Inter-American Development Bank

Recent Trends in CARICOM

Recent Developments

Institutional Development

Trade and Investment

The Bank's Cooperation with CARICOM

The Economic Status of Member Countries

Recent Developments

The Miami Summit of last year was of singular importance for the smaller economies of the Caribbean Community. For the member countries of CARICOM, the Free Trade Area of the Americas (FTAA) agreed upon by the Presidents in the Summit could provide a springboard for strengthening trade relations and investment links, consolidating and expanding economic reforms within each country, and -- more importantly -- attracting much needed foreign investment. The challenges, on the other hand, lay in determining: (i) whether their 13 economies can sustain the structural reforms required in order to take advantage of the benefits derived from full participation in a hemisphere-wide free trade zone, (29) and (ii) whether the negotiations leading to the creation of a FTAA will strengthen or weaken CARICOM as a subregional trade group. The latter point is important since the Miami Summit calls for the consolidation of existing subregional and bilateral agreements as a basis for expanding and enhancing integration within the hemisphere.

During the meeting of CARICOM heads of State held on February 16, 1995, Suriname was accepted as the fourteenth member of the group and the first non-English-speaking country. While Suriname had participated in CARICOM with observer status for several years, it had not been encouraged previously to become a full member of the organization owing to political problems affecting the country. By joining CARICOM, Suriname hopes to develop new markets for its rice, fish, and manufactured products such as glassware.

Institutional Development

During the past year and a half, CARICOM has been primarily concerned with three tasks. These are: first, putting into operation the second phase of the Common External Tariff (CET) which reduced tariffs on non-agricultural products to a maximum of 35 percent with a target of 5 percent to 20 percent by 1998; second, adopting measures to make the region more competitive and increase access to new markets and trading blocs; and finally, strengthening relations with neighboring countries through the creation of the Association of Caribbean States (ACS).

In the area of economic integration, however, the goal of creating of a Caribbean common market continues to be elusive. Reaping the benefits of increased intraregional trade is difficult because all of the countries in the Community have similar and very limited export bases. Indeed, trade within CARICOM has been minimal, and intraregional investment is virtually nonexistent. However, it must be acknowledged that CARICOM --as it has often done with considerable success in the past-- can serve as an effective political instrument in joint negotiations on trade and investment with larger countries (such as the United States, Canada, Venezuela, and Colombia) or regional trade blocs (such as the European Community, the NAFTA, MERCOSUR, G-3, and the Andean Pact).

Recognizing the limitations of CARICOM in the area of economic integration, the Heads of State on July 29, 1994, decided to form a new organization for economics and trade called the Association of Caribbean States (ACS). The members of this new grouping would be the 25 countries of the Caribbean Basin. (30) The ACS will thus have a total market of around 200 million persons, with an estimated Gross Domestic Product of US$500 billion, and annual trade worth some US$180 billion.

It is expected that the ACS will encourage economic cooperation in trade-related areas such as tourism, transport, and agriculture, the sustainable use of natural resources and cooperation for coping with natural disasters. The mandate of the ACS includes additional trade-related activities such as the introduction of new initiatives aimed at boosting trade, developing strategies for convergence of trade policies among its member countries, and between the ACS, other countries in the hemisphere and the rest of the world. One aspect of particular importance is that the new organization will be responsible for strengthening private sector participation in regional development and trade.

The launching of the ACS has been postponed at least until the second half of 1995 owing to delays in negotiations on the size of the Association's budget, and the time required for some countries to ratify the treaty (to date only five countries have done so). In an effort to stimulate the start-up of activities, Trinidad and Tobago (the host country for the Organization) is planning to create an interim Secretariat. It is expected that Mr. Simón Molina, a Venezuelan economist, will be confirmed as the first Secretary General of the group.

Trade and Investment

Since the creation of the common market in 1973, aggregate intra-CARICOM exports have accounted for between 8 percent and 12 percent of the area's total exports. Stated in constant dollars, intraregional trade for the 1991-1993 period was 2.6 percent less than in the 1981-1983 period. Excluding petroleum products --which are relatively unaffected by regional trade agreements-- intraregional exports fall to no more than 5 to 8 percent of total exports of the Community. Thanks to petroleum and petroleum-based products, Trinidad and Tobago is by far the most important exporter of goods to other CARICOM members, followed by Barbados and Jamaica.

The preliminary data show that in 1994 there was no significant change in intra-regional trade as a share of total exports by CARICOM countries (see the table on baseline statistics). Virtually all of the rise in intraregional exports in 1994 was attributable to an increase in Trinidad and Tobago's exports to other Community members. By the end of 1994, phase two of the Common External Tariff was in effect in accordance with the current timetable, eliminating import licenses and quotas on specific products in the majority of CARICOM countries. Thus, intraregional trade was made somewhat freer at a time when national economies were going through an adjustment process.

The fundamental issue with respect to CARICOM's exports to the rest of the world is whether the Community will continue to enjoy privileged access to European markets (under the Lomé Convention and the General System of Preference, GSP), the United States (under the Caribbean Basin Initiative -- CBI) (31) and Canada (under CARIBCAN). Preferential access to markets is being eroded by the introduction of the NAFTA, the revision of EU policy on banana imports from African, Caribbean and Pacific (ACP) countries, and successful completion of the Uruguay Round of GATT negotiations. While erosion of preferences can be generalzed, it is likely that Dominica, St. Lucia, St. Vincent and the Grenadines, and Jamaica will be most affected in relative terms.

Concerning access to United States markets, in March 1995 congressman Phil Crane introduced a bill in Congress --H.R. 553 concerning trade security in the Caribbean Basin-- which would grant CBI countries parity with the U.S.'s trading partners under the NAFTA, with respect to imports into the United States, until such time as they either join the NAFTA or reach some other form of trade agreement with the United States. At the moment, however, it is difficult to predict the success of this initiative.

With respect to differential tariff rates, the economies of the Caribbean will have to deal with certain immediate problems arising from the introduction of the NAFTA. Probably the most important of these will be to determine whether the Agreement has major consequences for the Caribbean basin. As it turns out, the existing arrangement --i.e. the Caribbean Basin Initiative-- with its unilateral and non-reciprocal duty-free provisions which held so much promise for the economies of the Caribbean when the initiative was adopted, has not lived up to expectations. Only the Dominican Republic and Jamaica have become important export platforms for clothing and assembled industrial products for the United States market. Hence, some question what economic benefits could be expected from joining a trade agreement which is broader and more complicated, and has more stringent political and economic requirements.

In this connection, two opposing views of the NAFTA have emerged. The first holds that gaining access to the Agreement is an urgent priority for CARICOM to avoid the detrimental effects that would result from the probable diversion of trade and investment away from the Community. According to this argument, the NAFTA will reduce the comparative advantage that the countries of the Caribbean enjoyed vis-à-vis Mexico under the CBI and CARIBCAN (Canada's differential tariff rate program favoring the Caribbean Community countries). In short, there is a fear that textile and clothing exports to the United States will be displaced by Mexican producers, and that the diversion of trade will soon be followed by diversion of investments as well. (32)

Critics of the NAFTA argue that there are numerous uncertainties concerning the position of the United States in future negotiations --i.e., when and under what terms and conditions CARICOM will be eligible to join the free trade agreement, and whether the CARICOM countries will negotiate entry individually or as a group. In this connection, the ability of CARICOM to act as a unified group will be put to the test soon when Trinidad and Tobago applies for membership to the NAFTA. In addition to these questions concerning the negotiations, critics also maintain that satisfying all of the NAFTA requirements --such as those having to do with economic reforms, intellectual property rights, and labor and environmental standards-- would entail adjustment costs for the region that are politically and economically unacceptable.

Beyond these doubts there is one important reason why the economies of the Caribbean are interested in joining the NAFTA. After Canada and Mexico, the Caribbean economies have integrated most closely with the United States economy. The United States is their most important trading partner - importing around 50 percent of their total exports and accounting for approximately 33 percent of their imports and is the major source of investment. The importance of the United States market is even greater than these figures suggest since that country imports most of the region's manufactured goods, including textiles, clothing, and chemicals produced in the Caribbean, and since Caribbeans (both legal and undocumented immigrants) in the United States constitute the second largest group, after Mexicans, remitting around US$2.5 billion annually to their home countries.

However, the debate over the NAFTA has changed somewhat following the Miami Summit and the Mexican crisis. The prevailing view now is that the best strategy would be for the countries of the Caribbean to continue negotiating an extension of existing preferential trade agreements such as the CBI, CARIBCAN, and the Lomé Convention and seek eventual parity with the NAFTA and simultaneously expand and enhance existing trade agreements in the Caribbean basin under the recently created Association of Caribbean States.

Two other trade-related issues are of concern to the countries of the Caribbean. First, the U.S. has recently taken steps to restrict imports of underwear and lingerie from eight countries, including the Dominican Republic and Jamaica, on grounds of injury to American manufacturers, although the principal producers in those two countries are American companies that operate under the TPL 807. (33)

Second, the U.S. is threatening to invoke Section 301 of that country's Trade Law against Caribbean banana producers, based on complaints filed by Chiquita Brands International, which produces bananas in Latin America. Chiquita Brands claims that its exports have been adversely affected by a European Union decision to grant special access to bananas from African, Caribbean, and Pacific (ACP) countries. Yet for the smaller banana-producing islands of the Caribbean, the loss of preferential access to the European Union market would be devastating since bananas are their main export. In the case of Dominica, St. Lucia, and St. Vincent, bananas account for 79 percent, 73 percent, and 58 percent of total exports, respectively. Consequently, the loss of their export markets would cause serious economic and social hardship since banana production and shipment and related activities, account for as much as 50 percent of employment in these islands.

The Bank's Cooperation with CARICOM

With the approval of a technical cooperation project for CARICOM in 1994, the Bank undertook to help the only subregional group that had not yet received IDB assistance for integration. The nonreimbursable technical-cooperation funding of US$1 million is intended to promote greater participation by CARICOM member countries in the global economy by strengthening intraregional ties. This program includes: (i) institutional strengthening of the CARICOM Secretariat to help it improve its capacity to handle macroeconomic and trade data; (ii) the development and implementation of a subregional system for economic data; (iii) the formulation of a regional action plan to promote private sector investment; (iv) the formulation of a plan of action for increased mobility of skilled workers; and (v) studies on expanding the use of financial instruments.

Under its Multilateral Investment Fund, the Bank has approved additional nonreimbursable technical-cooperation funding in the amount of US$1.6 million, along with an interest-free loan of US$620,000, to modernize securities exchanges in four Caribbean countries, three of which (Barbados, Jamaica and Trinidad and Tobago) are members of CARICOM. This program is expected to make securities exchanges in these countries safer and more attractive to investors by establishing modern, uniform standards for the clearing and settling of assets.

In 1995, the Bank will undertake two regional projects in the infrastructure and health sectors. The regional infrastructure project amounting to US$300,000, will provide a clearer picture of existing infrastructure in the area, identify basic needs and priorities, and recommend the best ways to meet these needs. The study will include recommendations on policy, financing, and financial guarantees, and on ways of boosting private sector participation in order to provide the resources for high-priority projects. The health project (US$300,000) will assess the main problems confronting the region's health sector. It will also identify the principal measures to be taken, viable policy alternatives, the necessary and sustainable strategies and means for overcoming the most important shortcomings affecting the sector.

The Economic Status of Member Countries

The economies of the Caribbean countries, once inward-looking and highly protectionist, are in a period of transition to a competitive and export-oriented economic system. In response to the changes that have taken place in international trade and capital markets, governments throughout the region are undertaking difficult reforms intended to make their economies more competitive in world export markets. The process of economic reforms is now beginning to bear fruit. In 1994, the Bahamas, Barbados, Belize, Guyana, Jamaica and Trinidad and Tobago all reported positive GDP growth, as the recovery which began the year before continued. During 1995, the CARICOM countries are expected to continue with recent economic policies, and further consolidate regional integration. For the moment, there is no evidence that the Mexican crisis has marred the region's economic outlook. Economic growth for the 13 member countries is forecasted to average around 2 percent this year, with the Bahamas, Barbados, Trinidad and Tobago, and some of the smaller countries such as St. Lucia and Antigua, showing the biggest gains. Economies based on tourism performed fairly well during the first quarter of this year as a result of a particularly cold winter in Europe and parts of North America which increased the flow of tourists into the region. Jamaica was an exception to this trend where fears of violence kept many tourists away. Trinidad and Tobago's success in attracting investment in its energy sector could boost economic growth to close to 3 percent.

Other economic indicators for the current year are not so upbeat. First, it is estimated that unemployment will remain at around 18 percent throughout the region. Thus, no appreciable gain in net employment is expected from economic growth since investment will be mainly in capital-intensive activities (e.g. Trinidad and Tobago's petrochemical sector) or higher occupancy rates at hotels which are already fully staffed. However, major construction projects now on the drawing board will create new employment late this year and in 1996.

The repayment of external debt continues to limit growth in certain countries of the region. The member countries of CARICOM are estimated to have combined external debts totalling US$10 billion, with Jamaica and Guyana the most severely affected with foreign debts of US$4.4 billion and US$1.9 billion, respectively.

Lastly, difficulties relating to the process of economic reform are complicated by the fact that, as indicated before, preferential access to the region's traditional markets is being eroded as the NAFTA comes into effect and by the new policies of the European Union regarding bananas, the successful completion of the Uruguay Round, and the protectionist pressures in the United States and elsewhere. As well, the CARICOM economies are still vulnerable to external shocks since many of them are running large current account deficits. In addition, internal investment --particularly in infrastructure and the export sectors -- is much too low to sustain medium-term economic growth.

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