One size does not fit all

WordsInTheBucket
Jul 24, 2017 · 5 min read

Globalisation means different things to different people. A central feature however, is the growing interdependence and interconnectedness of the modern world. Economic globalisation intensified in the post-Cold War period, as evidenced by increased ease of movement of goods, services, capital, and information across borders, creating a global economy; technological advances that drove this process forward and reduced the cost of international transactions; market-based approaches becoming the dominant strategy governing the international economy; and predominance of the private sector as the driver of economic activity and emphasis on trade liberalisation as the basis for growth.

The implications of CSME

The Caribbean was not spared from the far reaching hands of trade liberalisation. It established the Caribbean Community (CARICOM) Single Market Economy (CSME) in 1989. This union sought to remove all existing barriers to trade and create a single space for the free movement of services, capital, technology, and skilled professionals throughout the Caribbean region. With the model of the European Union (EU) in mind, Caribbean government leaders desired to implement provisions to eradicate restrictions and facilitate the right to establish businesses, to provide regional services, and to coordinate economic policies. However, in spite of years of structural adjustments, many question the level of success of the CSME in achieving real regional trade liberalisation.

The fact is that trade policy reform in the Caribbean was led by International Financial Institutions (IFIs), primarily the International Monetary Fund and the World Bank. These external financial bodies articulated an export-led development strategy for much of the developing world, wherein export was the major vehicle for country development. This was encapsulated in what we know as the Washington Consensus, a list of ten specific policy reforms which aimed to advocate for developing countries so that they would ‘catch up’ to developed countries.

Key elements of this Consensus were — 1. Fiscal discipline, 2. A reduction of public expenditure priorities, 3. Tax reform, 4. Interest rate liberalisation, 5. Competitive exchange rates, 6. Trade liberalisation, 7. Liberalisation of inflows of direct foreign investment, 8. Privatisation of state enterprises, 9. Deregulation (to abolish barriers to entry and exit, and 10. Secure property rights.

Following such market-oriented development strategies, CARICOM countries were obligated to reform the Common External Tariff, institute reforms in accordance with the World Trade Organisation’s international trade regime, and restructure trade relations with the EU. This one-size-fit-all approach however caused great issues for the success of CSME.

Although export-led strategies involved the removal of negative import lists, the removal of price controls and stamp duties on imports, and for investment regimes to attract Foreign Direct Investment (FDI), CARICOM countries were also obligated to take a stringent approach to their economies, regardless of differences in individual levels of development. Utilising the uniformed approach to trade liberalisation put out by international banks was similar to giving Usain Bolt a head-start of 500 meters in an 800 meters race. Small economies like CARICOM’s were not able to keep up with the demands placed on them.

To export or not to export

To give context, a majority of CARICOM countries are characterised by narrow production bases, rigid production structures, dependence on the export of largely primary products, a heavy reliance on both imports and tourism services, small domestic market size, small financial capital (which creates implications for investment), a susceptibility to natural disasters, and small manufacturing sectors. As such, the global policy approach has arguably not worked out favourably for this region.

Trade liberalisation, causing accelerated international resource reallocation, forced the region to chuck itself further into the export-oriented state of mind which worsens the historic relationship the region has with the world with regard to primary means of production. Think about the trans-Atlantic slave trade and building a Western Empire off of the sweat, blood, and tears of enslaved persons toiling on sugar, tobacco, and cotton plantations. Only now, developing countries are expected to deliver an even wider array of primary products in the form of exports, which are then manufactured by those with the means of production, and then import the finished products at multiplied costs. “Liberalise, globalise, open up your markets,” they say, but to the benefit of whom?

Now many countries in the Caribbean are stuck and although it may suggest that competitiveness in services will drive the countries’ economic growth in the future, it causes major setbacks for capacity to diversify economies. Since competitiveness now lies in value-added activity in knowledge-based export services, this creates further ramifications for the economies of the region. Efforts at economic diversification and moving up the competitive ladder are stunted.

The consequences of trade liberalisation

Standardised trade liberalisation has affected the internal balance of CARICOM countries in a host of ways. It has reduced government revenue, contributed to sluggish growth associated with the balance of payment constraints, increased foreign debt to counter sluggish growth, decreasing share of agriculture value-added as land use has been reallocated for industrial purposes, and increased vulnerability to natural disasters and external shocks.

We speak of trade liberalisation for development purposes, but what about distribution of benefits and the impact on the institutional and structural reality of small counties? Can the universal approach to trade liberalisation alone bring about economic growth and development in the Caribbean? The truth is, trade liberalisation and expansion of exports may be associated with integration into the global economy to a certain extent, however, policy shifts to accommodate this are accompanied by high adjustment costs for developing countries.

Erosion of trade preferences, domestic policies and economy management, external support and the global economic environment are just some key issues impacting the region’s ability to successfully make a transition. CARICOM economies face structural challenges such as undiversified economic base-heavy reliance on the exports of a few commodities/services, vulnerability to the fluctuations in prices and demands for exports, and high levels of imports for consumption and production. CARICOM’s success is further hampered by a slow pace of integration and low levels of trade between the countries. If we are to pursue export-oriented industrialisation, as instructed by the IFIs and the economic globalisation, we must start internally first, creating stronger economic links within the region.

CARICOM is a community of sovereign states pieced together for the sake of inter-governmentalism, it is not a unitary state, nor a federation. Unlike the EU, which has a central executive mechanism, CARICOM oftentimes gropes for consensus and the countries find themselves competing against each other more than uniting to build the capacity of the region to compete in the global market.

Deeper integration is needed in a reality of resource limitations and uneven distribution of resource-endowments and socio-economic development if we are to experience the benefits of trade liberalisation as a region. To start the car, all parts need to be working and the driver needs to know the direction to take to reach the goal. Therefore, leaders of the Caribbean need to put integration at the forefront to deal with the malady.

WordsInTheBucket

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