SOME ISSUES OF TRADE POLICY IN THE WEST INDIES

The second reason lies in the theory of economic integration itself. The present theory has been developed out of a neo-classical conception of international trade, which as several writers have shown, is notoriously inapplicable to schemes of economic integration involving not only developing countries at different stages of development, but developed countries as well. For the theory does not take into account the need for structural changes in the economies concerned. It concerns itself solely with the effects of integration on a region as a whole, and ignores the effects on individual countries. Hence it is unrealistic to expect any country to embrace a policy of integration, based solely on this orthodox theory.

Given this intellectual climate, the economic reasoning of the Croft Commission occasions no surprise. The omission of professional economists from membership of the commission did not help matters. But one should not necessarily assign any blame to the personnel of the Commission for the deficiencies in economic reasoning which are evidenced in the report. The blame lies as much with the governments concerned, and with the economics profession itself. With few exceptions, the debate among academic economists was largely conducted within the confines of the orthodox theory. And insofar as the Commission sought professional economic advice, they were also served with the neo-classical fare. Indeed, the only attempt to depart from the orthodox approach was made by W. G. Demas in his comments on the Report.

The third reason is a cultural and psychological one. The entire discussion of customs union, both public and private, relied on deriving analogies from the experience of countries in Europe and North America, particularly that of the European Economic Community. No consideration whatsoever was given to the pioneering work which was being done at the time by agencies of the United Nations, on problems of economic integration in Latin America. A whole new set of ideas on the role of economic integration in developing countries has emerged from these efforts. And some of these ideas were formulated to meet similar problems to those faced by the West Indian Territories. Here again the situation was not helped by the composition of the Croft Commission. Two of the three members were drawn from the United Kingdom, a country which was completely outside the pale of this new intellectual ferment. This is merely one example of the dangers underlying the belief which seems to persist in some quarters in the West Indies, that Britain. Europe, and North America possess a monopoly over ideas.

The almost total absence of any set of ideas which had been worked out specifically to meet West Indian needs, meant that once the special interest of individual territories began to intrude into the negotiations, the Federation was doomed to dissolution. For there was not a fully articulated set of arguments, which attempted to harmonise the differences between the various territories. As in other cases, piecemeal efforts at compromise proved more destructive than helpful.

This is not the place to present a complete theoretical framework for the economic integration of the Caribbean. However, some suggestions can be made as to the directions in which theoretical thinking should move. To begin with, a theory of economic integration for the Caribbean must start by recognising three things. First, that Caribbean countries are just as interested in the short run effects of integration, as they are in those of the long run. Most schemes of integration involve a transitional period, often of ten to twelve years. It follows that the balance of advantages for each territory during the transitional period must be clearly outlined.

Second, the main aim of a Caribbean common market, to accelerate development, must be clearly understood. To achieve this end, all integration should be required to do is to provide greater opportunities for each territory to increase its economic growth. It should not necessarily be expected that integration would allow all territories to enjoy the same rates of growth, or that it would equalize per capita incomes over the area as a whole. For the crucial test for each territory should be whether its rate of growth within an integrated market would be higher than outside of it, not whether it would enjoy the same rate of growth, or the same level of factor incomes as other participating countries.

In this respect, historical examples which purport to show the tendency towards regional inequality in common markets, are largely irrelevant, since they do not indicate that the slower growing region or country would have grown faster outside of integration. Had the main object of economic integration been sufficiently recognised, it might have been possible to avoid the crisis which occurred over freedom of movement within the Federation. For the central theoretical justification for the free movement of factors within an integrated area is, that free trade in goods and services alone, would not bring about the full equalization of factor incomes within the area. Had it been demonstrated to the smaller islands that their interest really lay in securing a faster rate of growth rather than equality of income with the larger territories, and if the arrangements for Customs Union had indicated clearly enough what opportunities these islands had for growth within an integrated market, the debate might not have embittered inter-West Indian relations in the way that it did.

Third, it must also be recognised that Caribbean economies differ significantly in terms of size, resources, and levels of development. This is especially relevant to the questions of industrialisation and in considering specialisation in new production. For example, islands like Jamaica, Trinidad, and possibly Barbados, may be able to develop specialisation in light manu­facturing, while British Guiana in the long term may be able to do so in heavy industry. On the other hand, territories like British Honduras and the Leeward and Windward Islands may have to continue to concentrate on primary production. It follows from this that any arrangements for the integration of the area must be designed to accommodate these rather differing needs.

One can get some clues to how these needs can be accommodated, by considering some of the ways in which a scheme of integration can provide opportunities for each participating territory to increase its exports, particularly in the short run. There are two direct ways by which a country may increase its exports through association in a Common market. In the first case, consumers in partner countries may buy the country’s exports instead of goods produced in their own countries. This is Trade Creation. In the second case, they may purchase a country’s exports as a replacement for goods which they have previously bought from countries outside the Common Market. This is Trade Diversion.

Now it may be expected that in the short run, a country is more likely to achieve an expansion in its exports through Trade Diversion, than through Trade Creation. One reason for this is that countries try usually to protect their existing production, by negotiating slower rates of tariff reductions for particular products, by insisting on escape clauses in the treaty of integration, and so on. Another reason (which relates particularly to exports of manufactures) is that trade restrictions may not be the only barriers which a country may encounter in competing with domestic production in another country. In some cases, the problem of securing adequate distributional outlets may be even more formidable than that of trade restrictions.

In the Caribbean, as in several other developing countries, some of the new entrepreneurs in the manufacturing sector have been recruited from commerce. One may find therefore, that local industries are tied to existing channels of distribution, either formally, through interlocking directorates, or through ‘gentlemen’s agreements’. It is true of course that new firms may emerge which may be prepared to merchandise the country’s products, or that producers in the exporting country may try to set up their own wholesale and retail outlets in the rest of the common market. But both of these possibilities are more likely in the longer run, because of the barriers which may exist in the short run against entry into commerce.

New commercial firms may be confronted with several short-term obstacles. In cases where they sell a wide range of goods (which is the normal situation of firms dealing in light manufactures) they may be denied supplies of particular locally produced goods, which are in great demand on the local market. Or they may be given less favourable terms of purchase than are extended to established dealers. In addition, the conservatism of local financial institutions often works against new firms getting similar credit facilities as established ones.

Granted therefore, that territories which wish to increase their exports of light manufactures, may have to look mainly to opportunities for replacing imports from outside the area, it must be pointed out that the opportunities offered by the proposed Caribbean Economic Community are probably greater than those being offered by other common markets between developing countries in the Western Hemisphere. For instance, if one looks at the latest year for which fairly complete figures are available, one finds that world exports of selected light manufactures to· the Caribbean territories (excluding Cuba), exceeded those of the countries belonging to the Latin American Free Trade Association, or to the Central American Common Market. The main reason why the Caribbean offers better opportunities for light manufacturing, compared with a large trade grouping such as the Latin America Free Trade area, is because several of the L.A.F.T.A. countries have practically displaced imports of these items with local productions. To this extent therefore, the Caribbean may offer greater export opportunities to islands like Jamaica and Trinidad, than these other trade groupings in the Western Hemisphere.

All of this is not to deny that difficulties also lie in the way of successful Trade Diversion. In general, the best prospects for such import replacements may be found in products which are already being traded before integration. For one thing, such products are already known in the markets in question, selling contacts have already been established, and so on. For another, importers may be reluctant to substitute new goods from a partner country for those from a country outside of the region, unless there is an overwhelming price advantage. This may be particularly relevant where the outside country is an advanced industrial country. Firms in the latter may be able to offer more liberal credit facilities or commissions. In addition, if the currency of the outside country is widely used in international trade, importers may want to earn their commissions in this currency, so that they can build up balances abroad, to serve as a hedge against devaluations and exchange control at home. Finally, firms in advanced countries often serve as points of contact, between importers in developing countries and the world of international business. This is often extended to importers as a fringe benefit for dealing with the firms in question. On the whole, it may require a great deal of promotional work for Caribbean countries to take advantage of op­portunities for Trade Diversion in the short run.

The problems involved in successful Diversion of Trade, imply that in certain cases, the arrangements for the economic integration of the Caribbean may have to allow for early opportunities for some form of competition between producers within the region. We noted earlier that Trade Creation is often politically unacceptable, especially during the transitional period.

And indeed, some economists, notably Sidney Dell, argue that developing countries should not look towards Trade Creation, in forming common markets among themselves. Conventional economists may take issue with Mr. Dell on two of the assumptions underlying this argument; first, that existing industries within each country are employing resources which would otherwise not be used at all; and second, that the case for protecting such industries is that the economy loses little if anything by putting idle resources to work.

As far as the first assumption is concerned, it is often pointed out that industries in developing countries employ scarce factors such as capital and skilled labour. And it can also be argued that so-called unskilled labour may at any point in time be a scarce factor, although there are a large number of unemployed persons. The truth of the matter seems to be that there is no such thing as unskilled labour from the point of view of manufacturing industry. Persons employed in the simplest tasks have to know some of the way of urban and industrial life. In this context, to treat the unemployed in developing countries as if one man were as good as the next can be very misleading. And it should not also be forgotten that there may be difficulties in the way of switching workers from one occupation to another. As regards the second assumption, the case for protection does not depend solely on how much a country may gain or lose by using its idle resources, but rather on whether it gains more, or loses less, than other countries in the region. Some careless statements of the arguments for protection in developing countries seem to suggest that there would be a case for protection so long as a particular country does not lose anything by setting idle resources to work. But this is strictly true only if it is assumed that other countries in the region do not themselves have unemployed capital, labour, and other resources. In cases where they do, the matter rests upon whether the level of employment is higher than in partner countries. Even after the objections are taken into account it would appear that the case made by Mr. Dell and others still requires qualification.

The qualification which must be introduced is that not all types of intro-regional competition will necessarily affect existing production in participating countries. For one must distinguish between competition for existing demands for regionally produced goods, and competition for the growth in demand.

One may therefore argue that in cases where the export opportunities offered by import replacement in the short run are not sufficiently attractive to some countries, the scheme of integration should allow producers within the Common Market to compete for any expansion in demand that occurs during the transitional period.

The question arises as to what arrangements can be devised in order to provide opportunities for dynamic trade creation during the transitional period. One such device is that of duty-free quotas. Each participating country can agree to extend duty-free quotas to other member countries, equivalent to any increases in demand for agreed products, which take place after the base period. If this is combined with the usual tariff reductions which take place during the transitional period, this would provide greater opportunities for trade without hurting existing production.

It should be emphasized that although common market arrangements in developing countries, should probably avoid dislocation of output and employment, there is the real danger that vested producing interests may block the full unification of the market, long after the transitional period is ended. By allowing for dynamic trade creation, participating countries will at least prevent these interests from gaining strength during the period of transition. Such arrangements may of course involve more complex systems of trade regulation. But ex-European colonies do not lack experience in administering discriminatory controls, since they have had to administer them almost from the earliest days of settlement.

Besides Trade Diversion and Trade Creation, there are two other export possibilities which need to be mentioned. The first of these is Export Substitution. In some cases, a participating country may be willing to trade quicker access to its internal market than the transitional period requires for greater access to markets in the rest of the world, where it is competing with another participating country. In this case, the latter country will increase its exports to the regional market, at the expense of foregoing increases in exports to the rest of the world. This may lead over time, to an increase in exports for both countries, if they are giving up market opportunities for producing goods with low-growth potential, for opportunities to export goods with a higher growth potential. Consider say the hypothetical example of Jamaica and the Windward Islands. Both of them are currently exporting bananas to the rest of the world. Now if Jamaica’s incremental comparative advantage is in light manufactures, while that of the Windwards is in bananas, it may be to their mutual advantage for the Windwards to encourage their residents to consume Jamaican manufactures, if Jamaica agrees in turn to hold off some of her bananas from the world market. This may not necessarily involve a reduction in Jamaican exports of bananas; all it may mean is that Jamaica will aim at a much slower rate of increase in her banana exports.

This possibility seems to refute the well-grounded belief that common market arrangements between competing primary producing countries, cannot give much assistance with their economic development. It is of course true that export substitution involves interference with the market mechanism, and requires greater governmental regulation of production and trade. But this is not an overriding objection, since the regulation of primary production is accepted for other reasons, such as price stabilisation. And in general, most economists agree that increased government intervention may be a necessary condition for accelerated economic growth.

The final possibility arises from Resource Combination. Insofar as the common market facilitates the freer exchange of raw materials, it may increase production possibilities and exports in some participating countries. This possibility on the supply side is ignored in the literature, where attention is largely confined to the demand effects of integration. But from a historical point of view, this has been one of the central advantages of international trade, since trade has permitted an exchange of resources between countries. For example, without raw materials from the rest of the world, Britain might not have emerged as the leading exporter of manufactures in the nineteenth century.

As far as the Caribbean is concerned, the most important possibility lies in the case of Jamaican bauxite. At present, Jamaica cannot convert her bauxite into aluminium, because of a shortage of hydro-electric power. As it turns out, this restricts seriously her prospects for industrial development. For instance, Jamaica might be able to develop a comparative advantage in light aluminium products, if the cost of imported aluminium could be reduced. One way of doing this is to effect a saving on transport costs, by arranging to get supplies of aluminium from a neighbouring country. Now British Honduras has unexploited hydro-electric resources. If Jamaica and British Honduras arc within one common market, an arrangement can probably be worked out whereby Jamaica exported some of her bauxite or alumina to British Honduras, where it could be processed into aluminium, and re-exported to Jamaica, to other countries within the regional market, and perhaps to the rest of the world as well. Both Jamaica and British Honduras will stand to gain by such an arrangement.

Here again it must be admitted that government intervention and cooperation will be required, both from the point of view of planning and financing these new developments, and of negotiating with the international companies concerned. But countries in the position of Jamaica and British Honduras, cannot afford to ignore any possibilities for fuller utilisation of their scarce natural resources.

On the whole, in order to establish a scheme of regional integration which can accommodate the interests of all of the Caribbean territories, the governments concerned must be prepared to take action beyond that of mere tariff reduction. They may have to introduce policies against restrictive practices in business and commerce, in order to speed up the processes of Trade Diversion and Trade Creation. They may have to exercise tighter controls over their exports to, and imports from the rest of the world. They may have to agree to participate in schemes of joint planning, investment, and negotiation, in order to mobilise all the resources of the region for accelerated development. All this and more will be required from these governments, for as experience has shown, the path towards regional integration is not a smooth one, and no one should expect it to be so.

This ends the discussion of policy alternatives open to the West Indies.

In practice, they are not strictly alternatives since governments may choose to combine some of them. Orthodoxy demands that economists should not espouse one set of policies over others. But unorthodox economists, among whom the writer counts himself, will probably advocate a place for regional integration among whatever combination of policies is eventually chosen.

 

[1] These are of course, not mutually exclusive categories, but for this purpose It is useful to treat them as such.

* This must not be interpreted as an argument against peasant agriculture as opposed to plantation agriculture. For one cannot compare productivity in these two types of agricultures, which are using land of markedly different quality. Indeed, a general case can be made in favour of an efficient system of peasant agriculture in the Caribbean. First, it can be argued that the basic quality of existing entrepreneurship in the peasant sector is higher than in the estate sector, since the practice of mixed cropping suggests that peasants are more willing to experiment with a wide variety of crops than the estates are. For some of the estates, it is a question of sugar or nothing at all In a sense, mixed cropping suggests that peasant agriculture may yield more flexibility in the supply of agricultural products and make for a more stable situation. Second, since peasant agriculture is more labour intensive than estate agriculture, its techniques are probably better adapted to the requirements of a labour surplus economy. Third, because of these differences in techniques, peasant agriculture may bring in more net foreign exchange per acre, because its import content is lower than that of the estate sector. Finally, the peasant sector may contribute more to the National income on a per acreage basis, because there is no foreign ownership over peasant production.

[2] The tendency towards mixed cropping is usually described as a response towards uncertain market conditions. It should however be mentioned, that since the Second World War, Jamaican farmers have been confronted with fairly assured markets for their export crops, either through the intervention of local marketing agencies, or through the arrangements which were made for the sale of their crops in the United Kingdom. It, as it is alleged, Jamaican farmers still feel uncertain about markets, might the reason for this not be sought in their attitudes towards the ‘urban elites’ who manage external marketing?