Caricom’s evolving policy framework
Integration efforts in the Caribbean have always been driven by a sense of common history, geography and politico-cultural make-up (which motivated the federation attempts of the late 1950s) and the imperatives of achieving economies of scale and scope so as to offset the disadvantages of extreme small size of population, physical area and resource endowment. An early theoretical formulation of economic integration was made in the early 1960s by Alister McIntyre based on the concept of ‘resource combination’ and this was subsequently built on with the publication in 1967 of a series of University of the West Indies studies, including the seminal work of Havelock Brewster and Clive Thomas entitled ‘The Dynamics of West Indian Economic Integration’. Brewster and Thomas recommended a transformation process utilizing a scientific approach to regional import substitution in which there would be production of foodstuff with high income elasticities of demand and manufacture of base materials of iron and steel, paper, plastic, rubber, natural fibres and synthetic textiles, glass, industrial chemicals, leather and footwear to complement the then current “light manufacturing” and “final touch” industries.
Instead of the pro-active and partly state-driven production integration strategy of Brewster and Thomas, the Caribbean governments adopted a gradualist and essentially market oriented approach to economic integration. Accordingly, a Free Trade Area was formed in 1968 and a Customs Union (with a common external tariff) was proclaimed in 1973. Production behind tariff walls and duty-free exchange of goods among the members of the Caribbean Community remained for a long time the core of the benefits of the integration process.
It was only in 1989 that there developed what amounts to a veritable sea change in the way integration was perceived. The Declaration of Grand Anse conceived of a Caricom Single Market and Economy (CSME) in which there would be, in addition to free trade in goods, free trade also in services and in factors of production – capital, labour and land. These are the main integration deepening tenets of the Single Market aspect of the CSME, as set out in the Revised Treaty of Chaguaramas. The Single Economy component refers to (a) the harmonization of Member States’ macroeconomic policies, such as Monetary (Union) Policy, Financial Services Policy, Interest Rate Policy, Capital Market Integration, Investment Policy, Incentives Policy and Fiscal (Tax) Policy and (b) the harmonization of sectoral policies, relating to agriculture, energy, and transportation, inter alia.
The core of the Single Market policy framework formally came into being in 2006. It is planned for the main elements of a consolidated Single Economy policy framework to be in place by the end of 2008 and for the entire implementation process to be concluded by 2015. The implementation of the Single Economy is being informed by what is contained in a Single Development Vision document which has benefited from the views of various stakeholders and recently received endorsement from the 18th Inter-Sessional Meeting of the Conference of Heads of Government of the Caribbean Community.
The CSME regime is therefore virtually in its infancy and some aspects are emerging faster than others. As a result, a clear cut assessment of the integration process is only possible with respect to trade, since liberalization in this area has been with us for a number of decades. However, since other areas of the CSME process have the potential for conferring considerably greater integration benefits these are also worth closer investigation.
Only modest growth in share of Intra-Caricom trade
While inconsistency in the availability of data for Caribbean countries makes for a certain degree of statistical distortion in trend analysis, Table 1 tends to indicate that intra-regional trade is a small proportion of Caricom’s total world trade compared with regional groupings such as the European Union and NAFTA. The Caricom share is even lower than that for ASEAN, a developing country grouping late-comer in the integration process. During the 2000-2005 period, a 20% intra-Caricom share of exports exceeded only in 2005 (average 18.3) and, during the previous five year period, 1995-2000, it occurred only in 1998 (average 19.2); during the 1990-1995 period there was no year in which a 20% share was attained (average14.1). While there has been some growth in the share since 1990 when it was 12.4%, there has tended to be stagnation in the last decade. In any event, about 70% of intra-Caricom exports is accounted for by petroleum-related products (and manufactured goods) from Trinidad and Tobago (T&T) and this figure could fall significantly when the Petrocaribe arrangement with Venezuela is fully implemented.
Besides T&T, there are certain other member states for which Caricom is a significant market for their exported goods, such as Dominica and St. Vincent and the Grenadines who source about 30% of their imports world wide from the regional market.
In terms of supplying its own needs, Caricom in 2005 consumed 85% of the animal and vegetable oils and fats it produced, 48% of mineral fuels, lubricants and related materials, 46% of beverages and tobacco, and 33% of manufactured goods classified chiefly by minerals. At a more disaggregated product level, the Region absorbed over 90% of its production of flour of wheat or meslin, sweet biscuits, detergents, cartons, boxes and cases of corrugated paper or paperboard, sacks and building cement; and over 80% of aerated beverages, unsweetened biscuits, beer, medicated soap, and bottles for soft drinks, wine, beer and spirits. Intra-regional trade in sugar and rice also increased very significantly since the late 1990s. Generally, product composition has not shown very significant movement up the value chain over the years. It suggests a production structure in the Caribbean that is nowhere near as sophisticated as the one that Brewster and Thomas (op.cit.) had proposed.
There are a number of reasons why intra-Caricom trade accounts for only a modest proportion of the Region’s total world trade. First, as previous analysts have indicated, small size, limited resource endowment, and considerable similarity in stages of development contribute to non complementarity in economic structures, thus inhibiting inter country trade. Second, there is a lack of entrepreneurship and supply capabilities. This is reflected in the frequent resort to request for suspension of the common external tariff because required inputs are not regionally available in the specified quantity or quality. Third, there is a certain degree of implementation deficit. A number of para-tariff measures are applied on imports from fellow member states (in order to raise fiscal revenue or protect domestic industry) which should not exist such as customs surcharges and service fees, foreign exchange taxes and environmental/bottle levies, and discretionary/discriminatory application to Caricom, but not domestic goods, of certain internal taxes, including consumption VAT and excise measures. In addition, agricultural products have tended to attract an unwarranted degree of sanitary and phyto-sanitary attention. Fourth, the Caribbean has never really engaged in ‘Buy Regional’ or similarly exhortatory campaigns. Perhaps it is too early to say that the import substitution process has run its course
See Table 1
INTRA-REGIONAL MERCHANDISE TRADE OF SELECTED TRADE BLOCS
AS A PERCENTAGE OF THEIR TOTAL MERCHANDISE (GOODS) TRADE
But trade is only a partial indicator of the level of integration in a single economy
Merchandise (goods) trade is only one of the important economic categories in the workings of the CSME. For example, most of the Caribbean countries can be described as services economies with varying degrees of intra-regional trade in services. For example, a not insignificant percentage of tourists arriving in Barbados originate
from other parts of the Caribbean. Developments in information technology are also increasing the tradeability of services with scope for greater intra-Caricom transactions. However, data generation of trade in services is very weak.
Intra-Caricom investment in services, has increased significantly in the last decade, particularly in the financial sector (by large banks and insurance companies) fuelled by mergers and acquisitions and other consolidation activities. In 2005 intra-Caricom investment
(of which goods constituted a minor proportion) accounted for about 10% of the US$2 billion world wide foreign investment inflows to the Region. For a capital scarce developing region this is quite an achievement, even though small compared with a 60% figure for the EU. With the coming into being of the Single Market in 2006 and the removal of previous entry restrictions on small scale services (and also small scale agricultural, manufacturing and mining) activities, there is likely to be an explosion of cross-border investment by operators benefiting from the demonstration effect of their larger Pan Caribbean counterparts, some of whom have transnationalization ratios (ie total Caribbean/domestic asset ratios) of nearly 1:1.
The long-term components of finance capital have also been exhibiting significant cross-border mobility. For example, with respect to equity capital, although there are only thirteen (13) cross listed securities on five of the seven stock exchanges in the Region, these are of more than average importance since, in 2005, they accounted for 67%, 58%, 49%, and 44% of the total market capitalization of the stock exchanges of the Eastern Caribbean, Jamaica, Barbados and T&T.
The growth of the regional corporate and government bond market has also reached significant proportions. The market is almost exclusively centred around the petroleum surplus economy of T&T, whose pension funds, insurance companies, merchant and investment banks during the 1997-2005 period financed US$1.7 billion worth of corporate securities issued by local and other regional companies and US$742.9 million of government bonds (at lower than international market interest rates) issued by eight Caricom countries for their development needs. Seen in this light, the benefits from regional integration are not inconsiderable.
With respect to the labour market, in addition to the movement of businessmen and their key managerial and technical personnel, six categories of skilled and semi-skilled nationals so far have the right to seek employment across Caricom borders: university graduates; certified nurses and teachers who are nevertheless non-graduates; media workers; sports personalities; artistes; and musicians. The feasibility of extending such rights to artisans, inter alia, so as to fill important regional manpower gaps, is being actively explored. Supporting this process of movement of labour is an Agreement on Transfer (ie portability) of Social Security Benefits and the very symbolic introduction of a Caricom passport.
Concerning the remaining factor of production, land, there has been affirmed a clear right of access for the establishment of a business (but not for speculative purposes) in keeping with Article 34, praph (f) of the Revised Teaty of Chaguaramas. This access typically involves up to three acres for the actual business and one acre for residential purposes. Of course agriculture and mining require special consideration.
The regional integration process is therefore multi-dimensional and, in some areas, certain member states may be winners and, in other areas, they may be losers. Intra-Caricom liberalization may result in disruptions and enterprise dislocations requiring adjustment mechanisms to be in place; also, divergencies, discrepancies and polarization may take place among member states instead of the expected economic convergence tendencies. Equity and cohesion are therefore important considerations. It is for this reason that the Heads of Government are actively in the process of setting up (by July of this year) a US$250 million Development Fund for Disadvantaged Countries, Regions and Sectors, of which US$120m. will be member states contributions and US$130m. contributions from foreign countries and international donor agencies.
Scope for further integration deepening and inherent limitations
The CSME is a very ambitious venture of which the only precedent is the EU integration experience. As mentioned above, the core of the Single Market policy framework has already been introduced; virtually all that remains to be done for completion of that process is the elaboration of a Protocol on Article 239 of the Revised Treaty on electronic commerce; treatment of goods produced in free zones and similar jurisdictions; free circulation of goods in the CSME; and contingent rights (for family members of those persons operating cross border). In addition, the institutional machinery development process that saw the introduction of the Caribbean Court of Justice and the Caribbean Regional Organization for Standards and Quality will soon give rise to the emergence of a Community Competition Commission, a Regional Accreditation Agency, and a Caribbean Animal Health and Food Safety Agency.
It was mentioned above that a meaningful Single Economy depends on the implementation of a number of harmonized macro-economic policies and coordinated sectoral policies. In this regard, there already exists a draft Caricom Financial Services Agreement (which regionalizes various regulatory requirements and promotes a seamless financial space) and a draft Caricom Investment Code (designed to make the Caribbean a single investment jurisdiction, rather than one with 15 different investment regimes) and work is proceeding on the other macroeconomic policy instruments so as to have most of these in place by the target date of end 2008.
With respect to the coordination of sectoral policies, this is being conducted in the context of a renewed drive for maximizing production integration possibilities as set out in a Single Development Vision that was recently endorsed by the Conference of Heads of Government. For example, in the area of agriculture there exists a food deficit (value of food imports minus receipts from exports) of over US$1.3billion. This deficit would be significantly reduced and food security enhanced if there is effective linkage of agricultural supply with tourism sector demand and, in this regard, investment capital of Barbados and T&T and the latter’s cheap energy and agro-processing/refining skills could be linked up with the not inconsiderable land resources of Belize, Guyana, Jamaica and Suriname. Niche manufacturing, including provision of handicraft and other items for the tourism industry, also has potential.1
Similarly, bauxite and alumina from Guyana and Jamaica could be smelted in energy-rich T&T, possibilities of which had been mooted since the 1960s, and coordination and cooperation activities are planned in the energy sector, where a regional gas pipeline and liquefied natural gas projects have been designed to promote greater energy security.
With respect to services, there is continued quest for a rationalized air and maritime transport system, given the absence of contiguous borders between member states. Single Market liberalization also now permits cross border investment in hotels below 15 rooms capacity and typical tour operator, tour guide and taxi services, inter alia, which had been previously reserved for the nurturing of national entrepreneurship. Major construction activities lend themselves to joint venture and collaborative and technical/managerial arrangements, and an accreditation/certification protocol will sti-mulate cross-border trade in business and professional services.
While there exists interesting production integration possibilities in Caricom, the interface between regionalism, on the one hand, and multilateralism, plurilateralism and bilateralism, on the other, has considerably reduced the Region’s policy
space and capacity to encourage backward and forward linkages in certain areas. For example, the WTO Agreement on Trade Related Investment Measures (TRIMs) prevents the employ of linkage creating local content and export ratios as a developmental strategy. Also, the proliferation of free trade agreements is causing tariff barriers to dwindle to allow for free market access in an increasingly competitive global environment.
The CSME has adopted this new “open regionalism” and has completed its own voluntary process of reduction of the common external tariff to a maximum of 20% for manufactured goods and 40% for agricultural commodities. (Of course, the global liberalization process has important fiscal implications given the openness of the Caricom economies and their considerable reliance on international trade taxes).
It is not surprising, therefore, that the CSME (with a market that is still small even when fully integrated) should be seen as a mere platform or pedestal for effective insertion of the Region in the global economy. The Single Market is designed to facilitate the movement of factors of production in an enlarged regional market space so as to gain increased cost efficiency, and the Single Economy provides the enabling business environment for the emergence of larger Pan Caribbean type enterprises, all for the purpose of greater global competitiveness.
The size or relative share of intra-CARICOM trade, therefore, should not be the sole criterion for judging the success of the regional integration process. As stated in praph 2 of Article 78 of the Revised Treaty of Chaguaramas, the objective of the Community’s trade policy is, inter alia, “the active promotion of export of internationally competitive goods and services originating within the community”. Nevertheless, the Caribbean has not taken full advantage of their preferential access to the Canadian, USA and EU markets (which preference is rapidly eroding anyway owing to Third Party States being given free trade access to these same markets, as in the case of bananas and sugar) and it also has trade deficits with virtually all the Latin American countries with whom it signed trading agreements within the last decade. Supply capacity remains an intractable problem.
Finally, there is a governance problem and related implementation deficit. The CSME, particularly the Single Economy aspect, requires a pooling of sovereignty and corresponding relinguishing or dilution of pure nationalist positions. However, there are varying degrees of commitment to the process and varying speeds of ratification of regional decisions/agreements and formulation of enabling laws and regulations. Under active consideration by the Heads of Government is an EU type commissioner structure, buttressed by a system of Community Law that emanates from the organs and institutions of the Caribbean Community
1 See Denis Benn and Kenneth Hall (Editors), ‘Production Integration in CARICOM: From Theory to Action’, Kingston and Miami: Ian Randle Publishers, 2006