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Finance & Development, December 1977
Article

The political economy of the Caribbean: Political and social factors that affect economic decisions and growth

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
December 1977
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Mahmood A. Ayub and Eric D. Cruikshank

The prevalence of powerful institutional forces in the Caribbean is a reality that makes economic analysis divorced from political economy a barren exercise. For economic analysis to be relevant for policymaking in the Caribbean, it must take cognizance of certain crucial political and social factors. The specific nature of the political forces (in the form of organized mass political parties and disciplined, aggressive trade unions), the influence of large multinational corporations on the economics of the region, the trend toward regional integration, and the vital impact of tourism on the economic and social life of the region are important aspects which need to be recognized in analyzing the development process in the Caribbean.

While most Caribbean countries have either achieved political independence, or expect to do so over the next two years, they continue to exhibit many features of a less developed, colonial structure. First, their economies are characterized by strong intersectoral dualism, with a small, highly capital-intensive nonagricultural sector existing side by side with a more traditional, labor-intensive agricultural sector. In Guyana, Jamaica, and Surinam, the capital-intensive sector is bauxite mining, and in Trinidad and Tobago, it is petroleum. The real linkages between this sector and the rest of the economy are either extremely tenuous or nonexistent. Second, the agricultural sector itself is marked by intrasectoral dualism. On the one hand, there are export-oriented crops such as sugar, rice, and bananas; on the other hand, there are the more domestically oriented crops—such as cassava— which are grown for local use. In some instances, as in the efficiently managed and relatively capital-intensive Wagenin-gen agricultural enterprise in Surinam, productivity is several times higher than that for a traditional holding. Third, almost all these countries continue to rely heavily on the export of just a few commodities, as they have over the last two decades. In addition, a vast majority of the commodities exported by this group go to only a few foreign markets, primarily to the United States, the United Kingdom, and the Netherlands. Only recently have Guyana and Jamaica attempted to diversify their markets. Finally, almost all the countries of the region have relied heavily in the past on foreign private capital and direct investment, supplemented by grants-in-aid from the metropolitan countries to which they have been historically linked.

This economic scenario is by no means unique to the Caribbean region. In fact, most developing countries share some of these features. What makes the Caribbean so different from the other geographic areas, however, is the coexistence of such an economic structure with a highly developed political structure. The political economy of the Caribbean region has two common characteristics: first, the existence of political democracy along classic Westminster (or in Surinam, The Hague) lines; and second, the existence of a strong, organized, and disciplined trade union movement. Although these features may not be restricted to the Caribbean area alone, there are few countries elsewhere in the developing world where the level of political consciousness and the attitudes and aspirations of the trade unions have facilitated the thorough assimilation of the unions into the ruling establishment.

These institutional realities, combined with the responsiveness of most Caribbean politicians to social issues, have an impact on economic growth. The existence of strong political parties and pressure groups and the possibility of alternative governments intensify the pressure for immediate improvements in the social conditions of the population. In view of the scarcity of resources, this has been at the expense of long-run objectives of promoting structural changes in the economy. The trade unions, moreover, lobby strongly (and with success) for policies which result in gains for their membership at the expense of employment generation, capital formation, and budgetary savings. The fact that most Caribbean political leaders came up through the ranks of the trade union movement helps to impart a definite economic class bias to their views on the direction of economic management.

These factors seem to have encouraged most Caribbean governments to equate the realization of immediate wage gains (for not even the wage class but the more limited subclass of the fully employed) with responsible stewardship of national welfare. In many instances wage increases are not justified on productivity grounds. As a result, investment is deterred, potential employment opportunities are curtailed, and the division between the traditional and modern sectors is more deeply entrenched. This is by no means a condemnation of the existing political institutions; it merely points to the conclusion that the coexistence of a parliamentary democracy with an independent trade union movement makes it critical for these countries to aim at an even greater growth effort than the one being made at present.

The multinationals

The role of multinational corporations in the Caribbean countries is extensive. Multinational corporations operate in the Caribbean in the bauxite, agriculture, petroleum, and banking sectors. Recently, concern has increased in many Caribbean countries about the potential dangers of the power that multinational corporations wield over their economies. Mr. Michael Manley, Prime Minister of Jamaica, expressed this concern in these words:

Clearly, political independence and national sovereignty are inconsistent with a situation in which the “commanding heights” of the economy are foreign- owned and controlled…. It must be at the very least a long-range objective to bring these sectors of the economy under local ownership.

Table 1Population and gross national product for Caribbean countries, 1974 some(In billions of U.S. dollars)
GNP at market pricesPer cent growth rates, 1960-74
Population

(In thousands)
Amount

(In millions of

U.S. dollars)
Per capita

(In U.S. dollars)
PopulationGNP per capita
Barbados2412901,2000.25.2
Guyana7913905002.41.5
Jamaica2,0082,3901,1901.73.6
Surinam3874601,1802.73.6
Trinidad
Tobago1,0701,8101,7001.62.1
Sources: World Bank Economic Reports; national statistical offices.

This concern is particularly evident in two countries. In Guyana, the bauxite mining and sugar industries were nationalized in stages between 1971 and 1976. In Jamaica, the Government is continuing negotiations with the bauxite companies for a larger share in the operations of the industry. In the remaining Caribbean countries, there is a heightened awareness of the dangers of excessive foreign economic influence.

The relationship between a national government and a multinational corporation involved in raw material prospecting and development is complex. The often tacit bilateral agreement can be described as follows: the State is expected to provide political and economic security, major infrastructure, the rights to raw material supplies, and the right to repa-triatìe a certain portion of earnings. The multinational corporation, in turn, is expected to provide a stream of payments in the form of tax remittances and remuneration to local employees, and payments for local goods and services.

In fulfilling its obligations and in extracting its dues, the State has a number of policy instruments at its disposal. This is well understood. What is not so universally understood, however, is that the multinational corporation, by virtue of its size, its geographical span of control, and its vertically integrated structure can deploy at least an equal number of instruments in seeking its objectives. One major difference, and one that is substantive, is this: where the State attempts to maximize welfare within its own national boundaries, the multinational corporation’s range of activities is extraterritorial. As a result, the State may enforce a policy—say, a taxation or a wage settlement—without reference to its comprehensive impact; in such a case, there may be economic feedbacks which are extremely adverse for the national economy. The unilateral imposition in 1974 of the bauxite levy by Jamaica and other members of the International Bauxite Association is an example where the net benefits to the Caribbean governments from the levy may have been less than had been anticipated.

Regional integration

The trend toward regional integration is the other important aspect of the political economy of the Caribbean region. This movement, which presently includes 12 member states of the Caribbean Commonwealth, plus the Bahamas and Surinam as associated members, evolved in an attempt to overcome the disadvantage that small size, geographical fragmentation, and external dependence have placed upon these countries. In the course of the last two years, the Caribbean community has taken several steps along the path to regional integration. These include (1) the establishment of a regional financial safety net that provides short-term support for intraregional balance of payments deficits; (2) a general. harmonization of fiscal incentives; (3) the launching of a new regional food plan, aimed at combating the region’s escalating imported food bill; and (4) the reorganization of the West Indies Shipping Corporation on a commercially viable basis.

Notwithstanding these favorable developments, the movement toward integration in the Caribbean has been slow. In the first place, similarities in resource endowment among many of these countries inhibit the possibilities of specialization. In the absence of regional industrial programming criteria, the tendency toward duplication of activity persists as the few production possibilities permitted by size and resources are jealously guarded. Furthermore, the recent economic problems encountered by Jamaica and Guyana have forced those countries to subordinate regional priorities to national ones. Finally, the widening divergence in political philosophy among the member countries has created a difference in the aspirations and management style of the regional governments. These events, reinforced by the prolonged disenchantment of the less developed countries in the partnership over the benefits of the Caribbean Common Market, have severely strained the fabric of the integration movement.

Impact of tourism

With the exception of Guyana, Surinam, and Belize, all Caribbean countries are heavily dependent on tourism, in terms of its contribution to gross domestic product (GDP)-—and employment—as well as to foreign exchange earnings. This economic reliance on tourism has played a crucial role in shaping the social outlook of the population. In particular, the Caribbean region has suffered considerably from rising expectations—the “demonstration effect” from prolonged exposure to the consumer habits of international tourists. This has been due partly to its proximity to the North American continent and partly to its historical association with the Western world. The situation is aggravated by advertising through the news media. Not only do major British and North American periodicals inculcate values through their wide circulation, but local news media also extol travel to, and consumer purchases from, these countries. As a result, there is a great demand for the more expensive consumer durables associated with the North American culture. This social phenomenon has had two important macroeconomic results. First, this emphasis on consumerism has forced gross domestic savings to remain very low relative to the economic potential of the region. Second, the large proportion of luxury and semiluxury goods in total imports has exacerbated the balance of payments situation. Recently, some of the governments have reacted to this situation by imposing stringent import controls. However, restrictive trade policies work counter to the general expansionary policy required to reduce massive unemployment.

Local problems

The preceding politicoeconomic scenario is complicated even further by a set of problems that are typically Caribbean.

The first problem is purely sociological but has strong economic repercussions. Throughout the Caribbean region, the Negro population is averse to agricultural labor, because of land tenure problems and the traditional opprobrium that the days of slavery imparted to this activity. This has had a strong influence on the choice of technology in agriculture, leading to increasing labor displacement through mechanization. Furthermore, rather than work on farms, many laborers prefer to migrate to urban centers such as Georgetown, Kingston, Paramaribo, and Port-of-Spain; this mobility only aggravates the problem of urban unemployment.

Second, despite their small size, most Caribbean countries have significant ethnic and religious diversity. The original inhabitants of the Caribbean area, the Amerindians, are now an insignificant proportion of the total population. Negroes and East Indians are the main ethnic groups, with small numbers of Chinese, Lebanese, and Europeans. This racial and religious diversity has tended to make the problems of national integration more difficult, and periods of bitter racial violence have not been uncommon. After the emancipation of the Negro slaves, the attendant labor shortages on the plantations led to the importation of East Indian indentured labor, after this had been successful in Mauritius. Relations between the Negroes and the Indians have always been tense. In the 1950s the emergence of competitive mass political parties with separate racial allegiances retarded the development and diffusion of the commonly shared “creole” culture. Although racial tensions have moderated considerably in recent years, the problems they cause are a potential source of trouble during difficult economic times.

Impact on growth

What has been the net effect of this politicoeconomic situation on the region’s economic position and prospects? To begin with, economic growth since the early 1960s has been sporadic. Apart from the year-to-year fluctuations in economic activity resulting from exogenous factors (such as international demand and weather conditions), there have been longer-term fluctuations arising from the differences in the level of private investment. In Surinam, for instance, the early and mid- 1960s witnessed a remarkable rate of growth, with nominal GDP actually doubling within a period of about eight years. This phenomenal rate of growth was triggered by the massive private investment by the Surinam Aluminum Company in its hydropower plant at Brokopondo. However, the momentum of this investment was not maintained; since the late 1960s there has been virtually no growth in real GDP. Similarly, in Jamaica real growth was spurred on by private direct investment and averaged over 6 per cent from 1963 to 1970. From 1970 to 1976, however, it has been virtually zero. The nature of investment in these countries precluded the possibility of sustained economic growth. Development was restricted to a single sector, growth was primarily attributable to enclave activities, and few linkages were established with the rest of the economy.

The bulk of private sector investment in the region has the same characteristics: it is foreign; it is concentrated in a few activities; it has been capital intensive; it has contributed to agricultural backwardness through wage differentials; and it has provided only limited stimulus to indigenous enterprise. Although such investment has ultimately led to growth, it has also retarded the ability of these countries to transform themselves through their own efforts, and has thereby increased their vulnerability to external factors. Over the past few years, the governments of the region have assumed an increasingly active role in a number of diverse economic activities to counter this excessive reliance on private foreign investment.

To finance their public investment programs, some of the Caribbean countries have recently turned to their tax systems in order to mobilize domestic resources. From Table 2 it can be seen that total taxes as a proportion of GDP remained fairly stable through 1973 in the five principal countries of the region. By 1975 Guyana, Jamaica, Surinam, and Trinidad and Tobago substantially increased the ratio of tax revenue to GDP. In doing so, these four countries applied specific tax instruments to siphon off windfall gains arising out of increases in several international commodity prices: in Guyana, a levy on sugar; in Jamaica, levies on sugar and bauxite; in Surinam, a levy on bauxite; and in Trinidad and Tobago, taxes on petroleum products. These taxes produced a dramatic increase in revenues in 1974 and 1975. Although these changes achieved major revenue increases, they have done little to strengthen the basic structure of the tax systems in these countries. Tax revenues remain susceptible to fluctuations in international commodity prices; this vulnerability was dramatically brought out by the effects of the large drop in the price of sugar on the world market in 1975-76. Furthermore, a large portion of the recent increments in tax revenue in Guyana, Jamaica, and Surinam has been absorbed by mounting public sector current expenditures.

Table 2Tax revenue as a percentage of GDP for some Caribbean countries, 1971-75
BarbadosGuyanaJamaicaSurinamTrinidad and

Tobago
197122.619.818.720.314.6
197225.223.617.720.815.3
197321.620.419.118.614.9
197418.528.923.718.926.9
197520.539.124.929.130.8
Sources: World Bank Economic Reports; national statistical offices.

The prospects for the economic development of the Caribbean region are heavily dependent on the political, social, and economic factors that have been described. The growth performance required for development will depend upon the ability of these countries to attract sizable external capital inflows, which in turn will depend upon how amicably the questions of local participation and ownership are settled with the multinationals. Success in increasing domestic savings (see Table 3), reducing the high urban unemployment, diversifying the sources of growth in terms of both products and external markets, and defusing racial tensions will determine (and be determined by) the economic growth of the region. Finally, in terms of regional integration, it is crucial that more attention be given to the design of a decisionmaking apparatus with balanced allocation of political and jurisdictional responsibility between regional entities and national governments. This is a factor upon which the success of the Caribbean integration movement will depend.

Table 3Capital formation for some Caribbean countries, 1970-75(In millions of current U.S. dollars)
197019711972197319741975
Barbados
Private393840486056
Public679121420
Total454549607476
Guyana
Private302018242918
Public2632344960133
Total5652527389151
Jamaica
Private216248238203297354
Public104107129184247371
Total320355367387544725
Surinam
Private3741556296101 1
Public161519263442 1
Total53567488130143 1
Trinidad & Tobago
Private161233247268309493 1
Public4154674761110 1
Total202287314315370603
Sources: World Bank Economic Reports; statiscal offices

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