Policy Innovations Digital Magazine (2006-2016): Commentary: The Urgency of Building Alternative Development Strategies

Aug 2, 2005

The Caribbean has felt the effects of various economic theories and development strategies over the years. In fact, one could even say that Caribbean society was created by a theory—the theory of Mercantilism in the 17th and 18th centuries—which gave rise to the plantation system and the Triangular Trade of slaves, sugar and rum. The Ricardian theory of comparative advantage came later, in the 19th century, and provided a post hoc justification for the patterns of specialization in primary agricultural commodities that had developed in an earlier period. In the 1950s W. Arthur Lewis stood the Ricardian theory on its head by using it as the rationale for an industrialization strategy based on cheap labor, which had replaced agricultural land as the abundant factor of production and therefore the source of comparative advantage. This was the development strategy that prevailed during the 1950s and 1960s.

The abundant cheap labor strategy failed to deliver on promised job creation and since the 1960s the Caribbean has seen a string of other development agendas come and go: import substitution, state-led development, self-reliance and basic needs, structural adjustment, Washington Consensus and post-Washington Consensus. None of these policies has been entirely satisfactory in solving the problems of under-development, and during this period there was widening differentiation in economic performance and income levels among Caribbean economies. A small group of countries with less than 10 percent of the Caribbean Community (CARICOM) population has achieved per capita income levels in the upper middle income range by specializing in services exports, mainly tourism and financial services. The rest of the region continues to have per capita income in the lower income range. Absence of employment opportunities has given rise to continued emigration, and the inflow of remittances from these migrants has become the largest single source of foreign currency for many countries.

The current process of globalization has brought considerable economic uncertainty for the small economies of the Caribbean region. Among the main issues are:

  • Preference dependence.
    Preference erosion is affecting or will affect the export of bananas, textiles and sugar.

  • Trade taxes dependence.
    Cuts in tariff rates obliged by trade liberalization will significantly impact government revenue.

  • Tourism vulnerability.
    Expansion of tourism is constrained by resource limitations and by environmental degradation. The industry is also vulnerable to natural disasters and terrorism.

  • Financial services vulnerability.
    The offshore financial services industry is vulnerable to changes in foreign taxation and regulatory policies.

The conventional wisdom is that Caribbean countries should seek a different entry point in the global economy through the development of new services exports that build skills and human capital. But it will take time to develop such services and to prove their worth in world markets. Given these circumstances, it is inappropriate to tell Caribbean countries that they must simply liberalize their trade and capital transactions under WTO rules. The immediate and certain effect is that fiscal revenues will fall and local output will be displaced by imports; while export expansion, to the extent that it will take place at all, will only provide economic benefits in the long term.

What, then, can be said about the search for appropriate development strategies in the Caribbean?

  • All the lessons of history suggest that countries should not put all their eggs in one basket, but rather seek to develop a diversified production base that mitigates vulnerability to external shocks, increases the resilience of the economic system, and thus maximizes the chances of self-sustaining growth.

To that end, construction of an integrated regional Caribbean economy must now be a strategic priority. The plans for this are well advanced in the establishment of the CARICOM Single Market and Economy. But CARICOM members will need to take the necessary steps toward transferring sovereignty to the regional body in certain areas in order to accelerate implementation.

The integrated regional economy must have a place for domestic agriculture and small industry as well as services, and must seek a reasonable balance between production for domestic, regional, and extra-regional markets.

The role of the state is significant in creating and facilitating the necessary regional institutions. The state should promote and undertake investment in physical infrastructure and sectoral development policies that are consistent with capitalizing on new entry points in the global economy.

Finally, it is useful to admit that no one has all the answers at either the regional or the international level. However, The WTO and the Bretton Woods framework offers an altogether too narrow and restrictive framework for the exploration of alternatives. The Caribbean, along with the rest of the developing world, needs space for experimentation and for learning from the shared experiences of development policymaking.

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