;
c. The facilitation of the creation and operation of regional
joint ventures; and
d. The encouragement of mechanisms for the promotion
and protection of investments by nationals of the Parties.
In table 11.1, minerals, fuels, and lubricants (mostly from

Trinidad and Tobago) represent the dominant category of
CARICOM exports to the United States and the European Union,
while inedible crude materials (mostly bauxite and alumina from
Jamaica and Guyana) dominate exports to Canada. Manufactured
products (mostly apparel) account for only a small share of the
total. The skewness in the distribution of exports toward min-
eral fuels and crude materials reflects American, Canadian, and
European investment in minerals, primarily oil in Trinidad and
Tobago and bauxite and alumina in Jamaica and Guyana.
On the import side, the distribution is different. The domi-
nant categories are manufactured products of all kinds, food, and
machinery and transportation equipment.
Table 11.1 CARICOM Domestic Exports to the United States, the European
Union, and Canada by SITC Sections, 2006
SITC Sections United European Canada

States Union
All Sections US$ 8,859,448 2,037,357 588,338

% of Total % of Total % of Total
Food and Live Animals Chiefly for Food 2.1 19.6 2.9
Beverages and Tobacco 0.7 2.0 4.4
Crude Materials, Inedible, Except Fuels 2.2 17.8 51.1
Mineral Fuels, Lubricants and Related Materials 75.5 40.4 0.6
Animal and Vegetable Oils, Fats, and Waxes 0.0 0.01 0.0
Chemicals and Related Products, Not 16.9 17.7 8.6
Elsewhere Specified
Manufactured Goods Classified Chiefly 1.4 1.6 18.7
by Material
Machinery and Transport Equipment 0.6 0.25 0.06
Miscellaneous Manufactured Articles 0.5 0.4 0.09
Commodities and Transactions Not 0.01 0.02 13.5
Classified Elsewhere
Source: Based on data from Caricomstats.org

The Influence of the United States
Just about every facet of the Caribbean economy is influenced by

the U.S. economy; it is the region’s largest trading partner. Much
of this influence flows through capital, trade, communications,
and migration. It also flows through the exchange rate. The cur-
rencies of Caribbean countries are pegged to the U.S. dollar, most
with a fixed peg and others with a soft peg that allows for varia-
tions in exchange rates. The chief benefit from this relationship
is monetary stability. But as the value of the U.S. dollar falls in
relation to world currencies, another benefit is the improvement
of the competitiveness of Caribbean exports to non-dollar coun-
tries. As the U.S. dollar depreciates against world currencies, so
does the Jamaican dollar against the U.S. dollar. Between 1999 and
2005, the Jamaican dollar depreciated against the U.S. dollar, the
pound sterling, and the euro by 59, 79, and 86 percent respectively
(Council of Economic Advisors, 2006; Bankofjamaica.org). This
means that there will be a significant shift in the source of imports
from the United Kingdom and the European Union to the United
States, further tying Jamaica to the U.S. economy.
For CARICOM countries, this shift appears to have been in
progress for sometime. Between the first quarter of 1996 and the
first quarter of 2007, U.S. exports3 to CARICOM doubled, from
US$1,031.9 million to US$2,159 million. But U.S. imports from
CARICOM grew even faster, transforming the U.S. trade surplus
with the region into a deficit, starting around the fourth quar-
ter of 2002. This was due more to an increase in the U.S. demand
for petroleum from Trinidad and Tobago than to changes in the
exchange rate since petroleum is traded in U.S. dollars. From the
first quarter of 1996 to the first quarter of 2007, 80 percent of U.S.
imports from CARICOM came from Trinidad and Tobago. With its
trade surplus with the United States reaching 1 trillion U.S. dollars
by the first quarter of 2007, Trinidad and Tobago attained a pow-
erful position as a supplier of capital to the rest of the CARICOM.
In contrast, the depreciation of the Jamaican dollar worsened the
country’s trade balance with the United States.
Trinidad and Tobago is among the major recipients of direct
investment from the United States, most of which goes into the
production of petroleum and natural gas that are exported to the
United States. Table 11.2 shows that while the trend for U.S. direct
investment in the major recipient countries has been upwards, it
appears to have moved in the opposite direction in Jamaica since
2004.4 The decline of U.S. investment in Jamaica in 2005 and 2006
is reflected in the number of affiliates, assets, and sales and in
the sharp rise in net income, indicating that assets were sold. A
similar picture emerged in Trinidad and Tobago when the num-
ber of affiliates declined sharply in 2004 while net income rose
sharply. It is noteworthy that in both cases the implied sale of assets
occurred a year after a sharp fall in net income (U.S. Department
of Commerce, Bureau of Economic Analysis).
The relationship between net income and compensation to
employees reflects the different character of U.S. investment in the
two countries. The high ratio of compensation to employees to net
income in Jamaica is the opposite of the low ratio in Trinidad and
Tobago. The former reflects predominantly labor-intensive (tourism
and manufacturing) operations that are less profitable while the latter
reflects capital intensive (oil and gas) operations that are profitable.
As the most important trading partner of the Caribbean, the
United States finds itself in a win-win relationship. U.S. investment
in the Caribbean generates imports of U.S. goods and services as
Table 11.2 Net Inflows of U.S. Foreign Direct Investment* in the Caribbean,
2002–2006 (US$ millions)
2002 2003 2004 2005 2006
Antigua & Barbuda 93 30 26 22 17

Bahamas 7,645 8,643 11,985 15,659 26,130
Barbados 1,817 984 3,146 3,865 4,756
Belize 52 64 96 102 95
Grenada 7 7 7 7 7
Guyana 157 165 169 183 211
Haiti 63 74 84 (D) 154
Jamaica 3,097 3,406 3,586 1,006 884
St. Kitts & Nevis –1 –1 –1 2 (D)
St. Lucia 17 (D) (D) (D) 117
St. Vincent & The Grenadines 6 6 6 6 (D)
Trinidad & Tobago 2,326 2,392 2,450 2,833 3,848
(D) Suppressed to avoid disclosure of data of individual companies

* Direct investment position on a historical-cost basis
Source: Bureau of Economic Analysis, U.S. Department of Commerce
well as a flow of profits to U.S. investors. U.S. investment in the

Caribbean often dictates the direction of Caribbean trade. For exam-
ple, investment in Trinidad and Tobago’s oil and gas triggers a flow
of energy exports to the United States. The same is true of invest-
ment in textile and wearing apparel and tourism in other parts of
the Caribbean. In 2004, for the Circum-Caribbean, 52 percent of
all tourists came from the United States. For CARICOM countries,
this share ranged from 87.2 percent for the Bahamas to 21.9 percent
for Dominica. For Jamaica, it was 70 percent. It stands to reason that
tourism, mining (bauxite), and manufacturing (wearing apparel)
industries have been the leading recipients of U.S. foreign direct
investment in Jamaica. As a result they are likely to channel the first
impact of fluctuations in the U.S. economy.
When the source of investment guarantees the market for the
output, it eliminates the need for marketing skills in the produc-
ing countries. They are essentially transformed by foreign direct
investment into export platforms. The platform model encouraged
by the CBERA is dependent on semi-finished materials from the
United States with value-added done by an army of low-wage local
workers. The exports of the producing countries are then inflated
by the finished value of the assembled products.
Least squares estimates of the income elasticity of U.S. general
imports from CARICOM countries (USMC), Jamaica (USMJ),
and Trinidad and Tobago (USMTT) for 46 quarters from 1996:1 to
2007:2 are shown below (see data in table A.4).
logUSMC 5 221.463 1 3.08 logUSGDP

(216.20) (21.54)
Adj. R 2 5 0.91
logUSMTT 5 236.61 1 4.66 logUSGDP
(218.74) (22.07)
Adj. R 2 5 0.91
logUSMJ 5 15.6821.16 logUSGDP
(7.28) (25.00)
Adj. R 2 5 0.34
It is clear from these results that the response of U.S imports from
Trinidad and Tobago and CARICOM as a whole to changes in
USGDP has been highly significant and positive. In contrast, the

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

downsides of SDT [special and differential treatment] proved
quite prescient—benefits have been limited, skewed in their distri-
bution, and arguably obtained at high cost to the trading system,
donor country consumers and many of the purported beneficia-
ries. Research has demonstrated that preferences can at best play a
marginal role to assist developing countries—what determines and
drives performance is not what others do, but what countries do for
themselves. (p. 37)
Since the CBERA was enacted in 1983, and following the failure
of the proposed Free Trade Area of the Americas, the United States
has entered into numerous bilateral trade agreements with indi-
vidual and groups of countries in the region. NAFTA was signed
in 1993. Because it diverted trade away from CBERA countries,
the United States amended CBERA in 2000 with the Caribbean
Basin Trade Partnership Act (CBTPA) to provide NAFTA parity
to countries designated by the U.S. trade representative to be eli-
gible. These include Costa Rica, Dominican Republic, El Salvador,
Honduras, Nicaragua, Panama, and five CARICOM countries:
Belize, Guyana, Haiti, Jamaica, and Trinidad and Tobago. On
August 2, 2005, President Bush signed Public Law 109–053, known
as the Central American Free Trade Agreement (DR-CAFTA),
which includes the Dominican Republic; negotiations are under-
way with Colombia for a similar agreement. The CARICOM coun-
tries would like a bilateral agreement of their own.
While the garment assembly in Jamaica has declined due to
higher labor cost, it has grown in Haiti5 where per capita income
is the lowest in the Western Hemisphere. This growth has been
stimulated by the Hemispheric Opportunity through Partnership
Encouragement (HOPE) Act of 2006 that grants preferential access

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

them drug trafficking, Internet gambling and money laundering,
security requirements, and the deportation of immigrants with

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

is a large movement of other people traveling from the Caribbean
to the United States. Principal among them are Caribbean tour-

ists, students, and business people. These groups bring with them
a flow of foreign exchange to the United States. It is estimated that
Caribbean visitors to the United States from CARICOM and non-
CARICOM countries spent an average of US$1.5 billion a year over
the period 1999–2005 (U.S. Department of Commerce: http://tinet.
ita.doc.gov/view/f-2005-151-001/index.html).
In 2006, among the 583,959 foreign students in the United
States, students from the CARICOM countries represented the
seventh largest group. If the average cost of education per student
is US$10,000 a year, allowing for scholarships and financial assis-
tance, then the total annual expenditure for 15,811 students would
be US$158 million. Although this may represent a small share of
the total student spending in the United States, the fact is that these
are large outlays of foreign exchange by small countries with per-
sistent deficits in their balance of trade. Over the years, declining
Caribbean exchange rates have reduced the number of students
studying in the United States. And since 9/11, more stringent visa
requirements have kept the numbers down. Among CARICOM
countries, by far the largest contingents of foreign students in the
United States have come from Jamaica, Trinidad and Tobago, and
The Bahamas.
Foreign students are an important channel through which the
knowledge of management and production technology is trans-
ferred when the students return home. But even when they do not
return home, they become a part of an expatriate pool of skilled
workers that can be tapped by their countries of origin. Ideally, the
programs of study chosen by students should match the demand for
skills in their home countries. But this is often not the case because
students’ view of their job prospects may differ from the needs of
their countries. Foreign students who go to the United States to
pursue advanced science degrees often don’t return because in their
home countries the opportunities for pursuing a career in their
field do not exist even though there is a need for local research and
development. American immigration policy encourages the reten-
tion of such skilled workers in the United States. Consequently
many are employed by American corporations.
While studying in the United States facilitates the transfer of
the knowledge of technological processes, it usually takes foreign
Table 11.3 Distribution of Patents and Trademarks in the Caribbean: Jamaica,

Trinidad and Tobago, Barbados, and Haiti
Residents Non-residents Total
Jamaica
Patents Granted, 2002 3 203 206
Trademarks Registered, 2002 287 1208 1495
Trinidad & Tobago
Barbados
Haiti
Source: http://stat.wto.org/CountryProfile
investment to transfer the process itself.6 But the transfer of tech-

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

that country and to support the pro-free enterprise government of
Edward Seaga in Jamaica. But after the collapse of the Soviet Union
in 1991, American aid began to fall sharply to the point where the
Caribbean began to feel ignored. Caribbean socialist political lead-
ers had lost their bargaining chip because they could no longer play
off the Soviet Union against the Americans. By then the “trade,
not aid” thrust of U.S. foreign policy toward the Caribbean had
taken hold, the major beneficiaries of this approach being the for-
eign investors and their local business partners. Economic growth
in the region did not reflect any significant forward thrust, in part
because many Caribbean countries were burdened by debt.
The Emergence of Reciprocity
When globalization eliminates unilateral preferential arrange-

ments, these small countries are forced to become competitive in
order to survive.7 Some see the elimination of preferential treat-
ment as replacing social peace with social and political upheaval
(Byron, 2000). The consequences are even more troubling because
of the uncertainty of the Caribbean’s place in the governance struc-
tures of the institutions of globalization. The urgency of this con-
cern is expressed by Byron:
Within the WTO, for example, these countries have been reduced
to waging guerilla war on the periphery of consultation and deci-
sion-making processes between the major actors, the EU and the
US. This comes at a time when it is clearly evident that their econ-
omies and societies still require an enabling external environment,
generated by appropriate international structures and policies, in
order to survive. This message therefore has to be preached exhaus-
tively by accomplished diplomats using appropriate coalitions and
alliances, in all multilateral fora as well as in bilateral relations.
(Byron, 2000, p. 139)
Gonsalves suggests that there is a tendency to see the threats rather

than the opportunities in this process, a tendency that he believes “is
linked to the fact that these economies depended on above-average
protection (relative to other developing countries) in the markets
of developed countries under the CBI, Lomé and CARIBCAN”
(Gonsalves, 2002, p. 300). The opportunities, in Gonsalves’ perspec-

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

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

challenge. According to the CRNM, the agreement provides for the
liberal entry of CARIFORUM business and entertainment services
into the EU. This means that CARIFORUM professionals will be
able to enter the EU on a short-term basis and entertainers, artists,
and creative people will have unprecedented access to EU markets.
The CRNM underscores the asymmetry in the degree of reciproc-
ity: the EU opened more than 90 percent of its service sectors ver-
sus the 65 to 75 percent for the CARIFORUM. For the Dominican
Republic, the share is more than 90 percent (www.stabroeknews.
com/index.pl/article?id=56538478). The rationale for the liberal-
ized CARIFORUM sectors rests upon their potential as conduits
through which investment and technology will flow to stimulate
development.
The disparate government reactions to these provisions in part
reflect differences in the potentials of the countries to exploit them.
Because the overwhelming emphasis of the agreement is on ser-
vices, Bruce Golding’s positive reaction suggests that Jamaica’s pri-
vate sector is well positioned to benefit from new opportunities in
this area. But critics are suggesting that a principle has been vio-
lated. According to a report by the Inter-American Development
Bank, “CARICOM countries have agreed to an approach that
emphasizes reciprocity by CARICOM’s MDCs (more developed
countries) and non-reciprocity for the LDCs (less developed coun-
tries). The principle has been put into practice in trade agreements
with Colombia, the Dominican Republic and Cuba” (IDB-INTAL,
CARICOM Report No.1, 2002, p. 50). Guyana is one of the MDCs,
but in the past two decades its economic growth has stagnated.
The structure of the Guyana economy is still state-dominated and
heavily weighted toward primary production—agriculture and
mining. As a result, it may not be able to respond readily to the
incentives offered by the liberalization of the EU market for ser-
vices. Two scenarios could emerge: Guyana may become a victim of
the asymmetry as EU investment and technology flow in to domi-
nate its service sector, leaving the primary sector neglected; or, the
modernization of the service sector may spill over into the primary
sector to make it more efficient.
Chapter 12
Epilogue
T he external economic environment is changing faster than the

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

of land for agriculture, it embraces its use for tourism and for the
extraction of minerals.
External events include the rise of China and other developing
countries that produce a vast supply of goods with large popula-
tions of low-cost labor against which Caribbean countries will not
be able to compete. However, by virtue of their proximity to the
North American market, CARICOM countries could benefit by
becoming channels for sending duty-free goods to that market,
rules of product origin permitting. They could also benefit if an
increase in the Asian demand for agricultural products revives
their flagging agricultural sector.
The continued rise in the price of oil will shift the center of eco-
nomic gravity in the Caribbean. Trinidad and Tobago’s trade surplus
will continue to grow, enhancing its position as the financial cen-
ter of the region and as a major supplier of capital. This new power
may encourage Trinidad and Tobago to take action independent of
CARICOM, slowing the process toward the Caribbean Single Market
and Economy. The rise in the price of oil will also focus the attention
of the non-oil-producing countries on the need for exploring renew-
able energy sources such as solar and wind power. Successful explo-
ration of alternative energy sources would alter the composition of
trade with developed countries, a trade that currently includes trans-
portation and other equipment hugely dependent on imported oil.
Already Brazil, which is at the forefront of alternative energy explo-
ration, is beginning to have an impact on Caribbean trade through
its investment in ethanol production in the region.
Whatever the configuration of the external alignment of the
CARICOM economies in the years ahead, it will require constant
reaction to changes in external events. For one thing, business
cycles in the developed countries will continue to test the capacity
of Caribbean economies to maintain their balance. As these econ-
omies evolve into the production of services, the external demand
for which is relatively elastic, economic fluctuations abroad will be
felt more sharply at home. Prudence suggests that all Caribbean
countries should learn the lesson the oil producers learned in an
earlier decade: control consumption spending when times are good
and channel the savings into a stabilization fund as a buffer against
future crises.
EPILOGUE 147
A future crisis might bring with it the declining value of the

international currency to which local currencies are pegged. In this
situation, the crisis is readily transmitted to the local economy in
the form of higher prices for imports from countries with stronger
currencies. But it will also have the effect of shifting trade from
countries with higher-valued currencies toward those with lower-
valued currencies, thereby creating a greater concentration of trade.
In other words, the pegged relationship holds countries with pegged
currencies hostage to the major currency. Yet Caribbean countries
seem to agree that the stability benefits of a pegged currency offset
the cost of wide exchange rate fluctuations.
As external events accelerate the drive toward a Caribbean Single
Market and Economy, they grind away at the independence of the
nation state, despite the insistence of some Caribbean countries that
regional arrangements should not impinge on national sovereignty.
The fragility of these small nation states is symptomatically man-
ifest in their need for trade concessions and other forms of assis-
tance from the developed countries. Their survival has depended
on the goodwill of their benefactors as well on their own indefati-
gable quest for these concessions.
Population
One important factor that will affect the long-run development of

the Caribbean is its population. CARICOM has a young popula-
tion. Table 12.1 shows that in 2000, the median age was 25.7 com-
pared to 35.3 in the United States. Nearly half (48.8 percent) of the
CARICOM population was under 25 compared to 35.4 percent
in the United States. With 30 percent of the population under 15,
CARICOM countries will have to allocate a large share of their bud-
getary resources to education. By as early as 2010, those under 15
will expand the ranks of those under 25, forcing governments to
allocate a disproportionate share of resources to law enforcement to
manage unrest caused by possible unemployment. The rise in crime
throughout the region, particularly in Jamaica, is in part a reflection
of this problem.
The aging American household may provide an escape valve
for the unemployed in CARICOM if they have certain skills.
Table 12.1 Population Profiles of CARICOM and the United States, 2000
CARICOM United States
Total (millions) 6.468 251.421

Percent Under 15 30.6 21.5
Percent Under 25 48.8 35.4
Percent 15–64 62.2 66.1
Percent over 64 6.9 12.4
Median (years) 25.7 35.3
Source: Caricomstats.org; U.S. Bureau of the Census
Already large numbers of nurses and other medical personnel have

migrated to the United States to fill positions in hospitals across
the country. This is not the first time that changes in the American
household have induced immigration from the Caribbean and
other developing countries. In the 1960s when large numbers
of American women moved into the labor force, the movement
created a demand for caregivers in the home. As a result, a large
number of women from the Anglophone Caribbean migrated to
work as domestics. Today as the American household ages, it has
created an increasing demand for health care. In the face of this
demand, the supply of American-born health care workers has
lagged, creating a gap that is being filled by health care profes-
sionals from the Caribbean, the Philippines, and Africa. This sug-
gests that there is a symbiotic relationship between the condition
of the American household and the migration of caregivers from
the Caribbean and other developing countries.
Since the age disparity between the Caribbean and the United
States is likely to last for a long time, the pull force of migra-
tion will remain strong. This means that the familiar problem of
migration reducing the returns on Caribbean investment in edu-
cation will persist. As a countermeasure to the outflow of skills,
the Caribbean will have to expand its effort to attract foreign cap-
ital into employment-creating industries in order to reduce the
push force of high unemployment rates and the wide disparity
in income distribution. Success will depend on the removal of
those barriers that place promising Caribbean industries in the
rain shadow of the prevailing flow of foreign capital. Because the
volatile mix of income inequality and idle young people offers
the potential for social disruption, it becomes a barrier to capital
EPILOGUE 149
inflow. In Jamaica, this barrier is evident in soaring crime rates.

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

Regional leaders lament the fact that although the contribution of
the Caribbean to this change is minimal, it stands to bear the maxi-

mum impact. Maximum in the sense that tourism, it’s most impor-
tant industry, will take a direct hit as rising sea levels erode beeches
and frequent hurricanes destroy vegetation. The process may be
gradual but the evidence is visible on the east and south coasts of
countries in the path of western- and northern-moving hurricanes.
It is not clear what changes in vegetation might occur; what is clear
is that as shorelines become inundated, the islands of the archipel-
ago will become smaller.
But there is promise in this future. In fact, the Caribbean is
well positioned to exploit renewable energy sources such as solar
and wind power. The potential is great, but the level of invest-
ment in these areas remains small. This will change as the price
of oil rises in response to the unquenchable appetite for energy in
the fast-growing economies of China and India. For the non-oil-
producing Caribbean countries, alternative energy sources can
reduce their dependence on Venezuela and Trinidad and Tobago
and restore some balance in the distribution of economic power in
the region. It might even reduce their cost of production, enabling
them to better manage the competitive implications of reciproc-
ity. The infrastructure for alternative energy will be the equiva-
lent of roads and railroads of the past, but its location will not be
simple in an age of heightened sensitivity about the environment
and in countries where lush vegetation and beautiful scenery are
major tourist assets. In the end, the benefits must be demonstra-
bly greater than the costs.
Institutions
A big question that the Caribbean must wrestle with is this: Are
the institutions in place to maximize the benefits of globalization
for the region? CARICOM is a work in progress, and over the past
two decades a plethora of new regional institutions have been cre-
ated. The supreme decision-making regional institution is the Heads
of Governments, which meets annually; its composition changes
over time and so does the fulcrum of power as national economic
fortunes change. The negotiation of the Economic Partnership
Agreement (EPA) between the CARIFORUM countries (CARICOM
plus the Dominican Republic) has exposed fault lines in CARICOM’s
EPILOGUE 151
institutional infrastructure. The fault line runs between the

CARICOM Secretariat and the Caribbean Regional Negotiating
Machinery (CRNM), a stand-alone entity. As the EPA negotiations
highlighted, the bone of contention, as some see it, is that because the
CRNM is not an integral part of the CARICOM Secretariat, it is likely
to take decisions without full consultation with all the CARICOM
member states. The following is the expression of one view:
It is apparently felt by many, inside and outside of the integra-

tion movement and its institutional arrangements, that the dual-
headed system of the CRNM on the one hand, and the CARICOM
Secretariat on the other, complicates the harmonization of the
necessary sequential tasks of strategizing, policy creation vis-à-vis
intended negotiations, the process of negotiations themselves and
then review and approval by the policy makers, the political direc-
torate. (Stabroeknews, March 5, 2008)
Of course, there is no guarantee that the integration of the CRNM

into the CARICOM Secretariat will enhance the effectiveness of nego-
tiations. It could become hide-bound in bureaucracy with less agility
to address complicated negotiating issues. If the lack of adequate con-
sultation with the member states is an institutional defect within the
CRNM, then that could be corrected without incorporating it into
the Secretariat. If the problem lies in the existence of two regional
power centers and the possibility of disharmony between them, then
the CRNM should be the negotiating arm of the Secretariat. Many
questions are still unresolved, even the location of the CARICOM
Secretariat that some think ought to be in a more central place.
There are other institutional issues that must be addressed. The
old adage that the smaller the country the greater the paperwork
holds true for the Caribbean. Much of this is derived from colonial
history and the need for the public sector to create jobs. The ports are
always cited as a classic example. Yet when technology is applied, it
can result in efficient operations (as in the case of container ports).
Cuba
The future of the CARICOM cannot be adequately assessed with-

out considering the future of Cuba. The U.S. trade embargo will
not last forever. Sooner or later it will be lifted and it will alter the
shape of Caribbean tourism. This will divert a significant share
of the current flow of tourists to Cuban destinations, forcing the
rest of the Caribbean to make their tourism product more com-
petitive. It will also divert some foreign investment from the rest of
the Caribbean. Already there is some Caribbean investment in the
Cuban hotel industry in anticipation of the lifting of the embargo.
Aside from forcing the rest of the Caribbean to improve its tourism
product, it may also help to accelerate the movement of CARICOM
toward its goal of a single market and economy in order to deal
more effectively with Cuban competition. Whichever way this sce-
nario plays out, the structure of economic power in the Caribbean
will be altered.
Globalization and the Preservation of Difference
The more globalized the world becomes the blurrier become the
cultural boundaries of the nation states. The proximity of the small
Caribbean states to the United States means that they must strug-
gle to maintain their cultural identity against the constant assault
of U.S. culture. But in this struggle there is also an opportunity
because cultural identity expressed in arts and entertainment is
exportable and, therefore, capable of generating foreign exchange.
The recently signed Economic Partnership Agreement with the
European Union includes provisions that facilitate the movement
of Caribbean artists and entertainers. The expectation is that the
export of art and entertainment will have spillover benefits for
Caribbean tourism as well as for the local art and entertainment
industry. It will also give Caribbean artists and entertainers greater
opportunities to tell the world of the experiences and aspirations of
Caribbean people.
Appendix
Chapter 5
Table A.1 Competitiveness Ranking of Caribbean Tourism (Out of 124

Countries)
Barbados Jamaica Dominican Trinidad & Guyana Suriname

Republic Tobago
Overall Index 29 48 50 85 100 108

Regulatory 31 49 51 88 96 110
Framework
Business 36 59 71 65 88 87
Environment &
Infrastructure
Human, Cultural & 17 36 29 104 109 112
Natural Resources
Source: United Nations, World Economic Forum, Travel and Tourism Competitiveness Report, 2007
Table A.2 Ranking of Components of Human, Cultural, and Natural Resources

(Out of 124 Countries)

Republic Tobago
Overall Index 17 36 29 104 109 112

Human Resources 42 39 57 64 95 112
National Tourism 2 15 21 106 68 97
Perception
Natural and 68 76 45 111 121 115
Cultural Resources
Source: United Nations, World Economic Forum, Travel and Tourism Competitiveness Report,
2007
154 APPENDIX
Table A.3 Ranking of Components of Regulatory Framework (Out of 124

Countries)

Republic Tobago
Overall Index 31 49 51 88 96 110

Policy Rules & 27 3 14 60 79 107
Regulations
Environmental 42 67 72 100 93 122
Regulation
Safety and Security 35 111 102 121 124 84
Health and Hygiene 42 67 79 64 87 71
Prioritization of 11 10 18 75 41 116
Travel & Tourism
Source: United Nations, World Economic Forum, Travel and Tourism Competitive Report, 2007
Chapter 6
Impact of Past Migration on Current Remittance Flows
The following distributed lag equation is chosen as the model for

the impact of past migration on the current flow of remittances:
R = a + bM + λb1M −1 + λ 2 b2 M −2 + … + λ10 b10 M −10 + u (1)
where R is the annual flow of remittances, M annual migration to

the United States, l the weighted impact of migration on remit-
tances, and u the error term.1 The Koyck transformation of this
equation reduces the parameters to be estimated to two:
R t = a(1 − λ ) + βM t + λR t −1 + u (2)
where l is assumed to be the diminishing weight of the impact of

the independent variable, 0 ≤ l , 1. The parameter b is the impact
multiplier that measures the instantaneous impact of a change in
migration (M) on remittances (R), and the equilibrium or long-run
multiplier (b/12l) measures the change in the equilibrium value of
R due to a marginal change in M.
Because the remittance profile of immigrants may also be influ-
enced by economic conditions at the destination, the migration
data are adjusted for changing unemployment rates in the United
States. This is done by dividing the actual migration for each year
APPENDIX 155
by a corresponding index of unemployment for that year. Thus as

the U.S. unemployment rate falls, the index falls and the adjusted
migration gets larger than the actual. The opposite is true when the
unemployment rate rises. A lower U.S. unemployment rate means
that a given volume of actual migration will have a larger impact on
remittances because of greater opportunities for employment and
higher wage rates.
The first step is to estimate the value of l in equation 2, where
M is unemployment-adjusted migration and R is remittance. The
results are as follows:
Rt 5 .0748 1 0.001439M 1 0.9910Rt21

(0.27) (9.21) Adj. R 2 5 0.83
t statistics are in parentheses
Because l , 1, the remittance impact will diminish marginally

as we go further into the past. However, the long-run multiplier
(b/12l) is positive. Since the purpose of this section is to develop a
profile of the impact of migration over the previous 10 years on the
current flow of remittances, the next step is to estimate the coeffi-
cients (b) of equation 1. The profile that emerges is depicted by the
value of l times the estimated coefficient (lb). The profile shows
that the remittance impact of migration is modest in the early
years, rising to its first peak five years after migration and a higher
peak eight years after.
Impact of Interest Rates on Remittance Flows
The following regression results show the impact of interest rates:
R 5 221.85 1 3.55IR 1 0.932Rt21

(2.052) (1.59) (9.62) Adj. R 2 5 .85
t stats in parentheses.
Since b is positive and l , 1, the long-term multiplier impact

(b/1–l) of interest rates on remittances is positive. However,
when the estimated coefficients of the distributed lag model in
equation 1 is multiplied by l, the impact of interest rates dimin-
ishes over time.
156 APPENDIX
Impact of Exchange Rates (ER) on Remittance Flows
R 5 239.55222.19 ER 1 0.870 Rt21

(2.41) (22.21) (8.52) Adj. R 2 5 0.86
t stats in parentheses.
Because the instantaneous multiplier b , 0 and l , 1, the long-run

multiplier (b/12l) impact of the exchange rate is negative.
Chapter 11
Table A.4 Data for Regression Analysis: USGDP and U.S. Imports from
CARICOM, Trinidad & Tobago, and Jamaica, 1996:1 to 2007:1
Quarters U.S. GDP U.S. Imports U.S. Imports from U.S. Imports
Current Value from CARICOM Trinidad & Tobago from Jamaica
US$ billion US$ million US$ million US$ million
1996:1 7624.1 604.1 237.1 202.3

1996:2 7776.6 618.6 242.7 198.9
1996:3 7866.2 650.9 241.4 230.0
1996:4 8000.4 682.2 295.3 207.2
1997:1 8113.8 670.7 313.3 171.2
1997:2 8250.4 632.1 258.2 187.1
1997:3 8381.9 713.5 313.9 196.8
1997:4 8471.2 625.5 247.4 182.7
1998:1 8586.7 624.3 233.9 187.3
1998:2 8657.9 664.8 251.8 203.7
1998:3 8789.5 648.6 252.4 185.0
1998:4 8953.8 622.9 232.7 177.2
1999:1 9066.6 633.4 235.1 170.0
1999:2 9174.1 642.5 260.8 152.6
1999:3 9313.5 827.3 387.7 175.5
1999:4 9519.5 863.5 409.9 180.7
2000:1 9629.4 859.6 413.4 177.7
2000:2 9822.8 926.1 507.8 176.1
2000:3 9862.1 1067.1 632.7 146.4
2000:4 9953.6 1108.3 674.3 147.4
2001:1 10021.5 1127.4 757.7 100.8
2001:2 10128.9 1035.7 644.6 122.9
2001:3 10135.1 990.5 584.9 116.3
2001:4 10226.3 810.6 393.5 121.1
2002:1 10333.3 765.8 414.4 99.4
2002:2 10426.6 932.9 569.0 91.1
2002:3 10527.4 1073.6 646.5 100.0
2002:4 10591.1 1229.8 807.2 100.9
Continued
APPENDIX 157
Table A.4 Continued
Quarters U.S. GDP U.S. Imports U.S. Imports from U.S. Imports
Current Value from CARICOM Trinidad & Tobago from Jamaica
US$ billion US$ million US$ million US$ million
2003:1 10705.6 1447.5 961.4 182.3

2003:2 10831.8 1426.5 990.8 99.8
2003:3 11086.1 1616.7 1175.2 109.0
2003:4 11219.5 1629.2 1204.2 103.5
2004:1 11405.5 1795.1 1390.3 73.8
2004:2 11610.3 1746.0 1281.8 82.8
2004:3 11779.4 1970.6 1522.5 81.4
2004:4 11948.5 2151.2 1659.6 82.2
2005:1 12154.0 2103.3 1616.5 89.5
2005:2 12317.4 2625.8 2048.6 89.7
2005:3 12558.8 2327.6 1822.8 87.6
2005:4 12705.5 2875.8 2392.4 109.9
2006:1 12964.6 2614.1 2101.6 132.9
2006:2 13155.0 2925.6 2429.4 132.4
2006:3 13266.9 2429.5 1922.0 135.9
2006:4 13392.3 2436.0 1916.9 118.3
2007:1 13551.9 2762.7 2196.2 198.5
2007:2 13768.8 2858.5 2308.9 197.5
Source: U.S. International Trade Commission

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

Caribbean Development
1. To test for trade diversion formally, the export similarity index developed by
Finger and Kreinin (1979) is applied. The formula for this index is as follows:
S(ab,c) 5 {S Minimum[X i(ac), X i(bc)]}100
It measures the similarity of the export patterns of countries a (Jamaica) and
b (Mexico) to market c (United States). X i(ac) is the share of commodity i in
Jamaica’s exports to the United States and X i(bc) is the share of commodity i in
Mexico’s exports to the United States. If X i(ac) 5 X i(bc), the index is 100 and
the exports are identical. If the index is zero, the exports are dissimilar. The
following table shows the values for X i(ac) and X i(bc) for 1997.
Share of SITC* Categories in Total Exports to the United States, 1997
Jamaica Mexico
339 Cotton women’s knit shirts 1.12 0.23

340 Cotton men’s non-knit shirts 1.54 0.07
632 Man-made fiber hosiery 5.86 0.08
649 Man-made fiber brassieres 0.75 0.19
* Standard Industrial Trade Classification

Source: Calculated from International Monetary Fund, International Financial Statistics Yearbook, 1997
160 NOTES
The index is calculated as follows:

S(ab,c) 5 100[ min (1.12, 0.23) 1 min (1.54, .07) 1 min (5.86, .08) 1
min (0.75, 0.19)] 5 .57.
This means that in 1997, 57 percent of Jamaica’s exports in these four catego-
ries were matched by exports from Mexico, confirming the existence of trade
diversion.
2. The least square regression results are as follows: GDP 5 2382 1 4.01
Exports
Adj.R 2 5 .93 (17.1)
t value in parenthesis.
4 The Service Economy
1. Data from CARICOM Statistics and the Caribbean Tourist Organization.

2. The assumption here is that there is no inconsistency between the corre-
sponding import and export data for the two countries. For a discussion of the
problem of consistency, see International Monetary Fund, Direction of Trade
Statistics Quarterly, March 2007, pp. xi–xii.
5 The Caribbean Tourist Industry
1. The principal taxes are departure tax (which ranges from US$3.00 in the U.S.
Virgin Islands to US$35.00 in the Cayman Islands), cruise passenger tax (which
ranges from US$1.00 for the Dominican Republic to US$60.00 for Bermuda),
and the hotel room tax (which ranges from US$5.00 in St. Marten to US$12.00
in Cancun) (Caribbean Tourism Organization, 2004).
2. This is also the situation in the financial sector. Lester Henry points out
that “outside of Trinidad and Tobago there is a high concentration of for-
eign ownership of commercial banks, suggesting that sector is relatively
open.” Henry singles out Jamaica, citing information from the Bank of
Jamaica: “as at September 2002, there were six commercial banks with a
network of 121 branches operating throughout the country. All but one of
the commercial banks is foreign owned. The lone Jamaican owned com-
mercial bank accounted for a mere 2 percent of all commercial bank assets
as at June 2002. This compares with a year earlier when three such enti-
ties accounted for 52.0 percent of all commercial bank assets.” Lester
Henry, Consulting Economist, “Implications for CARICOM Countries of
Negotiations on Financial Services in the FTAA and GATA: Assessment
and Strategic Options.” Prepared for the Caribbean Regional Negotiating
Machinery, May 2003, p. 2.
3. A credit rating report on one of the largest business corporations in Barbados,
Goddard Enterprises Limited, underscores the problem with manufacturing:
“The ratings of GEL are also tempered by the lack of competitive advantage for
NOTES 161
manufacturers in Barbados as they are faced with extremely high fuel, elec-
tricity, land and labour costs and must depend on imported raw materials.”
CariCRIS, Caribbean Information & Credit Rating Services Limited. www.
caricris.com
4. Based on data gathered from Central Statistical Offices and National Tourist
Offices of individual countries.
5. United Nations Environmental Program (www.uneptie.org/pc/tourism/
sust-tourism.economic.htm).
6 Migration
1. Riccardo Faini has developed a simple model to show that skilled migrants
may have a lower propensity to remit because they are more likely to reunite
with their close family in the host country. This contradicts they general view
that the brain drain may be offset by large flows of remittances from skilled
emigrants. “Remittances and the Brain Drain: Do More Skilled Migrants
Remit More?” The World Bank Economic Review, 2007 21(2); 177–191.
2. The Gini indices for Jamaica and Trinidad and Tobago are 37.9 and 40.3
respectively, but lower than those in Latin America where Mexico is 54.6 and
El Salvador is 53.2.
3. www.nationmaster.com
4. Ransford W. Palmer, Pilgrims from the Sun: West Indian Migration to America.
New York: Twayne Publishers, 1995, p. 13; The Labour Force, The Statistical
Institute of Jamaica, several issues.
5. Congresswoman Shirley Chisholm was the first woman to run for president
of the United States. More recently, another woman of Caribbean ancestry,
Yvette Clarke, won a seat in the House of Representatives for the Brooklyn
constituency in New York.
6. www.investjamaica.com/sectors/tourism/stats.php
7. Remittances are defined as private current transfers for the purpose of
this paper. Dilip Ratha has pointed out that current transfers as presented
in the balance of payments underestimate the total flow of remittances
because it excludes food, clothing, and other supplies sent home by immi-
grants and the wages and salaries of nonresident workers. Since this study
focuses on permanent residents, remittances are regarded as a portion of
their wages and salaries. “Workers’ Remittances: An Important and Stable
Source of External Development Finance,” Global Development Finance
2003, pp. 157–175. It is recognized, however, that temporary migrants also
remit funds. However, in the Jamaican case, their share in total migration is
small.
8. For the purpose of this study, immigrants are permanent residents. They are
recorded as immigrants upon receipt of their immigrant visa. This means that
many may have physically left their home country years before having received
their visa. During this time, many will have been able to work with a special
work visa. These include students and workers with special skills.
162 NOTES
9. Between 1998 and 2003, immediate relatives of U.S. citizens accounted for
54 percent of Jamaican immigrants and 47 percent of immigrants from the
Dominican Republic (Immigration Statistics, U.S. Department of Homeland
Security). It usually takes five to seven years for an immigrant to gain
citizenship.
10. In times of natural disaster, such as a devastating hurricane, immigrants usu-
ally respond generously even if their household is reunited abroad.
11. It could be argued that the flow of remittances is influenced by the difference
in interest rates between destination and origin countries. Such an argument
would be reasonable if remittances were treated as investment. The fact is
that most of the remittances go to finance consumption.
12 (i) Real GDP 5 26151.64 1 9.43 R
(46.23) (5.12) Adj. R-squared 5 0.46
(ii) GCF/GDP 5 20.61 1 0.0159 R
(16.17) (3.83) Adj. R-squared 5 0.32
t statistics are in parentheses
In both equations, the impact of remittances (R) is statistically significant
but very small. In equation ii, remittances worth US$1 million added only
.01 to the share of gross capital formation in GDP.
13. A classic example of this type of immigrant is the Jamaican-born Michael
Lee-Chin who settled in Canada after his university education there and
established a financial empire called Portland Holdings, which he chairs.
Portland Holdings acquired the National Commercial Bank (NCB) Ltd., one of
Jamaica’s largest banks, and its subsidiaries. It also acquired controlling stake
in United General Insurance Company (Jamaica’s largest automobile insurer)
and CVM Communications (which includes radio and television stations and
newspapers). Portland Holdings has also made acquisitions in the tourist sec-
tor (Trident Villas and Spa, Reggae Beach, and Blue Lagoon) and the health
sector (Medical Associates Limited, a privately held hospital in Kingston).
7 The Travel Economy
1. Repatriation of profits and other incentives offered to foreign investment liken

the tourist industry to an Export Processing Zone (EPZ) in the manufactur-
ing sector. “In the case of the EPZs, the broad conclusions from worldwide
experience are that they succeed in generating foreign exchange and employ-
ment, and may yield important positive externalities as well. Chief among
the positive externalities are (i) building human capital through explicit
training and learning-by-doing, including both workers and managers; and
(ii) the provision of catalyst and demonstration effects for other entrepre-
neurs in the economy.” John Dixon et al., Tourism and the Environment in
the Caribbean: An Economic Framework (Washington DC: The World Bank,
March 2001, p. 23).
2. W. Arthur Lewis, Theory of Economic Growth.
NOTES 163
8 Investment and Consumption
1. In its discussion of the high incidence of crime in Jamaica and its impact on
business, the World Bank cites three negative effects:
It has a negative impact on the investment climate and can deter or delay
both domestic and foreign investment, and hence growth because it
increases the cost of doing business and leads to loss of current and future
output when violence injures workers and curtails economic activity in
some areas.
It erodes the development of human and social capital, thereby reduc-
ing potential growth. It encourages the emigration of skilled people who
seek safer living and working environments.
It diverts public resources excessively away from productive uses to
such areas as police, justice, and the medical system to deal with the con-
sequences of crime and violence. (World Bank, The Road to Sustained
Growth in Jamaica, 2004, pp. 115–116)
In the better residential areas of Kingston, Jamaica, people surround their
homes with ironwork fences and often secure their entrances with two sets of
ironwork doors.
2. The case of Walkerswood (a small Jamaican company that bottles authen-
tic Jamaican jerk spice) is instructive. The World Bank reports that “one of
Walkerswood’s biggest and ongoing challenges to its growth and competitive-
ness is the high cost of capital, especially given that some of its competitors
have access to cheaper capital. The company has had to depend on retained
earnings and borrow on less than favorable terms from different sources for
investments. However, its success has begun to attract foreign investment”
(World Bank, A Time to Choose: Caribbean Development in the 21st Century,
April 2005, p. 57).
3. JAMPRO is an investment promotion agency of the Jamaica government.
4. A World Bank survey revealed that “for information on investment in the
Caribbean, most investors rely on their own companies’ internal reports
and analysis, and personal visits. By contrast, traditional investment pro-
motion, such as trade missions and promotional campaigns by destination
country officials, has not been widely used as sources of information. This
suggests that the investment promotion agencies in the Caribbean have
not been very effective in reaching potential investors. In the case of the
Dominican republic, Grenada and Jamaica, no investors cited investment
promotion activities as useful sources of information” (World Bank, A Time
to Choose, p. 61).
5. This is what is left after all factor costs are met.
6. Ackee is a bright red fruit that grows on the ackee tree. When the fruit is ripe
it reveals pods of yellow edible ackee, each with a black seed. Ackee is usually
prepared with salted cod and onions. Bacon can be substituted for the salted
cod. Its flavor and texture are like those of scrambled eggs.
7. Food exports consist primarily of agricultural products such as sugar and
bananas.
164 NOTES
8. In 1991, Barbados introduced a prices and incomes policy that involved a tri-
partite social partnership, patterned after the Irish model, between the gov-
ernment and representatives of workers and employers. According to Wayne
Charles-Soverall and Jamal Khan, “these three entities were designated as ‘Social
Partners’ who acknowledged that Barbados’ national success was largely due to
its peaceful and harmonious labour-management relations and that the tripar-
tite approach was the most effective strategy for achieving national development
and cooperation.” The following objectives were identified: (1) Safeguarding the
existing parity of the dollar; (2) Securing economic growth through competi-
tiveness; (3) restraining wage; (4) restructuring the economy; (5) promoting of
productivity (Wayne Charles-Soverall and Jamal Khan, “Social Partnership:
New Public Management Practice in Barbados,” AJPAM, Vol. 15, No. 1, January
2004, p. 26).
9 The Role of Government
1. A regression analysis of Barbados data for the three major tax categories—taxes
on goods and services (TGS), taxes on income and property (TIP), and taxes on
international trade (TIT)—produced the following elasticities with respect to
GDP over the 25-year period from 1980 to 2004:
LogTGS 5 29.75 1 1.916 LogGDP Adj. R 2 5 0.97
(0.54) (28.45)
LogTIP 5 23.66 1 1.155 LogGDP Adj. R 2 5 0.91
(.59) (15.73)
LogTIT 5 0.78 1 0.48 LogGDP Adj. R 2 5 0.48
(0.91) (4.28)
The elasticity of taxes on goods and services was the highest, 1.9, compared to
1.1 for taxes on income and property, and 0.48 for taxes on international trade.
If the trend continues, the gap between taxes on goods and services and taxes
on international trade will widen considerably as GDP grows.
2. Owen Arthur, the former prime minister of Barbados laments “the virtual
death of development economics” as a “massive intellectual tragedy” because
“the imperatives of development which should have more to do with economic
and social transformation, have been miniaturized to focus on programs of
competitiveness, the application of policies to promote macro-economic sta-
bility, and the broadening of the scope of the workings of the market and the
private sector.” Owen Arthur, “The Economic Partnership Agreement between
the Cariforum and the European Union and the Building of a Post-Colonial
Economy in the Caribbean,” public lecture given at the University of the West
Indies Cave Hill Campus, March 11, 2008.
3. See The New Palgrave Dictionary of Economics, Vol. 2, New York: Palgrave.
4. Bratsberg and Terrell explain their sample selection as follows: “To avoid
including immigrants who undertook some of their schooling in the United
NOTES 165
States, the sample excludes individuals whose birth year plus six plus years
of schooling exceeds the year of immigration. The regression samples also
exclude persons younger than 25 or older than 64 and those currently enrolled
in school.” Bernt Bratsberg and Dek Terrell, “School Quality and Returns to
Education of U.S. Immigrants,” Economic Enquiry, 40(2), April 2002, 179.
5. Teachers’ salaries in OECD countries averaged 125 percent of GDP per person
in 2005. In South Korea and Turkey, they were 234 percent and 254 percent
respectively (The Economist, September 29–October 5, 2007, p. 105).
6. On July 31, 2007, the United States House of Representative passed The Shirley
A. Chisholm United States—Caribbean Educational Exchange Act of 2007 to
support the development of education in the Caribbean. See appendix for the
details of the bill.
10 Caribbean Economic Integration:

Drifting toward a Single Market and Economy
1. As part of its manifesto for the 2007 national elections, the Jamaica labor Party
has proposed to grant institutional independence to the central bank, the Bank
of Jamaica (The Jamaica Gleaner, “Manifestos lack solution to grow Jamaica’s
economy,” August 19, 2007, http://jamaicagleaner.com/gleaner/20070819/
business6.html ).
2. See Financial Times commentary, July 2, 2007.
3. The Chiang Mai Initiative is a regional financial arrangement that was signed
at Chiang Mai, Thailand, in May 2000 by 14 South East Asian countries—the
ASEAN countries plus China, Japan, and Korea. The objective of the CMI is
to provide liquidity support, through a network of bilateral swap agreements,
to countries experiencing balance of payment difficulties (See Seok-Dong and
Lene Andersen, “Regional Financial Cooperation in East Asia: The Chiang Mai
Initiative and Beyond,” Bulletin on Asia-Pacific Perspectives 2002/03, pp. 89–99).
In a letter to the Financial Times, July 10, 2007, Yeomin Yoon of Seton Hall
University in New Jersey argues that “Perhaps the single most irresponsible
action in the whole crisis was capital account liberalization without a frame-
work of regulation.”
4. The Caribbean Cement Company is a subsidiary of Trinidad Cement Limited.
Several members of the Corporate Governance Committee of the Caribbean
Cement Company also serve on the Trinidad Cement Limited Corporate
Governance Committee (Caribbean Cement Company Annual Report, 2007).
5. In Trinidad and Guyana, the population of Indian ancestry may beg to differ.
6. Neal & Massy Holdings (Trinidad & Tobago), Jamaica Producers Group, Ltd.
(Jamaica), National Commercial Bank Group, Ltd. (Jamaica), Telecommunications
of Jamaica (Jamaica), Ansa McAl (Trinidad & Tobago), Industrial Commercial
Developments (Jamaica), Barbados Shipping and Trading (Barbados), Grace
Kennedy (Jamaica), Royal Bank of T&T (Trinidad & Tobago), and Desnoes &
Geddes (Jamaica) (Top 100, Barbados: Caribbean Communications, Inc., 1996).
7. Statistical Institute of Jamaica, Statistical Abstract, 1998.
166 NOTES
11 Caribbean External Economic Relations
1. Some critics say they were divided by the European Commission in order to bet-
ter manipulate them. The other five subgroups are: The West African Economic
and Monetary Union; the Southern African Development Community; the
Central African Economic and Monetary Community; the East African
Community; and the Pacific region.
2. The Caribbean Disaster Emergency Agency (CADERA) based in Barbados has
been in the forefront of advancing disaster preparedness in the region with the
help of funding from international agencies. www.cdera.org/home.htm
3. Free alongside ship (fas).
4. According to the Economic Commission for Latin America and the Caribbean,
“the Latin American and Caribbean region continues to receive a shrinking
proportion of global FDI flows. The region took in 12% of global inflows in
the 1980s, compared with 10% in the 1990s. Since 2000, it has received just
over 8% worldwide FDI. This could indicate that the region is being gradually
sidelined from FDI in the current pattern of globalization” (ECLAC, Foreign
Investment in Latin America and the Caribbean, 2005, p. 23).
5. Particularly in the production of cotton T-shirts and sweaters.
6. Sociologist James Petras dismisses the notion that foreign investment trans-
fers technology: “The experience with foreign investment and technological
transfers is largely negative: over 80% of research and development is carried
out in the main office. The ‘transfers of technology’ is the rental or sale of
techniques developed elsewhere, rather than local design. The multination-
als usually charge subsidiaries excess royalty fees, service and management
costs, to artificially or fraudulently lower profits and taxes to local govern-
ments” (Six Myths about the Benefits of Foreign Investment: The Pretensions of
Neoliberalism, Global Policy Forum, July 2, 2005, p. 1 [www.globalpolicy.org/
socecon])
7. The fear for their economic survival was behind the historic visit of fif-
teen heads of Caribbean governments to Washington DC to meet with the
President of the United States in June 2007.
8. Article 1 of the EPA deals with “trade partnership for sustainable develop-
ment” and the objectives of the agreement are as follows:
Contributing to the reduction and eventual eradication of poverty through
the establishment of a trade partnership consistent with the objective of
sustainable development, the Millennium Development Goals and the
Cotonou Agreement;
Promoting regional integration, economic cooperation and good gov-
ernance thus establishing and implementing an effective, predictable and
transparent regulatory framework for trade and investment between the
Parties and in the CARIFORUM region;
Promoting the gradual integration of the CARIFORUM States into
the world economy, in conformity with their political choices and devel-
opment priorities;
NOTES 167
Improving the CARIFORUM States’ capacity in trade policy and trade

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

Cincinnati: South-Western Publishing Co., 1975.
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———, 2006, A Time to Choose: Caribbean Development in the 21st Century.
Washington DC.
World Economic Forum, 2007, Travel and Tourism Competitive Index. United
Nations.
World Trade Organization, March 17, 2003a, Council for Trade in Goods, Request
for a Waiver, G/C/W/508/Add.1.
———, 2003b, General Council, Canada-Tariff Treatment for Commonwealth
Caribbean Countries, November 17.
Worrell, Delisle, 1992, A Common Currency for the Caribbean. Occasional Paper,
West Indian Commission Secretariat, St. Michael, Barbados.
Index
Ackee and saltfish, 85, 163 Social contract, 89

Acker, C. Edward, 38 Taxes, 109, 164
Africa, 148 Barbados Shipping and Trading, 165
African, Caribbean and Pacific (ACP) Bauxite and alumina, 19, 95
countries, 9, 13, 16, 17, 127 Beattie, Alan, 120
African Americans, 58 Belize, 7, 18, 32, 136
Air transportation, 37–39 Bermuda, 36
Aluminum Company of America Bernal, Richard, 142
(ALCOA), 19 Bhattacharya, Anandya, 34
Aluminum smelter, 19 Bissember, Enid, 117
American citizenship, 60 Bolivar, Simon, 129
Anglophone Caribbean, 7 Bolivarian Alternatives for the Americas
Anguilla, 113 (ALBA), 128–129
Antigua and Barbuda, 6, 10, 31, 32, Bolivia, 128
33, 71–72, 113, 137 Bratzberg, Bernt, 99, 164
Apostolopoulos and Sãnmez, 44 Brazil, 17, 136, 146
Apparel industry, 25 Bric countries (Brazil, Russia, India, and
Arawak Indians, 1 China), 9
Argentina, 111 Brooklyn, 58, 60, 161
Arthur, Owen, 107, 125, 164 Byron, Jessica, 140
ASEAN Free Trade Area, 123, 165
Asian financial crisis, 141 CAFTA, 109
Asia-Pacific Economic Cooperation Canada, 29
(APEC), 120 Capital, flight of, 120
Association of Caribbean States (ACS), 9 Capital intensive industries, 6
Australia, 17 Capital intensive industries, oil and
Ayub, Mahmood Ali, 119 gas, 19
Carare, Alina, 43
Baele, Lieven, 114 Caribbean, Commonwealth, 120, 128
Bahamas, 1, 6, 32, 111 Caribbean Basin Economic Recovery
Balance of payments deficit, 81 Act (CBERA), 24, 29, 127–128
Bananas, 3, 17–19 Caribbean Basin Initiative (CBI), 9, 29,
Baptiste, Fitzroy A., 46 30, 109, 124, 134
Barbados, 1, 7, 24, 28, 46, 47–48, 49, 50, Caribbean Basin Trade Partnership Act,
53, 57 30, 135
Corruptions index, 78 Caribbean capitalism, 45, 119
Foreign direct investment, 79 Caribbean Cement Company, 117, 165
Prices and incomes policy, 164 Caribbean central banks, 111
176 INDEX
Caribbean Diaspora, 67, 149 Costa Rica, 25

Caribbean Disaster Emergency Agency, Cotonou Agreement, 127–128
166 Cuba, 53, 128, 151–152
Caribbean Free Trade Association Cultural exports, 105, 153
(CARIFTA), 108
Caribbean integration, 9, 121 Davies, Omar, 37
Caribbean labor, 125–126 Debt service, 89
Caribbean Regional Negotiating Desnoes & Geddes, 165
Machinery (CRNM), 120, Distributive sector, low wage, 86
142–143, 151 Diversification, 18
Caribbean Single Market and Economy Dixon, John, 162
(CSME), 107–126, 146–147 Dollarization, 80, 111–114, 116
Caribbean Tourist Organization, 47, 160 Dominica, 6, 12, 17, 113, 128–129
CARIBCAN, 109, 128 Dominican Republic, 23, 28, 29, 58
CARICOM, 1, 2, 4, 6, 9, 19, 33, 48, 108, CARIFORUM, 128
110–111 Foreign investment, 78–79
Evolution toward services, 8 Telecommunications and information
Mobility of labor, 75 technology, 79
Secretariat, 112 Douglas, Denzil, 31
CariCRIS, 161 Drug trafficking, 136–137
CARIFORUM, 128, 141, 143, 150 Dutch disease, 20
Carnival celebrations, 60 Dutta, M., 167
Cayman Islands, 33, 34
Central African Economic and East African Community, 166
Monetary Community, 166 Eastern Caribbean, 79, 113
Central American Free Trade Central Bank (ECCB), 121
Agreement (CAFTA), 135 Currency Union (ECCU), 121
Central Bank of Barbados, 116 Economic Commission for Latin
Charles-Soverall, Wayne, 164 America and the Caribbean
Chavez, Hugo, 129 (ECLAC), 166
Chen-Young, Paul, 46 Economic integration, 107–126
Chiang Mai Initiative, 165 Economic Partnership Agreements, 13,
China, 146 17, 105, 128, 141, 150, 166–167
Chisholm, Shirley, 161, 165 Economies of scale, 28
Chiswick, Barry, 59 Economist Intelligence Unit, 110
Clarke, Oliver, 110 Education, investment in, 25, 28–29, 30,
Clarke, Yvette, 161 97–105
Climate Change, 149–150 Country profile, 98–99
Columbia, 25 Enrollment ratios, 98, 100
Commanding heights, 3 As an industry, 102
Commercial bank lending rate, 27 Job training programs; links with
Common currency, 116–117 American universities, 102
Common external tariff (CET), 109, 123 Private sector financing, 101–102
Consumption expenditure, source and Returns to, 99
composition, 84–85 Teachers, 101
Consumption goods, propensity to Worker productivity, 97, 100
import, 73, 80, 85, 87, 93 Employment, agriculture, 7
Corruptions Perceptions Index, 77 employee compensation, 84
INDEX 177
labor intensive offshore Government, 91–105

industries, 23 Share of GDP, 91, 96
Energy, alternative, 150 Grace Kennedy, 165
Ethanol, 136, 146 Greenaway, David, 141
European Commission, 166 Grenada, 32, 113, 139
European Union, 13, 16, 109, 112, 124 Guernsey, 36
Evolution of the Caribbean economies, Guyana, 1, 4, 7, 13, 14, 15, 17, 19, 32, 57
9, 10, 20, 145 Booker Tate Company, 15
Exchange rates, 22, 65–66 Cooperative Republic, 5
Stability, 77, 80–81, 86–87 Guyana Sugar Company, 14–15
Expatriate populations, 27
Export Development and Haiti, 1, 7, 110, 111, 135–136
Agricultural Diversification Harlem, New York City, 58
Unit (EDADU), 26 Harris, Donald, 94–96
Export processing zones, 21, 162 Heads of Government meeting, 129, 150
Export promotion agencies, 26 Health care, 62, 148
Extra-regional trade, 118–121 Hecksher-Ohlin international trade
theory, 97
Faini, Riccardo, 161 Hemispheric Opportunity through
Federal Reserve Bank, 112–113 Partnership Encouragement
Federation, West Indies, 3, 11, 108 (HOPE) Act, 135–136
Financial services, 79, 160 Henke, Holge, 46
Financial Times, 16 Henry, Lester, 160
Finger, Michael J., 159 Hoekman, B., 135
Florida, 57 Honduras, 53
Foreign aid, 139–140 Household budget, 80
Foreign direct investment, 77–81 Hudson, Michael, 33
Foreign exchange, 70 Human capital, 28
Foreign trade dependence, 80 Hurricanes, 71
Free Trade Area of the Americas, 135
Free Trade Zones, 23, 78 Immigration and Nationality Act
Freeman, Carla, 24 of 1965, 54
Import substitution, 22
Garvey, Marcus, 58 Income, distribution of, 84, 86, 94
General Agreement on Tariffs and Compensation to employees, 132
Trade (GATT), 123 Incomes policy, 164
General Agreement on Trade in Indebtedness, 82, 92
Services (GATS), 123, 137 Indentured servants, 53
Gibraltar, 36 India, 150
Girvan, Norman, 46 Indigenous raw material, 26
Gleaner, 110 Industrial Commercial
Globalization, 8, 9, 11, 49, 120 Developments, 165
Impact on the distribution Inflation, 80
of income, 83 Information and communications
Labor unions, 126 technology, 28, 36, 79
Goddard Enterprises Limited, 160–161 Institutional inertia, 81, 87–88
Golding, Bruce, 142–143 Inter-American Development
Gonsalves, Ralph E., 127, 140 Bank, 111
178 INDEX
Interest payments, 82, 89 Lewis, W. Arthur, 10, 75

Interest rates, 64–65 Lomé Convention, 109, 124, 127
International Business Corporation
Act, 33 Mackerel run down, 85
International Labor Organization, 6 Mandelson, Peter, 17
International Monetary Fund, 5, 23, Manhattan, 58
25, 160 Maritime transportation, 39–40
Balance of payments assistance Marketing boards, 86
from, 81 Marshall, Don D., 46
Staff Reports, 8 McMahon, Walter W., 98
Internet gambling, 136–137 McMorris, Michael, 82
Investment climate, 77, 88–89 Merchant capitalists, 86
Investment promotion, 163 MERCOSUR, 123
Ireland, 56, 57 Mexico, 26, 29, 30
Isle of Man, 36 Migration, 51–67
To Canada, 51–52
Jagdeo, Bharrat, 142 To Great Britain, 54
Jamaica, 4, 5, 7, 10, 11, 13, 14, 15, Migration circles, 55–56
18, 19, 23, 24, 25, 27, 29, 31, Return to country of origin, 60–62
47–48, 49, 53, 57, 64 To the United States, 51–52, 55–56
Banking crisis, 88, 92 Milner, Chris, 141
Crime, 89, 149, 163 Minerals, 130
Dollar, depreciation of, 131 exports, 32
Education profile, 98–99 Money illusion, 94
Food deficit, 85–86 Money laundering, 137
Foreign investment, 79, 82 Montserrat, 121
Golden age of growth, 94, 96 Mounsey, Allister, 36
Indebtedness, 82, 92–93 Mullings, Beverly, 28
Information technology, 79 Myers, Garth, 26
Profit outflow, 83
Public sector wages, 91 NAFTA, 29, 109, 135
Socialist decade, 96 National accounts, measurement of
Trade liberalization, 94–95 tourism, 7
Jamaica Labor Party (JLP), 83 National Commercial Bank, 165
Jamaica Producers Group, Ltd., 165 National Gas Company, 19
JAMPRO, 82, 163 National sovereignty, 108, 111
Japanese investments, 5 Neal & Massy Holdings of Trinidad and
Jersey, 36 Tobago, 121, 165
Johnson, Mark, 121 New York, 57
Nicaraqua, 128
Khan, Jamal, 164 Niche markets, 27
Khanna, Parag, 9 Nontraditional exports, 21–30, 31,
Klak, Thomas, 26 159–160
Kreinin, M. E., 159 Financing, 27
Labor unions, 86–88 Occupational downgrading, 59

Land tenure, 86 OECD countries, 28, 124
Lee-Chin, Michael, 162 Offshore assembly, 25
INDEX 179
Offshore banking, 33–36, 74 Saint Kitts and Nevis, 32, 114, 129
Offshore production, 21 Saint Lucia, 17, 32
Oil and gas, 19, 20 Saint Vincent and the Grenadines, 5, 7,
Organization of Eastern Caribbean 17, 114
States (OECS), 4, 26, 33, 121–123 Schneider, Keith, 159
Eastern Caribbean Central Bank Schuler, Kurt, 113
(ECCB), 122 Seaga, Edward, 140
Eastern Caribbean Currency Security, 149
Union (ECCU), 122 September 11, 37
Özden, C., 135 Services, 7, 160
Share in GDP, 7
Pacific region, 166 Singapore, 4, 5, 28
Palmer, 61, 161 Singer, Hans, W., 83
Panama, 80, 111 Single market, 115
Panama Canal, 53, 149 Slave trade, 1, 52–53
Parris, Ronald G., 46 Small Island Voice Global
Patents, 139 Forum, 45
Peoples National Party (PNP), 83 Socialist development strategy, 5
Petras, James, 166 Socialist governments, 109
Petrochemical industry, 79 South Korea, 4, 5, 165
Philippines, 63, 148 Southern African Development
Piccinini, Janice, 26–27 Community, 166
Political power, 120 Soviet Union, 140
Population, 147–149 Stewart, Gordon “Butch,” 37
Portland Holdings, 162 Stock market, regional, 117
Preferential treatment, 3, 9, 11, 13, 17, Stone, Carl, 103
18, 31, 50, 86, 109, 120, 127–130, Structural adjustment, 5, 81–82, 92
135, 140 Sugar industry, 7, 13–17, 18–19, 32,
Profit outflow, 82–83, 89 52–53, 159
Public safety, 77, 79, 89 Sural Group of Venezuela, 19
Suriname, 6, 32, 47
Queens, New York City, 58
Tax incentives, 94
Ratha, Dilip, 161 Tax policy, 77, 82
Reagan, Ronald, 134 Tax revenues, 93
Reciprocity, 140–143 Telecommunications, 136, 165
Regional trade arrangements Terrell, Dek, 99, 164
(RTAs), 123 Thomas, Clive, 142
Remittances, 55–56, 63–67, 70, 103, Thompson, Mel, 54
154–156 Tourism, 7, 32, 41–51
Repatriation of profits, 56 Competitiveness, 47–48
Rice, 19 Crime and violence, 79
Rodrik, Dani, 92 Cruise ship, 49
Rosecrance, Richard, 104 Demand for, 74
Royal Bank of Trinidad and Eastern Caribbean, 79
Tobago, 165 Exploiting the endowments of nature,
Royalties, 139 8, 43–44
Russian oligarchs, 34 Foreign exchange, 42, 50, 70
180 INDEX
Tourism—Continued Department of Commerce, 48

Hotel efficiency, 42 Direct investment by, 132–136
Impact of, 41, 43, 47 Impact on tourism, 48, 71, 133
Negative externalities, 44–45 Influence of, 131–136
Private foreign investment, 41, 45 International Trade
Taxes, 160 Commission, 134
Traa, Bob, 43 Third border, 149
Trade openness, 11, 12, 92, 145 United Kingdom, 33
Trademarks, 139 University of the West Indies, 74, 167
Travel economy, 69–75
Treaty of Chaguaramas, 108 Venezuela, 128, 150
Trinidad and Tobago, 1, 4, 7, 10, 11, 12, Venner, Dwight, 122
19, 32 Virgin Islands, British, 33, 36
Crude oil exports, 19 Virtual state, 104
Financial institutions, 117
Foreign direct investment, 79, 131 Walkerswood, 163
Intra-regional supplier of capital, Ward, Natasha, 36
117, 146 Wessels, G. M., 112
Oil boom, 5 West African Economic and Monetary
Share of profits in GDP, 83 Union, 166
Spending on social protection, 94 West Indians, 58
Turkey, 165 Wheeler, Graeme, 107
Turks and Caicos Islands, 33 Williams, Eric, 11, 85
Tyson Foods, 85 Williams, Marion, 116
Wilmore, Larry, 22
United Nations Environmental World Bank, 28–29, 88, 91, 95
Program, 161 World Development Report, 4
United Nations Human Development World Economic Forum, 47
Report, 1, 2, 4 World Trade Organization (WTO), 3,
United States, 9, 17, 19, 33, 84 13, 16, 46, 109, 123, 128, 145
Bureau of the Census, 58 Trade Related Measures (TRIMS), 124
Caribbean immigrants in, 55–56, 137. Trade Related Property Rights
See also Migration (TRIPS), 124
Caribbean students in, 138 World War II, 53–54
Caribbean tourists in, 137–138 Worrell, Delisle, 114
Caribbean trade with, 111, 133
Civil rights movement, 54 Yoon, Yeomin, 165

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Ransford W. Palmer-The Caribbean Economy in The Age of Globalization-Palgrave Macmillan (2009)

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The Caribbean Economy in

the Age of Globalization

US-Caribbean Relations: Their Impact on Peoples and Culture (1998)

1 The Caribbean Economy: An Overview 1

1.1 Profile of the Caribbean Community and

Caribbean Countries, 1980 and 1999 70

T his book looks at the Caribbean Community and Common

the distribution of income between labor and capital. Chapter 9 dis-

The Caribbean Economy:

T he United Nations Human Development Report (2007/2008)

2005 1975–2005 1990–2005 2005

Antigua & Barbuda 57 3.7 1.5 10,578 0.1

Source: United Nations, Human Development Report 2007/2008

government indebtedness. The two countries that exemplify this

Table 1.2 Comparison of Per Capita Income Growth

Jamaica 763 3,083

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

One is that early authoritarian leadership directed resources into

and Dominica still depend heavily on banana exports and are

Table 1.3 Percentage Distribution of Employment among the Main Industrial

Antigua & Barbuda, 2001 2.6 0.3 4.3 92.8

The Changing Shape of the Caribbean Economy

Caribbean economies are undergoing a kind of metamorphosis as

Table 1.4 Percentage Contribution of the Main Sectors to Gross Domestic

Barbados 0.9 6.3 9.0 83.8

Because tourism is the dominant service industry in the

replaces the traditional comfort zones of preferential treatment.

1960 1970 1980 1991 2000

* Represents GDP minus agriculture, mining, and manufacturing

The evolution into services is an extension of the W. Arthur

The Emergence of Trinidad and Tobago

Jamaica has twice the population of Trinidad and Tobago and is

The Caribbean as Small Open Economies

One of the principal indicators of globalization is trade openness,

common balance of payments experience of Caribbean economies

T he export agricultural sector remains a major employer in many

Thus the industry plays a social as well as an economic role that

(GUYSUCO), part of a wave of nationalizations by the Cooperative

Up until quite recently, Caribbean sugar received preferential

Table 2.1 European Union Import Price and Free Market

1995 31.2 13.3

Source: International Monetary Fund, International Financial Statistics

Caribbean sugar producers. Brazil and Australia can produce sugar

In the small eastern Caribbean islands of Dominica, St. Lucia, and

they see no viable agricultural alternative. But diversification within

refined sugar suggests a large potential for domestic refining. The

Jamaica’s. The pace of evolution of these economies toward ser-

T he definition of nontraditional exports is fuzzy and may

Nontraditional Exports and Economic Growth

The nontraditional frontier is where the structure of the Caribbean

may be visualized as a three-stage growth curve with GDP growth

apparel industry as well as to the information technology industry.

On the data entry floor of this offshore information processing facility,

There is no question that the income earned by women will

Nontraditional Exports and U.S. Policy

The United States is a major player in the offshore assembly of

the nominal value of US$472 million in 1997, representing roughly

The Competitiveness of the Offshore Assembly Industry

Offshore assembly firms tend to be notoriously footloose because

assembly firms to more attractive destinations in Mexico and

Indigenous Nontraditional Exports

From a development perspective, the perfect nontraditional export

into its marketing program the identification of markets for agro-