PrSPC(e. 1.s uLd Challenges for t1Ic ( naribbean WORLD BANK LATIN AMERICAN AND CARIBBEAN STUDIES Viewpoints Prospects and Challenges for the Caribbean Steven B. Webb The World Bank Washington, D.C. Copyright © 1997 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing July 1997 This publication is part of the World Bank Latin American and Caribbean Studies series. Although these publications do not represent World Bank policy, they are intended to be thought-provoking and worthy of discussion, and they are designed to open a dialogue to explore creative solutions to pressing problems. Com- ments on this paper are welcome and will be published on the LAC Home Page, which is part of the World Bank's site on the World Wide Web. Please send comments via e-mail to laffairs@worldbank.org or via post to LAC External Affairs, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use. The boundaries, colors, denominations, and other information shown on any map in this volume do not imply on the part of the World Bank Group any judgment on the legal status of any territory or the endorse- ment or acceptance of such boundaries. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to the Office of the Publisher at the address shown in the copyright notice above. The World Bank en- courages dissemination of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. Permission to copy portions for classroom use is granted through the Copyright Clearance Center, Inc., Suite 910, 222 Rosewood Drive, Danvers, Massachusetts 01923, U.S.A. The painting on the cover The Offering by Jonna Brasch, was provided by Art Professionals Limited in Jamaica. Steven B. Webb is senior economist in the Country Department III, Latin America and the Caribbean Regional Office, World Bank. This essay is based on and draws directly from Caribbean Economic Overview, a report prepared for the Caribbean Group for Cooperation in Economic Development by a team comprising Steven Webb, Lisa Da Silva, and Demetris papageorgiou. Marco Scuriatti provided research assistance, Deborah Trent assisted in the production of the report, and Elizabeth Forsyth and Marcus D. Rosenbaum helped with the editing. Library of Congress Cataloging-in-Publication Data Webb, Steven Benjamin, 1947- Prospects and challenges for the Caribbean / Steven B. Webb. p. cm. - (World Bank Latin American and Caribbean studies) ISBN 0-8213-33946-X 1. Caribbean Area-Economic conditions. 2. Caribbean Area- Economic policy. I. Title. III. Series. HC151.W377 1997 330.9729'52-dc2l 97-20135 CIP 111 81 . 6-.66 661 'sGaTIunoOD IDgD oi SAAOJ oXanosaJ 3aNJO Ax;TAIAQAO ( q< 91 .6-Z861 'CFDDD 01 RuiJUcuuTJ fcUTIhX 3NN JO AXlAAO j f c{qi 9. 6-0861 'uvoqq!2W9 tlp UT S)31DU;( teJST PUe UO Ultpu £1 aIlqp .......... uoSai Xq 'uoit 1uj pue tI o0I g I ajq< . . 6-1861 'solu-d TpAxoig vTodxa puu isoD Ioiauj 3 dD vi aqi .................. ''..''''''''''''''''''''''''..'''..'''''''''.'SJ 1O N ThHL HIIAA SNWV\dDOO)d aaVMIL S- I:I XaNNV .........................S. .OIVDIaNI xKdv wwIA S :l XINNV . . - .uouTdojoAaQ aJUoso-d u1uunH pue ioquj zz ------------------------------ ullopaMlolz>aS :)T qnd .z NOIIDv- dO1 VaNHIDV b 61. s.:oS Sutpunj 9 1....................................................sAXolJ praTdu AllunoD 1. aIV aNV'IVIIdVD NDIThMOd I .. Aanlas osuodsaoj it -.. . --- ....-- soauS ptau}l- tqi o0 saLPunoD uEvqqXeCD ;IlJjo siTodxq 6.sUTueaoId aoaaal-pl 6.NVThgIIMVD WHI UNV VJAVN Z ................... ----... ................ .......... t.Id O pUt A;d ,.SUNTdII. lNROZVV T A.SINANO')AID tIO ISI'I SINN aLN O D Table Al.1 Caribbean Countries; Summary of Economic Indicators ............................. 25 Table A2.1 Imports of Textiles/Apparel and Footwear under the 807 Production-Sharing Program, 1990 and 1993 .29 Table A2.2 Composition of Caribbean Countries' Exports to the United States, 1983-95 ............................................. 30 Table A2.3 U.S. Imports of Textiles from Caribbean Countries, 1989-95 ...................... 31 FIGURES Figure 2.1 Growth of U.S. Apparel Imports from CGCED, Mexico and the World, 1990-96 .11 Figure 2.2 U.S. Apparel Imports from the World, CGCED, and Mexico ................................... 12 Figure 3.1 Investment and Growth in the 1990s ................................... 14 Figure 3.2 Savings and Investment in the Caribbean ................................... 15 Figure 3.3 Net Flows to Smaller Caribbean Countries ................................... 17 Figure 3.4 Net Flows to Larger Caribbean Countries ................................... 19 Figure 3.5 Net Foreign Direct Investment in the Caribbean ................................... 20 iv LIST OF ACRONYMS CARIBCAN Caribbean Community/Canada Technical Cooperation Agreement CARICOM Caribbean Community Secretariat CBI Caribbean Basin Initiative CGCED Caribbean Group for Cooperation in Economic Development DOD Debt Outstanding and Disbursed DBMC Dominica Banana Marketing Corporation ERP Economic Recovery Program EU European Union FDI Foreign Direct Investment FTAA Free Trade Area of the Americas GALs Guaranteed Access Levels GDP Gross Domestic Product GNFS Goods and Non-factor Services GNP Gross National Product GSP Generalized System of Preference IDA International Development Association 1DB Inter-American Development Bank IMF International Monetary Fund NAFTA North America Free Trade Agreement OECD Organization for Economic Cooperation and Development OECS Organization of Eastern Caribbean States SITC Standard International Trade Classification v INTRODUCTION A TRAVEL POSTER OF TOURISTS in an unspoiled tropical lagoon shows one side of the Caribbean, but not the side where most of the region's 20 million people live-struggling close to or below the poverty line. Although a few countries are realizing their potential as business locations and tourist destinations a few hours from Miami and New York, most of the region faces many of the problems typical of poor countries everywhere. Fortunately, the economies of these coun- and societies.What's more, the small populations tries are small, so major improvements of living and narrow economic bases magnify the severity standards would not require massive investment of these threats. or huge export marketing opportunities. More- The challenge for the people and policy- over, the Caribbean's close economic and com- makers of the region is to promote sustainable munications links with Europe and North Amer- growth at a pace that will realize the opportum- ica, and the large expatriate communities there, ties while avoiding the dangers, and thus close the could provide the necessary resources and market gap with North America and Europe. Improving niches for goods and service exports.To some the governance and growth in the Caribbean will extent they already do. benefit not only the 21 million residents, but will On the other hand, their small size and also improve the prospects for protecting the convenient location are not unmixed blessings environment and fighting international crime. for Caribbean countries. Proximity to North This has disproportional importance to the rest of America makes it easy for financial capital and the world because of the ecological diversity of human capital-the best educated young peo- the region and its strategic location astride the ple-to move out if things look even temporari- routes between South and North America. ly sour at home. And location between South For the most part, the political basis to meet and North America attracts criminal activities, this challenge has important strengths. In recent drugs, and money laundering on a scale that years peaceful transitions from one elected gov- threatens to overwhelm some local governments ernment to another have deepened democracy in 1 2 * PROSPE CTS AND CHALLENGES FOPR THE CARIBBE AN the English-speaking countries, and some The trade agreement came at a time when Caribbean countries have had political transitions the major industrial countries were reducing aid to democracy where it was weak or absent. Sus- flows and emphasizing export development in taining these political successes will require sus- their assistance strategies.The countries of the taining economic development. Caribbean have accepted this new reality and Tourism, other service exports and manu- have made many of the changes necessary to facturing are leading the Caribbean growth. In open their economies.To realize the full long-run none of these areas, however, is the region grow- of opening in the Caribbean, however, the main ing as fast as the world market. And overall, the industrial trading partners must further improve region is growing only slowly-growth per capi- the export opportunities for non-traditional ta is slower than in East Asia, Latin America, and products from the Caribbean and must taper off even the high-income countries.The danger their financial assistance in a way that does not now is that growth might slow further, widening make excessive debt-servicing demands on the the gulf between incomes in Caribbean and in heavily indebted governments of the region. Europe and North America. The end or decline Caribbean countries, particularly the larger of traditional preferential trade arrangements and ones, continue to attract private investment from the expansion of Mexico, Cuba, and other com- the rest of the world, but it is not enough to off- petitors threaten to undermine the bases for even set the decline in official aid over the past the modest growth achieved recently. To prepare decade. Although governments of smaller for these eventualities, Caribbean countries need economies continue to receive positive capital to speed up implementation of the investments flows, often very large per capita, the net repay- and policy adjustments that will facilitate diversi- ments from governments of larger economies put fication of the private sector. a serious burden on public saving. Private foreign Improving policies in the Caribbean will direct investment (FDI) has grown since 1992. continue to bring benefits no matter what the This is a favorable change of composition, rest of world does, but the benefits will be greater because experience elsewhere indicates that FDI if the industrial countries liberalize their imports is less liquid and volatile, is the most likely to of non-traditional Caribbean products. The increase efficient investment and growth, and is advent of the North American Free Trade Agree- the least likely to finance unsustainable govern- ment (NAFTA) in 1994 produced high hopes ment spending or exchange-rate overvaluation. that it would lead to a similar agreement for the Getting more growth will require more invest- Caribbean, but such an agreement has not mate- ment, which will require making the opportuni- rialized and is not near the top of the post-1996 ties more attractive for private saving and financ- election agenda in the United States. Some ing from abroad and at home. Caribbean countries have also been looking to The increased openness of most Caribbean expand economic relations with South America, economies over the past decade, the improved which have been minimal in the past, and with macroeconomic stability and the growth of for- Europe. Apparel, shoes, and sugar are the main eign direct investment are reasons to hope that products for which NAFTA gives Mexico an overall growth will accelerate in the future. To advantage over the Caribbean, with apparel being realize this hope will require continued increase the most important. In the early 1990s, in trade openness, improved labor and financial Caribbean apparel exporters increased their mar- market systems, and more efficient public sectors, ket share in the United States, but growth slowed focused on human resource development, law in 1994-96 to about the same pace as the market. enforcement, and facilitation of private-sector Mexican apparel exports to the United States, in growth. It will also require more innovative and contrast, were already growing faster than the export-oriented private sectors. These develop- Caribbean in the early 1990s and have further ments to raise labor productivity will be necessary accelerated since NAFTA was signed. to keep exports growing along with real wages. RECENT TRENDS IN THE LAST FEW YEARS the common trait of most Caribbean countries- democracy-becamie even more widespread in the region.' Democracy was restored in Haiti, and a peaceful, if tense, election brought in a new president-the first time ever that one elected president had succeeded another there. Elections also brought in new governments in Barbados in 1994; in Dominica, Grenada, St. Kitts and Nevis, and Trinidad and Tobago in 1995; and in the Dorminican Republic and Suriname in 1996. A new prime minister was cho- sen in St. Lucia in early 1996. Thus, the maj'ority of independent Caribbean countries have new governments since 1994. The turnover of governments through the constitutional process, which is a hallmark of true democracy, is much in evidence in the Caribbean. There also are less welcome political devel- small size of the economnies, makes them excep- opments, however, especially relating to interna- tionally vulnerable to a threat that continues and tional drug-trafficking and money-laundering would increase with any decline in the general operations, which have sought to buy safe havens economy. This threat highlights the importance in the region. The 1992 report by the West Indi- of the Caribbean to the fabric of international an Comm-ission, A Time for Action, said that law and order. "Nothing poses greater threats to civil society in The Caribbean countries have widely vary- CARICOM countries than the drugs problem." ing econormic situations. (See Annex I for a sta- The democratic process has thus far resisted tistical overview.) Income levels range from low wholesale incursion in most countries, but the in Guyana and Haiti to upper-rmiddle in Barba- location of the Caribbean on the flight path dos and some countries of the Organization of from South America to North America, and the Eastern Caribbean States (OECS). All the coun- 3 4 * PROSPECTS AND CHALLENGES FOR THE CARIBBEAN tries have service-export industries, including Exports have grown in most countries, although tourism, but their importance varies. In Barba- very strongly only in the Dorminican Republic, dos, the Bahamas, and some of the OECS coun- Grenada and Guyana. tries, where service industries have developed In per capita terms, however, the growth for most strongly, people now enjoy the highest per the Caribbean as a whole was slightly negative capita incomes in the region. Rising labor for 1991-95. Haiti had the worst growth perfor- incomes are gradually pricing these countries mance, but even in the rest of the region per out of traditional agricultural export activities, capita growth averaged barely 1 percent per year. but during their econornic transition they have (See Table 1.2.) This is poor by world standards; been able to use migrant labor from other, low- annual per capita growth of gross domestic prod- er-income islands.Thus the export-diversifica- uct (GDP) for the period was 7.6 percent in East tion strategy of moving into services, a strategy Asia, 2.0 percent in South Asia, 1.3 percent in to which most countries have subscribed in their the high-income countries, and 1.1 percent in medium-term plans, has succeeded where it was Latin America. The Caribbean out-performed pursued. Countries that moved slowly with this the Middle East, Africa, and Eastern Europe- strategy, however, now need to implement it Central Asia, where growth was negative on more expeditiously in order to prepare for the average, but this hardly addresses the aspirations accelerating changes in the world economy. of the Caribbean. External conditions partly, but only partly, GROWTH explain the recent growth outcomes in the Caribbean: Hurricanes and tropical storms Growth in the Caribbean in the 1990s has retarded growth in St. Lucia in 1994-95 and in been positive in all countries except Haiti and, Dominica, St. Kitts/Nevis, and Antigua/Barbuda with Haiti excluded, has been slightly faster on in 1995-96. Continued growth in Europe and average than in the 1980s. (See Table 1.1.) the United States, however, has kept the Table 1.1 GDP at Factor Cost and Export Growth Rates, 1981-95 (average annual percentage changes) GDP' Exports 1991-1995 1981-1990 1991-1995 (curr US$) Antigua & Barbuda 6.3 1.9 2.0 Belize 4.7 4.6 3.0 Barbados 1.0 -0.4 1.0 Dominica 4.5 1.3 2.0 Dominican Republic 2.6 2.8 9.0 Grenada 4.7 2.3 9.0 Guyana -3.1 7.3 12.0 Haiti -0.1 -5.5 -8.0 Jamaica 2.5 1.0 6.0 St. Kitts and Nevis 5.8 3.6 2.0 St. Lucia 5.3 3.8 5.0 St. Vincent and the Grenadines 6.7 3.0 0.0 Suriname 0.6 1.6 -4.0 Trinidad &Tobago -3.5 0.6 -1.0 Region 2.7 2.0 2.7 Region w/o Haiti 2.9 2.6 3.5 Sources: World Bank's econom c and social database; IMF's Recent Econom c Development Reports; ard World Bank Staff Estimates, 'annual average % change calculated from GDP at tactor cost. RECENT T RENDS * 5 Table 1.2 Growth and Integration, by Region Real per capita Growth of real FDI inflows as a GDP growth, exports per percentage of Region 1995-95 capita, 1991-95 GDP, 1993-95 East Asia 7.6 14.1 3.1 South Asia 2.0 8.4 0.3 High income 1.3 5.0 n.a. Latin America & Caribbean 1.1 7.2 1.1 Caribbean 1.0a 1.61 44C Middle East & North Africa -0.5 0.4 0.4 Sub-Saharan Africa -1.6 -1.6 0.9 European & Central Asia -8.6 1.0 1.4 n.a. Not applicable. a. Excludes Haiti. b. Includes Barbados, Dominican Repubic. Guyana, Jamaica, Suriname and Trindad & Tobago, which had more than 70 percent of the region's exports in 1994. c. 1992-94, excludes Haiti and Suriname. Source: World Bank, Global Prospects and the Developing Countries (Washington, DC, March 1996); World Bank data. Caribbean tourist industry growing, if not in nomic policy and of private-sector entrepreneur- high boom. Higher world rmineral prices helped ship. St. Kitts and Nevis, St. Lucia, and St.Vincent exporters of oil (Trinidad), nickel (Dominican and the Grenadines have continued their good Republic) and bauxite (Guyana,Jamaica, and policies and growth from the 1980s, but the pace Suriname). Sugar exporters (in most islands; see has slackened as their tourist sectors mature and Table A1.1) faced mixed news, as world prices as sugar and banana export revenues plateau. improved. But the reform of the Common Agri- Barbados, the Dominican Republic, Grenada, and cultural Policy in Europe, where most Caribbean Trinidad and Tobago undertook varying degrees sugar is sold, brought the European price closer of structural adjustment in the 1980s and early to the world price and thus lowered the effective 1990s and are now enjoying the fruits. Guyana value of the preferential access. For countries like has stabilized its macroeconomic situation, com- Guyana that can produce more at the lower pleted part of the needed structural reforms, and price, opportunities will improve because expan- had strong growth in the 1990s as the economy sion of the European Community is leading to rebounded from the disastrous effects of earlier increased sugar quotas for the Caribbean. Banana policies. Haiti and Suriname also rebounded in exporters (Belize, Jamaica, and the Windward 1995, on the first hints of reform. In the last OECS economies) now must compete in three countries, this growth seems likely to con- Europe with bananas from Central and South tinue only if structural reforms, such as privatiza- America; the current quota system restrains the tion, trade liberalization, civil service reform and quantity of competition, but that restraint is slat- regulatory reform, improve the environment for ed to drop in 2001.The recent preliminary the private sector. Other countries, have experi- WTO decision against the European Union will enced stagnation or declining growth. In some probably hasten the decline. Banana growers in countries, such as Belize and Jamaica, this is the Windward Islands, especially Dominica in because the necessary adjustment programs are 1995, were also hit hard by the storms. not complete; in others, such as Antigua and Bar- buda, it is because such programs need to be POLICY REFORM AND GROWTH initiated. PROSPECTS Most Caribbean countries have made sub- stantial progress on macroeconomic stabilization The effects of external factors, however, did in the 1990s. Inflation rates are now below 20 not seem to persist as much as the effects of eco- percent annually everywhere, indicating that the 6 * PROSPECTS AND CHALLENGES FOR THE CARIBBEAN Caribbean economies are sharing in the success ed the region's exports until the mid-1980s, of most Latin American and OECS economies manufactured exports have grown considerably in achieving more macroeconomic stability. (See and are now the leading non-service exports to Table 1.3.) Fiscal deficits have also declined in the U.S. market. most countries and even turned to surpluses in a Given the trends of greater economic stabil- few. ity, smaller government deficits and more open Most Caribbean economies have substantial trade regimes in most Caribbean countries, what trade and financial relations with the rest of the are the prospects for future growth, compared world, but some barriers remain, even between with the recent deceleration? Recent worldwide the CARICOM countries. Table 1.2 shows that research shows that when low- and middle- FDI inflows per capita in the Caribbean have income countries open their economies and been substantial, even greater than for East Asia, integrate with the rest of the world, they tend to as Chapter 3 will discuss in more detail, but have faster than average growth rates. In the exports per capita have grown slowly in the open developing economies, per capita real 1990s.2 The Caribbean economies have always growth between 1970 and 1989 averaged more been very open in the sense of high export and than 4 percent and was at least 2 percent in each. import shares of GDP, because of the smallness The growing disparities in the distribution of of the economies, but openness in the sense of world income resulted from the exceptionally foreign-exchange convertibility and lack of price poor growth performance by most countries that distortions from world prices has come more were not integrating or were becoming more recently and more slowly. Exports as a share of closed.Among 27 countries that opened after GDP were already high and have increased in 1975, per capita growth increased from slightly the last decade in most countries, but the aggre- negative rates on average in the three years gate change is not large for the region.The com- before the opening to positive rates in the year position of exports has changed greatly since the of reform and the next two, and after that aver- early 1980s.Whereas primary products dominat- age growth rose further.3 Table 1.3 Inflation and Fiscal Deficits in the Caribbean, 1980-95 (annual averages) Inflation Overall Fiscal Balance, % of GDP 1981-90 1991-95 1980-89 1990-95 ANTIGUA ... 4 .. -6 BAHAMAS, THE 6 4 -2.5 -3 BARBADOS 6 3 -5 2 BELIZE 4 2 -7.5 -7 DOMINICA 5 3 -10 -11 DOMINICAN REP. 25 16 -1 -5 GRENADA 5 3 -28 -5 GUYANA 18 8 -48 -37 HAITI 7 25 ... ... JAMAICA 15 40 8.5 1 ST. KITTS 3 3 -4 -2 ST. LUCIA 4 4 -4.5 -2 ST. VINCENT 4 3 -3 -8 SURINAME 13 133 -17.5 -19 TRINIDAD 11 7 -5 1 Region 9 17 Region w/o Suriname 9 9 Sources: Ministries of Finance and Centra Banks; IFS database and IMF's Recent Economic Development Reports; World Bank Staff Estimates, RECENT TRENDS * 7 So why has growth performance in much remedy is not usually the abolition of all regula- of the Caribbean been disappointing? Trade lib- tions. Investors want clear, published, and non- eralization has begun but has not been complet- discretionary regulations that provide adequate ed and has not yet had a strong effect on growth. protection against breaches of contract or abuses Contrary to the experiences of most countries of the environment and other resources, but that that liberalized in the 1960s and 1 970s, where also allow desirable investment on a routine basis. the growth of output and exports responded The agenda for modernizing the public sector quickly to trade liberalization, the response in the must include reorientation of its internal incen- Caribbean to the liberalizations of the late 1980s tives so it provides a legal and regulatory envi- and 1990s has been slower.The immediate cause ronment that facilitates private-sector activity. of the difference seems to be that the countries The business environment also needs to be with early successful liberalizations made and improved by making labor markets more flexible sustained a real depreciation of the exchange and less contentious, upgrading economic infra- rate, which played a crucial role in stimulating structure, especially telecommunications, and and reorienting growth.4 None of the Caribbean improving supervision and regulation of the countries did this. financial sector.The rise of foreign direct invest- Another reason for the modesty of the ment, documented in Chapter 3, may indicate growth response to trade liberalizations is that that past reforms are starting to pay off. oligopolies of local trading companies still domi- Many potential investors and entrepreneurs nate the economy and policies in most who would accelerate growth are often not Caribbean countries. In a variety of ways they involved in the economy prior to policy reform. limit the dynamic development that new entrants Their potential employees, suppliers, and other to the export sectors might lead.The traditional beneficiaries are often unaware of what they are private sector has learned to live with and profit missing and are certainly not organized pohtical- from most of the restrictive policies and proce- ly. So generating support for the reforms requires dures that discourage investment and growth. the political leadership to get out in front with a The restraints to fresh entrepreneurs include vision of economic development that would alien-landholding laws and various investment draw new and dynamic entrants into the process, regulations that in law or practice require special benefiting their future employees and the econo- ministerial approval in order to proceed. The my at large. NAFTA AND THE CARIBBEAN TOURISM IS THE LARGEST EXPORT earner for the Caribbean, and minerals remain important for most of the larger countries. But manufacturing is second- or third-largest in most countries, and it is growing faster than minerals. More than 60 percent of Caribbean merchan- dise exports go to Canada and the United States; the share is even larger if one excludes sugar and bananas, which mostly go to Europe on preferential programs. So it is not surprising that Caribbean countries have sought free access for their goods to the North American market. They have followed with great interest the emergence of NAFTA and are actively promoting a Western Hemisphere Free Trade Agreement (WHFTA). Given the small size of their home markets, the best long-term growth opportunities for Caribbean countries would be with a large trade area to which they could export freely for various niche markets, and from which they could obtain low-cost, duty-free imports. The latter would increase competitiveness of Caribbean exports and tourism. This chapter summarizes the aspects of which detailed and recent information is NAFTA and the U.S. trade-preference regime available. that are relevant to the Caribbean. Although NAFTA has not yet had its full effects, patterns TRADE-PREFERENCE PROGRAMS are emerging. This analysis concentrates on apparel exports to the United States, which are The United States has several trade-prefer- quantitatively the most important and for ence programs that benefit the Caribbean. (See 9 10 * PROSPECTS AND CHALLENGES FOR THE CARIBBEAN Annex 2.) The Generalized System of Prefer- each other a number of reciprocal trade advan- ences has since 1976 granted the Caribbean and tages, including progressive tariff reductions and most other developing countries preferential immediate quota elimination. The Caribbean did access compared with other, mostly industrial, not lose any of the special programs described countries. The Caribbean Basin Initiative above, but their relative value diminished. For (CBI), implemented in 1983, offers even better most products, the CBI already provides tariff treatment for some products from the Caribbean countries equal or better treatment Caribbean and Central America, although it than what Mexico receives under NAFTA. But excludes many important Caribbean exports, like Mexico now clearly has an advantage in two petroleum, sugar, textiles, clothing, and footwear. important areas-textiles and footwear. Prior to Canada has a similar program called the 1994, Mexico and the countries of the CBI Caribbean Community/Canada Technical Coop- received the same treatment on textile exports to eration Agreement, or CARIBCAN. the United States. Now NAFTA allows Mexico's The U.S. Program for Production- apparel and footwear exports to enter totally Sharing Agreements, commnonly known as the duty-free, as long as these products are manufac- 807 Program, after its number in the tariff code, tured under the Special Regime Program; helps U.S. firms compete with labor-intensive Caribbean exports under this program, mean- foreign manufactures by allowing U.S. producers while, must continue to pay some duty, putting of partly finished goods, like cut cloth for cloth- them at a disadvantage. Understandably, ing, to ship them abroad for assembly (sewing) Caribbean officials are concerned that NAFTA and then to re-import them. Duty at the stan- provisions for the trade of these products will dard rate of 19 percent is levied only on the val- have a negative impact on the region's trade. ue added abroad. The program applies to many Indeed, there are indications that it already developing countries, not just the Caribbean, but has. New data on U.S. imports of apparel indicate proximity to the United States makes the pro- that the Caribbean is losing some of its market gram relevant mainly for Mexico and the share. In 1995, when U.S. apparel imports were Caribbean.' For most countries the program growing at 10 percent, sales from Caribbean pro- does not exempt these products from any exist- ducers (mainly the Dominican Republic and ing quota or other non-tariff barriers. Although Jamaica) grew at 13 percent. In 1996, the U.S. the program encouraged the growth of textile imports growth slowed to 5 percent, and trade in the 1990s between the Caribbean and Caribbean sales grew less than 1 percent. (See Fig- the United States, quota limitations impeded fur- ure 2.1.) Meanwhile, Mexican sales of apparel to ther growth for some countries. Accordingly, in the United States grew 61 percent in 1995 and 39 1986 the Reagan administration, under the percent in 1996, despite the stagnant U.S. demand. umbrella of CBI, expanded the 807 Program to The CBI countries have sought to obtain improve the Caribbean's access to the U.S. mar- NAFTA parity by way of the Caribbean Basin ket.With the Special Access Program (CBI) Free Trade Agreements Act. If implemented, this and the Special Regime Program (Mexico), parity would grant CBI countries the same priv- countries can increase their quotas as long as ileges that Mexico has attained through NAFTA. they demonstrate that they actually have the It would last 10 years, at which time countries capacity to produce. Although this was an would have to decide whether to join NAFTA, improvement and seems to have encouraged to form independent bilateral agreements, or to export growth, the quotas still discourage major return to the original CBI trade policies. new investments, because firms are reluctant to NAFTA parity would not be the same as joining invest in a large factory for which the existing NAFTA, in that parity would not obligate the quotas do not allow profitable exports. Caribbean to give reciprocal treatment to Cana- With the inception of NAFTA in 1994, da, Mexico, and the United States.To date, Mexico, Canada, and the United States granted NAFTA parity has not passed the U.S. Congress, NAFTA AND THE CARIBBEAN * 11 although there is strong support from some offi- growth of apparel exports from the Caribbean cials. It was not an issue in the 1966 election, countries to the United States slowed in 1994 which avoided stirring up opposition but also and 1995 and virtually stopped in 1996. left it out of the top spots in the post-election In Jamaica in 1995-96, 23 factories in the agenda of the president and the Congress. apparel sector closed. Approximately 15,000 peo- ple lost their jobs. This translates to approximate- EXPORTS OF THE CARIBBEAN lyJ$1.2 billion in payroll and aboutJ$300 mil- COUNTRIES TO THE UNITED lion in taxes lost to the government. In 1996 STATES Jamaican textile and clothing exports to the United States fell 5 percent.9 In 1980, about 98 percent of Caribbean A look at Mexico offers a contrasting situa- exports to NAFTA countries (excluding goods tion. Mexican apparel exports to the United manufactured in free-trade zones) went to the States have grown faster than those from United States; in 1994, despite increased trade Caribbean countries since 1991, and in 1994 and with Canada, the U.S. share was still 86 percent.6 1995, after NAFTA took effect, they grew three Moreover, non-traditional Caribbean exports to to four times as fast. Between 1989 and 1994 the U.S. market-led by apparel-almost Mexican apparel exports to the United States quadrupled between 1983 and 1994, measured in more than tripled, from US$500 million in 1989 current U.S. dollars (see Table A2.2). In 1983, to US$1,597 million in 1994. In the first year of textile apparel exports constituted only 6 percent NAFTA, 1994, the volume of such exports from of the exports of the Caribbean countries to the Mexico to the United States grew by 41 per- United States, but by 1994 their share reached cent, compared with 8 percent for apparel 39 percent. About 80 percent of these exports imports from the Caribbean countries and 11 entered the United States under the 807 Pro- percent for total U.S. imports of apparel. In the gram, mostly from free-trade zones in the first nine months of 1995 the growth of Dominican Republic and Jamaica.7 Caribbean exports to the United States Within the free-trade zones, manufacturing rebounded to 16 percent, while similar Mexican is subject to minimal taxation. Material inputs and exports grew by 68 percent. In this same period, machinery enter duty-free, and investment is freed the value of Mexican apparel exports to the from most regulations, although the national envi- Figure 2.1 ronmental and labor regulations still apply. Conse- Growth of U.S. Apparel Imports from CGCED, Mexico quently, the growth rate of apparel exports from and the World, 1990-96 (Percent Growth, US$) the Caribbean to the United States in the early 70 - 1990s was higher on average than the growth rate of all such imports by the United States (see Fig- 60. ure 2.1). Between 1989 and 1994, apparel exports 50 - from the Caribbean to the United States increased J H C , by about 94 percent in current dollars, while total 40 - U.S. imports of textiles increased by only 49 per- cent (See Table A2.3). The Dominican Republic and, to a lesser 20 extent,Jamaica are the leading exporters of V apparel and footwear to the United States among 0 the Caribbean countries. By 1994, Dominican 0- Republic apparel exports to the United States 1990 1991 1992 1993 1994 1995 1996 were US$1,572 million-more than double the A, World Tota 1989 figure andJamaica's were US$454 mil- -- CGCED Total lion, double the 1989 figure.8 But this robust -- Mexico 12 * PROSPECTS AND CHALLENGES FOR THE CARIBBEAN United States surpassed for the first time the val- assembly operations are mobile geographically, ue of similar exports from the Caribbean. because the required fixed investment is minimal The spectacular growth rates for Mexican and easy to transport. textile exports must be considered in light of the Caribbean countries could offset at least part small base from which they started, as Caribbean of this disadvantage if they made themselves more textiles also grew fast from a small base starting attractive than Mexico in other ways. Some in the 1980s. Both Mexico and the Caribbean advantages of the Caribbean-actual and poten- still have scope to increase their market shares, as tial-are economic: production quality and speed, one can see from Figure 2.2, which shows the education of the labor force, transportation costs, absolute levels of U.S. apparel imports from the local costs of production, and transaction costs. world, the Caribbean, and Mexico. Other advantages of the Caribbean are broader, including the long record of democracy and gen- Figure 2.2 erally better governance and judicial systems. It U.S. Apparel Imports from the World, CGCED, and would be self-defeating for the Caribbean to try Mexico (US$ millions) to compete with Mexico, Central America, and 40,000 - ~~~~~~~~~~Asia solely on the basis of low real wages, for the 35,0C0 - | g i| | 0 W| | .i | R W resulting emigration and social unrest would offset any gains in competitiveness.While avoiding real 30,000 - | X S E 2 | E | E Eg E | | | g appreciation of the exchange rate is important, 25,000 - ~~~~~~~~~gaining comnpetitiveness along with real income growth would require better investment in human resources and in economirc inf-astructure and |- e World otalaimproved pohlcy environments for business. Whe 10,000 it would be good for the Caribbean economies to 5,000 ~~~~~~~~~~~improve in these ways, opportunities for closer integration with the larger regional trade blocks- 0 18190191921919419196 NAFTA, MLECOSUR, and eventually the Free 1939199 199 192 193 194 195 996 Trade Area of the Americas-would also encour- * World Total age apparel manufacturers to increase the share of * CGCED Total value added in the Caribbean and help economnic ij Mexico development generally. To varying degrees the Caribbean countries RESPONSE STRATEGY have started moving away from trade policies of the past that relied on preferential market agree- U.S. apparel imports from Mexico have ments, protected domestic economic activities accelerated because NAFTA makes them duty- from import competition, and perpetuated the free. Similar exports from Caribbean countries to concentration of Caribbean exports.Whatever the United States are subject to 19 percent duty the industrial countries do about past preferential on the value added in assembly, which is around arrangements and future opening to the 33 percent of the exports' total value. In other Caribbean, it will be more based on geopolitical words, U.S. firms producing apparel and other considerations than on any reciprocal trade con- products under the 807 Program may choose cessions that the Caribbean might grant. Thus, it between outsourcing assembly operations to the would benefit the Caribbean countries to com- Caribbean and paying an average 19 percent plete the opening process quickly so that they duty on the value added, or outsourcing to Mex- could advertise themselves, for both manufactur- ico and paying no duty on the assembly value ing and export services, as attractive business loca- added. On the face of it, that is not a difficult tions near to Miami, Caracas,Toronto, Omaha, choice-especially considering that apparel and even London or Brussels, via air or Internet. - FOREIGN CAPITAL AND AID ECONOMIC ASSISTANCE TO THE CARIBBEAN has declined markedly since the early 1980s. In 1982 Caribbean governments received US$1.4 billion in grants and net loans from bilateral and multilateral donors and lenders, but by 1994 these net flows had declined to US$341 million.10 Net flows to governments from commercial sources also declined, from more than US$200 million in 1982 to a negative level in the 1990s, with net repayments of averaging $169 million in 1993-95. (See Table 3.1.) The reversals have been more dramatic for some countries than others, as discussed below. The decline of official assistance resulted from the coincidence of three trends-the declining aid flows worldwide, the declining geopolitical importance of the Caribbean with the end of the Cold War, and the necessity of repaying the structural adjustment lending from the 1980s.The difficulty of this sea change has been mitigat- ed by the shift of bilateral aid from loan to grant terms, in order not to repeat or exacerbate the problems that were emerging because of net repayment on earlier lending. How has the Caribbean dealt with this When aid flows first dropped after 1982, decline of assistance? And what can the govern- most of the economies contracted, with lower ments and the international donor/lender com- investment and growth. Then the countries munity do to help the economies obtain ade- mobilized more saving from other sources- quate resources for growth? domestic and foreign-to restore investment and 13 14 * PROSPECTS AND CHALLENGES FOR THE CARIBBEAN growth in the late 1980s and to offset further investment, for the rate now is not especially low, declines of aid in the mid-1990s. Figure 3.1 and growth has been strong for several years. In shows the relation of growth in 1990-95 with Barbados and Trinidad/Tobago-not coinciden- the average share of investment in the five-year tally the countries with the highest per capita period, starting two years earlier in order to income but low growth in the early 1990s- allow the supply effect to be felt., Investment investment rates have sunk too low for adequate rates in the range of 10 to 30 percent of GDP growth, although both countries have enjoyed are positively correlated with subsequent growth some recovery in the past two years. rates. Investment rates above 30 percent do not Domestic saving rates have followed a dif- seem to have led to more growth than rates in ferent path from investment in most countries. In the 20-30 percent range, but in the Eastern Belize and the OECS countries other than Caribbean States this may reflect productive but Dominica (and probably Antigua) domestic sav- lumpy infrastructure investments. ing rates show a clear upward trend, moving up to finance most of domestic investment. In Figure 3.1 Guyana and Haiti domestic saving became nega- Investment and Growth in the 1990s tive in the early 1990s, which clearly cannot last. Barbados and Trinidad/Tobago have experienced a less dramatic but longer term decline in domestic saving rates. Those trends probably reflected a shortage of attractive investment opportunities, since domestic saving nonetheless exceeded investment in the early 1990s. Since 0 X E S most public-sector deficits declined in the last decade-usually meaning increased public sav- ing--private domestic saving was stable as a share of GDP. This probably resulted from the same factors that kept investment from rising. These overall trendls suggest that the -6 -4 -2 0 2 4 6 8 Caribbean economies have adapted to declines of GDP Growth 1990-95 aid since the early 1980s by a combination of Source: IEC Database reducing public deficits and investing more effi- ciently, so that they can sustain modest growth with Despite the importance of adequate invest- the diminished resources from abroad. Such growth ment for growth, investment rates are not rising rates will not suffice, however, to reduce poverty in the Caribbean. Given the greater global avail- quickly or to close the income gaps with the high- ability of capital in the world, compared with a income countries. Adequate growth for these decade ago, the stagnation in the Caribbean objectives will require increasing domestic private mostly reflects a lack of demand and opportuni- saving, along with further increases in the efficiency ties for private investment, rather than shortages of investment and in foreign private financing. in the aggregate supply of financing. Figure 3.2 While private domestic saving was stable or shows the trends of domestic saving and total declining in the region, more foreign saving (net investment (which is also total saving) as shares external flows) went to the private sector in of GDP for the various countries for which 1993-94. Net foreign direct investment rose comparable data were available. In most countries from US$500 million on average in 1988-92 to the trends of investment have not been clearly US$1,235 mnillion in 1994.This shift in composi- up or down, but in three countries, there has tion of liabilities of the private sector bodes well been a secular decline on investment rate. In for the region. FDI is less liquid than private Guyana this reflects elimination of unproductive lending and bank deposits and is thus less likely %OfGDP %ofGDP B %ofD3 % of GDP 0n %oofCGDP%ofGDPGDof GDP L ID CD, C B, SUC CD~~~~~~~~~~~~~~~~~~~~~~C 1980 1980 ~~~~~~~~~~~~~~~~1984 1980 1 8 118 1981 5 1 1982 * ~~~~~~~~~~~~~~~~~~~~921982 e. 1 1983 C 1984 ~ ~~~~~~19619843 1 1983 1984~~~~~~~~~~~~~~~~~~~~~~~18 1985~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~18 0 ~~~~~~~~~~ ~~ ~~~~~~~~~~~~~~~~~~~~~~~1989 1987 t 1 o 1 9 8 8 1 9 9 1 888 81 CD 1990 19~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 9 3D 1990 1 1990 1 2)~~~~~~~~~~~~~~~~~~~~~192 ~ jN ~ ~ 1 1991932 C) 1994~~~~~~~~~~~~~~~~~~~~~~~~~19 -11994 993I 9) of GDP %ofGDP %ofGDP % of GDP B%fGPoGD 1DCDC C80 O ' O o C 000000 CD 000 00 0 00 ~~~~~~~~~~~~~~~~~~~~ ~ ~ 0 0 0 ~~~~1980 0~~ ~~~ ~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ G)~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~0 1981988 1988 1 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~z 1990 11989 1990 0: 1992 11992 1992 19411994 1994 uli 16 * PROSPECTS AND CHALLENGES F OR THE CARIBBEAN Table 3.1 Overview of Net External Financing to CGCED, 1982-95 (US$ million) 1982 1983-87 1988-92 1993-1995 Public Sector 1645 944 719 815 Loans 1345 601 115 -184 Multilateral 546 221 118 154 Bilateral 597 239 75 -169 Commercial 202 141 -78 -169 Grants' 300 343 604 999 of which debt forgiveness 0 0 91 131 Private Sector Loans (private non guaranteed) ... -214 -17 Foreign Direct Investment (net) 271 177 500 883 Total Net Resource Flows 1916 1121 1005 1681 1lncludes technical coop, grants ... = Not Available Source: 1997 World Bank's Global Development Finance pub ication, tormerly World DebtTables to cause sudden swings in the balance of pay- capita and relatively large populations (the ments. Also, because the service on FDI is prof- Dominican Republic, Jamaica, and Trinidad and its, it would tend to adjust automatically with Tobago) or small populations with high per capi- the performance of the economy, while debt ser- ta income (Bahamas and Barbados).12 vice comes due on a fixed schedule. Overall, the Smaller economies. The smaller economies rise of external funding to the private sector has still receive positive net aid flows to their public almost matched the decline of external funding sectors, and the flows are substantial, at least in to the governments. This helped finance the per capita terms, and have increased in the last growth of the private sector, increasing the tax five years. (See Figure 3.3.) The amount of capi- base from which governments could raise tal going to these economies' private sectors has resources, although in some countries the gov- grown, with private transfers (typically remit- ernment borrowed more domestically, tapping tances from emigrants living abroad) being the through the local banking system some of the largest subcategory, but with FDI holding steady funds flowing in from abroad. at around US$ 200 million since 1990. In St. Kitts and Nevis, St. Lucia, and St. COUNTRY CAPITAL FLOWS Vincent and the Grenadines, the govern- ments have limited borrowing to what they can The patterns for individual countries and obtain on concessional terms, although guaran- their governments and for individual sources dif- tees for private borrowing have caused some fer substantially from the aggregate capital flows problems. The private sector in the islands has for the region. A clear pattern emerges if the also received substantial inflows of direct invest- countries are divided into two groups: smaller ment. The other OECS countries and Belize, economies and larger economies. The smaller however, have managed less well. Governments economies have very small populations (i.e., the in Belize, Doniinica, and Grenada resorted to members of the OECS), very low per capita non-concessional borrowing, and typically they income (Guyana, Haiti and Suriname), or small have to repay more in principal than they are populations and middle income (Belize).The receiving in new loans; grants help keep their larger economies have either middle income per total capital flows positive. Moreover, foreign FOREIGN CAPITAL AND AID m 17 Figure 3.3 Net Flows to Smaller Caribbean Countries 1000 o800 1 600 - i 15- ! ..........................ZI.... To Public Sector 30 -U-cO |To Private Sector C) 400- 200 0 1970 1980 1988 1989 1990 1991 1992 1993 1994 1995 direct investment to these three countries has except Haiti; on a per capita basis Guyana typically been lower than to the other OECS received an annual average of US$77 in countries. FDI is smaller than private transfers, 1993-95-more than Haiti but less than the which are typically remittances from individuals OECS countries. who emigrated to find jobs. In Antigua and Haiti has recently received the most in net Barbuda the government has been running official flows, mostly in the form of grants, arrears, so actual credit flows are about zero, but although Haiti's large population has meant that accruals of additional debt for unpaid interest in the 1990s the grants have averaged only US$70 have been substantial and probably exceed the per capita in 1993-95. Official credit flows were small flow of grants still coming to Antigua. zero in the early 1990s, because the country was Direct foreign investment to Antigua in 1992-94 not creditworthy and did not repay principal on was less than half of what it averaged in the pre- old loans, but now lending on concessional terms vious five years. The lesson emerging from this is growing rapidly, along with grants. Private group is not new:These small economies are too transfers and other private flows were US$80 mil- vulnerable to allow the government much bor- lion in 1994 and presumably increased in 1995 rowing on commercial terms or much guaran- and 1996. In Suriname positive flows of official teeing of private borrowing, which is where grants and private transfers continued through the most of Antigua's arrears originated. With proper early 1990s, but there was virtually no lending fiscal management, none of these governments until recently. Creditworthiness was an issue, given should have needed to borrow commercially, the lack of an appropriate macroeconomic frame- because almost all were receiving well over work. In Suriname, net foreign direct investment US$100 per capita per year in official develop- was actually negative in the early 1990s. ment assistance in 1993-95. (Antigua and Barbu- Larger economies. The larger economies da received virtually nothing in those years. See have had low or negative flows to their public Table 3.2.) sectors in the 1990s, but large positive flows to In Guyana, net flows of grants and loans to their private sectors. (See Figure 3.4.) Not sur- the government have remained positive despite prisingly, the experience of the larger external debt stock and accrued debt service economies dominates the aggregate figures in ratios that are the highest in the region and Table 3.1. among the highest in the world. Rescheduling of The Dominican Republic has had little old obligations that were on commercial terms change in net flows over the past few years. and new concessional lending and grants have Flows to the government declined from 1992 to made this possible. Debt forgiveness counted as 1994, as the net lending flow became about grants amounted to US$114 million in 1991 but US$100 million more negative and grants stayed was not significant again until 1996.13 In the about constant at just under US$100 million. 1990s, Guyana has received more net official Increased flows to the private sector were almost assistance than any other country in the region as much as the official decline, as transfers 18 * PROSPECTS AND CHALLENGES FOR THE CARIBBEAN Table 3.2 Overview of Net Resource Flows to CGCED Countries (1993-95) (US$ million) Antigua & Dominican Barbuda Barbados Belize Dominica Republic Grenada Guyana To Public Sector -18 -6 31 18 41 12 56 Loans -23 -16 5 1 -57 1 4 Multilateral -5 -6 3 -1 30 1 22 Bilateral 0 -3 1 2 -43 2 -11 Commercial -18 -7 1 0 -44 -1 -7 Grants' 4 10 25 17 98 11 52 of which debt forgiveness 0.0 0.0 0.0 0.0 0.0 0.2 6.0 To Private Sector 21 10 13 16 182 21 2 Loans (private non guaranteed) -1 ... -2 ... -16 ... Foreign Direct Investment (net) 22 10 15 16 198 21 2 Total Net Resource Flows 3 4 44 33 223 33 58 memo items: official aid -0.3 1 30 18 85 13 63 official aid per capita($) -5 5 140 239 11 145 75 Table 3.2 (continued) (US$ million) St. Kitts St. St. Vincent Trinidad & Total Haiti Jamaica & Nevis Lucia & Grenadines Suriname Tobago CGCED To Public Sector 492 72 7 28 24 72 -22 807 Loans 24 -105 3 3 4 4 -36 -187 Multilateral 24 -12 2 3 1 -5 93 151 Bilateral -0.1 -69 -0.3 0.1 2 1 -51 -169 Commercial 0 -25 1 0 2 8 -78 -169 Grants' 468 177 5 25 29 67 14 994 of which debt forgiveness 10.3 40.3 0.0 0.0 0.0 0.0 0.0 57 To Private Sector 4 154 16 32 38 -21 366 855 Loans (private non guaranteed) ... 33 ... ... ... ... -32 -17 Foreign Direct Investment (net) 4 121 16 32 38 -21 398 872 Total Net Resource Flows 496 226 24 60 62 51 344 1662 memo items: official aid 492 97 7 28 23 63 56 976 official aid per capita ($) 69 38 167 169 204 154 43 46 'Includes technical coop. grants Source: 1997Wor,d Bank's Globao Development Finance publication, formerly World Debt Tables. increased about US$60 million and FDI contin- million in each of the other years in the 1990s.'4 ued its gradual rise, reaching US$271 million by The Paris Club rescheduling, the Extended Fund 1995 and probably more now. Facility, and adjustment lending from the World For Jamaica net flows declined in Bank finished around the end of 1995, so official 1992-94. Lending flows to the public sector flows have become more negative. Foreign direct became more negative, and grants other than investment has grown strongly in the 1990s, up debt forgiveness stayed in the range of US$90 to well over US$100 million in 1994 and 1995. million to US$180 million. Debt forgiveness was Private transfers were also large and at times cre- high in 1991 and 1993, US$231 million and ated problems for short-term macroeconomic US$105 million, respectively, but less than US$10 management. FOREIGN CAPITAL AND AID * 19 Figure 3.4 Net Flows to Larger Caribbean Countries .2600 t To Public Sector 200 200 1970 1980 1988 1989 1990 1991 1992 1993 1994 1995 Trinidad and Tobago has had small net rent expenditures needed to make use of the flows of official loans and grants in the 1990s. investments. The flows to the private sector have boomed, however, led by foreign direct investment, FUNDING SOURCES which rose from an averaged of US$134 mil- Bilateral loans need to be part of the discus- lion in 1988-92 to US$398 million in sion here along with grants, for they both come 1993-94.This was mainly to the oil and gas mostly out of the same development assistance sector. budgets. Even grants from multilateral sources Barbados completed most of its structural like the EU, the United Nations Development adjustment from the early 1990s and now has the Programme, and the Multilateral Investment debt profile of a successful graduate-robust Fund at the Inter-American Development Bank inward flows for the private sector and negligible (IDB) come ultimately from the foreign aid bud- net flows for the public sector-because it is gets of individual countries. The total of grants repaying past public borrowing and receiving lit- and net bilateral credit flows to the Caribbean tle in grant assistance. has grown some in recent years-from annual For the larger Caribbean countries the averages of US$679 million in 1988-92 to challenge for the medium term is to raise public US$830 million in 1993-95. As Table 3.1 shows, saving enough to sustain public-sector invest- almost 15 percent of grants have consisted of ment while repaying the principal on debt. The debt forgiveness in the 1990s. For the Caribbean inflows to the private sector that help the econ- governments the reversal of credit financing omy to balance payments internationally are not flows from multilateral and commercial sources directly available to the public sector to help pay accounts for most of the aggregate decline of its obligations.To raise resources to service its their external financing. debt, with negative net flows, the public sector The multilateral lending flows reflect a must run an overall surplus. In other words, to combination of two phenomena: balance of pay- avoid domestic borrowing, which is costly, the ments and project lending. Balance of payment recurrent public-sector surplus (public saving lending, from the International Monetary Fund after grants) must be enough to cover public (IMF), the World Bank and the IDB, were investment (other than what is externally intended to be short- and medium-term assis- financed) and net repayment of principal. Most tance that the countries would repay promptly. of the gross external lending is now for projects, Guyana,Jamaica, and the Dominican Republic so improved implementation is necessary to help (IMF only) partook heavily in the 1980s, and balance the flows to the public sector. A good Guyana continues to do so, but on concessional public-sector investment program is also needed terms. The repayment of loans that were on to obtain the mix of investments that will best commercial terms puts great strain on fiscal serve the economy and that will be sustainable, resources and the balance of payments, especially considering the maintenance and other recur- when the initial lending was excessive relative to 20 * PROSPECTS AND CHALLENGES FrOR THE CARIBBEAN Figure 3.5 Net Foreign Direct Investment in the Caribbean 1000 ' 800 00 1970 1980 1988 1989 1 990 1991 1992 1993 1994 1995 the actual subsequent growth. The standard since 1991, which indicates some interest from expectation for countries receiving adjustment foreign investors and thus a potential for more lending has been that, as it tapered off, the FDI when policies improve. The largest recipi- economies would be ready, along with donor ents of FDI in 1993-94 were Trinidad and Toba- support, to increase investment under a more go, with an average of US$392 million per year; efficient incentive regime. The resulting growth Jamaica, with US$306 million; and the Domini- of exports and inflows of investment capital can Republic with US$187 million. would allow the countries to improve the bal- Private transfers averaged US$940 million ance of payments and repay the adjustment per year for the subregion. Mostly these were loans. This has rarely happened smoothly. With a remittances from workers abroad, and they few exceptions-Barbados, St. Lucia, and financed private consumption or domestic Trinidad and Tobago-governments are sorely investment. The Dominican Republic and lacking the capacity to implement investment Jamaica had the largest flows, averaging US$392 projects.The problem is especially severe in million and US$307 million, respectively, per Haiti, Guyana, Jamaica and Suriname, where year. For Trinidad net private transfers have been repeated rounds of unplanned fiscal adjustment negative since at least the early 1980s, probably through inflationary erosion of real wages have reflecting remittances by foreigners who came to left a shortage of trained and motivated person- work in Trinidad. nel in the public sector."5 Shifts in the composition of external flows, Foreign commercial lending to the public from public sources and recipients to private-sec- sector has largely ceased, leaving negative net tor ones, are qualitatively appropriate and consis- flows for governments that borrowed in the past tent with Caribbean countries' medium-term and zero for the others. economic strategies of making the private sector As noted earlier, foreign direct investment the engine of economic growth. As most coun- has been the main source of increased financing tries, especially Barbados, the Dominican for the private sectors and for the aggregate Republic, and Trinidad and Tobago, improve the economies. The country-by-country review environment for the private sector, the interna- shows that this is happening in almost all coun- tional development community needs to renew tries, the biggest exceptions being Haiti, where its conumitment to support them with technical investor confidence is lacking. Guyana, for assistance, project funding, and, as appropriate, instance, has had modest but sustained FDI flows the reduction of debt service on old credits. GROWTH AND DEVELOPMENT in the Caribbean will not be easy. Some doors are narrowing for the region--specifically, official aid and traditional trade preferences from Europe and the United States. This seems unavoidable as budget constraints and other foreign concerns displace old colonial ties and Cold War alliances. But other doors are open- ing, as the private sector abroad sees opportunities for business-trade and investment-with the Caribbean private sector. The new doors must open faster than the old ones close if the region is to avoid a spiral of stagnation and social instability and to grow fast enough to reduce poverty. Caribbean economnies have been moving the longer term. Continuing these trends will gradually toward more reliance on private-sector require that the new export and financing chan- exports of services and away from dependence on nels expand faster than the old ones contract. preferential access for traditional exports to Europe W/hether that can happen in the short term is and the United States. Simiilarly, their external uncertain, however, because the value of the financing has been shidfting from flows to govern- preferential treatment for exports of bananas, ments, from both comimercial and official sources, sugar, and textiles has declined in the past few toward flows to the private sector from both com- years faster than expected, as have official aid mercial sources and remi'ttances. These sliifts have flows to many Caribbean governments. External gone furthest in the larger and higher-income commercial lending to governments dried up in countries of the region but are also happening in the 1980s, and the rebounds in the 1990s, often most of the smaller and lower-income countries, undesirable, have not been large in the aggregate. These developments have put Caribbean Making faster growth possible and making it growth onto a more sustainable foundation for happen will require actions by the industrial 21 22 * PROSPECTS AND CHALLENGES F OR THE CARIBBEAN nations and international financial institutions ments need to focus the mandate of the public and by the Caribbean countries themselves. sector.This is not an ideological recommenda- The decline of official trade preferences and tion, for the public sector in most high-income aid from the industrial countries to the capitalist countries is larger relative to national Caribbean seems unavoidable and in the long- income than in the Caribbean. Rather, it is a run desirable, but it could derail the develop- practical consideration, as recommended by Sir ment process unless the decline is predictable Arthur Lewis, so that the scope of public-sector and moderate enough in pace so that the activities matches the availability of resources, not economies have time to adjust. For the poorest only for the sake of macroeconomic stability-a countries, aid flows need to be sustained, and for prerequisite for efficient private investment-but the middle-income countries they need to be also for improving the performance of the public phased out smoothly. At the same time, the sector. growth of non-preferential, private-sector The problem with the public sector in most exports will need to expand at a faster pace to of the Caribbean now is not its aggregate size take up the slack. Bringing the Caribbean but its ineffectiveness in performing the myriad economies into a free-trade area for as much of tasks theoretically in its mandate.The most com- the Americas as possible seems to be the best mon complaint about governments is that exist- way to open up these export opportunities with- ing programs fail to deliver adequate service, out creating another regime of special trade pref- often because resources are stretched too thin. erences.The European Union should also con- Improving service delivery requires not only sider bringing the Caribbean into a broad trade focusing on the high-priority functions but also relationship as an eventual replacement for the allocating spending efficiently among wages, cap- trade preferences for bananas and sugar, and for ital, maintenance, and materials, and designing the various aid programs.The governments of programs to complement what the private sector the region receiving bilateral aid and lending is doing. Most Caribbean countries have exten- from international financial institutions need to sive infrastructure, but it suffers from low main- implement the programs and projects in a timely tenance, from obsolescence due to technological manner so that the grants and loans can disburse progress, and from demand that expands faster as planned. than supply.They also have extensive education Most of the international financing is com- and health-care systems, but they lack adequate ing from and going to the private sector, so the resources for complementary non-wage expendi- main challenge is to create institutional and reg- tures, and salaries are often too low to retain ulatory environments in which the financial qualified personnel. Usually the expenditure pro- resources from both domestic and international grams necessary for the Caribbean to compete in sources will go into efficient production, particu- the hemispheric market for private investment larly for export.16 The reason for the export exceed what the public sector can afford with emphasis in this context is to match the acquisi- the resources that the electorate and tax payers tion of external liabilities-foreign financing- will provide. with the increased capacity of the economy to In choosing where to focus its activities, the generate foreign exchange to service those government should consider what the private liabilities. sector needs for growth, and what the private sector can and cannot do for itself and for soci- PUBLIC SECTOR REFORM ety. Efficient and impartial regulation, enforce- ment of private contracts, maintenance of price Improving the environment for private sec- stability, and assurance of public safety are tor investment, employment, and growth requires emerging in the Caribbean as increasingly reform of the public sector at the macroeconom- important services for the government to pro- ic and the micro-institutional levels.17 Govern- vide in order toin order to promote private-sec- AGENDA FOR ACTION m 23 tor growth and social welfare. The growth of the underway or planned in the Caribbean, drawing middle class and the diversification of the private on models from Britain and New Zealand. Some sector and NGOs over recent decades mean that countries of the region are moving toward exec- the government can now reduce its role in many utive agencies and program budgeting, with "val- areas where it once seemed essential. In tradi- ue for money" audits of performance, as ways to tionally public-sector areas like health care, com- increase the incentives for more effective and munication, and electric power generation, the efficient delivery of service. private sector has expanded greatly in recent To implement these reform programs, it is years. necessary to have a government-wide vision of The choice of the role of the public sector where the whole program is going. Personnel should recognize the options for partnerships and financial information systems need to be with the private sector and NGOs. Management, implemented throughout the government to financing, and ownership are separable functions assure that the reform efforts in one agency do that can be allocated as appropriate to the situa- not merely shift redundant staff or spending from tion. Usually this means working together in one part of the system to another less visible roads, water, and social sectors, through mecha- one. Other types of institutional reform, howev- nisms such as cost recovery for publicly provided er, have had more success when implemented on services, management contracts for entities that a pilot basis, for instance with the customs and remain in public ownership, and subsidies for the tax administration reforms in Jamaica, with the poor to utilize private providers. For activities postal system and registry offices in Trinidad and that produce marketable goods and services, full Tobago, and with the various pilots in the East- privatization is more often the solution, in order ern Caribbean Economic Management Program. to reduce the strain on the public-sector budget Starting with pilots allows learning and reduces and managerial resources and, perhaps most the fiscal burden of the up-front costs of invest- important, to make a level playing field for com- ing in reforms, even ones that lead to longer- petition by the private sector. term savings. In choosing pilots it has proved Reducing the costs of doing business-to wise to pick areas with a high probability of suc- attract new entrepreneurs from abroad and from cess and high visibility, so that the success will the ranks of the domestic informal sector-will engender political support for pressing ahead in require streamlining bureaucratic procedures and, the next phase. more important, changing the attitudes and incentives of the officials. Some countries have REGULATION, TAXES, AND preserved the colonial tradition of cumbersome TRADE POLICY controls to prevent abuses, but in the fast-moving global business world today, this often prevents While reduction of regulation and taxes is decisions that are prompt enough to facilitate necessary in some cases, this has already hap- economic development.These governments need pened in many places. Some regulation and taxa- a more balanced approach, with incentives for tion needs to be retained or even strengthened in achieving results and serving the client. Other order to preserve the fairness of competitive countries face severe problems of corruption and markets and to provide the state with the neces- incompetence. The old culture of control, per- sary fiscal resources. Reducing the uncertainty mission, and favors should give way to a new and the special efforts needed to obtain the most attitude of providing service to facilitate interna- favorable treatment will be important to attract tionally competitive production. new investors, although this will not be easy. Changing incentives for government offi- Many politicians and local business firms find cials requires evaluating individuals and agencies comfort, and sometimes corruption, in the tradi- and holding them accountable for actual perfor- tional non-transparent ways of granting licenses mance. Some efforts in this direction are already and favorable tax treatment. Often the existing 24 * PROSPECTS AND CHALLENGES FOR THE CARIBBEAN private sector sees little need for change and per- LABOR AND HUMAN RESOURCE haps prefers not to face the wider competition DEVELOPMENT that a more transparent regime would bring. But that is exactly what is needed to bring more cap- For development to reduce poverty and be ital, more jobs, better wages, and more growth to sustainable, it needs to use labor relatively the economy as a whole. intensely and build on the skills and energies of For many people, especially the traditional the people. Reducing payroll taxes and other business community in the Caribbean, improving taxes on labor input in the formal sector would the environment for the private sector means help encourage appropriately labor-intensive giving special incentives. It is no wonder that investments. Foreign investors in the service sec- people already in business want such policies and tors, which hold the most promise for most do not mind too much having to go through Caribbean countries, need a well trained and various hurdles to get special access to the tax flexible labor force. Education levels have been a breaks and other advantages.These strengthen traditional advantage of the English-speaking their profits and their privileged position. But Caribbean, and Cuba has made major advances fresh, new business is usually more interested in in this area, which remain offset by other factors. transparent rules, quick responses, and a stable Other non-anglophone areas need to give more macroeconomic environment, which any sub- attention and resources to education. Throughout stantial programs of fiscal incentives would the Caribbean, the content of education and undermine. training has not kept up with the times and Private investment needs complementary needs serious revamping. Part of the solution will infrastructure, such as roads, ports, and especially include curricula with more on technology, telecommunications. The latter is probably the computers, hotel and restaurant management, most important now, and clearly the best practice and health-sector management. The more funda- is to have regulations that increase the diversity mental reorientation will require close coopera- and competition by the private sector in electron- tion with employers and stronger incentives for ic communications services. For roads, the public students, parents, and workers of all ages to pay sector needs to strengthen its program of mainte- attention to the job market in deciding what to nance and upgrading. For ports-sea and air-the study and how. opportunities for the private sector are growing, Flexibility is more difficult in a small econ- usually in partnership with the public sector. omy, and an important way to increase flexibility Although some external financing goes of labor utilization for the Caribbean will be to directly into investment, much of the external increase mobility of labor within the region. financing and domestic saving goes through the Implementing the agreement of the CARICOM financial sector. This sector has expanded rapidly countries to allow unrestricted movement of in recent years, but regulations and supervision university graduates would take a step in the have failed to keep pace. Many countries have right direction. Trained people are often leaving had financial crises, of which Mexico is only one because they cannot get into a situation with a of the more spectacular. During financial crises mix of other workers to maximize their efficien- and the subsequent cleanup, vast amounts of cy and earning power. The solution is not to try resources get misallocated.The advantages of to keep out competing labor, but rather to allow prevention are a clear lesson for the Caribbean the right mix of labor to occur in the countries, but not an easy one, given limited Caribbean. This will require eliminating most administrative resources. Regional standards for national barriers to the markets for factors-cap- regulations, external technical assistance, and ital and labor-as well as goods, so that region- cooperation among supervising agencies would wide firms can form on a scale necessary to be useful. compete in the hemispheric and world markets. ANNEX I: SUMMARY INDICATORS Table All Caribbean Countries: Summary of Economic Indicators (US$ mill.) (1995, unless indicated otherwise) Antigua & Dominican Barbuda Bahamas Barbados Belize Dominica Republic Grenada Guyana Population 69 279 261 216 74 7813 91 842 GNP/capital 6820 12140 6710 2630 2990 1460 2980 590 Real GDP m.p. (1987 US$ MIL) 380 2790 1526 456 156 6554 191 452 GDP % Change 1995 -1 0 0 2 0 3 3 6 1994 4 0 5 5 1 4 2 9 1993 4 2 0 3 2 3 -1 8 CPI % Change 2 2 2 3 1 13 3 8 Pop. in poverty (%) 2 12 5 8 35 33 ... 20 43 Unempl. rate(%)2 7 15 16 11 10 30 16 11 Exports, GNFS 431 1826 891 295 104 2677 163 444 GNFS % of GDP 113 65 58 65 67 41 85 98 Sugar Exports ... ... 32 48 87 ... 127 Banana Exports ... ... 22 16 1 ... Bauxite, minerals ... ... 273 ... 178 Other Exports 3 39 ... 137 95 26 383 22 175 Tourism 319 1143 503 78 36 1638 ... ... Nonfinancial PS balance -42 29 20 -31 -5 -18 3 -154 Nonfinancial PS % of GDP -11 1 1 -7 -3 0 2 -34 Current account balance -21 -149 17 -30 -36 -125 -22 -135 Current account % of GDP -4 -4 1 -5 -16 -1 -9 -23 Tot EDT 275 ... 597 261 93 4259 113 2105 EDT %of GDP 72 39 57 60 65 59 466 EDT % of XGNFS 64 ... 67 88 89 159 69 474 25 26 * PROSPE CTS AND CHALLENGES FOPR THE CARIBBEAN Table A1.1 (continued) Caribbean Countries: Summary of Economic Indicators (US$ mill.) (1995, unless indicated otherwise) St. Kitts St. St. Vincent & Trinidad & All Haiti Jamaica & Nevis Lucia Grenadines Suriname Tobago Countries Population 7155 2525 41 166 111 410 1305 21358 GNP/capital 250 1510 5170 3200 2280 880 3780 3559 Real GDP m.p. (1987 US$) 1653 3980 153 441 201 861 4966 24760 GDP % Change 1995 5 1 5 5 4 4 3 1994 -11 1 3 2 0 -2 4 1993 -3 1 5 2 1 -6 -2 CPI % Change 25 20 2 3 2 236 5 Pop. in poverty (%) 2 ... 34 15 19 17 39 21 Unempl. rate (%)2 16 12 16 20 16 16 Exports, GNFS 128 2946 141 357 124 388 2097 13012 GNFS % of GDP 8 74 92 81 62 45 42 12254 Sugar Exports ... 95 ... ... ... ... 38 441 Banana Exports ... 48 ... 66 22 ... .. 175 Bauxite, minerals ... 723 ... ... ... 334 910 2418 Other Exports3 86 516 23 53 38 99 1189 ... Tourism ... 999 ... ... 47 ... ... Nonfinancial PS balance -176 126 1 -9 1 31 152 Nonfinancial PS % of GDP -11 3 1 -2 0 4 3 Current account balance -67 -245 -20 -51 -35 92 294 Current account % of GDP -3 -6 -9 -9 -14 27 6 Tot EDT 807 4270 56 128 206 95 2556 ... EDT %of GDP 49 107 37 29 102 11 51 EDT % of XGNFS 630 145 40 36 166 24 122 Sources: IMF reports, World Bank's Econom c & Social Database; EDT -Total Debt Stock (Long-term debt + Short-term debt) World Bank Staff Estimates PS - Public Sector ... not available (N/A) XNGFS - Exports of Goods and Non Factor Services 'GNP per capita calculated by Atlas Met 3includes re-exports CPI - Consumer Price Index 2Latest availab e data since 1989 ANNEX II: U.S. TRADE PROGRAMS WITH THE CARIBBEAN EXCLUDING MERCHANDISE produced in free-trade zones, 71 percent of the Caribbean countries' total exports flowed to the NAFTA region in 1983. By 1994 this total had declined to 46 percent. This reflects the large shift in composition of exports from traditional goods to non-traditional goods (which include apparel and textile products almost exclusively produced in free-trade zones) and a shift in the direction of trade away from the NAFTA region. In 1983, 92 percent of the Caribbean coun- GENERALIZED SYSTEM OF tries' exports to NAFTA countries went to the PREFERENCE United States. By 1994, this concentration had diminished slightly, but the overall picture had The Generalized System of Preference changed very little, with 86 percent going to the (GSP) became effective January 1, 1976, with the United States, 13 percent to Canada, and the intent of promoting economic development remaining 1 percent to Mexico.18 Given the over- through trade diversification. Under this program whelming share of the region's exports going to approximately 4,300 products enter the United the United States, it is safe to conclude that any States duty-free from developing countries policy affecting the trade relationship between throughout the world. Eligibility for duty-free the Caribbean region and the United States will status through GSP is dependent on direct expor- affect the trade relationship between the tation from the developing country to the United Caribbean region and NAFTA. The following States, as well as a requirement that at least 35 section describes the various trade programs that percent value-added occur in the country. Under the Caribbean has used to enter the U.S. market, the GSP program, products eligible for duty-free and their consequential effect on overall trade access can change over time, and the United between the regions. States will "graduate" countries from duty-free 27 28 * PROSPECTS AND CHALLENGES FOR THE CARIBBEAN eligibility, both for specific products and for the exports from the Caribbean. Only 8.4 percent of entire program, if the developing country total exports from CBI-eligible countries achieves a specified national income or level of (including the nine Central American countries penetration of the U.S. market. In the past, Hong not covered in this report) entered the United Kong, Singapore, South Korea, and Taiwan have States exclusively through the CBI program in graduated. 1994.19 THE CARIBBEAN BASIN THE PROGRAM FOR INITIATIVE PRODUCTION-SHARING AGREEMENTS (807) The Caribbean Basin Economic Recovery Act, or the Caribbean Basin Initiative (CBI) as it To facilitate the global competitiveness of is more commonly known, was initiated by the U.S. firms, the U.S. government has instituted a Reagan administration in 1983, and then perma- program that provides for sharing production nently extended in 1990 to encourage economic with developing countries. Provision 9802.00.80 diversification in the Caribbean region. Twenty- of the Harmonized Tariff Schedule of the United eight Caribbean and Central American countries States establishes preferential tariff treatment for are eligible for CBI status, including British and products covered under this program. This provi- Dutch colonies, but excluding Cuba. Almost all sion (commonly known as 807, from its number of them have requested to be beneficiaries and in the previous tariff schedule) allows U.S. firms have been so designated. to compete with labor-intensive articles manu- Unlike GSP, the CBI does not have a grad- factured by foreign producers, especially in Asia. uation process and consequently provides benefi- This program has been the main vehicle of ciary countries with greater security for duty- access to the U.S. textile market for Caribbean free access to the U.S. market. Its scope is also countries. Established well before the Caribbean larger, covering 6,000 products, compared with Basin Initiative, it permits the duty-free entrance the GSP's 4,300 products. Although the CBI of goods assembled abroad from U.S.-made requires that merchandise be imported directly components and re-exported back to the United from the eligible country to the United States, States. The plan, which attempts to stimulate the program offers greater flexibility than GSP in trade with the Caribbean countries, is ideal for terms of the 35 percent value-added require- textile and electronics assembly production, and ment. Countries of the Caribbean Community as such it has been a major influence affecting Secretariat (CARICOM) may satisfy this rule trends in the apparel trade of the Caribbean with materials derived from any one, or all, of region. Garments assembled under this program's the CBI countries, and, for goods containing at provisions are subject to the same quota, docu- least 15 percent U.S. content, the value-added mentation and customs laws as other apparel, but requirement is reduced to 20 percent. In addition importers pay duty only on the difference to the above eligibility requirements, the CBI between the final value of the product and the allows tariff-free access to the U.S. market for value of the U.S. inputs. (Foreign inputs are per- articles assembled or produced in whole from mitted in the assembly process but are subject to U.S. components or ingredients imported direct- tariffs.) Under the production-sharing program, ly from the United States.The CBI excludes components must be exported directly from the items such as petroleum and petroleum products, United States in assembly-ready condition, and luggage, handbags and flat leather goods, certain finished articles must not "lose their identity" gloves, canned tuna, ethanol, sugar, watches with during the assembly process. In 1994, 80 percent parts from communist countries, most footwear, of the Caribbean countries' apparel products and most textiles and apparel. CBI thus excludes entered the United States under this program some of the most important manufactures and its extension.20 ANNEX II * 29 The production-sharing program may have the exporting country, once that country has been the catalyst for much of the growth in U.S. demonstrated that it possesses the production textile trade between the Caribbean countries capacity to satisfy the requested GAL increase. and the United States, but quota limitations With the exception of quota restrictions, the impeded further growth for some countries. production-sharing and special access programs Accordingly, in 1986 the Reagan administration, are identical and must adhere to the same con- under the umbrella of the CBI, expanded the tent and customs laws. Accordingly, countries production-sharing program to improve the export under the special access program only Caribbean's access to the U.S. market. after they have reached their specified quota lev- els under the production-sharing program. All THE SPECIAL ACCESS PROGRAM CBI countries are eligible for the GALs. How- (807A) ever, to date the only Caribbean countries to participate are Dominican Republic, Haiti, The Special Access Program for Caribbean Jamaica, and Trinidad and Tobago.2' One year exporters, also known as 807A, and the Special after the GALs were implemented, the Regime Program, an identical initiative for Mex- Caribbean countries' textile exports to the Unit- ico, permit CBI countries and Mexico to negoti- ed States increased to 23 percent of total ate guaranteed access levels (GALs) to the U.S. exports-from 12 percent in 1985-and have market for apparel products. Under these pro- continued to grow since then (see Table A2.2). grams, GALs may be increased at the request of Table A2.1 Imports of Textiles/Apparel and Footwear under the 807 Production-Sharing Program (1990 and 1993) (current US$ millions) Countries of origin Dominican U.S. total Mexico Republic Jamaica Other CBI imports 1990 1993 1990 1993 1990 1993 1990 1993 1990 1993 Apparel and textiles 759 1,461 584 1,218 160 315 739 1,627 2,618 5,288 Footwear 71 91 15 115 0 1 1 0 908 1,133 Note: According to the American Apparel Manufacturers Association, U.S. textile imports under 807 were misclassified until recently. This may explain the statistical discrepancies between Tables A3.1 and A3.3, Source: "Production Sharing: Use of U.S. Components and Materials in Foreign Assembly Operations, 1990-93," SITC Publication 2886 (May 1995), Tables 1-7, B-16, B-31. 30 * PROSPECTS AND CHALLENGES FOPR THE CARIBBEAN Table A2.2 Composition of Caribbean Countries' Exports to the United States, 1983-95 (current US$ millions, unless otherwise noted) 1994 1995 (Jan.- (Jan.- 1983 1985 1987 1990 1992 1994 Sept.) Sept.) Total exports 4,825 3,965 3,463 4,436 4,835 5,512 4,059 4,399 Traditionala 3,692 2,420 1,624 1,656 1,466 1,489 1,144 1,039 Percentage 77 61 47 37 30 27 28 24 Non-traditionalb 1,133 1,545 1,839 2,780 3,369 4,023 2,915 3,360 Percentage 23 39 53 63 70 73 72 76 Of which: Apparel from textilesc 282 464 778 1,183 1,659 2,145 1,557 1,799 Leather products and footweard 60 64 83 142 195 292 219 186 a. Includes crustaceans & mollusks (036), sugar & honey (061), cocoa (072), tobacco manufactured (122), a uminum ores & concentrates (285), ores & concentrates of base (287), crude oil from petroleum or bitumen (333), petroleum products refined (334), alcohol, phenols, etc. (512), inorganic chemical elements (522), gold, non-monetary (971) of the Standard International Trade Classification (SITC). b. Includes all SITC codes not listed above. c. Includes men's or boy's coats, jackets, etc. (841), men's & boys outer garments (842), women's & girls outer garments (843), women's & girls coats, capes, etc. (844), articles of appare of textile fabric (845), undergarments knitted or crocheted (846), c othing accessories (847) and appare & clothing accessories except textiles (848) of the SITC. d. Includes manufacturers of leather (612) and footwear (851) of the S TC. Note: The values of the traditiona exports are derived on y from the SITC numbers listed in footnotes b and c as ong as these SiTCs were among the top twenty export items of the region that year.Total textile exports to the United States vary 2-4 percent by source. This has been explained by differ- ences in how the U.S. Department of Commerce and the American Apparel Manufacturers Association define textiles. Source: U.S. Department of Commerce. ANNEX II * 31 Table A2.3 U.S. Imports of Textiles from Caribbean Countries and Mexico, 1989-95 (current US$ millions) Country 1989 1990 1991 1992 1993 1994 1995 1996 World total 21,047 21,937 22,595 26,722 28,216 31,386 31,649 36,390 Percentage growth - 4.2 3.0 18.3 5.6 11.2 10.4 5.1 Mexico 500 508 673 901 1,127 1,597 2,566 3,560 Percentage growth - 1.6 32.6 33.8 25.1 41.4 61.0 38.7 Caribbean 1,090 1,140 1,363 1,619 1,955 2,111 2,388 2,400 Percentage growth - 4.6 19.6 18.8 20.8 8.0 13.2 0.5 Of which: Jamaica 226 235 252 293 389 454 531 505 Percentage - 4.2 6.7 16.4 32.8 16.8 17.0 -4.9 growth Haiti 166 160 146 61 92 29 72 98 Percentage - -3.7 -8.8 -57.9 49.2 -68.6 148.3 36.1 growth Dominican Republic 642 694 910 1,203 1,410 1,572 1,731 1,753 Percentage - 8.1 31.1 32.1 17.2 11.5 10.1 1.27 growth -Not available. Source: American Apparel Manufacturers Association, Note:Total textile exports to the United States vary 2-4 percent by source. Th s has been explained by the different definitions for textiles used by the U.S. Department of Commerce and the American Apparel Manufacturers Association. As well, according to the American Apparel Manufacturers Asso- ciation, U.S. textile imports under 807 were misclassif ed until recently. Th s may explain the statistical discrepancies between Tab es A3.1 and A3.3. NOTES I Unless otherwise noted, the term Caribbean in this include interest on debt or repatriation of profits, which report refers to the member countries of the Caribbean are part of the current account. Interest payments are com- Group for Cooperation in Economic Development: bined with net flows for the measure of net transfers, Antigua and Barbuda, Bahamas, Barbados, Belize, Domini- which are often negative for developing countries. ca, Dominican Republic, Grenada, Guyana, Haiti,Jamaica, t The analysis in the Country Economic Memoran- St. Kitts and Nevis, St. Lucia, St.Vincent and the dum onJamaica: A Strategyfor Growth and Poverty Reduc- Grenadines, Suriname, and Trinidad and Tobago. tion, World Bank 1994, p. 92, found that the effect of 2 The export growth figures in Table 1.2 do not investment on growth was strongest with about a two-year include free-trade zones, which are more important in the lag. Caribbean on average than in the other regions. Including 12 Of course, all of these countries are small by con- free-trade zones would raise the average annual growth ventional standards. The smallest "larger" economy-Bar- rate of Caribbean exports by almost 2 percentage points. bados, with a 1994 gross national product, GNP, of 3Jeffrey D. Sachs and Andrew Warner, "Economic US$1.78 billion-is not much larger than the largest Reform and the Process of Global Integration," Brookings "smaller" economy-Haiti, with a GNP of US$1.54 bil- Papers on EconomicActivity (Washington, D.C., 1995, Issue lion-but they each belong to their group in terms of the 1): 1-96.These results are consistent with the findings of pattern of capital flows. The extremes are far apart- Dollar (1992) for 1976-85. David Dollar, "Outward-Ori- Dominican Republic with a GNP of US$10.5 billion and ented Developing Economies Really Do Grow More St. Kitts/Nevis with US$185 million. See Table A1.1. Rapidly: Evidence from 95 LDCs, 1976-1985," Economic 13 From the same Organization for Economic Coop- Development and Cultural Change 40(3): 523-44. eration and Development (OECD) sources as the data on 4 Michael Michaely, Demetris Papageorgiou, and grants. Armene Choksi, Liberalizing Foreign Trade: Lessons of Experi- 14 From the same OECD sources as the data on ence in the Developing World, in Demetris Papageorgiou, grants. It is possible that some additional debt forgiveness Michael Michaely and Armene Choksi, eds., Liberalizing occurred but is not counted in grants. Foreign Trade, Vol. 7 (Oxford: Basil Blackwell, 1991). Wo Bank, Public Sector Modernization in the 5 Almost 60 percent of U.S. textile imports under Caribbean (Washington, D.C., 1996), pp. 18-20. 807 come from Mexico, the Dominican Republic, and 16 The relevant regionwide reports of the Bank Jamaica, with most of the rest coming from other CBI include Caribbean Countries Policiesfor Private Sector Develop- countries. See Table A3.1. ment (1994) and Prospectsfor Service Exportsfrom the English- 6 IMF, Direction of Trade Statistics. Speaking Caribbean (1996). 7 Estimates from the American Apparel Manufactur- 17 See Public Sector Modernization in the Caribbean ers Association. (1996). 8 By contrast, in the same period Haiti's exports of 18 IMF, Direction of Trade Statistics. these products to the United States fell to one-third of 19 See "Caribbean Economic Recovery Act: Impact their 1989 value. on U.S. Industries and Consumers, Tenth Report 1994, 9 Estimates compiled by the World Bank with figures Investigation No. 332-227," Table 3-1, p. 28. from the Jamaica Manufacturers Association and the 20 American Apparel Manufacturers Association. Jamaica Promotions Corporation. 21 Costa Rica (a CBI member but not a subject of 10 Net flows subtracts repayments of principal on this study) also participates in the 807A program. "A Spe- loans and direct investment abroad from the gross inflows cial Report from the International Committee of the of loans, official grants, private transfers, debt forgiveness, American Apparel Manufacturers Association, 807 Apparel and direct investments.VWhen the repayments are large, as Assembly," Vol. 1, No. 1 (December 1989). for Jamaica, net flows can be negative. Flows do not 32 WORLD BANK LATIN AMERICAN AND CARIBBEAN STUDIES VIEWPOINTS SERIES Latin America after Mexico: Quickening the Pace by Shahid Javed Burki and Sebastian Edwards Poverty, Inequality, and Human Capital Development in Latin America, 1950-2025 by Juan Luis Londofio available in English and Spanish Pobreza, Desigualdad y Formaci6n del Capital Humano en America Latina, 1950-2025 Juan Luis Londofno Dismantling the Populist State: the Unfinished Revolution in Latin America and the Caribbean by Shahid Javed Burki and Sebastian Edwards Decentralization in Latin America: Learning through Experience by George E. Peterson Urban Poverty and Violence inJamaica by Caroline Moser and Jeremy Holland La pobreza urbana y la violencia en Jamaica Caroline Moser y Jeremy Holland Prospects and Challengesfor the Caribbean by Steven B.Webb Black December: Banking Instability, The Mexican Crisis and Its Effects on Argentina byValeriano E Garcia PROCEEDINGS SERIES Currency Boards and External Shocks: How Much Pain, How Much Gain? Edited by Guillermo E. Perry Annual World Bank Conference on Development in Latin America and the Caribbean: 1995 Edited by Shahid Javed Burki, Sebastian Edwards, and Sri-Ram Aiyer Annual World Bank Conference in Latin America and the Caribbean: 1996-Poverty and Inequality By Shahid Javed Burki, Sri-Ram Aiyer and Rudolf Hommes 11*~1 r Wep~~~~~~~~~~~~~ iio j hiei ~ Pt [IIexI , fjn kA Ii K~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ~~~~rrnazt~~~~~~~~~~ ~ ~ h84k3 .IuEMnI.or 211Em~~~~~~~~~~1-