Resources Allocation in the Private Sector

In effect, the preferential trading arrangements between each Caribbean country and its metropolitan partner reflects the historical concept of the Caribbean economies as being counterparts of the temperate countries. In the past century certain institutions of a private nature have emerged linking the Caribbean and Latin America alike even more firmly, and in a dynamic manner, with the metropolitan economies, especially the United States. These institutions are the multinational corporations.

For our purposes the salient feature of the multinational corporation (MNC) is the integration of its activities, involving segments of the economies of a large number of different countries, within the frontiers            of a single decision-making machinery. The goal of the MNC is the maximization of profit in the long run, but this goal often resolves itself into a number of proximate objectives such as the maintenance of existing, and the capture of, new raw material sources, and of markets; and a high rate of technological progress in the fields of process and product innovation.

The operations of MNC’s may actually conceal certain existing economic relationships between the Caribbean and Latin America. In the previous section we mentioned the low volume and narrow range of trade between the two regions. What is not brought out by those figures is the extent to which the resources of each region reach the other in a more finished form vii processing plants in the Uni­ted States. For example in 1962 Latin America imported 60,000 tons of aluminium, the bulk of its requirements, from the United States and Canada . But the United States and Canada in turn import nine-tenths of the raw materials needed to make aluminium from the Caribbean. That is to say, North American-based multinational corporations, four in number, mine and treat bauxite in the Caribbean, and transfer the material to processing plants in the United States and Canada . Part of the out­put of aluminium and semi-finished aluminium products is then exported to Latin America.

On the other side, a substantial portion of Latin America’s output of metal ores is exported to the United States. This is the case for such commodities as Mexican iron ore, manganese, fluorspar, lead, zinc and asbestos; Chilean copper; Venezuelan petroleum and iron ore; Peruvian copper, lead and zinc; and Brazilian manganese. In turn, these materials provide a significant portion of total

U.S. supplies, and the bulk of U.S. imports of these materials from Latin American takes the form of imports by parent companies from their branches and subsidiaries in the area. To complete the circuit, some 37 percent of the imports of metal manufactures, and machinery and transport equipment, by the four largest Commonwealth Caribbean territories is supplied by the United States. Thus to some extent, the resources of Latin America participate in the development of the Caribbean through the channels of the MNC and via the American economy.

The significance of this is three-fold. First, it indicates that there are significant economic relations between the two regions which are hidden by the multinational corporations. Moreover, it suggests that the existing competitivity of the production structures of the two regions is no guide to their potential complementarity. But what is perhaps most important is that the product and commodity flows are not so much between economies, as be­tween one plant end another, within the multinational corporations and their own marketing agencies. Thus, intra-corporate commodity   transfers between plants located within different countries may satisfy the formal criteria of international trade, but so far as resource allocation is cocerned, the flows are of an internal character within frontiers which are institutionally, not politically, defined .

The consequence of the high degree of mobility within the company must be a certain degree of rigidity so far as intra-regional product and capital flows between companies are concerned. For example, the MNC with raw material facilities and processing capacity will not normally purchase raw materials from another prod user. For in the first place, the cost of purchase from another producer will be in some sense at a market value which includes profit, while the material is obtained from their own subsidiary et production cost. Secondly, the opportunity cost of purchasing from another producer will be the lower utilization of capacity in the subsidiary. In other words, one of the elements of a profit-maximization policy for an MNC is the fullest possible utilization of capacity in all its vertically and horizontally integrated activities. The result is that while there is a premium on intra­company product and factor flows there is a rigidity in product and factor flows between companies producing similar sets of commodities, whether these companies are producing in the same region or :n the same country, or not.

Thus corporate integration can, end often does, result in regional fragmentation. This fragmentation does not only occur between the two regions, as we have already suggested. The experience of the Caribbean with its bauxite industry suggests that fragmentation can take place within a given region and even within one country. Thus that part of the bauxite output of Jamaica and Guyana which is produced by Reynolds Metals, the U.S. aluminium producer, reaches the fledgling aluminium smelting industry of Venezuela after being shipped to the U.S. and manufactured into alumina at Reynold’s plants. It is then re-exported to the South American mainland, in spite of the fact that Guyana borders on Venezuela, and Jamaica is also nearer to that country then the United States. Conversely, Reynolds’ bauxite output in Guyana end Jamaica has not so far been available to the existing processing capacity in both countries because this capacity is owned by a different company.

It is interesting to examine in this light the experience of Latin American countries in attempting import -substitution industrialisation. Countries such as Brazil and Mexico have had some success in replacing finished consumer goods. But difficulties encountered in attempting to extend this to the stages of intermediate and capital goods has meant that the pace of import-substituting growth has slackened considerably. The area therefore continues to be a major ex porter of basic materials, and a major importer of capital and intermediate goods.

The reason is often held to be the fact that economies of scale are most important for capital and intermediate goods, and that the smallness of national markets in Latin America can­ not support these secondary and tertiary stages of industrialization. It should, however, be noted that the standard pattern for import-substitution in the area has been the persuasion of U.S. firms to locate plants in the area for the service of national markets. Many of these ventures are undertaken in partnership with local capital but normally the U.S. firm (usually an MNC) supplies the technique, the brand name, the management, the physical equipment and the materials. And it is noteworthy that in 1964 of the total U.S . exports to foreign manufacturing affiliates of U.S. firms in Latin America, 57 percent (U.S. $400 million) consisted of parent company exports to affiliates of materials “for processing or assembly” and of “Capital equipment for investment use!” The larges items in the former category were transport equipment, chemicals , food products and electrical machinery.

Such factors suggest that the size of the markets for intermediate and capital goods is limited not only by the national boundaries but also by corporate frontiers. Thus where a country has set up three car-assembly plants  under the aegis of Ford, General Motors, and Renault the “market” for motor-vehicle components is split in three, one to each parent company; and is further fragmented by a certain degree of product differentiation and the built in propensity (often cemented with specific contractual arrangements) for each subsidiary to purchase from its parent.

When considered in conjunction with the fact that the bulk of Latin America’s exports of basic materials consist of intra-corporate flows, this factor gives us a clue to understanding the resilience of the traditional pat­ tern for Latin America to export primary products and import manufactures. For where raw material out­ put in Latin America is institutionally linked to processing capacity in the metro polis, and where assembly in the area is institutionally linked to supply in the metropolis; the pattern of economic activity and of inter­ national trade and capital flows assumes a degree of permanence which the liberalisation of trade barriers, by itself, cannot break. For both the Caribbean and Latin America such a framework of resource allocation works so as to systematically divorce their resources from their needs, and to integrate their resources with the needs of the North American industrial complex. The limited import­ substitution achieved by the two regions so far consists in essence merely of the relocation of a part of the incremental terminal assembly facilities of the MNC’s within the hemisphere. *

It has been suggested that the most important aspect of economic development in the production structure is the continuous substitution of domestic output for imported output in incremental supplies; that this process is most important for intermediate and capital goods; and that it is marked by substantial growth of inter industry interdependence within the national economy. Clearly, the structure of the MNC with its vertically integrated links with the metropolis Inhibits the growth of such industrial interdependence within the national and regional economies. Equally, this structure makes for growing inter-activity interdependence within the corporate economy. One of the characteristics of the growth of today’s large firms is the continuous extension of the production frontier into produced inputs and elaborated outputs: the former being the equivalent of the substitution of domestic for imported out­put in the national economy. And in so far as the bulk of processing facilities are already in the metropolitan economy it is natural that the extensions of the production frontiers will take place there.

This also helps to explain why the direction of technological progress tends not to be to the advantage of the Caribbean and Latin America. Naturally, firms and governments which face a growing dependence on foreign sources for important materials will have a strong incentive to look for substitutes more readily and reliably available. Part of the rapid emergence of synthetic materials in the United States, for example, can be seen as the substitution of domes ­ tic technology for imported natural resources. The tendency for the growth of demand for some of the reg ion’s exported raw materials (as distinct from agricultural products) to be less than the growth of income of the consuming industrial nations can be seen as the logical result of the organisation of technological research. The needs of the two regions lie rather in the direction of a larger utilization of domestic resources for the satisfaction of domestic needs. The present organization sets up a built-in incentive for the replacement of the regions’ resources by metropolitan resources.

Moreover in so far as it is metropolitan capacity which satisfies the bulk of the regions’ needs for finished goods, and metropolitan technology which makes available the range of production possibilities, then there is also a built-in propensity for the satisfaction of the regions’ needs to be based on Imported resources, technological and human as well as natural.