SOME ISSUES OF TRADE POLICY IN THE WEST INDIES
VI. Some Policy Alternatives
In considering the question of policy alternatives, three major possibilities will be discussed. One can begin with the classical solution, which involves a devaluation of the currency. A successful devaluation of the currencies of Jamaica and Trinidad may have several important effects on the economic development of these territories. First, it may eliminate the need for existing overseas preferences, and leave Jamaica and Trinidad free to frame a trade policy which will give emphasis to their potential comparative advantage in light manufacturing. Second, it may lead to an increase in employment, or at least the preservation of existing levels of employment, by discouraging producers from mechanizing with imported machines. Third, it may stimulate the growth of output both from the supply and demand side. In respect of the former, it may induce a greater flow of investment, both domestic and foreign, into export and import-competing production. As far as demand is concerned, local consumers may substitute locally-produced food and manufactures for foreign goods, and foreign consumers may increase their expenditure on West Indian products, particularly light manufactures.
The real question is however whether a devaluation can be successful under Jamaican or Trinidadian conditions. For first of all, there is no certainty that it will lower wage costs in terms of foreign currencies, to a sufficient extent, or for a sufficiently significant period of time, in order to allow all of these effects to come into operation. Indeed one of the crucial tests for a devaluation, is what effects it will have on the cost of living, and in tum what will be the response of the Trade Unions to the rise in prices. For insofar as the devaluation leads to an increase in import prices in terms of local currency, the cost of living will go up, and Trade Unions may respond with c1aims for wage increases. If these c1aims are successful, at least part of the favourable effects of the devaluation will be eliminated.
Governments can however take action to dampen the effects of a devaluation on the cost of living. It has been claimed, especially in Jamaica, that distributive margins on imported goods are unduly high, because of various kinds of restrictive practices such as the sole agency system. Governments may therefore combine an anti-restrictive practices policy with that of a devaluation. In extreme cases, they may even resort to controls on margins and/or prices. Another way of dampening the effect on the cost of living is to subsidize a few key items in consumption, such as flour and salted fish.
Even if there is some rise in the cost of living, governments may be able to discourage unions from pressing c1aims for wage increases.
Reservations may also be expressed against the effects of devaluation on saving and investment decisions. A devaluation may increase the propensity of local savers to accumulate balances abroad, rather than to invest them at home. However, no one can accurately forecast what effects a devaluation is likely to have on investment decisions in a developing country. And it is instructive to note that Mexico experienced an increase in foreign direct investment, especially in manufacturing, after the devaluation of 1954.
On the whole, exchange rate changes have been widely used by countries both developed and underdeveloped, to stimulate their economies during periods of reconstruction and development. Nonetheless, it must be admitted that devaluation is a delicate instrument, and policy makers should not necessarily be criticised for not using it in circumstances where it may otherwise be considered appropriate to do so.
Leaving aside devaluation, another alternative is for Jamaica and Trinidad to join with other developing countries in working out a multilateral approach to the problem of primary products. This may either involve getting exporting and importing countries to participate in a compensatory scheme for shortfalls in export receipts, or in stabilisation schemes for individual commodities. Since such an approach will be substituted for existing preferences, no doubt special provision will have to be made for the transitional effects of multilateralism on high-cost producers. It is not inconceivable that schemes of compensation could be devised, which could finance projects for increasing productivity in high-cost producing countries, or for developing alternative types of production.
The chances of success for such a policy are probably better now than they have ever been in the past. As we noted earlier, world opinion is moving rapidly in favour of multilateral solutions for the problems of primary producing countries. And it may well be the case that if Jamaica and Trinidad play a positive role in this movement, their current trading problems may receive more sympathetic consideration during international negotiations, than if they were forced into accepting international solutions by Britain and Canada joining the ranks of the multilateralists.
One must not ignore however, the difficulties involved in getting concrete action on commodity problems, for some of the political problems are as formidable as those of the economic. But if Jamaica and Trinidad show some willingness to co-operate with other developing countries in finding common solutions to their commodity problems, this may well improve the climate for co-operation in other matters, such as economic aid.
A third alternative is to retain existing preferences for as long as may be necessary or possible, and in the meanwhile to promote industrialization and development through a scheme of regional economic integration. Trinidad’s proposal for a Caribbean Economic Community fits into this category, since it combines existing preferences with new regional preferences. But it cannot be denied that there are several difficulties in the way of such an approach, not the least of which is the bitter memory of the failure of the first experiment with regionalism. It can be argued however, that one of the reasons why the West Indian Federation failed was because of a shortage of ideas about how a scheme of integration could be devised which could accommodate the economic interests of all participating territories.
There were several reasons for this. First, greater stress was laid on the political as opposed to the economic advantages of regional integration. West Indian Customs Union was for the most part considered as a necessary condition for political federation. Even the Croft Report, which was supposed to articulate the economics of Customs Union, felt it necessary to stress a conception of a customs union which emphasized its role as an arm of political federation.
