Caribbean Economic Development
Karen_2
Unit8econ.pdf
ECON3501
CARIBBEAN ECONOMIC
DEVELOPMENT
UNIT 8 – REGIONAL ECONOMIC INTEGRATION
RESOURCE MATERIALS
Levitt, Kari; Witter, Michael (1996). The Critical Tradition of Caribbean Political
Economy: The Legacy of George Beckford. Kingston. Ian Randle Publishers
Beckford; George (2000) Persistent Poverty; Underdevelopment in the Plantation
Economies of the Third World. UWI Press.
Todaro Michael & Smith Stephen; C. (2011) 11th Ed. Economic Development. Pearson
Education & Addison-Wesley
Bhagwati Jagdish (2004). In Defence of Globalization, Oxford University Press
Blackman; Courtney. (2005). The Practice of Economic Management: Caribbean
Perspective Kingston: Ian Randle Publishers
United Nations- UNDP, Human Development Report. World Bank-World
Development Report 2
GLOSSARY
ACP – African Caribbean and Pacific
ACS – Association of Caribbean States
CARIBCAN – Caribbean and Canadian Association
CSME – Caribbean Single Market and Economy
OECS – Organization of Eastern Caribbean States
3
ECONOMIC INTEGRATION
Economic Integration refers to the removal of barriers to trade that
prevent or hinder the flow of goods and services into or out of a
nation or society.
It usually implies repealing tariffs, quotas, embargos, or other punitive
customs practices,
and may also include extending favourable taxation rates or regulatory
treatment to encourage cross-border investments.
4
ECONOMIC INTEGRATION
Trade barriers can be:
Tariffs - taxes imposed on imports to a country
Quotas - a limit to the amount of a product that can be imported
Embargos - complete ban on the importation of a good) and border restrictions
For example, Canada, Mexico and the United States have formed the North
American Free Trade Agreement (NAFTA) now, United States Mexico and Canada
Agreement (USMCA), which reduces trade barriers between the three countries.
Canada, the U.S. and Mexico are still free to set their own trade barriers on goods from
other countries. 5
ECONOMIC INTEGRATION
Usually integration involves one or more written agreements that describe the areas
of cooperation in detail, as well as some coordinating bodies representing the
countries involved.
This co-operation usually begins with economic integration and as it continues,
comes to include political integration.
We can describe integration as a scale, with zero (0) representing no integration at
all between two or more countries.
Ten (10) would represent complete integration between two or more countries.
This means that the integrating states would actually become a new country — in
other words, total integration. 6
ECONOMIC INTEGRATION
7
ECONOMIC INTEGRATION
The single market is the midpoint of the integration scale between political and economic integration.
It is the point at which the economies of the co-operating states become so integrated that all barriers to the movements of labour, goods and capital are removed.
Political integration - as the economies of the co-operating countries become completely integrated into a single market, there appears a need for common policies in social policy (education, health care, unemployment benefits and pensions) and common political institutions.
This forms the basis for political integration. 8
ECONOMIC INTEGRATION
There are three important dimensions of economic integration:
1. Trade in goods and services
2. Movement of capital and integration of financial markets.
3. Human migration (Labor)
9
STAGES OF ECONOMIC INTEGRATION
Preferential Trade Agreement (PTA)
is perhaps the weakest form of economic integration.
In a PTA countries would offer tariff reductions, though perhaps not
eliminations, to a set of partner countries in some product categories or
sectors.
Higher tariffs, perhaps non-discriminatory tariffs, would remain in all
remaining product categories or sectors. 10
FREE TRADE AREA
Free Trade Area
occurs when a group of countries agree to eliminate trade barriers between
themselves, but maintain their own barriers against non-member countries.
Hence there are no tariffs or quota restrictions.
The North American Free Trade Area (NAFTA), now USMCA is an example of a
FTA.
Free trade areas are pursued vigorously by governments because they are a move
towards a free market for a wide range of goods and services.
These are goods and services that originate from one and traded to one of the
other member countries of the regional economic free trade area. 11
FREE TRADE AREA
Examples of Free Trade Agreements: AFTA: Association of South East Asian Nations (ASEAN) Free Trade Area (1992)
CEFTA: Central European Free Trade Agreement- Non- EU countries in Southeast Europe
CISFTA: Commonwealth of Independent States Free Trade Area- (2011)
COMESA: Common Market for Eastern and Southern Africa (2000)
GAFTA: Greater Arab Free Trade Area (1997)
GCC: Gulf Cooperation Council (1981)
NAFTA: North American Free Trade Agreement- Canada, US and Mexico (1994)
SAFTA: South Asian Free Trade Area (2004)
SICA: Central American Integration System (1993)
Caribbean Free Trade Agreement (1965-1973) 12
CUSTOMS UNION
Customs Union
This is an agreement among several countries to eliminate barriers to trade
among themselves and erect common barriers against non-member
countries.
Hence a common external tariff is charged to non-member countries.
The European Union represents such an arrangement but CARICOM also
represents a customs union.
With customs union there is the inherent problem of policy coordination. 13
CUSTOMS UNION
Examples of Custom Unions:
CAN- Andean Community (1969/1996) Bolivia, Colombia, Ecuador, and Peru
CUBKR- Eurasian Customs Union (2010)
EAC- East African Community (1967- 1977) (2000)
EUCU- European Union Customs Union (1958)
MERCOSUR- Mercado Común del Sur- Southern Common Market-(1991) U (1994
SACU- Southern African Customs Union (1910) Up. (1970)
14
COMMON MARKET This is a Customs Union however countries can move labor and capital freely across
borders.
Group formed by countries within a geographical area to promote duty free trade and
free movement of labor and capital among its members.
Common markets impose Common External Tariffs (CET) on imports from non-
member countries.
Labor is the principal factor of production that benefits from the forming of a common
market. In recent times, greater effort has been allowed in CARICOM toward becoming an
actual common market.
Many categories of workers are now allowed to cross regional borders to seek
employment.
The European Community (EC) was issued with EC passports, as well as CARICOM
members. They can also work in different parts of the region without restrictions.
15
COMMON MARKET
Examples of Common Market:
EEA- European Economic Area (1994)
EFTA- European Free Trade Association (1960) Iceland,
Liechtenstein, Norway and Switzerland
CES- Common Economic Space (2003) replaced by the Eurasian
Customs Union 2012 and the Eurasian Economic Union (2015)
CSME – CARICOM Single Market and Economy (2006) 16
ECONOMIC UNION
An economic union typically will maintain free trade in goods and services,
set common external tariffs among members, allow the free mobility of capital
and labor, and will also relegate some fiscal spending responsibilities to a
supra-national agency.
Hence it is a common market with a substantial co-ordination of economic
policies.
It is the fourth important discrete point on the integration continuum.
It involves the union of policies with regard to major macroeconomic variables
such as inflation, interest rates and exchange rates. 17
ECONOMIC UNION
Examples of Economic Unions:
EU- European Union's (EU) Internal Market (1993)
EEU/EAEU- Eurasian Economic Union (2014)
18
MONETARY UNION
This agreement allows for Economic Union arrangements with the inclusion of a
Currency Union (i.e. Common Currency)
This involves the formation of a central monetary authority which will determine
monetary policy for the entire group. A well-known example is the European
Union (EU).
An outstanding example of an economic union in the Caribbean is the
Organization of Eastern Caribbean States (OECS), which comprises the Lesser
Developed Countries (LDCs) of the CARICOM group, such as Antigua and
Barbuda, Dominica, Grenada etc.
These countries share a common currency, the Eastern Caribbean Dollar and a
common Central Bank (Caribbean Development Bank). 19
POLITICAL UNION
The final step in the process of economic integration is the
development of a political union.
This involves the elimination of trade barriers in addition to the
development of common external barriers plus the free movement
of factors of production, the harmonization of economic policies, and
common political institutions and governance procedures.
E.g. the former United Soviet Union. 20
REGIONAL ECONOMIC INTEGRATION
Regional economic integration is an agreement among countries in a
geographic region to reduce and ultimately remove, tariff and non tariff
barriers to the free flow of goods or services and factors of production
among each others, countries agree to coordinate their trade, fiscal, and/or
monetary policies.
Regional integration is the process by which two or more nation-states
agree to co-operate and work closely together to achieve peace, stability
and wealth.
Many trading blocs already exist and in order to compete effectively,
Caribbean countries as well as other developing countries must improve
their own competitiveness.
21
BENEFITS OF REGIONAL INTEGRATION
Regional economic integration carries many benefits to Caribbean
economies.
In many cases, it is seen as a continuum with several discrete or pausing
points at which countries may decide either to stop the integration
process or pause prior to integrating further.
Regional economic integration is usually fueled and pursued in the
interest of trade. 22
23
BENEFITS OF INTEGRATION
Trade creation: Trade creation occurs when consumption shifts from a high cost
producer to a low cost producer. Economic integration increases specialization by
removing trade barriers and by encouraging specialization, it enables a shift in
production from high cost to low cost countries.
Economic integration increases the variety of products available to
consumers in member states. Removal of trade barriers enables consumers
to have a variety of commodities from which to choose. Local consumers are no
longer restricted to consuming local products. Increased variety and consumer
choice improve people’s standard of living. 24
BENEFITS OF INTEGRATION
Economic integration allows for improved relationships when there are
conflicts between countries.
When countries are united in economic efforts, it becomes necessary to maintain
friendly relations.
When there are successful integration efforts, what was considered as
international trade is immediately converted to domestic trade.
This removes much of the bureaucracy that was previously involved in
international trade and results in trading being more efficient and hence,
more profitable. 25
BENEFITS OF INTEGRATION
Member countries enjoy economies of scale: Economic integration enables
member countries to expand the scale of production and enjoy economies of scale
because of the expanded market.
Attracting Direct Foreign Investment (DFI): Investors are attracted by large
markets. Small and fragmented national markets are usually not sufficient to attract
huge investments. Economic integration makes the region a huge market which
foreign investors find attractive.
Economic integration improves bargaining power: A group of countries
acting together improves their bargaining power in trade agreements with other
countries and trade blocs. A common policy and common stand enables the group
of countries to integrate to achieve more than they would if the individual countries
bargained individually. 26
BENEFITS OF INTEGRATION
Economic integration Reduces problems of exchange rates:
Economic integration enables member countries to use the same currency
throughout the region. This eliminates the need for converting currencies
for cross border trade.
Integration encourages specialization: The knowledge that a country
will be able to freely export surplus output to its trading partners
encourages specialization which greatly improves the efficiency and quality
of output produced.
Employment due to movement of factors of production: The free
movement of factors of production in an integrated region enables
unemployed factors of production to find employment in other countries. 27
BENEFITS OF INTEGRATION
Lower costs of research and joint utilities: When countries integrate, they are
able to undertake very costly projects that they would not have afforded individually.
This enables them to undertake costly research, develop better and modern
infrastructures and services.
Increases competition: With many firms from the member countries competing
for the market without restrictions, firms are forced to improve on quality and sell
at lower prices. Firms must devise the most efficient methods of production so as to
favorably compete. Integration therefore promotes efficiency.
Peace and security: Economic integration promotes peace and security within the
region. A country will find it difficult to wage war against a fellow member state.
There are also many structures aimed at resolving conflicts amicably without
resorting to war.
28
BENEFITS OF INTEGRATION
Benefit of Economic Integration to the Caribbean Region
A wider market
Greater economies of scale
Efficient allocation of world resources
Increased Investments
Greater variety of goods and services
Lower prices
Promotion of regional economic growth and development 29
PITFALLS OF INTEGRATION
Creation of Trading Blocs: It can also increase trade barriers against
non-member countries.
Trade Diversion: Due to trade barriers, trade is diverted from a non-
member country to a member country despite the inefficiency in cost.
For example, a country has to stop trading with a low cost
manufacture in a non-member country and trade with a manufacturer
in a member country which has a higher cost. 30
PITFALLS OF INTEGRATION
National Sovereignty: it requires member countries to give up some
degree of control over key policies like trade, monetary and fiscal
policies.
The higher the level of integration, the greater the degree of
controls that needs to be given up particularly in the case of a
political union economic integration which requires nations to give
up a high degree of sovereignty. 31
EVOLUTION OF CARIBBEAN INTEGRATION
The West Indies Federation was a political union in the making established in1958 by
the British Caribbean Federation Act of 1956 and comprised of ten territories: Antigua and
Barbuda, Barbados, Dominica, Grenada, Jamaica, Montserrat, the then St Kitts-Nevis-
Anguilla, Saint Lucia, St Vincent and Trinidad and Tobago.
Fundamental issues debated with a view to strengthening the Federation were direct
taxation by the Federal Government, Central planning for development, Establishment of a
Regional Customs Union and Reform of the Federal Constitution.
Several problems including governance and administrative structures imposed by the
British; policy disagreements an unwillingness to give up power to the Federal Government
were faced.
The demise however, was led by the withdrawal of Jamaica – the largest member and
Trinidad and Tobago’s subsequent withdrawal shortly after. 32
EVOLUTION OF CARIBBEAN INTEGRATION
The Caribbean Free Trade Association (CARIFTA) was founded by Antigua and Barbuda,
Barbados, Guyana, and Trinidad and Tobago in1965, with the signing of the Dickenson Bay Agreement
(the Agreement establishing the Caribbean Free Trade Association).
They were joined in 968 by Dominica, Grenada, St Kitts-Nevis-Anguilla, Saint Lucia, St Vincent and
the Grenadines, Montserrat and Jamaica.; and in 1971 by Belize.
The intent was to unite their economies and to give them a joint presence on the international
scene by encouraging a balanced development through:
increasing trade – buying and selling more goods among the Member States
diversifying trade – expanding the variety of goods and services available for trade
liberalizing trade – removing tariffs and quotas on goods produced and traded within the area
ensuring fair competition – setting up rules for all members to follow to protect the smaller
enterprises.
33
EVOLUTION OF CARIBBEAN INTEGRATION
In addition to providing for free trade, the Agreement sought to:
ensure that the benefits of free trade were equitably distributed
promote industrial development in the LDCs
promote the development of the coconut industry (through an Oils and Fats Agreement)
which was significant in many of the LDCs
rationalize agricultural production but in the interim, facilitate the marketing of selected
agricultural products of particular interest to the LDCs (through the Agricultural Marketing
Protocol)
provide a longer period to phase out customs duty on certain products which were more
important for the revenue of the LDCs 34
EVOLUTION OF CARIBBEAN INTEGRATION
The main limitation of The Caribbean Free Trade Association (CARIFTA) was that it
only facilitated the trading of merchandise goods.
According to the narrative of Singh, CARIFTA also failed to harmonize the industrial
and foreign policies throughout the region (“Guyana Chronicle: The History of
CARICOM”).
This led to the development of a broader form of integration that accommodated
the free movement of commercial services, people and capital within the Caribbean
known as the Caribbean Community (CARICOM) in 1973.
35
EVOLUTION OF CARIBBEAN INTEGRATION
The Caribbean Community and Common Market (CARICOM) 1973- 1989, replaced CARIFTA in 1973 with the signing of the Treaty of Chaguaramas.
CARICOM was a stronger form of integration with three ‘pillars’ of economic integration (a common market in goods), functional cooperation (education, health and several other areas), and foreign policy coordination.
CARICOM now comprises twenty countries; fifteen of which are Members and five Associate Members. They work together to coordinate economic policies, engage in development planning, launching of special projects targeted at less-developed countries and handling trade disputes within the region.
The CARICOM customs union was never completed and in the 1980s intraregional trade deteriorated. 36
EVOLUTION OF CARIBBEAN INTEGRATION
CARICOM Single Market and Economy (CSME) - In 1989 CARICOM Heads
of Government (HoG) declared their intention to create a Single Market and
Economy (CSME).
The legal basis was laid with the signing of The Revised Treaty of Chaguaramas in
2001.
New organs of governance were set up and the Caribbean Court of Justice was
created.
Security was added as the fourth pillar of integration in 2007.
The CARICOM Single Market was officially inaugurated in 2006 and the Single
Economy is scheduled for completion in 2015. 37
EVOLUTION OF CARIBBEAN INTEGRATION
The CSME seeks to implement provisions for the removal of trade and
professional restrictions.
These provisions facilitate the right to establishment businesses,
to provide regional services, the free movement of capital and the
coordination of economic policies.
In the ensuing years, some Caribbean economies, under the auspices of
multilateral lending institutions, implemented structural
adjustment programmes having at their core, programmes of economic,
financial and trade liberalization that far exceeded their commitments as
expressed in the Treaty of Chaguaramas. 38
EVOLUTION OF CARIBBEAN INTEGRATION
The fundamental aspects of CSME are as following:
Consumer Affairs
Competition Policy
Social Security
Contingent Rights
Immigration Arrangements for Free Movement of Persons
Administrative Arrangements for Commercial Establishment
Government Procurement
Trade and Competitiveness in CARICOM 39
CSME OBSTACLES
CARICOM is characterized by the heterogeneity of the region in terms of GDP per
capita as well as population. Furthermore, the economies are very open, but tend to
focus on very few export goods.
Economic Integration among the countries in the Caribbean region has a long history
through CARIFTA, CARICOM and now CSME.
The standard explanations for the conflicts and failures of regional economic integration
among developing countries have been concerned with the issue of equity in the
distribution of benefits.
If within an integrated area, some countries are much more developed than others, the
gains from being integrated are very likely to be distributed unequally. 40
CSME OBSTACLES
The advanced economies tend to attract more new industries than the less
advanced.
The possible consequence is a wider gap between the members:
The already developed area becomes more developed while the more rural
area is condemned to a lower level of development.
The establishment of free movement within CARICOM might not stimulate strong
migration flows.
There are not many incentives for a broad reallocation of labour within
CARICOM. 41
CSME OBSTACLES
Due to the relative neighborhood to the large US labour market, citizens of
CARICOM willing to move will probably prefer to go to the US or other higher
developed countries outside CARICOM.
Right now CSME is partially implemented with certain categories like graduates,
musicians artists etc. Artisans and unskilled persons still have to get work permits.
The aim of CSME was to ensure that all facets of the agreement were in place
by 2015.
CSME 2017-2019 in tandem with the Community Strategic Plan 2015–2019
https://today.caricom.org/2018/10/26/implementation-plan-for-the-csme-2017-
2019/
42
CSME OBSTACLES
Concerns about distribution of cost and benefits
Conflict with domestic policies
Inadequate infrastructure
A strong precondition for regional and economic integration is adequate infrastructure.
Economic gains prompted from regional integration are highly dependent upon the
ability of the system to move resources, people, capital, and information seamlessly from
the sourcing areas to production hubs and finally to distribute its products efficiently.
Vested interest threatened
Little role for private sector
Weak states 43
CHALLENGES TO INTEGRATION
https://www.everycrsreport.com/reports/RL34308.html#_Toc202746444
44
GLOBALIZATION AND CARICOM
Globalization poses significant challenges to small developing economies such as
those in the Caribbean, which are already dealing with a number of issues in their
pursuit of sustainable development.
For Caribbean countries, the impact of globalization on trade has been reflected in
increased liberalization and market-opening policies, especially during the latter
part of the 1980s and the 1990s.
The reduction of trade barriers and the increasing openness of these economies
have not led to a significant increase in intraregional trade or helped them to
obtain a growing share of the extra- regional export markets. As a result, these
countries’ growth potential has been limited. 45
GLOBALIZATION AND CARICOM
This was the genesis of the CARICOM Single Market and Economy (CSME).
It was intended to achieve a much broader and deeper integration than had
been possible under the existing treaty and, through the development of
economies of scale, to increase the competitiveness of these countries in
the global economy.
Additionally, the creation of CSME was also meant to enhance the bargaining
position of CARICOM countries in international negotiations such as those
at the level of the World Trade Organization (WTO) and the future Free
Trade Area of the Americas (FTAA). 46
GLOBALIZATION AND CARICOM
Globalization has been a prerequisite for the development of specific sectors but
has not provided the means to overcome the weaknesses and stumbling blocks
that have marked the development of some of the more traditional sectors.
In this regard, it has reinforced a process of change in sectoral output and, in so
doing, has made the existing disparities among CARICOM countries more visible
and transparent.
In the case of the agricultural sector, this change in the composition of output
has reflected a loss of competitiveness resulting from high production costs,
external shocks and a heavy dependence on trade preferences granted by the
European Union. 47
GLOBALIZATION AND CARICOM
Globalization has affected the use of natural resources, the expansion of
human settlements and development policies aimed at addressing poverty
and income inequality, which are among the most serious sustainable
development issues confronted by the Caribbean countries.
The most important and urgent requirement for seizing the
opportunities presented by the global environment is the transformation
from a labour intensive to a highly trained knowledge-based workforce 48
