9929
*maal& Economic Development Institute
of The WoFrld Bank
Increasi:ng the International
Competitiveness of Exports
from Caribbean Countries
Edited by
Yin-Kann Wen
Jayshree Sengupta
EDI SEMINAR SERIES     F






EDI SEMINAR SERIES
Increasing the International Competitiveness
of Exports from Caribbean Countries
Collected papers from an EDI Policy Seminar
held in Bridgetown, Barbados
May 22-24, 1989
Edited by
Yin-Kann Wen
Jayshree Sengupta
The World Bank
Washington, D.C.



Copyright i) 1991
The International Bank for Reconstruction and Development / THE WORLD BANK
1818 H Street, N.W.
Washington, D.C. 20433, U.S.A.
All rights reserved
Manufactured in the United States of America
First printing August 1991
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The material in this publication is copyrighted. Requests for permission to reproduce portions of it
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The backlist of publications by the World Bank is shown in the annual Index of Publications, which
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Yinn-Kann Wen is a senior economist in the National Economic Management Division of the World
Bank's Economic Development Institute. Jayshree Sengupta is a consulting economist.
Library of Congress Cataloging-in-Publication Data
Increasing the international competitiveness of exports from Caribbean
countries: collected papers from an EDI policy seminar held in
Bridgetown, Barbados, May 22-24, 1989 / edited by Yin-Kann Wen,
Jayshree Sengupta.
p. cm. - (EDI seminar series)
Includes bibliographical references.
ISBN 0-8213-1790-3
1. Exports-Caribbean Area-Congresses. 2. Caribbean Area-
Commercial policy-Congresses. 3. Competition, International-
Congresses. I. Wen, Yin Kann, 1943- TI. Sengupta, Jayshree,
1943- . III. Economic Development Institute (Washington, D.C.)
IV. Series.
HF3312.153 1991
382 .6'09729-dc2O                                  91-3204
CIP
EDI Catalog No. 400/091



CONTENTS
Acknowledgments v
Preface vii
Summary Report 1
Alan Roe and Jayshree Sengupta
1. Increasing International Competitiveness:
A Conceptual Framework 17
Gerald K. Helleiner
2. Fiscal and Monetary Policies in Small Economies 27
DeLisle Worrell
3. Wage Price Policies for Increasing International
Competitiveness in the Caribbean 41
Courtney N. Blackman
4. Mauritius: An Export-Oriented Island Economy 53
layshree Sengupta
5. Managing Entry into International Markets:
Lessons from the East Asian Experience 67
Yung Whee Rhee
6. The Applicability of the East Asian Experience to
Caribbean Countries 91
Winston H. Griffith
iff



iv Contents
7. Increasing International Competitiveness: A Caribbean
Community Program 101
Havelock R. Brewster
Participants  111
Resource Persons 113



ACKNOWLEDGMENTS
We thank the following participants for reading the draft seminar report prepared by
Alan Roe and Jayshree Sengupta: Courtney Blackman, Havelock Brewster, Sidney Chernick,
Terrence Farrell, Winston H. Griffith, Gerald Helleiner, Yvonne Hyde, and Yung Whee
Rhee. To the extent possible, we have incorporated their views and comments. We thank
the authors for their cooperation in revising their papers. We also thank Samuel Laird and
Hilbourne Watson for their thorough review of the entire manuscript. We made some
editorial changes in the interest of consistency and accept full responsibility for any errors or
omissions. The views expressed in the papers are those of the authors and not necessarily
those of the World Bank.
We also would like to thank Sulaiman Wasty for going through the report meticulously
and providing valuable editorial comments and Kamlesh Gillespie for incorporating
additional comments into the text. We thank the management of the Caribbean
Development Bank (CDB), especially Neville V. Nicholls, president, and Marius St. Rose,
vice-president, for their support. We extend our gratitude to Peter T. Knight and Timothy
King for including this book in the EDI Seminar Series.
Thanks are also due to Juan Martin of the Latin American Institute for Economic and
Social Planning and Parmeshwar Ramlogan of the CDB, the seminar codirectors, for all they
did to make the seminar successful. Numerous colleagues at CDB and EDI helped behind the
scenes, especially Jennifer Fletcher of the CDB, seminar administrator, and Judy Tung of EDI,
seminar assistant. Finally, we wish to express our appreciation for the cooperation and
patience of Dulce Afzal, whose excellent secretarial assistance was vital in bringing out this
book.
The Editors
June 1991
V






PREFACE
The Senior Policy Seminar "Increasing the International Competitiveness of Exports of
the Caribbean Countries" took place in Barbados on May 22-24, 1989. It was attended by
thirty-three participants from fourteen countries, as well as representatives of regional and
international organizations. The seminar was organized jointly by the Economic Development
Institute (EDI) of the World Bank, the Caribbean Development Bank (CDB), and the Latin
American Institute of Economic and Social Planning (ILPES). The participants included senior
government officials, central bankers, and academics. The scope and content of their
discussions are described in the rapporteurs' summary at the beginning of this volume.
The Caribbean region consists of about twenty small countries, mostly island economies
that have a wide range of per capita incomes. Some are middle-income countries, but others
are among the poorest in the world. All are former colonies of European powers. As colonies,
they produced mainly sugar, cocoa, coffee, and tobacco and did very little manufacturing.
Upon gaining independence, they found themselves faced with high population growth rates
and therefore sought to industrialize quickly and to diversify away from the previous
pattern of exporting primary products and commodities. Being very small countries, they
have to import almost all the capital and raw material needed for manufacturing, as well
as consumer goods and foods. The only minerals found in large quantities in the region are
petroleum and bauxite. Like many developing countries, the Caribbean region has in recent
years had to contend with sluggish markets abroad, high production costs, and
inappropriate public policies. As a consequence, the countries have experienced slow export
growth and serious balance of payments difficulties, made all the worse in some cases by a
heavy external debt-service burden.
Owing to these circumstances, the industrial sector has not expanded fast enough to
absorb the growing population, and unemployment has become a serious problem throughout
the region. Even though the Caribbean countries have preferential access to the markets of
the European Economic Community (EEC) under the Lome Convention, their principal
exports-notably sugar and bananas-have not been expanding as rapidly as those of their
competitors. The region's manufactured exports, which have preferential access to U.S.
markets if they have an American component, are up against similar problems because of
low labor productivity, high wages, and shortages of skilled labor and entrepreneurs.
However, the link to the U.S. dollar (because of trading relations) adversely affected the
competitiveness of these economies during most of the 1980s. Even tourism, the primary
source of foreign exchange earnings for many of these small countries, is battling high costs
and inefficiency.
Being latecomers to industrialization, the Caribbean countries lack the infrastructure
needed to support industrial expansion, in contrast to the East Asian newly industrializing
economies (NIEs). They are also far behind the NIEs in technical education. In many of
vii



viii  Preface
them, the public sector is large and inefficient and an obstacle to the growth of private
enterprise and foreign investment. High transport costs, inadequate port facilities, poor
roads, and inadequate shipping services have also stood in the way of increasing export
competitiveness.
The seminar was convened to discuss the need for the Caribbean region to improve its
international competitiveness and was judged by most of the participants to be a timely
activity. The seven background papers presented at the seminar and included in this volume
examine the main policy instruments that can be used for this purpose: the exchange rate,
fiscal and monetary policies, and incomes policies. These instruments are described in the
Summary by Alan Roe and Jayshree Sengupta, rapporteurs for the seminar. Participants also
discussed the experience of successful exporters such as Hong Kong, Singapore, Taiwan,
Republic of Korea, and Mauritius and debated whether it could be replicated in the
Caribbean. Another topic of discussion was whether the small countries should strengthen
existing regional arrangements and enhance regional cooperation to increase their
competitiveness.



SUMMARY REPORT
Alan Roe and Jayshree Sengupta
The Senior Policy Seminar on Increasing the International Competitiveness of Exports of
the Caribbean Countries was held in Bridgetown, Barbados, from May 22-24, 1989.
Participants from fourteen countries1 as well as representatives from two regional
organizations2 attended the seminar. Two international organizations namely the United
Nations Economic Commission for Latin America and the Caribbean (UN/ECLAC) and the
International Monetary Fund (IMF) were also represented. The seminar was formally opened
by Mr. Neville Nicholls, Mr. Juan Martin, and Mr. Yin-Kann Wen, representing the three co-
sponsoring organizations namely the Caribbean Development Bank (CDB), the Latin
American and Caribbean Institute for Economic and Social Planning (ILPES), and the
Economic Development Institute (EDI) of the World Bank (National Economic Management
Division) respectively. The seminar was moderated by Mr. Sidney Chernick of the EDI.
The seminar proceedings can essentially be divided into four main themes:
1. The definition of a conceptual framework for measuring and monitoring the degree of
export competitiveness. Discussion centered mainly around a background paper
presented by Professor Gerald K. Helleiner.
2. The main elements of an economic policy package necessary to achieve improved
export competitiveness. This was informed by background papers presented by Mr.
DeLisle Worrell (Fiscal Policy and Monetary, Credit and Interest Rate Policy); by
Mr. Courtney N. Blackman (Wages and Incomes Policies); and by Mr. Alister McIntyre
(Exchange-Rate Policies).
3. The experiences of successful exporters, drawing on two background papers; one on the
experience of East Asia presented by Mr. Yung Whee Rhee and a second, on the export
performance of Mauritius presented by Mrs. Jayshree Sengupta. In addition, the
applicability of the East Asian experience drew on a background paper by Professor
Winston H. Griffith.
4. Regional arran ements to stimulate improved export performance, especially the role
of CARICOMU. This discussion was supported by a background paper written by Mr.
Havelock R. Brewster.
This summary report attempts to capture the main points of view presented both in the
background papers and from the floor of the seminar. Its four main sections conform with the
1. Anguilla, Antigua and Barbuda, Barbados, Belize, British Virgin Islands, Cayman Islands, Dominica,
Grenada, Jamaica, St. Lucia, St. Vincent and the Grenadines, Trinidad and Tobago, and Turks and Caicos
Islands.
2. The Eastem Caribbean Central Bank and the Organization of Eastem Caribbean States.
3. CARICOM (Caribbean Community) has thirteen member countries: Antigua and Barbuda, The Bahamas,
Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, Montserrat, St. Kitts and Ncvis, St. Lucia, St.
Vincent, and Trinidad and Tobago.



2  Summary Report
four themes of the seminar described above. A brief fifth section highlights some of the
central issues and questions provoked by the seminar as a whole.
The Conceptual Framework for Defining and Measuring Competitiveness
The background paper by Helleiner drew an important distinction between the rather
loose concept of competitiveness of a country, and competitiveness as applied to individual
activities, industries or firms. He noted that in theoretical terms certain activities of any
country will always be internationally competitive although what these might be will
depend on the exchange rate, and the structure of the domestic factor prices, prevailing at
any particular point in time. In that sense "competitiveness" is a concept akin to that of
"comparative advantage" according to which every country, however poorly endowed or
managed, will always enjoy comparative advantage and competitiveness in some activities.
Pursuing this line of reasoning it is possible to conceive of a natural competitiveness, in
which there is a ranking of activities in terms of their relative profitability, in the absence
of government intervention. The policy challenge might then be regarded as one involving
the changing of the ranking in order to raise the relative profitability of certain activities.
The policies which might be invoked to achieve this would include numerous elements
including training and specific investment incentive packages. Equally, ill-conceived policies
such as a consistently overvalued exchange rate may affect the "cut-off point" in the ranking
at which exporting is no longer profitable.
In the Caribbean and other developing economies, natural resources tended to provide a
basis for a reasonable level of profitability in certain traditional activities, especially in
the agricultural sector, and so discussions about improved competitiveness were often
concerned mainly with non-traditional industries. Here, in addition to the natural resource
base, there were three fundamental determinants of competitiveness: unit labor costs
expressed in foreign currency (e.g., the U.S. dollar); the dollar costs of and reliability of
other inputs such as power and materials; and transport costs. For most practical purposes it
is the first and second of these that can be worked on by policymakers to achieve improved
competitiveness. With regards to unit labor costs, these are directly affected by three main
constituent elements, namely, labor productivity, local currency wage rates, and the nominal
exchange rate-policies towards any of these three variables could therefore influence
competitiveness.
In principle, any country can assess its competitiveness in relation to the overall
competitiveness (or each of the components of competitiveness) of any particular activity by
direct price and cost comparisons with relevant foreign competitors. In practice numerous
factors such as differentiated products, variations in output mix, and the basic
confidentiality of the relevant data could render such comparisons difficult. However, it is
important to stress that the price competitiveness of developing countries' products were not
necessarily the critical factor in overall export competitiveness. Established reputation,
brandnames or the uniqueness of products could enable some exporters to consistently set
prices above the world price and still achieve profitable sales. Caribbean tourism was
probably a good example of this though not in all the islands. The small size of the
countries did not necessarily imply that the demand curves they faced were all infinitely
elastic.
When governments are concerned about the lack of competitiveness of particular
activities, there are essentially three actions which they can take:
1. exchange rate devaluation, although this does not make sense if improvements are
being sought only in relation to a limited range of products;
2. special subsidies for particular industries provided that these can be justified by
infant industry or similar theoretical arguments for intervention; and
3. simply drop the idea that the activities in question can achieve any export success.
A fourth point mentioned in Helleiner's paper, namely, the non-price elements in
competitiveness, was picked up for extensive further debate by commentators from the floor.



Summary Report 3
In particular, a serious question was raised as to whether price and non-price competitiveness
can be sensibly distinguished. In the real world, export success depends on a complex mixture
of price and non-price factors and new exporting industries or even countries have often
lacked some of the critical ingredients of success. Worse still, in many cases there might be
considerable ignorance as to precisely which factors were missing or were otherwise
unsatisfactory. In other country contexts, such as in Singapore, foreign trading companies had
enabled local industry to acquire the necessary marketing and related expertise to break into
world markets. In the Caribbean, a more open approach to direct foreign investment may
also be necessary to complete the package of ingredients needed to achieve real export
breakthroughs. Other discussants supported this general line of argument by noting how
important a degree of "street wisdom" was in turning a good export idea into a financially
successful export business. The failure to promote sales of Jamaica winter vegetables in the
U.S. was cited as an example of how the absence of specific types of knowledge about the
requirements of destination markets can ruin export prospects. In this particular case, the
competitiveness coming from a project that was sound in terms of technical and price factors
was completely negated by serious marketing failures.
In general, participants accepted the predominant importance of non-price factors and
emphasized the range of extension supports which might strengthen the region's capabilities
to package their export ideas. There was considerable disagreement however about the
mechanism for achieving improvement in this area and several contributors disputed the
merits of dependence on foreign investment. There was suspicion in the comments of a few
people about the efficacy of a technology transfer mechanism based on foreign investments.
This reflected a corresponding conviction that the region needed to do things for itself.
Others felt that the expertise available in the region to provide extension support to
exporters was very limited and efforts ought to be made to target the use of such expertise.
However, the practical implications of this suggestion were not explored in any detail.
Overall, while considerable doubts were expressed about the efficacy of the exchange rate
and other price intervention mechanisms in achieving price competitiveness, little interest
was shown about any subsidy schemes to boost exports.
A second main line of discussion concerned Helleiner's proposition that it was important
to discuss competitiveness at the level of specific industries and not at the national level.
This was disputed by several participants who referred to various features-institutional,
cultural and attitudinal-in the Caribbean which were inimical to increasing
competitiveness in any activity. The poor quality of support services such as in telephones
and facsimile transmission were mentioned in this context. There still existed suspicions
about export-led growth because of the region's earlier preoccupation and experience with
dependency and related theories of economic exploitation of poor countries. Most contributors
seemed to feel that there were indeed national traits which compromised the region's export
success but which were difficult to analyze in a tangible way and even more difficult to
drastically change.
A final area of discussion emphasized the important point that competitiveness is a
rapidly moving target. New products are continually emerging to challenge the old, and new
process and product technologies are raising overall productivity in the best-practice plants
by 6 percent per annum, even in traditional industries, such as textiles. Above all, new
exporters are always emerging to establish the base-line of costs which would need to be
matched by successful non-traditional exports from the Caribbean. In this climate for change,
even standing still competitively involves an ongoing willingness to change and improve the
region's products and lower production costs.
The policy implications of this for a successful export strategy are very clear. It needs to
be supported by a high quality export information and monitoring service which can keep
would-be exporters fully abreast both with new technical and product challenges, with new
market possibilities and with the plans and achievements of actual and potential
competitors. The provision of such an information service need not necessarily imply a high
degree of government intervention in the actual business of exporting. But it would probably



4  Summary Report
need to be operated at least in part with support from the government. Participants agreed
that there was need for the information provided, to be forward looking as far as possible.
Ex post measures of competitiveness based on market shares, actually achieved in particular
markets provided at best, a limited basis for assessing the region's export competitiveness.
The idea is to help turn the potential advantage into actual advantage by providing
appropriate and timely information.
Economic Policies and Economic Management
The discussion on policies to support exports was organized under four broad headings
corresponding to the subject matter of the background papers, namely, fiscal policy,
monetary, incomes policy, and exchange rate policy. There was also some discussion on
special incentive arrangements. There was a degree of apparent disagreement amongst
participants about the respective roles and relative importance of the various policy
instruments. However, much of this was ultimately resolved by noting that there are at
least three separate categories of countries in the Caribbean region which can be expected to
have different perspectives on the policy mix. These are:
1. Countries which comprise the Organization of Eastern Caribbean States (OECS).4
Here monetary instability is unlikely to occur because of the monetary arrangements
which are followed, especially the inability of members to use the Eastern Caribbean
Central Bank to finance fiscal deficits. This means that monetary policy is not
seriously on the agenda of instruments which can influence export competitiveness. It
also means that serious exchange rate misalignment necessitating major changes in
nominal exchange rates is unlikely to be an issue. At the same time, the climate of
broad economic stability, which many participants saw as an important precondition
of export success, was reasonably well assured.
2. Countries such as Guyana and Jamaica where serious monetary and fiscal instability
has occurred in the recent past and where stabilization programs are an absolutely
unavoidable requirement of any strategy to improve export competitiveness. Here an
active approach to exchange rate and monetary policy is essential.
3. Other Caribbean countries such as Barbados where macro policies have been
reasonably sound, where the general economic climate is stable and where as a
consequence it has proved possible to think of the nominal exchange rate as an
instrument which can be held reasonably constant. In these countries, an explicit
choice has been made to rely on strict fiscal and monetary policies for maintaining
the balance of payments equilibrium.
Exchange Rate Policy
Participants agreed with the central proposition of McIntyre's presentation, namely, the
importance for international competitiveness of maintaining a stable real effective exchange
rate which took proper account of changes in technology, terms of trade, etc. However, there
was substantial uncertainty about what this implied in practical terms. In his own paper,
Worrell considered the practicalities of McIntyre's proposition in two polar cases. In the
first of these, monetary and fiscal policies are operated consistently both with the
maintenance of a long established nominal exchange rate (e.g., as in Barbados), and with
the preservation of an adequate level of foreign exchange reserves. In such cases, any given
nominal exchange rate can persist for very long periods of time. In the alternative case,
policies and external circumstances are such as to cause an unsustainable drain of reserves
which will eventually leave the authorities with no choice but to devalue the nominal
4. The member countries of OECS are Antigua and Barbuda, Dominica, Grenada, Montserrat, St. Kitts and
Nevis, St. Lucia, and St. Vincent. The British Virgin Islands was admitted as an associate member in
November 1984.



Summary Report 5
exchange rate. In both cases, Worrell suggested that the nominal exchange rate is
effectively an endogenous variable over which the authorities maintain little real
discretion as an instrument in raising competitiveness. However, both the semantics and the
substance of this further proposition were rejected by several commentators. In particular, it
was generally accepted that the authorities do have discretion in the sense that through
their monetary and fiscal policies they have some choice about whether or not to put
themselves into a position where nominal exchange rate changes become necessary. This is
what has happened in, for example, Barbados. Equally, several comments were made which
suggested that, contrary to Worrell's own position, long-term undervaluation might be
regarded as a possible element in a strategy to boost economic competitiveness. However, no
real conclusions were reached on this latter point which recurred in the discussion of the
East Asian experiences.
Three of the practical implications of applying McIntyre's central proposition were
actively discussed. The first of these concerned the difficulties for policymakers caused by
large parallel foreign exchange markets, especially those fed from illegal trade in narcotics.
Parallel markets were a problem in Jamaica and Guyana. The existence of such parallel
markets made the management of foreign exchange on any sound basis extremely difficult. In
particular, such markets are associated with the inefficiencies arising from multiple pricing
of the same outputs in different uses, the loss of indirect tax revenues, a high incidence of
illegal capital flight and numerous other ills. The only eventual solution was a unification
of exchange rates but this was certainly not easy to achieve and was extremely problematic
where narcotics was the basis of the parallel market.
The second problem was the appropriate choice of the basket of currencies. Although
pegging to a basket ought in principle to be a means to achieve greater exchange rate
stability, McIntyre noted that of the countries in the region, only Guyana pegged to a basket
of currencies rather than to a single currency and most commonly the dollar. The Guyanese
experiences were difficult to interpret because of the extreme economic instability that the
country had suffered in recent years. In other countries, the task of defining an appropriate
basket and assessing whether to move away from the dollar peg was extremely difficult
especially if the geographical diversification of exports was a major objective of policy.
Under present arrangements, the changes in competitiveness against, for example, the
European Community associated with dollar devaluation or appreciation were largely
arbitrary. This was a particular problem for the tourism sector in the region. A third
problem was that in the face of large terms of trade and other external disturbances, it was
extremely difficult to assess the "right" prices against which to calibrate a stable real
exchange rate. This was particularly pertinent in Latin America and the Caribbean where
the average terms of trade deterioration since 1982 had exceeded 22 percent.
A further line of discussion focused on the merits of using nominal devaluations and the
likelihood that these could achieve desirable results. A useful taxonomy was proposed
involving three separate reasons why the authorities might need to change the nominal
exchange rate, namely:
1. passive reasons associated with an attempt to preserve a real effective exchange rate
against the effects of an external disturbance;
2. compensatory reasons associated with the need to offset the consequences of bad fiscal
and monetary policies; and
3. pro-active reasons associated with conscious efforts to achieve enhanced export
competitiveness.
In all of these cases it was agreed that there was never a guarantee that a nominal
devaluation would result in a change in the real effective exchange rate. McIntyre listed
five major factors which can be considered as necessary conditions for this to happen. These
include the need for wage costs to grow more slowly than the rate of devaluation; the
existence of adequate spare capacity in the economy; the absence of substantial expectations
on the part of speculators that one nominal devaluation would merely lead to others; and
the ability of the government to avoid a serious deterioration in its own deficit in the face



6  Summary Report
of the devaluation. If one or more of these conditions failed to be met then the prospects
might be that active nominal exchange rate policies would result in a continuous downward
spiral of inflation-devaluation-and more inflation.
It was also noted that in the cases where the market for foreign exchange had
effectively collapsed, as in the case of Guyana (point 2), the role of the nominal exchange
rate becomes quite limited, if not irrelevant. A new nominal exchange rate could hardly be
found to increase the supply of foreign currencies, or reduce their demand sufficiently to
restore equilibrium on the foreign exchange market. In such cases, a parametric shift in
foreign exchange, through foreign debt forgiveness, is required to bring supply and demand
closer together. As the gap between demand and supply is closed, nominal devaluations
would once again promote equilibrium. In the extreme case of market collapse, the
equilibrium exchange rate is indeterminate in a world of practicality.
Finally, in relation to the possible pro-active role of the exchange rate to stimulate
competitiveness, much of the discussion focused on the OECS. Although it was recognized
that the monetary stability in that area had probably been an important ingredient for
their superior economic performance, this did not necessarily imply that such a policy was
correct in the long term. In particular, one proposition put forward was that under present
arrangements in the OECS, a negative external shock will necessarily be absorbed via
changes in the level of economic activity. Specifically in 1992, when the EEC has become an
integrated market, difficulties may arise from a possible decline in the banana price and
this might need to be addressed through a more active policy toward the exchange rate.
In summary, McIntyre's basic proposition about the maintenance of the real effective
exchange rate was seen as a useful guideline for policy. Sound exchange rate policy was
generally seen as an important part of the enabling policy for competitiveness. The practical
consequences of this in different contexts was however a matter of some dispute and the
seminar recognized the need for substantively different policy approaches in the different
categories of countries identified earlier.
Fiscal and Public Expenditure Policy
The background paper by Worrell provided a broad ranging review of the impact of
public expenditure and specific forms of taxation upon economic activity in general, and on
export competitiveness in particular. The sub-set of those issues which were pertinent to the
question of competitiveness were identified in the discussion and constitute the main focus of
this summary. The paper itself can be consulted for the broader discussion.
ExPENI'TuR1cs. On the expenditure side most Caribbean governments face major claims upon
budgetary resources and are unlikely to be able to divert more than small amounts
specifically to try to boost competitiveness. In particular, education budgets rightly pre-empt
a large proportion of resources in most countries while there were also obvious and important
claims upon health budgets. Equally, in those Caribbean countries which are unable to
finance deficits through monetary expansion, expenditure has to be restrained to keep the
total in line with total domestic revenues and foreign grants. Although basic public
expenditure programs may not appear to be directly related to competitiveness, their
indirect effects are extremely important. For example, adequate standards of health are
necessary to support the development of tourism. Similarly in a world in which the
knowledge-intensity of industry is rapidly increasing, a high quality education is a very
important prerequisite for long-term competitiveness in non-traditional sectors. Additionally,
the provision of appropriate infrastructure is clearly necessary for sound export performance
and it seems unlikely that the improved export extension services, referred to earlier in this
chapter as a key element of export competitiveness, can be achieved without increasing
public expenditure. In other areas the role of the government is less clear. Worrell's own
view about the direct involvement of the government in productive activity, including
exporting, was pragmatic. He saw no necessary reason why the ownership of productive



Summary Report 7
resources by the state should be harmful to export performance. The extent of such
involvement should however be conditioned by what he called the "stabilization needs of
the economy."
There was little explicit discussion of the need for government subsidies to support
exporting. However, it could be inferred that there was little real enthusiasm for this as a
long-term approach to boosting export competitiveness. Worrell did point out that there
were various approaches on the tax side of the government's activity which could equally
well be used to achieve competitiveness. It is reasonable to summarize the discussion of
public expenditures by noting that in developing countries there are many claims on public
expenditures. Hence, for the government to support directly or indirectly, export
competitiveness would mean additional pressure on limited budgetary resources. In all
countries it would be appropriate to maintain organizations to champion the cause and spend
more in these areas. But it should not be expected that such organizations would or should
attract a large share of total budgetary resources.
TAXATION. The seminar discussion covered a wide range of possible effects of the main
categories of taxation on export competitiveness but with occasional digressions to consider
the equity and distributional side effects of those taxes. In Worrell's paper, for example, it
was argued that higher rates of personal income tax were unlikely to seriously reduce the
supply of work effort. However, several participants disputed this, arguing that
comparability with the U.S. labor markets was relevant to many Caribbean professionals
and that the recent trend in the Caribbean to diminish the importance of the personal
income tax was an important step in this context in protecting the region's competitive edge.
It was generally acknowledged that reduction of personal income tax could possibly harm
the equity of the overall tax system, but wide disagreement arose as to whether it was
possible to operate, for example, a value added tax (VAT) system in the Caribbean so as to
maintain reasonable progressivity in taxation. One view was that differential higher rates
applied to high income consumption goods, such as air tickets, could ensure reasonable
progressivity, even in the complete absence of an income tax. Another view based on the
experience in Grenada suggested that special pleading and tax avoidance by the rich and
the powerful was just as likely under a VAT system as under a system dominated by personal
income taxation. There was, however, evidence from some countries such as Grenada that the
move to an expenditure-based system could achieve its theoretically expected result of
boosting savings, and so indirectly supporting exports. Beneficial results were also visible in
Antigua.
In relation to the corporate income tax, it was argued in Worrell's paper that its main
effect from the viewpoint of competitiveness is that of providing the government with a
lever (differential rates of tax) to boost investment. This proposition was generally accepted
and broadened to note that an appropriate structure for corporation tax was part of the
package of signals whereby governments could attract or deter enhanced foreign investment.
Other important elements of that same package could include an acceptable investment code
for foreign investment and membership of the Multilateral Investment Guarantee Agency
(MIGA).
A final point of some importance and again dispute concerned the role and effect of
import tariffs. Worrell's paper argued strongly against overprotection of import substitutes
even though this might superficially be seen as having benefits for total government
revenue. However, his argument related mainly to the hardship effect on consumers. It was
agreed that where import substitutes do not compete for resources with exports, then an
import duty merely plays the role of a consumption tax. But in most cases this absence of
competition cannot be assumed. In the more general case it was argued from the floor that
high import duties would certainly harm export performance by raising the profitability of
industries supplying the home market relative to export industries. Thus moderate import
taxation or alternatively an East Asian policy of ensuring essentially free trade conditions



8  Summary Report
for export activity via duty rebates or other means is an important element of strategy for
export competitiveness.
Monetary Policy
The central conclusion of the background paper in this area was that "there are very few
financial policy levers that actually work" in the context of small island economies. This
broad judgement was applied to exchange controls, to interest rate policies as well as to
credit controls and reserve requirements. However, once again the discussion brought out
important differences between different types of economies in the Caribbean. In relation to
interest rate policy, the Barbadian policy of keeping interest rates "at the minimum level
consistent with the underlying trend in international interest rates" might indeed be
consistent with the need for a passive approach to an interest rate policy in a reasonably
stable environment. However, in less stable situations, a more active policy towards interest
rates was argued to be a potentially important way of deterring capital flight and helping
to achieve greater macroeconomic stability. It was not so much the impact of interest rates
on saving which was relevant in this context as the impact of the interest rate on that part
of saving which could be exported for investment elsewhere.
In relation to exchange controls, the comment made by one participant that their first
and most important role is a psychological one and a device to raise the costs of transacting
in foreign exchange received wide support. If you have to actually use the control, it was
argued, then monetary policy has probably failed. Worrell's argument was that in such
circumstances anyone who was denied access to foreign exchange would probably acquire it in
parallel markets. Essentially if an economy becomes fundamentally unsound, exchange
controls will not be able to prevent capital flight. Prior to that stage, the existence of
exchange controls provides central banks with valuable information on how the economy is
performing. If you actually abandon controls and legalize investment overseas, you
immediately cease to know where that investment is.
Aside from this relatively specific set of propositions about particular financial
instruments, two general points of direct relevance to export competitiveness were referred to
several times. First, it is the primary objective of monetary policy to achieve a stable
inflationary environment. Without this basic platform, any serious moves to boost
investment, to raise productivity or diversify exports are likely to be compromised by the
enormous uncertainties and numerous distortions in relative prices associated with high
inflation. Thus sound monetary policy was another part of the enabling environment to
support enhanced exports. Second, the need to ensure an equal footing with foreign
competitors not only in relation to inputs at world market prices but also in relation to
financial inputs required among other things, access to trade finance and foreign exchange for
exports. This is an institutional requirement which had been well provided for in the case of
the East Asian economies and was discussed in some detail in the paper by Rhee.
Wage and Price Policies
Blackman introduced his background paper on the subject by observing that "wage
restraint is the centerpiece of incomes policy," and price control is its occasional companion.
His central proposition was that the failure in Caribbean economists to treat wage rates as a
controllable variable, and hence to recommend an incomes policy, has been a costly error on
the part of these economies. In the environment of the late 1980s such a policy had several
important roles to play. By helping to limit the price of tradables it could help to improve
the international competitive position of the region. Incomes policy and wage restraint could
also be of help in global markets where "production arbitraging" by multinationals gave rise
to the most stringent degree of price competitiveness in export markets. It could be useful
where the competitors were increasingly from the Pacific Basin rather than from the old
imperialist centers. In this context, the various competitive weapons included political



Summary Report 9
stability, quality of infrastructure, and labor costs. As for labor costs, the Caribbean was not
necessarily well-placed. He provided a number of specific examples of wage differentials
with relative competitor countries but drew attention in particular to the "four tigers" of
East Asia all of which had benefited from incomes policy restraint made possible by
authoritarian govemments and conciliatory trade unions.
In seeking to establish a more coherent control of incomes in the Caribbean, he recognized
the inappropriateness of the authoritarian approaches of East Asia and argued instead for
systems based on those applied in Western Europe. The systems there do not generally
attempt to provide long-run subsidies to inefficient labor but they do regard the wage rate as
a production variable which is domestically controllable. However, control in this and other
fields of policy is flexible and accommodates the vagaries of economic change itself. This is
in sharp contrast to the situation in some Caribbean states where the failure to recognize just
how small they are has often resulted in large provocative and inflexible responses. These
have included fierce exchange controls, import restrictions, nationalizations, and continued
support of inefficient state industries.
He recommended a comprehensive program for incomes, of indefinite duration, involving
the major participants in the wage determination process, conducting on-going review and
negotiations about appropriate wage and salary levels. It would be institutionalized at the
boundary of economic and political policymaking. The purpose of the policy would not be to
set rates for every individual job but to establish guideline ceilings and floors between
which most wages and salaries would be market-determined.
Much of the subsequent discussion was on the basic role which incomes policy in the
Caribbean might play and there were some arguments against such a policy. One view was
that some Caribbean countries, such as Barbados, may not need a long-term incomes policy
but may need to achieve a once-and-for-all downgrading of the power of trade unions and
establish a balance between wage and profit incomes more favorable to export expansion.
This might involve the same sort of reform of labor legislation and confrontation with major
unions which had been tried in Mrs. Thatcher's Britain. Several participants drew attention
to the need to maintain flexibility in the policy and, above all, to allow it to provide
adequate reflection of productivity change and emerging scarcities of particular skills.
Others also noted the danger of an imbalance in policy application as between the public
and private sectors with tight restraint in the public sector, giving rise to a progressive
drain of skilled personnel and a general de-motivation of that sector. However, the
discussion included little in the way of serious dissent from Blackman's main proposition.
All agreed with the theoretical point that the availability of an incomes policy gave
governments a greater prospect of achieving an acceptable level of employment consistent
with their various other policy objectives.
Lessons From Mauritius And East Asia
MAURITIUS. The background paper by Sengupta emphasized the similarities between
Mauritius and the Caribbean islands in terms of their smallness, dependence on external
trade, strong links with the U.S. and the EEC, and substantial dependence on tourism.
However, Mauritius by contrast with most Caribbean economies, had achieved a significant
diversification of activity through a sustained export orientation of policies based
predominantly on the export processing zone (EPZ) established in the early 1970s. This same
emphasis had also enabled the economy to benefit from a major expansion of EPZ exports in
the 1980s to help overcome the major financial imbalances which had afflicted the economy
from 1979 to 1983.
Several main lessons were suggested for the Caribbean including the following:
1. The clear government support for export-led growth based centrally on foreign capital
and a well-defined incentive package has enabled the economy to take effective
advantage of its cheap and plentiful labor supply and easy market access to the EEC
and the U.S.



20  Summary Report
2. By using surpluses from sugar in periods of high prices (e.g., 1970 to 1974), and
generally, by attempting to raise agricultural productivity in parallel with
industrial development, Mauritius has succeeded in releasing land for food production,
thus reducing its dependence on imported food.
3. By keeping wages under control through a unique system of tripartite agreements
between labor, private enterprise and government, the government of Mauritius has
assisted EPZ exports to remain competitive. It has achieved a high rate of re-
investment of surpluses back into EPZ firms. Regrettably, however, this has generated
only limited diversification of exports away from textiles and knitwear.
4. This combination of policies has enabled Mauritius to move close to full employment
in spite of the high rate of population growth which the Meade report on Mauritius
in 1961 had expected to give the economy a serious unemployment problem.
The contrast with the Caribbean where unemployment rates are as high as 25 percent is
also striking. Finally, the maintenance of a competitive real exchange rate through periodic
devaluation was an important part of the explanation of rapidly rising EPZ exports and a
sharp contrast with experience in most Caribbean countries. The outcome of the second surge
of EPZ exports during the period 1983-1988 had brought the EPZ to the point where it now
accounted for 60 percent of exports, 20 percent of the labor force, and 14 percent of GDP.
However, trade was still heavily concentrated on knitwear products (88 percent of the total
exports were knitwear, of which 80 percent of the sales was directed to the EEC).
Discussion focused on two main points, namely those aspects of Mauritius' performance
that were unlikely to be replicated in the Caribbean, and the desirability of Caribbean
countries learning the lesson in relation to the other and more easily replicable aspects. As
regards the first point it was stressed that a significant part of the apparent success of
Mauritius had been based on sanction-busting vis-a-vis South Africa. It was well documented,
according to McIntyre, that a major part of the apparent investments from Hong Kong had in
fact come from South Africa and that most tourism revenues had also come from this source.
Specifically, the estimates from the Commonwealth Secretariat and elsewhere indicated
that up to half the exports of manufactures might be explained in this way. This was not
something which was feasible or desirable in the Caribbean, he said. The author pointed
out that in the World Bank's documents, research papers and memoranda, no such figures
have been attributed to South African trade and investment.
As regards the other issues, most reservations focused on various factors which seemed to
throw doubts on the long-term sustainability of the Mauritius' export successes. The most
important of these was the reliance on the single factor of low labor costs. While there was
nothing wrong with the EPZ concept as such, its ultimate success would need to include a
transition to more knowledge-intensive production involving a serious transfer of technology
into the companies in the zones. It was far from clear what could be done to ensure that this
transition actually did take place. A second and related point concerned the apparent
inability of Mauritius to diversify its manufacturing away from knitwear products and into
areas of production more clearly grounded in the domestic economy. Without such
diversification its successes thus far had to be regarded as fragile. The question of whether,
notwithstanding the reservations just described, the output and employment gains of a period
of rapid EPZ growth were worth seeking in Caribbean countries was not discussed at any
length.
EAsr ASIA. The record of the successes of the four main East Asian exportcrs, namely, Hong
Kong, Taiwan, Singapore and South Korea were recognized to be of greater relevance to
Caribbean countries because of the absence of the special factors involved in the Mauritian
case. The fact that these successes have now been sustained over a considerable period of
time also made these countries' experiences interesting. Rhee opened the discussion by
emphasizing three relatively common misconceptions about East Asian economic performance.



Summary Report 11
1. That the East Asian export success was largely attributable to the "magic of the
market," whereas the active markets of the present day largely had to be fostered by
government intervention.
2. That the fundamental reasons for success were related to the central role of the major
policies. In reality, sound policies were important but would not have worked as well
as they did without a great deal of work on constructing appropriate institutions.
This institutional side has been frequently overlooked.
3. That the successes have depended in part on an appropriate sequencing of change,
including policy reform. But a progressive upgrading of industry away from labor-
intensive manufactures has also been important. The sequencing adopted in the four
different countries was therefore an important facet of the lessons to be learned.
Rhee provided a detailed analysis of the factors that had contributed significantly to
export success in East Asia. Some important lessons could be drawn from the analysis, four of
which are as follows:
1. All four of the "tigers" established in different ways the capacity to package
technical, marketing and managerial know-how so as to make their products saleable
and profitable in overseas markets. He indicated that in all four cases, the initial
gaps in these packages were filled by drawing in a variety of knowledge from
abroad: in no case was the effort entirely an indigenous one. Thus, for example, both
Hong Kong and Taiwan drew in large numbers of experienced Chinese businessmen
who had earlier acquired specialized skills from the Japanese. Singapore by contrast,
not having had the benefit of these human resources, relied extensively on
multinational corporations to package the critical elements. These examples closely
parallel the discussion reported above (The Conceptual Framework for Defining and
Measuring Competitiveness) about the importance of a variety of non-price factors in
export competitiveness. Rhee's analysis complemented this by suggesting that once a
developing country acquires the capacity to package the critical elements, the
creation of the physical capital is straightforward either because domestic savings
are high or because foreign capital can readily provide the capital to make up for
shortages of savings. Specifically, Hong Kong relied on local sources for marketing
know-how because of its entrepot experience, but used skilled immigrants for its
technical and managerial know-how. Korea made some use of foreign marketing
expertise as well as foreign capital. Singapore relied heavily on foreign sources for
most elements including a dependence on foreign direct investment.
2. Each of the countries established early on an "equal-footing" treatment for exporters
in relation to all taxes and subsidies that might otherwise have raised the relative
profitability of products for domestic markets over that for exports. This has meant
above all that exporters have been guaranteed unrestricted access to imported raw
materials and intermediate inputs at world prices (i.e., prices which are no worse
than those faced by their international competitors). Such a policy does not subsidize
exports, an approach which is in any case precluded by the GATT, but merely
provides them with a neutral status vis-a-vis production for domestic use. The five
main methods available to achieve this had included the Free Trade Zone (FTZ)
approach used in Mauritius and four others, namely, full free trade; bonded
manufacturing warehouses; automatic import licensing and duty exemptions on imports
used by exporters; and finally, automatic import duty drawbacks. Table 3 in his paper
provides a summary of the combination of these methods actually employed in each
of the four countries at different time periods. In brief, Hong Kong and Singapore
(after 1967) came closest to the model of full free trade. Taiwan and South Korea
have both made extensive use of all the other four approaches.
3. The establishment of a variety of infrastructure, including non-physical infrastructure,
involving information systems about the nature and trends in world markets (see also
The Conceptual Framework for Defining and Measuring Competitiveness above). As
regards physical infrastructure, the beginnings of outward-oriented policies in the



22  Summary Report
late 1950s and 1960s had been helped by the existence of port and related facilities
constructed in Hong Kong and Singapore to support entrepot trade and in the other
countries by the Japanese colonialists for their own purposes. Subsequently, all four
countries had devoted substantial resources to necessary infrastructure including the
FTZs in Taiwan and Korea. As regards non-physical infrastructure, attention was
drawn to export marketing institutions (see Table 5 in the paper), the development of
trading companies; and above all to the institution of business-government
collaboration which is a unique feature of East Asian experiences. The monthly export
meetings held by President Park in Korea and the success of these in ensuring rapid
identification and removal of impediments to exporting provides a key example.
4. The establishment of easy access to trade finance on reasonable terms. Rhee argued
that exporters cannot respond to orders unless they have assured access to trade
financing. Pre-shipment finance is needed to pay for imported inputs; domestic
intermediate inputs; domestic wages, interest and rent; and inventories of finished
products. Post-shipment finance is needed to pay for export sales on credit. The lesson
from East Asia was that there was a need to concentrate on short-term pre-shipment
trade finance and shorter-term post-shipment finance. Longer-term financing for
heavier manufactures was less important in the early stages of industrialization.
The discussion about Rhee's suggestions were led off by Winston H. Griffith who
provided a comprehensive critique of the view that the East Asian experiences were capable
of being replicated in the Caribbean. His argument was centered on the fallacy of
composition-the view that what had proved possible for a few countries in the 1960s and
1970s was unlikely to be possible for many additional countries in the 1990s because of the
resistance which their manufactured exports would encounter in the main industrial markets.
However, he also presented a variety of other arguments which together indicated that the
East Asian experiences had depended on special factors. The first of these was the benefits
obtained from the geo-politics of the Cold War at the time when their main burst of
industrialization was occurring. Second, there was the favorable rate of growth of world
trade, especially in manufactures, at that time. Third, the increasing sophistication of
computer and other technology was making the comparative advantage associated with low
wage rates increasingly less important. This was also causing the re-absorption of certain
manufacturing processes back into the U.S. and Western Europe. The fourth point was the
tacit approval which East Asian countries had received for side-stepping regulations
designed to limit the sales of their products in certain industrial markets.
Clearly this skeptical view represented a polar extreme to that of Rhee, and inevitably
provoked a lively discussion. Most contributors accepted one or more of the detailed points of
Griffith's critique but not necessarily the whole package. It was noted that the intellectual
attitudes of the 1960s and especially the consensus about dependency and exploitation
continued to color the thinking of Caribbean policymakers, even though few of them would
now openly admit to this. By contrast to the early view of W. Arthur Lewis that the region
should and would learn from foreign investors, the Commonwealth Caribbean Regional
Secretariat (1972) noted: "too much control of the (Caribbean) economies has been exercised
from abroad particularly by international cooperation in the form of direct foreign
investment. Too much reliance for economic expansion has been placed on foreign imports-
the historical prime mover in the economies of the region." As a consequence, the regional
policymakers had shown resistance to any domination by foreign investors, especially in
commodity production. If any consensus at all emerged from the discussion it was that,
notwithstanding the greatly enhanced difficulties of the 1990s compared with the 1960s,
there were important lessons to be learned from the East Asian experiences. The region had
little choice but to compete more actively in world markets even though such an approach is
unlikely to lead it to the same high rates of growth as the East Asian economies had
enjoyed. In short, comments of the type made by Griffith did not constitute the basis for a
substantially different model of economic development. The advice to learn and adapt the
lessons from East Asia was not tantamount to advising that these experiences could or should



Summary Report 13
be fully replicated in the Caribbean. Rhee in particular noted that if the Caribbean was not
prepared to learn lessons from successful economies, from where would it draw lessons for its
future strategy?
In summary, three strategic elements of East Asian experience were identified as
comprising the sine qua non of a successful outward oriented policy. These are:
1. willingness to be forward looking and to continuously monitor and understand the
markets and consumers to whom you are trying to sell your products;
2. an unambiguous political commitment to export trade established at the highest
levels and backed by action and not just by rhetoric; and,
3. an equal-footing treatment of exports, which means that whatever the country
decides to do in the area of trade protection, it must create an environment for exports which
is equivalent to a free trade environment.
A wide variety of other and more detailed elements would also be necessary for export
success including sound trade financing arrangements and good educational training facilities.
However, most of these could be developed if the underpinning of political commitment and
baseline policies, as indicated above, were in place.
Caribbean Regional Arrangements
The lead paper by Brewster (which in his absence, was presented by Chernick)
addressed the matter of Caribbean Regional Arrangements in its second section. Brewster's
paper emphasized four activity areas to be organized as Community facilities from which
he felt individual member states could derive benefits in pursuing their efforts to enhance
international competitiveness, namely: (a) regular intergovernmental consultations on
macroeconomic management at the level of senior economic officials backed by appropriate
statistical and analytical reviews (see, for example, OECD Economic Outlook) and research
on current problems of macroeconomic management; (b) a systematic plan for upgrading the
technology and productivity of primary export industries supported by a regionally based
external technology aid program for exports; (c) a program for targeting and promoting new
export industries and services, a feature of which should be normative guidelines embracing,
for example, environmental, social, intellectual and aesthetic concerns; (d) a research
program relevant to Caribbean economic, social and technological futures-aimed at
questions arising from the "pre-competitive," emerging international environment, such as
those concerned with the quality of life, post-adjustment/stabilization issues, and the future
for existing and new industries.
The features of this set of regional proposals which could distinguish them from existing
regional efforts are: first, that they would represent a coherent, concerted attack on a
specific problem; and second, the locus of action and responsibility would rest with the
enterprises, regional institutions and government departments directly involved in
implementation, as distinct from remote control by the Community bureaucracy.
These proposals generated a good deal of consensus from the floor to the effect that
structures and committees were already in place to help move the Caribbean to a higher
plane of integration and cooperation. It was not particularly helpful at this stage to suggest
a whole new range of committees and institutions before serious effort has been made to
make the existing arrangements more effective. In any case, it was noted that many of the
ideas put forward by Brewster were already in place. The Economic Commission for Latin
America (ECLA), for example, already carried out an annual survey of Caribbean economic
development and the CARICOM countries do have a plan for technological development.
The fundamental question was whether a regional approach to competitiveness was more
useful than individual national approaches and, if so, how could existing arrangements to
foster regional competitiveness be made more effective.
Several familiar arguments were put forward to emphasize that a regional approach to
enhance competitiveness was indeed preferable. Such an approach, for example, would help
achieve substantial gains in both production and in support areas such as education and



14  Summary Report
research and development. It would provide greater muscle to individual companies and
countries fighting for improved access to the major markets and it would force a greater
convergence of macroeconomic and other policies. For example, it could help to avoid the
excesses of monetary expansion which have occurred in Jamaica and Guyana. Finally, on a
more defensive note it might give the Caribbean greater coherence to respond to the
accelerating trend for economic harmonization in the major trading blocs, and notably in the
integrated Europe of post-1992 and in the U.S./Canada free trade pact.
Why in the light of these clear benefits had Caribbean integration not moved forward
faster and why some fifteen years after the CARICOM treaty had arrangements about, for
example, a common external tariff, not proceeded on the agreed time schedule? Several
participants addressed this question by questioning whether the resolve to cooperate really
was well established in the region. It was noted, for example, that the individual
Caribbean countries simply did not understand just how small they were. Germany and
France had long ago recognized that they were too small to survive individually in the
modem world but this same message had yet to get across to most countries in the Caribbean.
Part of the reason for this was psychological. In the Caribbean, senior policymakers
sometimes preferred to be large fishes in very small ponds rather than smaller fishes in
somewhat larger ponds. There was a reluctance to surrender even small elements of control
even where this was clearly necessary for integration to proceed. A specific example related
to the efforts of an Antiguan company to encourage Trinidadians to buy property in Antigua.
This was eventually aborted because the Trinidadian officials wanted to directly monitor
the use of the money inside Antigua to ensure that it did not leak outside the region. This
was unacceptable to the Antiguan authorities. Other examples were cited in which
otherwise successful exercises in cooperation were aborted by petty restrictions imposed on
one small but vital part of the operation. Operations involving intra-regional capital flows
were especially problematic and this would undoubtedly complicate on-going efforts to
establish a regional stock exchange.
However, in spite of this relatively depressing history, the discussion ended on an
optimistic note. It was argued by several people that the EEC example and especially the
move toward the completion of the single market by 1992 offered both lessons and challenges
for the Caribbean. One lesson was that real harmonization takes a very long time: the
European Community in the twenty years prior to the Single European Act had made
precious little progress toward further integration because of the refusal of the French
administration to allow decisions to proceed on the basis of the majority voting of members.
Once this veto had been removed, progress toward full integration had been much
accelerated. Another lesson was that the dynamic effects of full integration in the form of
enhanced inward investment to take advantage of the enlarged market were proving to be
extremely important in the united Europe's case because Japanese, Scandinavian and U.S.
companies are all becoming far more active in this area. The Caribbean could possibly expect
a similar effect from full integration and not least from non-U.S. companies anxious to obtain
a toe-hold in the U.S. market. The challenge was that large integrated trading blocs were
becoming the norm rather than the exception in the modem world and that very small
countries had to design a response to this. There was a reasonable prospect that the
acceleration of these global trends would help to crystallize thinking in the Caribbean, and
give substance and structure to the outline undertakings and loose commitments about
cooperation which had been in place for many years. If this was indeed the case, then a
real enhancement of Caribbean trade and finance could undoubtedly provide a major boost to
the region's export competitiveness.
Overview of Main Issues
The discussion during the three days of the seminar covered a wide variety of factors
which directly or indirectly impinged on the competitiveness of Caribbean exports. No major
formula emerged to transform the present situation, but there was a good deal of consensus on



Summary Report 15
certain key issues. This final section of the paper merely highlights some of the more
important aspects of this.
First, in relation to the definition and assessment of competitiveness, there was a broad
consensus that while price competitiveness is relatively easy to define and assess, it
represents only a small part of the overall situation of competitiveness in any particular
country. The reality is that export success involves a complex interaction of price and non-
price factors and that any overall strategy to enhance competitiveness must proceed on a
broad front. While such a strategy was likely to be developed first and foremost in the
light of the needs of particular industries, account had to be taken of the idea that national
traits and attitudes were part of the explanation of poor export performance.
Second, the range of policy instruments which could be mobilized to enhance
competitiveness was recognized to be very wide and, to a degree, country-specific. However,
the linchpin of a sound strategy invariably involved the maintenance of a stable real
effective exchange rate which took proper account of the external circumstances facing the
country including changes in technology and the terms of trade. The practicalities of this for
the nominal exchange rate vary considerably between different parts of the Caribbean. In
particular, those countries which have systematically maintained reasonably sound
monetary and fiscal policies have little need for the regular adjustment of their nominal
exchange rates. In those cases, but not in general, the nominal exchange rate can be thought
of as endogenously set by a variety of factors including the monetary and fiscal policies
chosen by the country. In more unstable environments, the nominal exchange rate certainly
needed to be actively manipulated as part of a strategy for export competitiveness, though
this by itself is no guarantee for export success. In addition, in most cases, technical decisions
about, for example, the basket of currencies against which to peg or crawl the exchange rate
were also part of that strategy.
Third, fiscal, monetary and incomes policies all had roles to play in supporting an
export competitiveness strategy and there were many different avenues through which such
policies could exert an influence. Regarding public expenditure, the general view was that
expenditure on basic services such as education and health may be as effective as
expenditures specifically tailored to subsidize or otherwise pursue short-term gains in
exports. However, this was not to deny the importance of public expenditures on export
extension services, information services, and other export support arrangements. As regards
monetary policy, it was agreed that its primary role in supporting exports is that of
establishing a stable inflationary environment. The specific instruments of monetary policy,
such as exchange controls and interest rates had particular roles to play in helping to
achieve this. As regards incomes policy it was generally agreed that greater but flexible use
of such a policy had the potential to enable governments both to achieve improved export
competitiveness and to improve the employment situation consistently with its pursuit of
other policies.
Fourth, the lessons from successful export economies could be divided into those which
were unlikely to be replicable in the Caribbean context and those which have some
potential to be replicated. There was a significant disagreement in the seminar about the
exact dividing line, with some participants arguing that the potential for learning from East
Asia was extremely limited. However, those who recognized that there were indeed lessons
of some importance were also in broad agreement that the three key elements of a successful
export strategy, as evidenced by the East Asian economies, were those referred to earlier,
namely:
* a willingness to be forward-looking and to continuously monitor destination markets
and consumers;
* an unambiguous commitment to export trade, established at the highest level; and
* an equal-footing treatment for exports for tax and other purposes to ensure that the
profitability of exports is at least at par with the production of the same goods for
domestic markets.



16  Summary Report
Finally, as regards Caribbean integration arrangements, the seminar manifested a
mixture of disappointment and optimism. The disappointment was that most arrangements to
support a regionally-based export push were already in place but were being used to only a
limited degree. The optimism concemed the prospect that the accelerating global moves to
establish and consolidate large trading blocs such as the EEC would crystallize thinking in
the Caribbean and give substance and concreteness to undertakings and agreements for
integration which had already been in place for many years.



1
INCREASING INTERNATIONAL COMPETITIVENESS:
A CONCEPTUAL FRAMEWORK
Gerald K Helleiner
A recent U.S. book on the subject of international competitiveness begins:
The problem of international competitiveness has been defined in highly diverse ways. These
definitions (and the proposed solutions to the problem) are partially inconsistent, and
thoroughly confusing to most academics, politicians, policymakers, and business managers.
There is good reason for this confusion. The collection of problems alluded to as
"competitiveness" is genuinely complex. Disagreements frequently occur not only at the level
of empirical effects and of policies, but also in the very definition of the problem. Well-
intentioned and reasonable people find themselves talking at cross purposes; sometimes it
almost seems they are addressing different subjects (Spence and Hazard 1988:xvii).
It seems that in order to engage in useful exchanges concerning the possibility of
increasing the competitiveness of exports we must first agree on what it is we are talking
about.
Competitiveness and Comparative Advantage
International competitiveness cannot be a "problem" for long in all sectors and industries
at the same time. Unless there are sustained capital inflows permitting the value of imports
of goods and services to exceed the value of their exports-a less and less likely prospect for
most developing countries today-current payments will fall to the level of current receipts.
Even with capital inflows there still exists a sustainable imbalance at which current flows
must settle. This implies a regime for the exchange rate and local factor (essentially labor)
remuneration that will generate that balance or sustainable imbalance. This regime and the
resulting prices and incomes will make some economic activities profitable and others
unprofitable.
In the absence of governmental intervention, a comparative advantage that roughly
determines the ranking of possible profitability in different activities, including those that
do not at present exist in a given country, obviously lies behind these relative
profitabilities. One cannot have a comparative disadvantage in everything! If an
unfinanceable deficit persists, the value of the domestic currency or domestic incomes will
eventually fall, and, in the case of currency devaluation, some tradable goods and services
will thereby become profitable to sell for export or to replace imports.
In the smaller, poorer, and more structurally rigid economies, there is less prospect of
"switching" existing production from domestic consumption to export, or of "switching"
demand from imports to already existing domestic import-competing firms. In these
economies what is at issue is the restructuring of production via new investments toward
17



18   Increasing International Competitiveness: A Conceptual Framework
profitable exporting and import-competing activities. And this may take some time (as well
as financial investment).
Thus a country is always internationally competitive in some activities and
internationally uncompetitive in others. That is, there are always some tradables that are
profitable to produce domestically and others that are not. Given a country's underlying
comparative advantage (which is the product of its resources, technology, income level,
etc.), which activities are competitive and which are not at any one time depends, above
all, on the exchange rate, the structure of domestic factor prices, especially wages, and the
structure of other governmental forms of encouragement or disencouragement. This also
depends on changes in domestic (as well as international) productivity that may be
influenced by government policies, either directly or indirectly. Since the world is
continually changing, some activities on the margin of "tradability" are moving into or out
of international competitiveness all the time. As the pace of global technical change
quickens, it becomes more important than ever for potential exporters-both firms and
governments-to be able to monitor and adapt to continuing shifts in global industry and
hence in their own competitiveness.
If a country attempts to maintain unsustainable official exchange rates or other such
"temporary" policies, such actions may also generate "lags" in the adjustment of
profitabilities to the positions at which they are likely to "settle" for more extended
periods. For many activities, however, competitiveness, in the sense of the availability of
profit from exporting, is fairly stable and predictable (although how much profit exporting
generates may still be quite variable over time). To speak of strengthening a country's
overall international competitiveness, then, is to speak nonsense. It makes sense to discuss
international competitiveness only in terms of particular economic activities, industries, or
firms-such as tourism, unskilled labor-intensive manufacturing, bananas production, and
sugar production.
What industries, then, are we to be concerned with? Perhaps an obvious starting point is
the distinction between those (traditional) industries and activities in the tradable sector
(exporting and import-substituting) that have already been profitable and have existed for
some time, and those (nontraditional) that are fairly new, or are being seriously
contemplated, or those that have not even been thought of yet. Currently of prime interest in
the Caribbean is the possibility of significantly expanding nontraditional exports. (The
Caribbean is not alone in this regard; see Bond and Milne 1987.) One of the difficult
questions for policymakers is how to identify the most promising new activities in which
international competitiveness may be realized. In considering the desirability as well as the
possibility of such new economic activities, they must also take into account broader issues of
development strategy. Different activities generate different externalities, learning effects,
and distribution of incomes. In some activities it may also be more difficult to remain
competitive in the face of rapid global changes in technology and demand. These matters
are beyond the scope of the discussion.
Competitiveness and Market Shares
Collectively, developing countries can expand their exports to the industrialized
countries in ascending order of probable difficulty, (1) by sharing in the industrial countries'
expanding domestic demand without expanding their present market share, (2) by displacing
the market share of other industrialized country exporters without expanding total import
share of the relevant market, or (3) by displacing the accustomed market shares of domestic
producers. Individual developing countries can also, of course, compete with-and displace-
one another. Indeed if, as many fear, aggregate developing country access to individual
national markets, or to the EEC, or to the U.S.-Canadian free-trade area, or to the OECD as
a whole faces some upper bound, there may be no option but to compete primarily with one
another. Global price elasticity of demand for manufactures of the kind most likely to be
exported by developing countries seems likely to be greater than for primary product exports



Gerald Helleiner 19
(see Bond and Milne 1987: 105-6). But special measures in "sensitive" industries-such as the
Multifibre Arrangement (MFA) for the textiles and clothing sector-can negate such
presumptions. If access to such markets is limited in terms of imports in general, the
developing countries can consider displacing some industrialized countries' exporters and not
simply one another. Obviously there may be some potential for displacing of traditional
suppliers in other developing country markets as well.
A country's overall international export competitiveness, as "revealed' in the export
data, is sometimes summarized in a measure that combines (1) the behavior of market share
in traditional products (and destinations) with (2) the degree of success in expanding exports
of nontraditional goods and services.
Export growth can thus be decomposed into that which is attributable to growth in
world markets for traditional exports, that which is attributable to altered share of
traditional markets (traditional "competitiveness"), and that attributable to the
development of new nontraditional exports ("diversification"):
AX = (x1W2 - xlW1) + (x2W2 - x1W2) + (NT2 - NT1)
where Wt is the world market for this country's traditional exports in period t, xt is this
country's share of these world markets in period t, and NTt is the value of nontraditional
exports in period t. (A further term may be useful to distinguish changes in world prices for
exports from changes in the volume of world trade.) Adding the traditional
.competitiveness" component to the "diversification" component of export performance in
this expression (i.e., the last two terms), and expressing the sum as a percentage of total
changed exports, yields a "revealed" measure of overall changing export competitiveness.
Such an after-the-fact (ex post) summary measure, indicating the export performance
record, offers policymakers little guidance in formulating current policies or assessing future
prospects. For that we must turn to micro-level measures of incentives and profitability.
Profitability and Price Competitiveness in Nontraditional Exporting
To identify new activities in which exporting is likely to be profitable over some agreed
time horizon-that is, in which a country is internationally competitive-policymakers
must look at the country's resource base; the unit labor costs in dollars (efficiency-adjusted
local currency wage rates multiplied by the exchange rate); the dollar costs, and ease and
reliability of gaining access to other inputs, such as power, water, and materials; and the
location and hence dollar international transport costs.
To a substantial degree, the resource base and transport costs are invariant, at least in
the short to medium term. That is not to say that full advantage has necessarily been taken
of the opportunities to which they give rise, but only that they are basically exogenous and
slow to change. Policies seeking to increase the international competitiveness of particular
nontraditional activities are likely to bear on the unit labor costs and the reliability of the
infrastructure.
The international price/cost competitiveness of particular industries at any point in time
can be gauged by direct micro-level comparisons of price/cost levels and trends in domestic as
against competing foreign industries. Product differentiation, the introduction of new
products, variations in the output mix, rapid productivity changes, and confidentiality
regarding cost data can all make such direct industry-level price/cost comparisons very
difficult. One of the best-known systematic studies of international competitiveness (of a
number of U.S. industries in the 1960s) provided evidence that nonprice factors-product
quality, shipment delay, after-sales service, and the like-were of major, sometimes even
dominant, importance (Kravis and Lipsey 1971: 151-65). Obviously the more homogeneous
and standardized the product, the more important are price considerations relative to the



20   Increasing International Competitiveness: A Conceptual Framework
quality. Marketing, shipment, and related issues are nevertheless always important, as
explained.
Despite the importance of non-price factors in exporting it is also true that international
price competitiveness matters more in some sectors than in others. Profitability can be
achieved in some activities by realizing an export price (in dollars) that is consistently
higher than that of the international competition. If the demand for a particular country's
export product is less than infinitely elastic (i.e., if its price is not essentially "given to it"
by the world market) it can use its market power to enjoy a better price. The pricing rule for
such cases is the familiar profit-maximization one-based upon the equating of marginal
revenue with marginal cost. For policy purposes this translates into the equation of national
marginal revenue (total earnings of nationals, direct and indirect) with marginal social cost
(calculating all input costs, direct and indirect, as their social opportunity costs), and
allowing, where possible, for both positive and negative externalities. Where capacity is
not being fully utilized, in the short to medium term, the marginal cost may be low, and
prices may also sensibly be set below that of the international competition.
In small countries these pricing considerations arise only in export sectors characterized
by a degree of uniqueness or product differentiation. An established reputation, a brand
name, or a unique resource may permit such pricing above international competition, as in the
case of some kinds of tourism or some particular alcoholic beverages. The Caribbean as a
whole appears to have unique tourist attractions, although individual countries in the
region do not (Rosensweig, 1988). There are unlikely to be such possibilities in nontraditional
activities where the object is to break into new export markets, and least of all in unskilled
labor-intensive exporting. On the contrary, in these cases it may be necessary to price below
the international competition at the outset, in order to attract buyers' attention.
Which countries should be used to compare international price/cost competitiveness?
Assuming that the range of exportable industries being studied has already been narrowed to
a 'short list" of those in which the Caribbean has a broad comparative cost advantage (or
potential advantage) relative to the countries to which it proposes to sell (notably the
United States and EEC members), the most relevant price/cost comparison is with competing
exporters, not with the United States or European countries themselves. All external
suppliers of the U.S. or European markets can be assumed to overcome broadly the same
entry barriers, allowing for the existence of preferential advantage from the Caribbean
Basin Initiative (CBI), Generalized System of Preferences (GSP), and others (see World
Bank 1988), which remain roughly unchanged.
Measuring Price Competitiveness in Theory and Practice
The most useful competitiveness indicator for any one country's industry would therefore
be some kind of weighted average of the relative dollar price/cost levels or trends in the
same industries in the major supplying (or potentially supplying) countries. The weights may
vary from one industry to another, depending upon the intercountry sourcing pattern of the
target market country's imports of the product in question. In the case of many nontraditional
Caribbean export prospects, heavy weight will have to be assigned to Mexican competitors.
Unfortunately for the Caribbean, Mexican hourly compensation costs in U.S. dollars are now
less than half of what they were ten years ago; on the other hand, those of Taiwan and
Korea have roughly quadrupled (U.S. Bureau of Labor Statistics and World Bank data).
Notice that the weights that are most appropriate for these industry-specific
competitiveness calculations are likely to be strikingly different from those employed by the
International Monetary Fund (IMF) or by central banks in their calculations of trends in the
real effective exchange rate (Edwards 1988). Moreover, even if these weights were the same,
the exchange rate "required" to make one sector or activity internationally competitive may
bear little relation to the rate that is appropriate for a sustained balance of payments
equilibrium, once one takes into account the role of external capital inflows, the performance
of other sectors (e.g., oil in Trinidad), or heavy debt-servicing obligations (e.g., in Guyana).



Gerald Helleiner 21
What can be used as a measure of product- or industry-specific prices or costs? Ideally,
one would like to compare U.S. dollar costs, landed at the U.S. port, including freight and
insurance, but excluding profits or taxes. This is impossible. In practice, it is extremely
difficult even to compare total U.S. dollar costs at the factory level in different countries. In
industries in which labor costs make up a large share of the value added, one could move a
long way toward the objective if one could compare U.S. dollar unit labor costs, including
benefits, employer-paid social insurance contributions, and so on (preferably adjusting for
short-term variation attributable to the degree of capacity utilization). Unfortunately, even
that measure can prove elusive. (Table 1.1 presents some recent data.) A measure of U.S.
dollar wage rates is often the nearest one can approach to the preferred unit labor costs.
Table 1.1 Hourly Compensation Costs for Semiskilled Production Workers In Export
Manufacturing Industries, Selected Countries, 1987
Country               U.S. dollars per hour"    Index (U.S.=100.0)
Industrialized Countries
F.R. of Germany                   15.93                    116.6
United States                     13.66                    100.0
Canada                            11.94                     87.4
United Kingdom                     8.67                     63.5
Portugal                           2.36                     17.3
Newly Industrialized Economies (NIEs)
Hong Kong                          1.98                     14.5
Taiwan                             1.84                     13.5
Korea, Republic of                 1.54                     11.2
Thailand                           0.35                      2.6
Near NIEs
Sri Lanka                          0.29                      2.1
Philippines                        0.26                      19
China                              0.15                      1.1
Latin America
Panama                             1.77                     13.0
Brazil                             1.14                      8.4
Mexico                             0.84                      6.2
Costa Rica                         0.95                      7.0
Guatemala                          0.88                      6.4
Honduras                           0.53                      3.9
Caribbean
Dominican Republic                 0.79                      5.8
Haiti                              0.58                      4.3
Jamaica                            0.63                      4.6
Barbados                           1.72                     12.6
Trinidad and Tobago                1.66                     12.2
Antigua                            1.40                     10.3
St. Vincent                        1.15                      8A
Grenada                            1.02                      7.5
St. Kitts and Nevis                0.93                      6.8
St. Lucia                          0.92                      6.7
Dominica                           0.92                      6.7
Note: Estimates contained in this table should be treated with caution. They are derived from a number of
independent sources, including the industrial countries, Hong Kong, Taiwan, Korea and Brazil ILO reports. For
Barbados, Costa Rica, Haiti, Honduras, Trinidad and Tobago, and Jamaica, the sources were various studies of free
zones. Data for the remaining countries were developed from various informal and published sources. No importance
should be attached to small differences.
a. Including estimated payroll taxes, fringe benefits, and year-end or equivalent bonuses.
Source: World Bank 1988:35



22   Increasing International Competitiveness: A Conceptual Framework
Data on country-level U.S. dollar wage rates leave open the important questions of
differential wage structures and incentive systems and of the representativeness of the
average wage rate in different countries. Gary Fields (1984) has noted the importance of
wage structure in assessing the prospects and consequences of manufacturing for export. If, as
he says is typical in the Caribbean, manufacturing wages are much higher than agricultural
wages-for example, because of union pressure, minimum wage laws, and foreign firms' or
government wage-setting practices-an overall "average wage" would be quite misleading.
Even within the manufacturing sector there may be significant complications that limit
the usefulness of average manufacturing wage data. Differences in the skill mix can be
especially important, and countries' skilled-unskilled wage differentials can be expected to
vary with such influences as the educational qualifications of the work force and ease of
emigration. In the apparel sector, for example (see Table 1.2), not only is the wage rate's
relationship with the average manufacturing wage highly variable across countries
(compare Brazil's 55-62 percent with Hong Kong's 99-100 percent) but it also can change
significantly within the same country over time.
Table 1.2 Hourly Compensation Costs in Apparel Manufacturing as Percentage of Comparable
Costs in Manufacturing Production
1975                          1986
Brazil                      62                             55a
Hong Kong                   99                            100
India                       84                             75b
Korea                       62                             65
Singapore                   69                             79
Taiwan                      74                             82
a. 1985.
b. 1982.
Source: U.S. Bureau of Labor Statistics.
To calculate the U.S. dollar wage, then, one requires a representative wage rate for the
industry in question, expressed in local currency, and the U.S. dollar price of the local
currency. Where there is more than one exchange rate (or equivalent export earnings
retention schemes), care must be taken to employ the rate that relates to exports in the
industry in question.
There is no substitute for direct industry- or product-specific price/cost comparisons in
ascertaining international price competitiveness in particular industries at a given point in
time. It is also important, however, to be able to gauge changing competitiveness of the
relevant industries or sectors over time. Indeed, increasing competitiveness is the theme of
this seminar. And, to an important degree, any change in domestic productivity is the
product of the level and composition of domestic investment.
In light of the difficulties in acquiring the desired "representative" wage data, it is
small wonder that the analyst of changing competitiveness is so frequently driven to simpler
and cruder measures-typically to measures of change in the overall level of prices and in



Gerald Helleiner 23
the nominal exchange rate, that is, to change in the real (inflation-adjusted) exchange rate,
adjusted, where relevant, for industry- or sector-specific subsidies and taxes.
A usable, if rough, international price/cost competitiveness index for a particular
industry, j, in country h, then, is
C jh=Ei E i p W ij
ip hj
where Ei is an index of change in the domestic currency cost of the currency of country i; Pi is
an index of overall price change in country i; Ph is an index of overall price change in the
home or domestic country; and Wij is the share of country i in the competing imports of
product j in the third country or countries (the market) for which competitiveness is being
measured. This measure, C-h, records the change in the real effective exchange rate that is
most relevant for assessing the competitiveness in a particular export market of industry j in
country h.
If possible, the expression Pi/Ph (the overall relative rate of price inflation) should be
adjusted for particular taxes or subsidies relating to industry j, so that it becomes Pij/phj the
relative industry j-specific rate of price inflation. Relative price change may also be
substituted for, wherever possible, by overall or industry j-specific measures of change in
labor costs.
Again, it is important to stress that, although this measure appears to bear some
resemblance to the usual real effective exchange rate measures, the (industry-specific)
weighting system suggested here will generate quite different results. Traditional trade-
weighted measures of the real effective exchange rate remain, of course, important for
assessing the overall appropriateness of official exchange rates, if the changing terms of
trade, capital flows, debt-servicing obligations, and productivity change, are taken into
account.
Price Competitiveness: Some Policy Issues
Avoiding gross misalignment (and undue instability) of the real exchange rate seems to
be an obvious prerequisite for reasonable export success. The antiexport bias associated with
overvalued currencies has certainly hurt many African and Latin American countries in
recent years. Undervaluation of the domestic currency (and relative neutrality, as between
exports and import substitutes within the tradable sector) seems to have been associated
with successful export expansion in such cases as Korea and Taiwan. It is striking, however,
that economic analysts have recently been unable to find any systematic cross-country
relationship between the real effective exchange rate (as traditionally measured) and
export performance. This is sufficiently surprising, and new, that it may be worth quoting:
We have experimented at length with various definitions of competitiveness, but found little
support for the hypothesis that export growth can be associated with price competitiveness in
the developing countries. Regression of exports on real exchange rates showed little
correlation. An alternate possibility was to compare actual real exchange rates with the
corresponding purchasing power parity. But, again, we were not able to provide an
explanation for export growth with such a variable. (Adams, Behrman, and Boldin 1988: 14)
This perhaps serves to underline the need to focus on industry-specific incentives. There
does exist fairly firm econometric evidence that nontraditional export growth is associated
with the level and stability of the real exchange rate.
There is a presumption that investors in new kinds of (export-oriented) production
respond better to stable and appropriate real exchange rates that are associated with low
rates of price inflation than to those achieved through constant readjustment of nominal
exchange rates in response to ongoing inflation. Cautious fiscal and monetary policies are
therefore an important concomitant of getting and keeping the real exchange rate "right," as



24   Increasing International Competitiveness: A Conceptual Framework
long as this has not already been rendered too difficult (in the short run) as a consequence of
prior inflationary experience.
If the overall real exchange rate does not provide a particular potential export industry
with the international price/cost competitiveness it requires for successful exporting, there
are essentially three possible short-term policy responses:
1. Devalue the domestic currency to the point where the industry becomes
internationally competitive (allowing for possible inflationary offsets).
2. Create subsidies, speciai exchange rates, or other special arrangements for the
industry, sufficient to make it internationally competitive, that is, profitable.
3. Abandon immediate efforts to export in that industry.
A decision to devalue may be the product of inability to compete in a range of specific
potential export industries. An effort generally to encourage exports is likely to involve a
real devaluation of the currency. It is unlikely, however, that one or two industry-specific
competitiveness calculations will engender an across-the-board devaluation (unless, of course,
the products in question are of overriding importance). Given the exchange rate, the choice is
between options (2) and (3).
Industry-specific, targeted, export encouragements raise all of the theoretical issues and
arguments long debated in the literature on protection. This is not the place to reiterate
them. Suffice it to say that there are some reasons for believing that significant positive
externalities come from some kinds of nontraditional export activities, notably in
manufacturing, and that negative ones may well come from others; and there are some
significant successful precedents for the targeting of infant exports in East Asia (Westphal
1982). However, countervailing and antidumping duties may be levied against differentially
subsidized exports. They cannot be deployed against devaluation-assisted competitive
products (but, of course, other protectionist measures can be).
Nonprice Dimensions of Competitiveness
Price/cost competitiveness is a necessary condition for export success. It is unfortunately
not sufficient. Information about markets, product design and packaging, quality control,
reliability of supplies, marketing and distribution skill are among the further critically
important elements in successful exporting. The knowledge required can be obtained only
through experience and learning by doing. Nor is this knowledge acquisition a "one shot"
affair. Once acquired, it must be kept continually up-to-date. The fastest growing markets for
manufactured exports from developing countries are not in standardized or local products but
in made-to-order goods in which detailed (and changing) know-how is essential.
Marketing in the sense of finding or attracting customers and persuading them to place
orders or buy output is almost inseparable in practice from building up the firm's supply
capabilities. In getting orders, firms sell the whole package of their capabilities and
knowledge together with their readiness to learn more and invest further in their exports.
What is marketed is above all the firm's ability to meet all the buyer's requirements. Thus
improving supply capabilities is central, and is virtually inseparable from developing skills in
communicating to customers what the firm can do for them. (Keesing and Lall 1988: 14-15).
In small island economies, the key nonprice issue is frequently the adequacy of the
relevant infrastructure. If transport and communications are sporadic and unreliable, it will
be very difficult for suppliers to respond to buyers' needs in a competitive manner. In these
cases, it may be necessary to concentrate on a subset of potential exports for which the
reliability of delivery is relatively less important, until better infrastructure can be
developed.
Once a developing country has the basic incentives right and has begun to acquire a
record for reliability, business can multiply rapidly. Equally, "glaring failures and policy
obstacles tend to cut off the learning and evoke lasting buyer mistrust of an economy as a
source of supply" (Keesing and Lall 1988: 18).



Gerald Helleiner 25
What appears to be most needed in the early stages are specialized and informed
service suppliers and consultants, with directly relevant business experience, to provide
instruction, advice, and firm-specific extension services for the most promising potential
exporters with production capacity. High-cost, generalized public sector export promotion
agencies have not had a good track record.
The availability and cost of trade credit-preshipment (usually short-term working
capital) or postshipment (often longer-term)-may also significantly affect the profitability
and international competitiveness of particular exportables. Difficulties with export credit
may merely be a by-product of problems in the overall domestic financial system, rather
than being inherently export-related. Where this is the case, one first ought to pursue the
requisite strengthening of overall financial management. It may nonetheless be necessary-
pending more fundamental policy change and/or economic development-to consider credit
measures specific to the particular desired export expansion. It is usually argued that such
export-specific measures may be especially important for small and medium-size enterprises
either producing directly for export or subcontracting for others who do. In the Caribbean
area, the relative role of such smaller enterprises is likely to be fairly great. Scale
economies in export marketing, distribution, and information management, as well as in
credit management, require the consideration of potentially larger-scale institutions for the
efficient performance of these essential functions.
Swift, easy, and duty-free access to key inputs, many of them imported, has also
frequently proven to be vital. In the successful East Asian cases of rapid expansion of
manufacturing for export, the liberalization of imported input requirements (direct and
indirect, so as not to discriminate against local suppliers) for the expanding new export
sectors was undertaken long before any thought was given to overall trade liberalization.
Competitiveness and Foreign Investment
There is another sense in which the term "international competitiveness" is frequently
used-that is, in the sense of attractiveness to foreign investors. To some degree international
competitiveness in this sense overlaps with the industry- or activity-specific concept of
competitiveness discussed above. Certainly any discussion of the attraction of a country to
foreign investors must be set in the context of a particular economic activity or industry. If
the basic conditions for industry- or activity-specific profitability are not met, neither
domestic nor foreign investors will be interested. Foreign investors, however, typically have
further concerns, beyond those of domestic investors. Prime among them is their greater
perception of risk, their inability to repatriate earnings or capital, currency devaluation,
nationalistic policy measures directed discriminatorily against them, and the like; this
makes them very sensitive to that amorphous factor of "business climate." They also
frequently face different constraints; in particular, they have more limited knowledge of
local conditions. Among the key relevant issues, of course, is the extent to which the
government from the outset treats foreign investors differently from domestic investors.
Differential treatment may mean either more favorable treatment for foreign investors or
less favorable, fewer conditions or more numerous ones. In export-oriented activities, much
more than in those catering to local or regional markets, foreign investors can be expected to
respond to special tax and subsidy incentives. In these sectors there is therefore a particular
danger of mutually destructive competition among countries that are in other respects quite
similar to attract highly mobile international capital and skill. There are potential gains
to host countries from some harmonization of policies toward export-oriented foreign
investors to reduce that unpleasant prospect.



26   Increasing International Competitiveness: A Conceptual Framework
References
Adams, R. Gerard, Jere R. Behrman and Michael Boldin. 1989. "Productivity,
Competitiveness and Export Growth in Developing Countries." University of
Pennsylvania, photocopy.
Bond, Marian, and Elizabeth Milne. 1987. "Export Diversification in Developing Countries:
Recent Trends and Policy Impact." In IMF, Staff Studies for the World Economic
Outlook. Washington, D.C., August 1987, pp. 98-144.
Edwards, Sebastian. 1988. Exchange Rate Misalignment in Developing Countries. World
Bank Occasional Papers, New Series, 2. Washington, D.C.
Fields, Gary. 1984. "Employment, Income Distribution and Economic Growth in Seven Small
Open Economies." Economic Journal 94, no. 373 (March): 74-83.
Keesing, Donald B., and Sanjaya Lall. 1988. "Marketing Manufactured Exports from
Developing Countries: Learning Sequences and Public Support." In Gerald K.
Helleiner, ed., Trade Policy, Industrialization and Development: New Perspectives.
Oxford University Press, forthcoming.
Kravis, Irving B., and Robert E. Lipsey. 1971. Price Competitiveness in World Trade. New
York: Columbia University Press.
Rosensweig, Jeffrey A. 1988. "Elasticities of Substitution in Caribbean Tourism." Journal of
Development Economics, 29: 89-100.
Spence, A. Michael, and Heather A. Hazard, eds. 1988. International Competitiveness.
Cambridge, Mass.: Ballinger.
Westphal, L. E. 1982. "Fostering Technological Mastery by Means of Selective Industry
Promotion." In M. Syrquin and S. Teitel, eds., Trade, Stability, Technology and
Equity in Latin America. New York: Academic Press.
World Bank. 1988. The Caribbean, Export Preferences and Performance. World Bank Country
Study. Washington, D.C.



2
FISCAL AND MONETARY POLICIES
IN SMALL ECONOMIES
DeLisle Worrell
In today's interdependent world, even large industrial countries like the United States
must be concerned about their ability to export. Small countries cannot grow at all if they
are not able to sell additional output in international markets at competitive prices. Small
open economies must identify a combination of policies that accords with their comparative
advantage-actual or targeted. Alternatively, they should maintain a stable policy regime
over time to which comparative advantage may be adjusted via suitable investment. Such a
policy regime will have numerous elements. It may be argued that the most important are
the microeconomic aspects affecting the supply of skills, the choice of technology, and the
efficiency of resource use. This discussion focuses on fiscal and monetary policies in relation
to competitiveness, but there are specific associated policies, particularly microeconomic
policies, without which the expected outcomes may not be attained. Fiscal policy, as part of
a well-tailored package, may play an important role in promoting strong growth in
internationally traded goods. Monetary policy only helps in the short run to adjust
expenditure plans temporarily. It has few lasting effects.
Economic Characteristics of Caribbean Dualism
Output in the Caribbean countries may be divided into those goods that may be traded
among countries, such as clothing, agricultural products, and tourism, and goods that by their
nature must be provided locally, such as government services and public utilities. Small
economies must accept the ruling selling price of traded goods. Anything they produce is too
trifling in amount to make a difference to the international price. When their production
costs change, firms in the traded sector have to change levels of output, and use new kinds of
organization, marketing, and technology if they are to survive and prosper.
Firms in the nontraded sector may adopt similar strategies, but in addition they may
change the price at which they offer to sell. The market will tolerate some change in price,
depending on the strength of demand, and consumers have no option to appeal to cheaper
foreign suppliers.
Fiscal and monetary policies will have different effects on the traded and nontraded
sectors. For example, measures to reduce costs such as lower tariffs on inputs and reduced
interest rates should lead to an increase in the output of tradables, but the effect on
nontradables may be ambiguous. For items where the country only needs as much as it
already consumes, prices may instead fall. Serious policy error will result if the effects on
traded and nontraded production are not measured separately. The extent of the supply
response may be overestimated. More important, the extent to which an increase in output
arises in the traded sector may be miscalculated, and we may then expect too large an
27



28   Fiscal and Monetary Policies in Small Economies
improvement in the balance of payments. The fact that the expected foreign reserve gain
may not materialize could threaten the entire policy package.
The Mobility of Capital
Because finance moves readily across borders in search of the most profitable locus of
investment, domestic savings do not represent a constraint to growth. The limitation to
investment is the failure to identify areas of comparative advantage where domestic firms
could supply products of internationally acceptable quality. Once such opportunities are
perceived, investment funds could come from international sources in unlimited quantity.
There is clear evidence throughout the Caribbean in support of this contention.
Why then is there not a surge in investment in Guyana, the country with the greatest
wealth of natural resources in the Caribbean? The answer lies in the existing social and
political unease in the country and the decline of basic infrastructure. The prerequisites for
investment are an orderly, stable society with obvious legitimate political authority,
dependable public utilities and transport, and basically sound education, health, and social
services. Once these are provided for, investment follows profitability.
Orthodox economists believe that domestic savings are the key to sustained economic
growth. That is true of a closed economy that does not permit foreign investment. There are
no Caribbean countries remaining in that category. It is also true if investment is directed to
the nontradable sector where it does not generate the foreign exchange necessary to service
the foreign debt. In fact there are only a few instances of major foreign investment in
nontradables in the Caribbean, and they are concentrated by and large in public utilities.
Thus, where infrastructure is inadequate, fiscal resources must be allocated to bring it to
the required minimum. Taxes and other incentives that enhance the rate of return on
investment should feature prominently in a growth-oriented strategy. It is important to
establish which incentives lead to greater profitability. The tax regime in the investor's
country of origin must also be taken into account. Specifically, will his own tax authorities
allow him to make deductions for local taxes forgiven, just as though he had paid that tax?
Bilateral arrangements govern these matters. Such allowance is possible under some double
taxation agreements.
Efforts to raise the domestic savings rate in the absence of demonstrated investment
opportunities have no value. The real savings rate will not rise even if people try to
increase their holdings of bank deposits and other financial "savings." Since there is no one
to invest, banks lend out the additional funds for consumption. The increase in financial
"savings" is matched with increased consumption, not more investment. If for any reason the
demand for consumer credit is weak, banks will just accumulate reserves with the central
bank, without making loans for fruitful investments.
Limits to Import Substitution
For small nonsubsistence economies, domestic production of importables is a small
percentage of national output, usually less than 10 percent. (If we treat the Caribbean as a
single market in defining importables, that percentage is no different, although for small
countries the CARICOM market may be highly significant.) Nonsubsistence economies
require a wide range of goods and services. If any small economy tried to produce more than
a handful of these items, we would see a multitude of tiny producing plants, each one too
small to attain the economies of scale required to sell at world market prices. The list of
items for which the domestic market is sufficiently large or the economies of scale
sufficiently small is soon exhausted.
Import substitution is not a realistic policy option for the Caribbean. Attempts to
stimulate import substitution by fiat have all failed. They result in high prices, inconsistent
quality, and a parallel market of international trade in competing products. A few import-
substitution activities are able to compete domestically, but with the aid of a moderate



DeLisle Worrell 29
tariff. Such activities may be encouraged to help generate employment and economic growth.
But the overall contribution of import substitution to national output will remain small as
long as the economy does not revert to subsistence.
Endogenous Exchange Rate Adjustment
Small countries with large and rich neighbors do not have much say in their exchange
rate. The value of Papua New Guinea's currency in Australian dollars, the value of
Botswana's currency in South African rand, the value of the Netherlands guilder in deutsche
mark, and the value of the Jamaican dollar in U.S. dollars are all determined by the
smaller country's foreign exchange reserves and balance of payments performance. If fiscal
and monetary policies are so designed as to secure adequate foreign exchange reserves, the
value of the currency may remain the same indefinitely.
Efforts to eliminate exchange rate uncertainty encourage trade and investment flows.
Other circumstances such as relative factor use, technology, marketing, and choice of
products adapt over time to this basic relationship, thereby preserving a country's
comparative advantage. The only really favorable circumstance for a currency change by a
small country is a high level of foreign exchange reserves and strong underlying economic
growth. But there is little incentive to change the exchange rate under such circumstances.
If foreign exchange reserves are low and the balance of payments weakens, then the
local currency will be devalued. The authorities do not have much choice in the matter.
Often they may wish to insist that the currency's value remains unchanged, but they have
no foreign exchange to sell at that rate. Increasingly over time the market ignores the
central bank, and traders set their own rates for buying and selling among themselves. The
longer the central bank delays devaluation, the smaller its share in the foreign exchange
market. Ultimately, it will command foreign exchange only from primary exporters.
These views contrast with those of economists who believe that the exchange rate is an
instrument to be used to improve balance of payments performance and stimulate growth.
They believe that the exchange rate determines the balance of payments outcome. The truth
is just the reverse. The naive version of the conventional view is that devaluation makes
domestic goods cheaper and foreign goods more expensive. Both locals and foreigners buy
more domestic goods and fewer foreign goods; hence the balance of payments improves and
home output rises. This sounds too good to be true and it never happens that way in small
economies. It is impossible to produce domestic goods to substitute for more than a fraction of
imports, and the demand for a country's main exports is determined by quotas and
administrative arrangements. The increased cost of imported inputs raises the cost of
domestic goods, and so, instead of cheaper domestic goods, there is inflation and little
improvement in the balance of payments. Not many economists believe this naive version.
More sophisticated economists now view devaluation as a device to gain temporary
advantage, to be exploited by an increase in the supply of export goods and a decline in
living standards at least for some (hopefully more affluent) segments of society. Domestic
costs do tend to catch up in time, but there is an interval in which costs are lower and
exporters have an advantage that could boost production. Admittedly, if domestic substitutes
are not available the country will have to incur higher import costs until there is renewed
growth in income. The new rationale for exchange rate adjustment is no more convincing than
the old.
Endogenous Money
Central banks in small open economies find themselves frustrated at every turn in
attempting to regulate the amount of finance. In the end, the amount of finance depends on
government borrowing and the central bank's accumulation of foreign exchange reserves.
Central banks try to influence economic performance by changing the amount of finance or its



30  Fiscal and Monetary Policies in Small Economies
allocation, but the means at their disposal are not effective, as will be explained below.
The government budget is the most effective way of influencing economic activity.
The budget outcome is reflected in the supply of finance. The comparative performance of
the traded and nontraded sectors affects the balance of payments and this also helps to
determine the quantity of money. Increases in the supply of money are fully determined by
government borrowing from the central bank and the increase in foreign exchange reserves.
Wage and Price Formation
Domestic inflation has a large import element, and wages are sensitive to inflation. This
circumscribes the extent of domestic cost adjustment where wages are a substantial proportion
of total costs. The leeway for cost adjustment depends on how far wage increases lag behind
price increases, on the technical change affecting labor productivity, and on the level of
unemployment, which affects the bargaining strength of workers. Fiscal and monetary
policies for increasing domestic competitiveness should work on the narrow wedge between
domestic inflation and the price of imports, rather than by increased unemployment.
Another means of increasing domestic competitiveness is to upgrade technology and enhance
productivity.
A Model of the Small Open Economy
A simple model of the small open economy is presented in Table 2.1. It may be used to
simulate a path of output expansion over time.
National Output
National output is the sum of quantities of tradables aand nontradables. The quantity of
tradables produced depends on wage costs and the costs of financing working capital
compared with the selling price. When costs rise relative to selling prices, firms trim their
output and vice versa. In time, profitable firms will improve their technology with new
investment to compensate for cost increases.
The intended supply of nontradables responds to demand and to the relative prices of
tradables and nontradables. Although few nontradable goods directly substitute for
tradables, the contents of the consumption basket may be altered in response to changes in
relative prices. The actual amount supplied is adjusted to demand, with a lag. Production is
equal to last year's output plus a proportion of the discrepancy between that output and this
year's demand. Nontradable goods are sold at a price that reflects the costs of producing a
level of output. The costs include the price of imported inputs along with wage and finance
costs.
Balance of Payments
A country's balance of payments is the value of its exports of goods and services less the
value of its imports of goods and services plus capital inflows. Changes in import
substitution make a negligible contribution to the balance of payments, and exports of goods
and services are assumed to be approximately the same as sales of tradable goods. Imports of
goods and services are determined by demand, that is, by absorption and the relative prices
of tradables and nontradables. Imports are in unlimited supply at international prices.
If the foreign exchange loss is less than some level of reserves that is considered
adequate by the private sector, there is no change in the exchange rate. But when the
foreign exchange loss is greater than this, the exchange rate depreciates at a rate that is
determined by the expected loss of foreign exchange reserves. Exchange rate depreciation
raises the price of tradables, affecting the profitability of investment in the tradable sector,



DeLiske Worrell 31
the cost of nontradable goods, the demand for imports and for nontradables, domestic
inflation, and wages.
Table 2.1 A Simple Model of the Small Open Economy
National Output
Q = Qt+Qn
Qt = Qt (Pt, w, r)
Qn = Qn (a, Pt/Pn. Qn 1-11)
Pn= Pn (Qn Pt r)
Balance of Payments
m  = m (a, Pt/Pn)
dR = Pt (Qt - m) + K
de= to   dR < R
(f (dR)     dR > R
Pt = ePf
Wages, Prices, and Interest Rates
w  = w (P (4), dQ/dN, (L-N)/L)
N  =N (Q)
p =bl Pt + b2 Pn
r = rf+f(dMO/P)
Intended Spending
a = Q + dMO/P
dMO  = Ag +dR
Growth
Qt (+i)/Qt = Q(It)
It = f (PI, tax [PI)
Note: Qt = output of tradables; Pi = price of tradables; w = wages; r  interest rate; a = intended
spending; Pn = output of non-tradables; Qn = output of non-tradables; m = real imports; dR = change
in foreign exchange reserves; It = investment in tradables; tax (PI) = corporate tax rate; K = net foreign
capital; e = exchange rate; de = exchange rate change; R = adequate level of foreign exchange reserve;
N = employment; L = labor force; rf = foreign interest rate; dR = national output; P = price index; MO =
money; Ag = central bank lending to government; Pf = foreign price index; PI = rate of return; (-i) and
(+i) = periods of lags; bl, b2 = weighted average ratios; f() = function; f(dR) = function of dR.
Wages, Prices, and Interest Rates
Prices are simply a weighted sum of the prices of tradables and of nontradables. Fiscal
and monetary policies influence inflation via the price of nontradables. Wages adjust to



32  Fiscal and Monetary Policies in Small Economies
inflation with a lag. The extent of adjustment depends on labor productivity and the rate of
unemployment. Employment varies with output and with the rate of technical change.
The interest rate is linked to interest rates in international markets, but not rigidly.
There will be differentials, within limits, in response principally to the government's
demand for domestic finance.
Intended Spending
The amount that the economy plans to spend during a given period is the sum of output
plus expected real increases in the supply of money. The supply of money is the sum of
government borrowing from the central bank and the accumulation of foreign exchange
reserves.
Growth
Output will stagnate, whatever the demand at home and abroad, if there is insufficient
investment in the modernization of systems and the implementation of competitive
technologies. Furthermore, if the increase in output of traded goods is inadequate, the
exchange rate depreciates and drives output down via reduced real demand for nontradable
goods. Investment in tradables, to maintain the growth of output of tradables, is the
effective way to raise the ceiling on the expansion of national output. Investment in
tradables depends on the after-tax return on the production of tradables, assuming the
necessary infrastructure has already been provided.
The rate of investment in tradables that is necessary to ensure that growth does not come
to a halt because of capacity limitation may be derived in the tradable sector. The model
may also be used to gain insight into the magnitude of responses to some global policy
measures, such as increased government borrowing from the central bank or to changes in
interest rates.
Fiscal and Taxation Policies
The effects of fiscal policies may be grouped under the categories of stabilization,
growth, and income distribution. Stabilization refers to the short-term adjustment of national
spending. Economic growth refers to the longer-term trend in output and requires incentives
for investment, particularly investment in tradables. The purpose of income distribution is to
ensure a minimum standard of household welfare. We assume that the target is the
provision of basic needs to all households, especially the disadvantaged. Each aspect of
fiscal policy can be examined in relation to these objectives. In the end we need a total
package that offers the best compromise among them.
Government Revenue
THE PERSONAL INCOME TAX. The economic impact of the personal income tax depends on the
average rate, the degree of progressivity, and the nature of allowances. A higher average
personal income tax rate dampens spending and acts as a stabilizer against excessive foreign
exchange spending. There is no reason to expect higher rates to reduce the supply of labo- or
work effort, popular myths notwithstanding. The labor market is not such that a worker
may decide to work 36 hours per week if his tax rate is at a certain level and 40 hours per
week if it is lower. The work week is 40 hours long. The worker decides whether to work or
not. Where there is widespread unemployment, someone else is standing ready to replace the
worker should he or she decide not to work. The few trivial examples of workers refusing
overtime because of tax deductions do not affect the argument. A negligible amount of the
national product is produced in overtime. Work effort depends on the organization of jobs



DeLiskr Worrell 33
within the firm and the quality of management. Among the self-employed, some may choose
to vary their activity in response to tax structure. Typically, however, they adjust activity
between taxable and tax-exempt activity.
An efficiently administered progressive income tax is the most straightforward way to
redistribute income. But a market economy will fail to achieve income redistribution via the
progressive income tax if the rate of progression exceeds what is socially desirable. Those
affected will resort to political lobbies and seek out tax shelters and legal loopholes in
order to frustrate the excessive progression. If the government reacts in a hostile fashion to
block these avenues, those affected will begin to leave the country. In a small country the
proportion of skilled people who may be lost in this way is often quite significant. The
progressive income tax is an important instrument for income distribution but progressivity
must not be taken beyond what society accepts as reasonable (which may vary from time to
time).
Many of the allowances, exemptions, and rebates provided for under the personal income
tax regime are designed to redistribute income-for example, the personal allowance,
allowances for mortgage interest payments, and health-related deductions. The level at
which they ought to be set should be determined in the light of the degree of income
distribution desired and the other means available for achieving it.
Investment by means of allowances may also be encouraged-for example, rebates on
export profits, allowances against equity investment, and credits that dividend recipients
may claim for taxes paid by firms before distribution. These allowances have an important
role to play in encouraging investment that may lead to increased competitiveness. Most tax
regimes in the Caribbean also include incentives for financial accumulation. In my view,
they have no justification.
A well-designed personal income tax serves all three objectives of fiscal policy. The rate
may be adjusted to the requirements of overall economic activity and spending. Progression
may be adjusted to secure income distribution targets along with other ways of achieving
welfare levels. Allowances may also contribute to income distribution but they have a
potentially more important role as incentives for investment.
THE CORPORATE INCOME TAX. Like the personal income tax, the corporate tax may be used to
dampen expenditure for short-run stabilization purposes. It may also serve to redistribute
income. It adds to the progressivity of the personal income tax because it reduces the
dividends accruing to owners of the firm, except where the full amount of corporate tax is
allowed against personal income tax paid by dividend recipients. However, the most
important role of the corporate income tax is as an investment incentive via the rules
governing taxation. The incentives offered by a combination of the corporate tax rate,
allowances, exemptions, and other incentives that the tax system offers to the firm can be
formulated (see King and Fullerton 1984; Worrell 1989). These would include such things as
accelerated depreciation allowances, special performance rebates for exports and new
industries, write-offs against future profits, investment grants, and so forth. One may
calculate the most effective incentive for various activities and adjust the structure of the
corporation tax so as to ensure that investment in the tradables sector is encouraged most.
TAXES ON IMPORTS AND EXPORTS. Taxes on imports may be used to adjust expenditure and they
may also provide for additional import substitution. It has been argued that high import
tariffs give perverse incentives for investment in importables rather than in exportables, the
so-called anti-export bias. If the argument is valid, it must mean that investment that is
diverted to import substitution would otherwise have gone into the production of exports. But
there is unlimited finance available for investment in exports, whether the profitability of
exports is less than the profitability of import substitution. Even if a small country makes
import substitutes too profitable and investors take up all available opportunities for import
substitution, there are still investment funds available in New York and San Juan, if not in
Port-of-Spain, to take up the additional profitable opportunities in the export sector. What



34  Fiscal and Monetary Policies in Small Economies
is more, the scale of investment in import substitution is trivial compared with the scale of
investment in exports. No matter how profitable import substitution may be, investment will
be quite small, a few million at most, and will be easily financed from local sources. In
contrast, export investment is sizable, reaching US$10 million or more. An investor with the
required finances may easily take up import substitution possibilities as an afterthought to
his main export interest. There is a sound argument against overprotection of import
substitutes. It is based on hardship and excessive expense to the consumer, not on the effect on
exports. Moderate import tariffs may be used to adjust expenditure and to encourage
reasonable investment in import substitutes.
It is possible to effect some income redistribution via differential tariffs on different
classes of imports. The CARICOM Common External Tariff (CET) generally levies the
highest tariffs on consumer durables and imposes lower tariffs on machinery, raw materials,
and basic foods. But many have questioned the effectiveness of such income-distribution
efforts. There is a great deal of market discretion between the tariff and the sale to the
final consumer. For instance, it is possible to impose higher markups on low tax items to
make up for lower markups on high tax items that one does not wish to sell at exorbitant
prices.
In the Caribbean there are few taxes on exports because of the need to maintain
competitiveness. It might be desirable to have negative taxes on exports where international
regulations permit. Small economies have nothing to lose and much to gain from such taxes,
in contrast to large countries for which negative export taxes are a form of "beggar-thy-
neighbor" policy.
CONSuLmprIoN TAXES, SALES TAXES, AND EXCISES. These taxes may have useful stabilizing
effects provided the revenues they raise go to reduce the fiscal deficit. They reduce the
volume of goods and services, including imported goods and services, which may be
purchased with a given national income, although in the process they add to inflation.
Taxes on spending are regressive in spite of the usual provisions for higher rates for consumer
durables and luxuries.
There is a popular but specious argument that taxes on spending increase the propensity
to save. Is it reasonable to presume that households will abandon plans to acquire
commodities to which they aspire and accumulate funds instead because the goods have
become more expensive? It is possible that households may be forced to postpone major
purchases as a result of increased taxes resulting in a temporary slowdown in spending; but it
is also likely that any additional funds accumulated in this period will go toward the down
payment on the intended purchase as soon as financial savings have brought the household
once more within reach of the purchase price.
Firms in the nontraded sector may pass on to consumers some price changes resulting from
taxes on spending. There may be a reduction in output accompanying the price increases.
Firms in the traded sector may not raise selling prices so their output may decline.
Government Expenditures
THE GovERNMENT WAGE BILL. Government expenditure may be used as a stabilization tool,
to reduce the deficit and contain national expenditure. To reduce the wage bill, which
accounts for more than 50 percent of government expenditure in the Caribbean, the
government will have to cut back on the services it provides. The average wage of
government workers generally maintains some relationship to wage movements in the overall
economy, although there may be differences in timing. So the only way to manage
government wages is to manipulate national wages, which very few countries are able to do
by government policy directive. The government must therefore accept the ruling wage and
trim the civil service payrolls in order to attain its wages bill target.



DeLisle Worrell 35
Valiant attempts have been made in many countries-including Jamaica, Guyana, and
Grenada in the Caribbean-to shed civil servants without drastically reducing the quantity
and quality of public service. In the Caribbean cases, the majority of popular opinion does
not find any improvement in public service, and in Jamaica and Guyana social indicators such
as nutrition, mortality, and educational achievement show a decline.
Any government that decides to reduce the wages bill should determine in advance
which services will be reduced or eliminated. If it fails to do so, health and education are
most likely to deteriorate because they command the largest share of government
expenditure. In any country that faces a large economic adjustment problem, the government
should plan to contain the wage bill because wages and salary payments account for such a
large proportion of government expenditure. If this is not achieved, a major reduction in
government spending cannot take place.
A reduction in government services may have damaging consequences for economic growth
and income distribution. The government provides the essential foundations for economic
progress in the form of communications facilities, education, health services, law and order,
the regulation of commercial transactions, the determination of national standards, and so
forth. Unless these services are delivered with proficiency, economic stagnation is
inevitable.
Many governments redistribute income in desirable ways and provide housing and health
services for the old, for children of unstable households, and for persons with disability.
They also provide education for the poor and the illiterate and healthy recreation for
communities in depressed circumstances.
The choice of programs to be cut in an era of fiscal austerity is not simple or painless. To
aid in the decision, governments should maintain ongoing, up-to-date surveys of the
population to measure the consumption of essential goods and services at various income
levels and sources from which this consumption is derived. To what extent do households
purchase essential services out of their own income? To what extent do they rely on free
provision by government, on government-subsidized provision, and on other sources? From this
information, one may assess the effect on the consumption of basics when the government
withdraws any of its provisions.
It is perhaps more difficult to determine where cuts in government expenditure begin to
hinder eventual growth prospects. But some measures are available to help inform the
decision, for example, educational achievement data, crime statistics, major health
indicators, and reports on the maintenance of infrastructure. If such indicators are monitored
carefully, it will be possible to anticipate any serious erosion of the country's capacity to
sustain investment.
GovERNMENT PURCHASES. There is not much scope for manipulating government purchases to
secure an overall expenditure target. The level of purchases is decided by the extent of
government activity that is already fixed so as to adjust the wages bill in accordance with
the considerations just discussed. Only temporary economies in the purchase of goods and
services are possible.
TRANSFERS TO HOUSEHOLDS. The main function of transfers is to improve the distribution of
income. Whether cuts can be made in these expenditures depends on the level of provision of
services that are affected and on the other delivery systems that satisfy these targets. The
tradeoffs may be evaluated along with other factors affecting income distribution using the
social indicators recommended earlier. (Transfers to firms may be considered a negative
corporate income tax in terms of their economic affects.)
INTEREST PAYMENTS. Governments will have no discretion in the level of current interest
payments. But projected interest costs are an important factor determining the strategy for
financing the government deficit. It should influence the extent of current borrowing, both
local and foreign.



36  Fiscal and Monetary Policies in Small Economies
GOVERNMENT INVESTMENT. The level of govemment investment that provides for the
strongest rate of growth will depend on the extent of state ownership of production. Much
economic analysis has been devoted to determining what the government ought to own. The
only convincing answer is that the government ought to own what citizens, expressing
themselves through legitimate government representatives, decide it should own. Other
positions have vigorous defenders. There are those who argue for only minimal govemment
interference, primarily in the areas of law and order, health, education, roads, and ports.
Some would even question whether all of these should be included in the minimum list.
Others believe that the private sector should not be allowed to exploit citizens via natural
monopolies such as public utilities. But in the end is it better to own public utilities or to
regulate privately owned public utilities?
Beyond this, why should government not own productive enterprise? Governments are
large entities and may need considerable resources to launch novel investment initiatives, for
example, exports. It is futile to expect the typical small furniture manufacturer, who has
difficulty maintaining delivery schedules to nearby outlets on home territory, to venture
successfully into exports. The popular notion that privately owned enterprise is more
efficient than government operations is too often based on biased comparisons between
inefficient government and state corporations, on the one hand, and relatively more efficient
private enterprises, on the other. Many examples might be cited to reach exactly the
opposite conclusion.
I am therefore inclined to a strictly commonsense view of the scope of government
investment. There is not much sentiment in the Caribbean to divest govemment of its basic
functions of education, health, social security, and law and order. In addition, the ownership
of public utilities should remain as is so long as service is efficient or ways may be found to
make it efficient. "As is" may mean state owned, private owned, or state regulated, or a
combination of these. The government should eschew 100 percent ownership of producing
firms unless there is a need for fiscal expansion. The overall degree of government
investment beyond basic government services may have to be varied in response to the
stabilization needs of the economy. As long as no inroads are made on the investment
required for basic government services, the adjustment of government investment should have
little effect on long-term growth and the distribution of income.
Government Borrowing
Invariably, a government must manage its deficit and borrowings so that there is little
need to borrow from the central bank. Often, overborrowing from the central bank in previous
periods must be reversed.
If the foreign debt service is low (less than 10 percent of revenues from the export of
goods and services) and the projected export growth is strong, foreign borrowing on reasonable
terms might be sought as the first option. The terms should include maturities approaching
ten years and the best available international market interest rates. Targets for foreign
borrowing might be established on the basis of debt-service projections under various
scenarios, taking into account possible future foreign borrowings as well. The targets would
have to be adjusted to the extent that the available terms of credit fall short of what is
desired. Lower targets must be set if the debt-service ratio is initially higher. Provided the
deficit is not too large, an extra dollar of foreign borrowing is preferred to an extra dollar of
domestic borrowing because the foreign borrowing provides foreign exchange to finance the
import content of government expenditure. But if the fiscal deficit is too large, efforts must
be made to attract domestic finance.
Domestic finance may be considered a substitute for direct taxes but such finance may not
be forthcoming in sufficient quantity. The government is then forced to borrow from the
central bank, creating new money to fund spending, hence driving up imports faster than
foreign exchange receipts and weakening the balance of payments. Additional
nonexpansionary domestic finance may be secured if the govemment's borrowing requirements



DeLisle Worrell 37
crowd out the private sector. To attract finance, the government may use increases in interest
rates and increases in the requirements for holding government securities. If these measures
crowd out private sector credit and expenditures, they will serve to assist the adjustment
process. However, too often measures to attract finance to the government do not crowd out
the private sector. Private demand for consumer credit remains high despite interest rate
increases, and banks borrow from the central bank to satisfy the requirement to hold
government securities without reducing the credit to the private sector. The results are the
same as if government had borrowed directly from the central bank.
Overview of Fiscal Policy
Fiscal policy is complicated by the many tools available and their disparate effects.
However, this offers rich scope for tailoring fiscal policy to a variety of ends. For a given
deficit the extent of income distribution and the mix of incentives for investment may be
varied in response to the country's needs. Fiscal policy must be assessed in a medium-term
framework. Certain policies-for example, incentives for investment-need to be sustained
for several years to achieve the intended effects. Also, the current year's fiscal policy
should be varied in response to future economic performance and past economic performance,
as well as the current year's outcome. For example, a one-year fiscal expansion to compensate
for temporary loss in export demand is quite reasonable, whereas a long-term downward
trend in export demand should not be compensated for in this way.
Monetary and Financial Policies
Interest Rates
As discussed earlier there is no reason to expect that higher interest rates stimulate
savings. Even when interest rates encourage the accumulation of financial assets, they do not
improve the return on investment; if there is no more investment, there is no more real
saving. It is argued that the interest rate is an efficient credit-rationing device. More
competitive firms bid credit away from the less competitive firms, by accepting higher loan
rates. However, it is far more likely that consumers will bid credit away from all firms,
both competitive and noncompetitive, if willingness to bid up the interest rate is the main
criterion. Moreover, firms producing tradables are least able to accommodate rising finance
costs because they cannot raise their selling prices; so high interest rates inhibit growth and
destabilize the economy by encouraging consumption at the expense of production and
nontradables at the expense of tradables.
In any case, central banks in small countries do not have much choice in the
determination of interest rates. If Caribbean interest rates are more than a few points higher
or lower than comparable rates in New York, Miami, and London, short-term capital moves
into or out of the region. There are a variety of perfectly legal ways of moving funds even in
countries with the most stringent exchange controls. For example, a firm may elect to borrow
at home and to make cash payments for imports rather than negotiate suppliers' credit, if it
is much cheaper to borrow locally. When enough firms do that, the balance of trade credits
becomes negative and the country is financing all its transactions with foreigners rather than
making use of a foreign exchange float, provided by foreigners. In addition, there are
numerous illegal channels for financial flows that central banks and national governments
have no effective means of detecting, even when balance of payments statistics reveal
evidence of their existence.
The interest rate policy reflected in the publications of the Central Bank of Barbados
stresses that interest rates should be kept at the minimum level consistent with the
underlying trend in international interest rates. The thrust of the policy is to avoid erratic
fluctuations to which international interest rates are subject and, at the same time, not to



38   Fiscal and Monetary Policies in Small Economies
allow wide gaps between local and foreign interest rates to be sustained long enough to
encourage short-term capital flows. It is a policy that is highly recommended.
Reserve  Requirements
Many economic adjustment programs in the Caribbean include reserve requirements
because they are presumed to reduce credit to the private sector. How is this achieved? If
banks do not hold excess reserves, an increase in the reserve requirement results in a switch
from government securities in the first instance. The central bank has to replace the finance
that the banks previously provided for the government, and there is no effect on credit for
the private sector. To make the increase in reserves effective, credit to the government by
the banks must be locked in as well. The financial system will then resort to discounts from
the central bank and to foreign borrowing to satisfy an active demand for credit by the
private sector. Both these avenues must be cut off by regulation.
We now appear to have a straightjacket on the supply of credit, but that is an illusion.
The scarcity of credit drives up interest rates, widening the gap between local and foreign
rates and attracting short-term foreign finance to augment the supply of loanable funds. In
some instances the increase in reserve requirements may dampen the demand for credit
temporarily, but that effect should not last.
Lending to the Government
Efforts to divert funds to the government, often desirable for adjustment purposes as
mentioned earlier, are likely to have a similar outcome. Two measures can be used for this
purpose: the central bank can require more financial institutions to hold government
securities and it can increase interest rates on government securities. In either case, financial
institutions must be denied access to other sources of funding for credit to the private sector
when they are forced to divert funds to the government. As a scarcity of funds emerges, it is
likely to provoke an increase in interest rates and an inflow of foreign short-term finance.
Central Bank Sales and the Purchase of Government Securities
Open market operations have essentially the same result. The central bank offers
government securities for sale to financial institutions at attractive discounts. Funds are
diverted from credit to the private sector, the private sector bids up the interest rate, and
short-term funds flow into the economy.
Credit Controls: Global and Selective
Credit controls may put a temporary damper on credit and perhaps expenditure, either
globally or in selected areas such as consumer credit. But if the controls remain in force for
any length of time they are circumvented by informal financial arrangements of one kind or
another. Devices that have sprung up in the Caribbean include a revival of partnerships
and 'sou-sous," direct lending that bypasses the financial system, lease and buy-back
arrangements, and new institutions registered under nonfinancial legislation to carry out
what are essentially financial operations.
Specialized Financial Services
Special discount facilities, exchange rate guarantees, and export guarantees are
instruments that the central bank can use to support the expansion of the tradables sector. So
far, however, their impact in the Caribbean countries has been quite small. The promotion of
stock markets, another much heralded financial innovation, has also had limited impact.
Perhaps little better could be expected given the small size of the Caribbean economies.



DeLisle Worrell 39
Exchange Controls
Exchange controls increase the cost of making foreign exchange transactions; they have
no other effect. They fail completely in their intended purpose, which is to ration foreign
exchange. Anyone who is denied foreign exchange under the official channel offers to buy
from unofficial channels. If it is too difficult or dangerous to buy locally, foreign exchange is
always available for local currency in North America, where such transactions are perfectly
legal if one is prepared to pay the huge discount. Once foreign exchange earners recognize
that they may profit substantially by selling unofficially, they may readily make
arrangements to divert a large part of their earnings from official foreign exchange
repositories.
Overview of Monetary and Financial Policies
There are few financial policy levers that actually work. Credit controls, reserve
requirements, and exchange controls may have a short-term impact on credit and may cause a
pause in the growth of national expenditure. Government's need to put other expenditure
adjustment measures in place during this breathing space. If they continue to rely on
financial measures, the private sector will soon make necessary adjustments and expenditure
will revive. Innovative financial services may help support exports and the growth of
output, although they cannot be depended upon as the main stimulus.
The Recommended Policy Regime
In formulating their fiscal and monetary policies, governments must first establish a
framework of analysis that will distinguish those policies that show promise from those
policies that are not applicable. That is the intention of this simple model. It also allows
authorities to identify the possible limits to economic growth. It requires a detailed
assessment of the main fiscal adjustment measures with respect to revenue, expenditure, and
financing and of their impact on the growth of income, the adjustment of the balance of
payments, and the distribution of income. Governments require associated policy information
on the consumption of essential services and the state of the infrastructure. They may then
establish fiscal targets for a chosen multiyear horizon and simulate and deduce the
associated exchange rate and monetary adjustments that might help them arrive at the
targets.
The policy regime must be tailored to fit the country's circumstances. Countries that are
suffering from a prolonged debilitating economic crisis will need to drastically reduce the
scope of government activities until they arrive at a core of public services, however few,
that may be effectively delivered by the existing government. Countries facing a severe
balance of payments disequilibrium will need to reduce the fiscal deficit, targeting
expenditures on basic services and infrastructure. They may need to accompany the fiscal
adjustment with devaluation and higher interest rates if the market deems the current
levels are unsustainable. Countries with no balance of payments adjustment problem should
seek to stimulate investment in the tradable sector directly or by suitable incentives and
should try to improve the welfare of their least advantaged citizens.
References
King, Mervyn and Don Fullerton. 1984. The Taxation of Income from Capital. Chicago:
University of Chicago Press.
Worrell, Delisle. 1989. "Taxation and Investment Incentives." Central Bank of Barbados.
March, photocopy.






3
WAGE PRICE POLICIES FOR INCREASING
INTERNATIONAL COMPETITIVENESS
IN THE CARIBBEAN
Courtney N. Blackman
The failure to treat wage rates as a controllable policy variable, and hence to
recommend an incomes policy, has been a costly error on the part of Caribbean economists. In
fact, wage rates in the Caribbean have for a generation been administered by trade unions,
governments and, more recently, by the International Monetary Fund. Only a few Caribbean
economists have assigned a role to wage restraint in macroeconomic management, and many
still dismiss incomes policy as unworkable (see, for example, Worrell 1987: 217-18). Some
Cave Hill economists, in mistaken application of the Keynesian closed-system model, have
applauded inflated wage awards as a means of stimulating aggregate demand. The Trinidad
and Tobago experience has demonstrated conclusively that the consequence of Keynesian-type
remedies in open economnies is a balance of payments deficit.
Sir Arthur Lewis recommended an incomes policy to Caribbean governments as early as
1964 and again in his brilliant presidential address at the annual general meeting of the
Caribbean Development Bank in 1972. However, it was fashionable in those days to decry
the future Nobel prize winner as 'Afro-Saxon," 'neoclassical," and "nonprogressive."
Even without the stamp of academic approval, Caribbean governments have resorted to
wage restraint when nothing else seemed to work. Both the Barbados Labor party and the
Democratic Labor party when they were in opposition, flayed the incumbent administration
of Barbados for breaking off negotiations with trade unions and legislating wages, only to do
the same when they came into power. The Guyanese government foreshadowed the Thatcher
wage-restraint technique of trade union bashing; the Jamaican government has used frequent
currency depreciations to cut real wages; the Chambers administration in Trinidad and
Tobago imposed its famous "one-two-three" wage settlement for the civil service-a 1 percent
increase in the first, 2 percent in the second, and 3 percent in the third year. The Robinson
administration went beyond wage restraint to cut civil service salaries by 10 percent.
This chapter argues that an incomes policy is an essential tool for macroeconomic
managers in the small open economies of the Caribbean. First, it supplements fiscal and
monetary policy by restraining aggregate expenditure and, considering the high propensity
to import in the Caribbean, it cuts imports; second, by restricting the price of nontradables, it
curbs domestic inflation; and third, by limiting the price of tradables, it improves
international competitiveness.
Competitive Environment of CARICOM
The economic environment of CARICOM has been marked in recent decades by increasing
volatility, dynamism, and competitiveness. Emerging from the safety of Commonwealth
commodity preferences and the security of marketing arrangements with metropolitan
mother companies, Caribbean producers are now being exposed to competition from other
41



42   Wage Price Policies for Increasing International Competitiveness in the Caribbean
developing countries. At the same time, they are confronted by the protectionism of the
industrial countries. The last vestiges of imperial concern-the Lome Convention, the
Caribbean Basin Initiative, and the Caribbean-Canadian Initiative (CARIBCAN)-promise
more than they deliver.
In the period immediately after World War II, Caribbean commodities, such as sugar
and bananas, enjoyed preferential markets in the United Kingdom and, to a lesser extent, in
Canada and the United States. Trinidad's oil, Guyana's sugar and bauxite, and later
Jamaica's bauxite and alumina were produced by British, Canadian, or American
multinationals and their access to world markets was ensured. At the same time, regional
financial markets and, indeed, the Caribbean monetary system were integral parts of the
sterling area and the region's balance of payments protected by the limitations imposed by
the Currency Board System.
These protective arrangements began to disintegrate in the 1960s under the pressure of
three main forces (1) political nationalism, (2) economic nationalism, and (3) the coming of
the Information Age. Beginning in the early 1960s, Anglophone Caribbean islands moved in
regular succession toward independence. Today only Anguilla, the Cayman Islands, the Turks
and Caicos, Montserrat, and the British Virgin Islands remain British colonies. In the 1960s
economists of the strident New World Group provided the ideological stimulus for delinking
the Caribbean economies from "dependence" on the metropoles. (In fact, formal dependence
has been replaced in some instances by the even more complete economic tutelage of
international creditors.) Meanwhile, the New Information Age, brought into being by
fantastic developments in transportation, computers, and telecommunications, has
transformed the world into a global village. Countries are now increasingly sensitive to
events in remote parts of the world.
With the global village has come the global marketplace and the global workplace.
Multinationals now purchase raw materials and components from the cheapest sources,
assemble them in the most efficient production centers, and sell them into the most lucrative
markets. They indulge in what might be called "production arbitraging," to borrow a term
from the world of finance. If they find that products can be produced more economically in
the Philippines, they close their plant in Barbados (as Intel Corporation did). If shirts can
be produced cheaper in Thailand, then orders are shifted from Jamaica. As the old colonial
ties fade, countries move inexorably into a world of competitiveness.
Reflecting these revolutionary changes, the international economic and financial
environments have spawned numerous problems. The terms of trade, for example, have
turned sharply against commodity producers like CARICOM. At the same time, interest
rates and exchange rates fluctuate violently as vast volumes of capital move daily from one
financial center to another in search of the highest rates of return.
The new competitors that Caribbean countries face are other developing countries in the
Pacific Basin and Latin America. They compete as suppliers of garments, electronic parts,
and other manufactured components in the markets of Western Europe and North America.
They also offer their sand, sun, and sea to European, North American, and, increasingly, to
Japanese tourists.
The important considerations in this new environment are political stability, the quality
of the infrastructure, and labor costs. It is in the area of labor costs that Caribbean countries'
rivals have a competitive edge. Although up-to-date comparative statistics of wage rates
are difficult to obtain, the most recent data available to the Investment Promotion Agencies
of Barbados and the OECS indicate that wage rates and productivity in the OECS countries
are comparable to those in other Latin American countries and are at about the same levels
as those of Hong Kong and Korea (see Tables 3.1 to 3.4). But they are far above those of
China, Thailand, and Sri Lanka. Wage rates in Jamaica are slightly higher than in the
OECS; rates in Barbados and the Bahamas are about twice as high and are comparable to
those of Taiwan and Singapore. Rates in Trinidad and Tobago, which were the highest in
CARICOM during the oil boom, are now somewhere between those of Jamaica and Barbados.



Courtney N. Blackman  43
A fierce Latin American rival of CARICOM is Mexico, which, in cooperation with the
U.S. government, has developed a series of industrial estates ("maquiladora") on its
northern border with the United States. A large number of American and Japanese firms
have also established themselves on the U.S. side of the border to facilitate production-
sharing with the Mexicans. There is a continuous flow of components and materials south of
the border for further manufacture or assembly, and a return flow north of semifinished or
finished products. This phenomenon deserves careful study by CARICOM governments and
manufacturers. As a tourist destination, Mexico has the additional advantage of proximity
to the United States.
Undoubtedly the most formidable opponents of CARICOM are the "four tigers' of East
Asia. Their greatest advantage is their exceptional wage productivity, reflecting a
culturally inspired work ethic. Singapore and Taiwan, although no longer low-wage
producers, employ capital and technology far superior to that employed in CARICOM. Most
important, the success of these "four dragons" derives in a large degree from their rigorous
policies of wage restraint. All of these countries also have authoritarian governments of
some sort and traditionally docile trade unions, a combination that adds up to a most
effective incomes policy. This type of incomes policy is not generally available in the
CARICOM because of the West European traditions of parliamentary democracy and trade
unionism. That is why the experience of small West European states given below is so
instructive for the Caribbean nations.
Strategic Framework of Incomes Policy
Almost every economic report on the Caribbean begins with a comment on the small size,
limited resource base, and openness of the region's economies. European states such as the
Netherlands, Belgium, Norway and Sweden also think of their economies as small, as
having a limited resource base, and as being highly open. It is helpful to review their
strategic response to situations comparable to those faced in the Caribbean.
The central theme of the economic strategies of small West European states is flexible
adjustment in the face of international economic developments that are beyond their control.
Being small, they cannot, as the Japanese have so adroitly done, transfer the cost of
adjustment to other nations by adopting protectionist measures. Instead, they have combined
liberal trading policies with compensatory domestic policies. Peter Katzenstein (1985: 44)
describes this approach as follows:
For the small European states, with their open economies and fear of retaliation by other
governments, exporting the costs of change through protectionist policies is not a viable
political strategy. Protectionism would not only invite retaliation but also increase the costs of
the intermediate inputs of products manufactured for export, thus undermining the
international competitiveness of these small, open economies.
Indeed, Western Europeans have been far more supportive of free trade practices than
larger countries such as the United Kingdom, France, Canada, and the United States, not to
mention Japan. Sweden and Denmark regard import competition as a useful check on domestic
inflation and on monopolistic tendencies in their small domestic markets. Alice Bourneuf
commenting on the Norwegian position on this issue noted: "The solution is not to develop
industries and protect them from more efficient foreign competition" (quoted in Katzenstein
1985: 40), although favoring liberal international economic regional trading arrangements-
Benelux, its Nordic version, and (in the 1950s) the European Free Trade Area.
In monetary matters, the small European states have favored the free convertibility of
their currencies and have generally striven for currency stability. For example, Switzerland
has pursued conservative monetary policies promoting an extremely strong currency; Austria
has pegged to the strong deutsche mark; the Benelux countries have huddled around the
deutsche mark under the umbrella of the European monetary system, which will probably



44   Wage Price Policies for Increasing International Competitiveness in the Caribbean
unify West European currencies before the end of the century. Yet they have not been
unwilling to devalue when needed, as Sweden did in the late 1970s.
The centerpiece of this compensatory policy is the restraint on wage increases imposed or
agreed upon under a national "incomes policy." Occasionally price controls are coupled with
wage restraint. Katzenstein (1985: 52) observes: "Economic openness has made the adoption
of incomes policies an opportunity with which most of the small European states have
experimented in the last two decades."
Three major considerations are at the base of the incomes policies of West European
countries. First, they understand the futility, over the long run, of subsidizing inefficient
labor. Subsidies to domestic enterprises are calculated to bring their operations to the level
of international competitiveness. Restructuring, mergers, and assistance with research and
development are encouraged. Second, they respect the imperative of the balance of
payments: protected and inefficient labor does not promote balance of payments stability in
the long term. Third, they recognize that the wage rate is a production variable that is
domestically controllable. What is more, in small and cohesive societies with centrally
organized trade unions, the negotiation of sensible wage rates is likely to involve
politicians, businessmen, and trade unionists, who have the national interest at heart.
The absence of dogma and ideological grandstanding, an important feature of the West
European approach, has promoted a climate of rationality and compromise:
The strategy of the small European states is flexible, reactive, and incremental. It does not
counter adverse change by shifting its costs to others abroad; it does not attempt to preempt
change by ambitiously reordering the economy at home. Instead, the small European states
continually improvise in living with change. (Katzenstein 1985: 79)
The typical Caribbean response to an uncertain and volatile environment has been almost
the direct opposite of the West European reaction. Indeed, the Caribbean nations behave
more like big countries than like small ones. They have invited conflict with larger nations
and multinationals by nationalizing foreign assets or unilaterally abrogating agreements.
Instead of trade liberalization, CARICOM imposed fierce exchange controls and import
restrictions. Instead of minimizing intervention, the governments sought to "occupy the
commanding heights of the economy," sometimes, virtually the entire economy. Instead of
encouraging industrial efficiency, inefficient public sector and private sector enterprises were
encouraged with quotas, import licenses, and other protectionist devices. All this promoted
rigidity in the industrial policies of CARICOM.
The Caribbean nations paid inadequate attention to their balance of payments. In both
Guyana and Jamaica, a balance of payments crisis was triggered in the mid-1970s by policy
decisions that wiped out foreign exchange reserves in less than two years. In Trinidad and
Tobago, the Bobb Report had warned as early as 1978 that government expenditure patterns
were unsustainable. In Barbados, neither the steady decline in manufactured exports since
1984 nor the steady rise in external debt costs have deterred an inexorable increase in
government expenditure.
Most notably, CARICOM neglected to institutionalize an incomes policy as a technique of
internal adjustment to changes in the external environment. The members of CARICOM have
preferred adjustments in real wages to be brought about by traumatic devaluations, which
led their economies into a state of chronic crisis.
Incomes Policy in Macroeconomic Management
There are four established objectives of macroeconomic policy: (1) economic growth,
(2) full employment, (3) price stability, and (4) balance of payments stability. The Dutch
economist and Nobel Laureate, Jan Tinbergen, proved that the number of policy instruments
must match the number of policy objectives being pursued. I would identify the minimum
policy instruments required in the CARICOM situation as: fiscal policy, monetary policy,
incomes policy, and exchange rate policy.



Courtney N. Blackman 45
Fiscal policy is the most important instrument with which to achieve economic growth.
Before economic growth can take place, investment must increase relative to consumption as a
proportion of GDP. Through its budgetary measures, the government may regulate the
allocation of income between investment and consumption. As the largest recipient of income,
the government must also devote careful attention to its own allocation between capital
expenditures and disbursements on wages, salaries, and social services.
Monetary policy is the instrument for achieving the objective of price stability.
Ultimately, price stability depends on the liquidity of consumers relative to the
availability of goods and services. By controlling the supply of money and credit in the
economy, monetary authorities are able to influence the rate of inflation. Monetary policy,
through the use of selective credit control and differential interest rates, may also be used to
favor investment expenditure at the expense of consumption and thus promote economic
growth.
Exchange rate policy is the specific tool that can be used for achieving balance of
payments stability. If for some reason a disequilibrium develops between foreign payments
and inflows, a change in the exchange rate may restore equilibrium. In the case of a deficit,
a currency devaluation increases the cost of imports and reduces the price of exports; in the
case of a balance of payments surplus, upward revaluation of the currency produces the
opposite effect.
Note that the three policy objectives of growth, price stability, and balance of payments
equilibrium are interrelated. Economic growth promotes price stability by increasing the
availability of goods and services, thus easing the need for a strong monetary policy; it also
increases the volume of exports, promoting equilibrium or surplus in the balance of payments.
(Surpluses, in moderation, are easier to deal with than deficits.) Balance of payments
stability promotes a favorable climate for investment and growth and thus reduces the need
for strong fiscal and monetary policies.
In a regime of floating exchange rates, currency adjustments take place continuously and
so a balance of payments equilibrium is automatically achieved. Increased expenditures on
imports resulting from excessive wage increases quickly cause the value of currency in the
foreign exchange markets to drop quickly, thereby bringing the balance of payments back
into equilibrium.
For small developing countries with thin foreign exchange markets, the operation of
floating exchange regime would be most hazardous. For this reason, most of them peg their
currency to a strong international currency or currency basket and make discrete changes in
their exchange rate should their currency move significantly out of equilibrium.
The CARICOM experience has also shown that frequent devaluations can be
destabilizing and prejudicial to economic growth by creating a climate of uncertainty and
expectations of future devaluations. For this reason, some CARICOM states-most notably
the Bahamas, the OECS, and Barbados-have decided to hold the exchange rate steady
and to rely on strict fiscal and monetary policies to maintain balance of payments
equilibrium. The nature of their monetary arrangements makes it easier for the OECS to
conduct this policy: The inability of member states to use the Eastern Caribbean Central
Bank to finance fiscal deficits imposes a discipline on both monetary and fiscal policy in
that subregion.
Until the 1960s, policies that promoted investment might also have been expected to
stimulate employment. This became less true in the 1970s and 1980s. As Peter Drucker
(1987: 21) explains, "In the industrial economy itself, production has become uncoupled from
employment." An additional policy instrument is therefore required to promote employment.
That is where the incomes policy comes in. The restraint of wages slows the rate at which
capital is substituted for labor in the production process. Moreover, by restraining wage
increases, an incomes policy may prolong the viability of firms and allow them to respond to
economic change with some flexibility.
An incomes policy also complements the other three instruments. A lower rate of wage
increase reduces the burden on fiscal and monetary policy by restraining disposable incomes.



46   Wage Price Policies for Increasing International Competitiveness in the Caribbean
The slower growth in disposable incomes curbs inflationary pressures in the economy and
restricts imports, thus assisting exchange rate policy. Post-Keynesian economists believe
that, even in the highly developed market economies, an incomes policy is necessary to
achieve price stability.
In dismissing an incomes policy, Worrell throws the full burden of macroeconomic
policymaking on fiscal and monetary policy, since he agrees with pegged exchange rates and
also proposes exchange rate stability. In effect, he is using two and one-half policy
instruments to address four policy objectives. He deplores the chronically high levels of
unemployment that plague the Caribbean region but suggests no macroeconomic policy tool to
deal with it.
According to the Tinbergen theorem, the additional policy tool of an incomes policy is
essential for dealing with the policy objective of full employment, especially when the
adjustment of real wages through currency devaluation is ruled out. Without an incomes
policy, the economy will adjust to wage increases that are higher than productivity gains by
unemployment, even if aggregate demand and aggregate supply remain in equilibrium and
foreign payments remain in balance.
If the trend in excessive wage increases continues unchecked, domestic wage levels will
eventually render exports uncompetitive and precipitate a balance of payments
disequilibrium. This imbalance may be covered through foreign borrowing for some time.
However, when fDreign exchange reserves run out and a country's creditworthiness is eroded,
attempts to correct the balance of payments through tight monetary and fiscal polices will
exacerbate rathe:r than alleviate the employment problem, as the examples of Jamaica,
Guyana, and Trinidad and Tobago show. A traumatic currency devaluation, or a series of
devaluations, will then be carried out to cut the real value of wages and so restore the
competitiveness of tradables.
The moral of the story is that in small open economies that decide to maintain stable
exchange rates the use of an incomes policy is unavoidable. An incomes policy is even more
critical in promoting the international competitiveness of small open economies. Small size
implies narrow domestic markets and, as we have so painfully learned in the Caribbean,
viable manufacturing enterprises cannot be sustained by only the island markets and hardly
by any regional market. Short of capital and heavily dependent on imported raw materials
and intermediate goods as inputs for this production systems, the Caribbean countries find
labor cost the only variable that they can control to increase competitiveness. All other
factors of production are available to their competitors on the same terms. Thus increases in
wages in excess of productivity gains must inevitably lead to losses and the ultimate
collapse of enterprises, with subsequent unemployment. The process is painfully well-known
in Trinidad and Tobago and Barbados, where the decline in wage cost competitiveness has
led to significant job losses. Similarly, a wage level that is too high will deter new
investors, as the sharp decline in new foreign business startups in Barbados also
demonstrates. Existing firms are more prepared to trim labor costs and hold on as long as
possible in defense of their original investment.
Excessive wage increases will slow new investment; hence they will slow job expansion
and export earnings. An intelligent incomes policy would address this problem. That is why
governments need to intervene in the wage-determination process.
Aspects of Incomes Policy
An incomes policy may be described as a continuing program, whether formal or
informal, for the regulation of wages and salaries so as to reflect changes in productivity. It
is a process of continuous dialogue and negotiations between the government, business, and
labor unions, with the government acting as an intermediary when a consensus cannot be
reached.



Courtney N. Blackman  47
The incomes policy is a multifaceted instrument, hence its versatility and effectiveness.
There are ten measures that might be used at some time or other in the application of an
incomes policy.
1. Wage Cut or Voluntary Give-Back. Wage cuts are usually imposed by governments in
extreme circumstances as a means of saving public sector jobs, as was the case recently in
Trinidad and Tobago. Such a drastic measure is expected to have a demonstration effect on
the private sector. Both the Netherlands Antilles and Aruba have used cuts in the civil
service and public enterprise wages and salaries as a substitute for a currency devaluation,
the effects of which they considered unpredictable and more damaging. American trade
unions, especially in the steel, automotive, and airline industries, have frequently agreed to
enormous "give-backs" in the form of reduced wages and benefits in order to ensure the
survival of the enterprise.
2. Wage Freeze and Price Control. Wage freezes are frequently used as a shock treatment
to halt spiraling inflation. They are usually imposed in tandem with price freezes. Price
freezes are difficult to sustain over long periods except in times of national emergency.
However, they can provide a welcome breathing space in which more comprehensive and
sustainable policies can be initiated.
3. Wage Restraint. Wage restraint is based on the principle that wage and salary
increases should be related to gains in productivity. Indeed, the traditional practice of
linking wage and price increases has no basis in economic logic. Indeed, the only means of
curbing inflation is to ensure that wage and salary increases fall short of the rate of increase
in prices. In periods of declining sales, wage restraint reduces the incentive of management to
lay off workers in the short run or to substitute capital for labor over the long term.
4. Wage Inflation. The establishment of a statutory minimum wage technically falls
under the rubric of incomes policy. In a rare move in the 1970s, the government of Singapore
deliberately stimulated a rise in wages for the declared purpose of squeezing low-wage
industries out of business. It had concluded that the use of Singaporean labor in low-tech jobs
was uneconomical. This policy created difficulties during the 1981-82 recession.
5. Differential Wage Increases. Under an incomes policy, governments may deliberately
promote wage and salary differentials in order to stimulate the supply of strategic skills. In
the Caribbean, especially in Barbados, the practice of granting progressively lower
percentage increases to senior staff has so compressed wage scales as to provide little
incentive for senior officers to take on increased responsibility.
6. Tradeoffs. Governments may trade cheap social services or income tax concessions that
raise real incomes in return for reduced wage increases. This technique is quite common in
Western Europe. The late Prime Minister Tom Adams tried this once in Barbados-without
success.
7. Employee Share Ownership Plans (ESOPs). ESOPs, a form of payment in kind, have
become popular in the United States. They reduce cash payments to employees and improve
the cash flow of the enterprise. In effect, the employees trade off current earnings in return
for job security, future earnings, and a share in the management of the enterprise.
8. Flexible Wages. It is the practice in many Japanese enterprises to pay a relatively
low base wage, and to offer an annual bonus that varies with the profitability of the firm.
This reduces the pressure on the enterprise to lay off workers in periods of declining profits.
9. Retreading. Retraining enables workers to earn higher wages from their improved
skills. Retreaded workers may be moved out of "sunset" into "sunrise" industries, with the
cost met entirely by the government or shared between government and private enterprise.
Sweden is most famous for this practice.
10. Corporate Strengthening. Government subsidies are sometimes extended to failing
enterprises to assist them in restructuring or forming merger programs as a means of restoring
their viability. The purpose of this measure is to protect jobs and increase the future
earnings of workers.



48   Wage Price Policies for Increasing International Competitiveness in the Caribbean
Conclusion and Recommendations
The ten measures just described are not likely to succeed if applied, as CARICOM has
hitherto done, in a piecemeal and haphazard fashion. An incomes policy is a comprehensive
program of indefinite duration in which the major participants in the wage determination
process conduct an ongoing study and review of labor markets and engage in consultations and
negotiations about appropriate wage and salary levels in the economy. In short, an incomes
policy must be institutionalized.
The fact that both business and labor are already centrally organized in most CARICOM
states would make it easier to introduce an incomes policy, which is essentially a political
process. The failure of the British Labor party to institute an incomes policy in the 1970s
was due to the extreme fragmentation of British trade union management.
The purpose of an incomes policy is not to set rates for every individual job, but to
establish guidelines, ceilings, and floors. The majority of salaries and wages, especially in
small and family businesses, would be market determined. Sometimes, and only if absolutely
necessary, minimum wages would be established.
The institutionalization and successful operation of an incomes policy cannot take place
unless the following conditions are present:
1. A consensus must emerge in society at large to the effect that the wage rate is an
important factor in the achievement of economic growth, price stability, balance of
payments equilibrium, and full employment; and that it is critical to international
competitiveness. In this respect, it would help greatly if academic economists would accept
that the wage rate is an administered price, which depends on the attitudes brought to the
negotiating table by business, trade unions, and government officials. The wage rate does not
emerge from the blind workings of the market. Moreover, labor is the only factor of
production over which we may collectively exert considerable control.
2. Governments must take the lead in the institutionalization of incomes policies. They
must be continuously involved in the wage determination process; they cannot regard
themselves merely as rescuers, intervening only when negotiations are hopelessly
deadlocked.
3. The trade union movement should liberate itself from obsolete images of commerce and
industry in which management and labor are perceived as natural opponents. This would
enable industrial relations to move forward from confrontational zero-sum conflicts into the
arena of positive-sum games.
4. Similarly, business must develop greater openness in its dealings with staff and trade
unions. Participative management should be gradually developed and staff encouraged to
have a stake in the enterprise through ESOPs.
5. The government, in close cooperation with labor and business, should promote greater
flexibility in the labor markets so that the improved operation of market forces may
progressively reduce the burden on incomes policies. For example, experiments with flexible
wages should be initiated. Pension rights should be made more portable. Severance payment
schemes should be reformed so as to facilitate mergers and the restructuring of ailing
businesses. Programs should be developed for retraining workers with obsolete skills, and
opportunities provided for low-paid workers to improve their skills and marketability.
Finally, the flexibility of labor markets would be greatly enhanced if the plethora of
impediments to the free movement of skilled labor within CARICOM were eliminated.
References
Bobb, Euric. 1978. The Report of the Committee to Review Government Expenditure.
Submitted to the Trinidad & Tobago Government. October.
Drucker, Peter F. 1987. The Frontiers of Management: Where Tomorrow's Decisions are being
Shaped Today. London: Heinemann.



Courtney N. Blackman 49
Katzenstein, Peter, J. 1985. Small States in World Markets: Industrial Policy in Europe.
Ithaca, N.Y.: Cornell University Press.,
Worrell, DeLisle. 1987. Small Island Economies: Structure and Performance in the English
Speaking Caribbean since 1970. New York: Praeger.



50    Wage Price Policies for Increasing International Competitiveness in the Caribbean
Table 3.1 Average Direct Labor Cost by Country
Wage                           Totalb      EffectiveC
(U.S. dollars    Fringesa      (U.S. dollars  (U.S. dollars    Percentage of
Country       per hour)       (percent)       per hour)    per hour)    Barbados Rate
Barbados               1.61          35              2.17         2.53             100
Costa Rica            0.86           50              1.29         1.40              59
Dominican Republic   0.60            45              0.87         0.99              40
Mexico                0.75           37              1.03         1.44              47
Puerto Rico           5.76           41              7.66         8.79             353
a. Fringe as percentage of direct labor cost.
b. Total includes only required fringes plus base pay.
c. Total paid per actual hour worked.
Source: Mentor Interviews, Mentor International.
Table 3.2 Comparison of Indirect Monthly Salaries
(U.S. dollars)
Costa       Dominican                   Puerto
job                   Barbados      Rica        Republic      Mexico        Rico
Product manager              650         740             583          872        4,500
Quality control manager      n.a.        594            1,083         734        4,000
Plant engineer              1,200        440             975        1,190        2,916
Quality control Inspector    n.a.        158             100          311         1,720
General accountant          1,200        460             866          819        2,000
Analyst                      n.a.        473             538          n.a.       2,167
Computer operator            550         250             n.a.         265        1,273
Secretary                    550         300             866          265        1,600
Clerk                        400         170             100          140          860
n.a. = Not applicable
Source: Mentor Interviews, Mentor International.



Courtney N. Blackman 51
Table 3.3 Wage Rates in the Garment Industries of Selected Countries, 1986
Wages
(U.S. dollars                              Percentage of U.S.
Country             per hour)             Fringesa                Productivity
Antigua                 US$1.25                   28                    60 -65
Bahamas                    2.10                   25                    65 - 70
Barbados                   2.30                   26                    70 - 75b
Dominica                   0.83                   26                    55 -60
Grenada                    0.75                   22                    60 -65
Guyana                     0.70                   30                    55 -60
Jamaica                    1.09                   17                    65 -70
Montserrat                 0.95                   24                    60 -65
St. Kitts and Nevis        0.90                   24                    60 -65
St. Lucia                  0.95                   27                    60-65
St. Vincent                1.15                   26                    60-65
Trinidad and Tobago        1.66                   37                    70-75
Costa Rica                 0.78                   33                    60-65
Dominican Republic         0.78                   22                    65-70
Guatemala                  0.89                   29                    60 -65
Honduras                   0.83                   46                    60 - 65
Panama                     1.58                   40                    70- 75
Puerto Rico                4.28                   25                    85
Haiti                      0.58                   40                    75
a. Fringe as percentage of direct labor cost.
b. In U.S. owned and managed companies in Barbados this ranges from 85 to 95 percent.
Source: Bobbin Consulting Corp., 1986.



52    Wage Price Policies for Increasing International Competitiveness in the Caribbean
Table 3.4 Wage Rates of Selected Countries
Wage Rate
(U.S. dollars
Country                                per hour)
Antigua and Barbuda                             125
Barbados                                        1.20 - 2.50
British Virgin Islands                          1.30
China                                            .13
Costa Rica                                      1.20
Dominica                                         .70
Dominican Republic                              .50
Grenada                                          .73
Hong Kong                                        .80
Malaysia                                        .50
Montserrat                                      1.00
St. Kitts and Nevis                             1.00
St. Lucia                                        .75
St. Vincent and the Grenadines                   .93
Sri Lanka                                        .20
Thailand                                         .30
Source: Eastern Caribbean Investment Promotion Service.



4
MAURITIUS: AN EXPORT-ORIENTED
ISLAND ECONOMY
Jayshree Sengupta
As islands, Mauritius and the Caribbean countries have many features in common. They
belong to the same group of African, Caribbean and Pacific (ACP) countries under the Lome
Convention. The convention's trade provisions granted the European Community (EC) duty-
free access, on a nonreciprocal basis, to all ACP exports of manufactured goods and tropical
agricultural produce. Mauritius cashed in heavily on its privileged entry into the EC market
for its sugar exports. This chapter examines the common points and some of the major
differences between the Caribbean countries and Mauritius. Of particular interest is the
evolution of the Mauritius economy from import substitution to export promotion and the
lessons that the Caribbean countries can draw from this experience. In the future, Mauritius
will have to maintain its export growth and the Caribbean countries will have to increase
exports so as to achieve a higher rate of GDP growth. Therefore, the Caribbean countries
and Mauritius will have to take similar steps in many areas to achieve or maintain a faster
rate of economic growth.
Similarities between Mauritius and the Caribbean Countries
As islands, Caribbean nations and Mauritius are all small countries and have to depend
on trade for earning foreign exchange. Their small domestic markets and dependence in many
cases on a single commodity for export have led to similar sets of problems. All have
colonial pasts (Mauritius did not gain its independence until 1968), and until recently all
have faced population growth, and unemployment is still a serious problem in many of them.
Like Mauritius, the Caribbean countries lie near two large continents and are closely linked
to the North American and EC markets. In addtion, tourism is a vital ingredient of the
economy, although it is more important in the Caribbean countries where it is the prime
earner of foreign exchange.
At the same time, there are some differences. Mauritius is a multiracial democracy in
which the political scene is dominated by a complex coalition of many parties
representative of the racial groups. Private enterprise has shown a great deal of initiative
and responded to various incentives. The labor force is educated and easily trainable and the
government has been pursuing an export-led strategy for some years now. When shocks and
disturbances destabilized the economy, the government was quick to recognize the problems.
Mauritius has been successful in implementing economic reforms and in achieving a high rate
of export growth and has avoided high international debt and inflation. The government
has also managed to keep labor costs low, especially in the manufacturing sector.
Efforts to face up to the population challenge came even before independence when in
1962 a report to the government of Mauritius (the Meade Report) suggested that Mauritius
should diversify its economy. The report pointed out that the country's high population
53



54   Mauitius: An Export-Oriented Island Economy
growth and dependence on one crop (sugar) would only make the employment situation worse
and then recognized the limitations of the sugar industry as a means of generating
additional jobs.
Like Mauritius, the Caribbean countries have experienced external shocks and slow
growth because of falling commodity prices. But, unlike Mauritius, the Caribbean countries
have relied more on protection in developing their manufacturing industries, which resulted
in various inefficiencies and biases. Manufacturing, in any case has not been the key economic
activity in the Caribbean countries and has accounted for only a small percentage
(12 percent) of the GDP. It is concentrated around a few activities, and the Caribbean
countries depend on a few markets for their exports. All these factors have constrained the
performance of exports with the result that low foreign exchange earnings have remained a
problem for most of the Caribbean countries. Since the public sector has grown in many of
these countries and their public expenditure has become excessive, they have had to rely
more and more on external borrowing. The government faces financial problems and
overstaffing, yet the movement of wages has outstripped the growth of production. As a
consequence, the Caribbean countries are losing their competitiveness, and their balance of
payments performance has remained unsatisfactory. Unlike Mauritius, the Caribbean
countries lack a supply of trained and skilled labor and more important, a dynamic group of
private entrepreneurs. Mauritius exploited its assets well and opted for rapid industrial
growth and welcomed foreign investment.
On the agricultural side, most Caribbean countries need to diversify their agricultural
activities. As will be discussed below, this has been an important aspect of Mauritian
economic growth. Raising agricultural productivity and absorbing the younger generation of
agricultural laborers, preventing them from migrating to towns in search of employment, has
been a problem in the Caribbean countries. However, Mauritius is now facing the same
problem after almost half a decade of rapid industrial growth.
Transition from Import Substitution to Export Promotion
Incentives for Industrial Growth
To encourage industrialization and diversification from agriculture, the government of
Mauritius offered a number of incentives and concessions under the Development Certificate
(D.C.) scheme introduced through the Development Certificate Act of 1964 to encourage
import-substitution industries. The private sector responded, though not too vigorously, to
concessions offered by the government. The D.C. scheme encouraged industries for the
domestic market-from packaging materials to chemical fertilizers. A D.C. company was
given five to eight years of corporate tax exemption and dividends to its shareholders were
also exempted for the first five years, beginning in the year of the first dividend. A D.C.
holder was provided protection from foreign competition by tariffs and nontariff barriers,
and a D.C. company was allowed a rebate of duty on the import content of exports in some
cases and outright duty exemptions on imports of equipment and raw materials.1 All
manufacturing industries were owned by the private sector (except the now defunct sack
factory and a livestock feed factory that was under public investment). The public sector was
important, too, in the area of infrastructural development, health, and education.2
1. As a result, the average effective rates of protection (EROP) rose. In 1983 the EROP in electrical
machinery was 824, in leather products 330, textile and apparel 189, metal products 113, paper products
and printing 108, beverages and tobacco 79, and in food 24.
2. In late 1971, the First Development Plan was launched (1971-75), followed by the Second Plan
(1976480). Total government expenditure was 25 percent of the total GDP in 1968 and did not increase
in real terms during 1968-73.



Jayshree Sengupta 55
But the small size of the market prevented economies of scale from being realized. The
D.C. firms were unable to compete in the export markets because the high level of effective
protection that was granted to them to encourage their growth in fact made them more
inefficient. Value added was low because local raw materials were in short supply, and the
impact on unemployment was also far less than expected. Thus the limitations of the import-
substitution strategy were especially apparent in relation to the unemployment problem. To
ease the unemployment situation the government provided a "relief work' program that was
to absorb 30,000 workers (relief workers were temporary employees, employed on a four-day
basis). But it proved to be a fiscal drain and only a stop-gap measure. In the case of the
Caribbean countries, the failure of private sector to provide employment at a suitable pace
encouraged the growth of public sector employment.
Evolution of Export Growth Strategy in the 1970s
After independence in 1968, the government's main concern was unemployment, which
was growing substantially as the labor force was increasing at almost twice the rate of the
population. The government sent a team to study industrial development in small export-
successful nations, in which manufacturing was export-oriented and free trade zones were in
operation. Responding to the recommendations in the team's July 1970 report, the government
declared it intended to create an export-processing zone (EPZ). The idea behind the EPZ was
to provide fiscal concessions and other benefits that would encourage overseas manufacturing
firms with established markets to locate the labor-intensive part of their activities in
Mauritius. The incentives included a long-term tax holiday; an option to repatriate profits;
and duty exemptions on imports of machinery, equipment, and raw materials. The EPZ also
offered the provision of a "literate, adaptable and non-unionized work force" and a
guarantee against nationalization. The main purpose of an EPZ was to create jobs and absorb
workers laid off as a result of the mechanization initiated by the government in the sugar
industry after independence.
Mauritius' EPZ was to be different from the EPZs in other developing countries. This was
not a geographically restricted free zone and the EPZ was defined in the most general terms
as any area of land on which an eligible factory had been, was being, or was likely to be
built. These so-called bonded factories employed mostly underpaid female labor, received
certain privileges normally granted to geographically limited zones, and offered potential
investors the chance of selecting the site of plants that suited their needs for providing
labor, transport, and electricity. The legal framework provided a distinction between EPZ
factories and those with Development Certificates and other enterprises, such as those
involved in sugar production and processing.
Since the EPZ was created to attract foreign capital, the government provided
institutional and administrative support and insurance to protect exporters against defaults
by importers. Numerous measures were needed to support the export-led industrialization
strategy. For example, the Ministry of Commerce and Industry was restructured. Export
services were secured under bilateral and multilateral technical assistance programs with
more advanced countries. This assistance compensated for skill shortages within the
ministry and bolstered staff strength. New units for project evaluation, monitoring,
investment promotion, and export marketing were created. Investment capital was already
available from the Development Bank of Mauritius, while commercial banks were providing
working capital within the limits authorized by the Bank of Mauritius to foreign-controlled
companies registered in the country. Commercial banks also provided term loans either alone
or jointly with the Development Bank of Mauritius when the size of the loan entailed
consortium lending (Bheenick and Schapiro 1989: 103). From the beginning the export of
manufactures was targeted to U.S. and EC markets. (The EPZ firms enjoyed preferential
access to the European Community on a duty-free basis under the Yaounde and Lome
conventions.)



56  Mauritius: An Export-Oriented Island Economy
An unexpected boost to export-led growth in Mauritius came from the sugar sector. During
the first half of the 1970s, there was a record sugar crop and a tremendous surge in sugar
prices between 1970 and 1974 (which rose twentyfold). The balance of payments improved
and investible funds were amply available. They went into EPZ firms because these
enterprises had the additional benefit of having a generous allocation of foreign exchange
for the importation of raw materials, machinery, and equipment. But the government still
felt that foreign investment was crucial for the growth of EPZ exports.
The government of Mauritius therefore launched a coordinated promotional campaign to
disseminate information on the Mauritian EPZ, particularly the incentive packages
available, through brochures and articles in newspapers, trade journals, and magazines. The
government conducted promotional talks and set up displays of attractive features of the
Mauritian economy at industrial and trade fairs. It also conducted seminars for businessmen,
industrialists, and potential investors and directly approached foreign investors. In additon,
it organized visits to Mauritius of a select group of potential entrepreneurs and
representatives of private investment organizations.
Setback in Exports and the Beginning of a Crisis (1979-82)
Export growth began to pick up in 1975-76 but then slowed-down during 1979-82. The
political situation had changed, and the repercussions from the two oil shocks of that time
and a general world recession were being felt in the industrial countries of the world. There
was also a sharp decline in sugar prices in 1976, which, along with the oil price increase,
led to balance of payments difficulties. Although the sugar boom had cushioned the first oil
shock to some extent, the euphoria over surging sugar prices led the government to enter some
risky ventures. Substantial wage increases since 1976 as well as end-of-year bonuses ranging
from one to twenty-two months' wages in certain sectors were granted. Both food subsidies
and social expenditure were increased as the government pursued goals of a welfare state.
Government expenditure as a percentage of GDP went from 22 percent in 1975 to 29 percent in
1976, and to 32 percent in 1978. This resulted in budgetary deficits and accelerating double-
digit inflation. The real GDP growth rate declined by 1980. Investment in manufacturing also
declined, and expansion of the manufacturing sector came to a halt. There was a sharp drop
in foreign exchange reserves and the government had to borrow in Eurocurrency markets. Four-
fifths of fixed investment in manufacturing in 1977-81 went to highly protected import-
substitution industries (World Bank 1985).
The govemment also launched an ambitious investment program in infrastructure-
building a bulk sugar terminal, harbor, roads and hydroelectric plants. Imports rose because
of the increase in EPZ's input requirements from 50 percent of GDP in 1972 to 53 percent in
1973, manufactures' reaching the peak at 65 percent in 1977. As a result the balance of trade
deficit widened, and unemployment increased as some of the EPZ firms began to shut down
on account of higher wage costs and competition from other developing countries. The
Mauritian export subsector grew at the rate of only 4 percent between 1980 and 1983, and
production for the internal market also stagnated. All this led to a review of policies by the
government, which decided that it needed to reorganize and reinforce existing institutions,
create new ones, and modify the incentive structure.
A Change of Policies (1979-88)
The government embarked on a stabilization and structural adjustment program and
obtained support from the IMF and the World Bank. The first standby agreement was signed
with the IMF in 1979. The stabilization program focused on demand management. The
overall budgetary deficit was narrowed from 14 to 7.3 percent of GDP in 1984, the external
current account deficit was reduced from 16 percent of GDP to 2.6 percent in 1984, and
inflation curbed from 29 percent in 1979 to 5.9 percent in 1983. Central to these stabilization
policies was the exchange rate policy, which included a devaluation of the Mauritian rupee



Jayshree Sengupta 57
by 30 percent in 1979 and 20 percent in 1981, with respect to the Special Drawing Right
(SDR). In 1983, the rupee was linked to a trade-weighted basket more representative of
Mauritius' trading patterns, and a flexible exchange rate policy was adopted. Wage
restraints were imposed that allowed wage increases in both public and private sectors to be
considerably below the cost-of-living increase. This was achieved through a system of
remunerative orders (ROs) that were trilateral agreements among private enterprises, trade
unions, and the government on minimum wages, terms and conditions of employment, and job
specifications. During 1979-80 and 1985-86, the consumer price index (CPI) increased by a
cumulative 134.6 percent while the cost of living adjustment cumulatively allowed average
wages to rise only by 48.6 percent. Consumer subsidies were also reduced, and credit and
monetary policies became restrictive.
The structural adjustment lending (SAL) program supported by the World Bank focused
on promotion and the diversification of exports in agriculture and industry and import
substitution in food and energy. Several policy measures were undertaken and import
substitution firms were made eligible for the drawback of duty on the import content of the
exports in their manufacturing. The export incentives package was extended to firms engaged
in export services or the reexport of merchandise. An export credit guarantee scheme was
started under the management of the Development Bank of Mauritius, followed by an export
credit insurance scheme. An export promotion unit was established in the Ministry of
Commerce and Industry. The second structural adjustment program (SAL II) initiated in 1983
put more emphasis on export-led industrialization, and the government implemented a
number of policy reforms.
Under the SAL II agreement of 1983, a number of recommendations were made and a
program of action was adopted to improve the incentive system, which included the
following measures:
1. Quantitative import restrictions were eliminated. By July 1984, quotas on all
commodities with tariffs of 30 percent or more had been removed. The remaining
quotas were removed by January 1985.
2. Price controls were eliminated. The number of imported products subject to price
controls was reduced from thirty-four to eleven, locally produced goods from forty to
seventeen; only basic necessities remained under price control.
3. The corporate tax rate system was changed-the effective corporate income tax was
reduced from 65 percent to 35 percent and applied to all company profits before the
distribution of dividends (June 1984). A system of corporate tax benefits was
introduced for exporters operating outside the EEC scheme in which the tax rate
would be reduced by 2 percentage points for each 10 percent of the output exported.
4. Wage rates for male workers in the EPZ were liberalized. Previously, the ROs for
the EPZ provided for a substantially higher minimum wage for males than for
female workers. This had an adverse effect on the employment of male workers. It
also imposed a potential limitation on the expansion of EPZ firms in the face of
declining supplies of female workers and was a likely source of tension, in the face of
rising female employment and high levels of male unemployment. The government
therefore decided to eliminate from the ROs the provision specifying minimum wage
levels for male factory workers and unskilled laborers in EPZ firms. In response, the
employment of males in the EPZ increased, and export production continued its rapid
expansion.
Three institutions were created to encourage private, local, and foreign investment: the
Mauritius Export Development and Investment Authority (MEDIA), the Industrial
Coordination Unit (ICU), and the Mauritian Equity Finance Fund (MEFF). The ICU was
created within the Ministry of Industry and Cooperatives to act as a one-stop shop,
providing clearances and permits for potential investors. The MEFF was later replaced by
the State Investment Corporation. Double taxation agreements were signed with France,
United Kingdom, the Federal Republic of Germany, and India to protect EPZ firms.



58   Mauritius: An Export-Oriented Island Economy
The World Bank suggested a reduction in the average level and variability of import
duties, but the government did not take this step. Further liberalization was feared because
of its expected adverse impact on the balance of payments, external reserves, and public
revenue. The government was also concerned about the effect lower import duties might have
on the financial position of D.C. enterprises, which would become noncompetitive in a
liberalized regime. In January 1986, however, some high import tariffs on transport
equipment were lowered an average of 25 percent, but the government was not ready to agree
to a schedule for phased rationalization of the overall tariff structure.
The government also phased out price controls on many manufactured products-starting
with forty items in 1983 down to eight in 1985-the remaining controls were on essential
items such as soap, kerosene, and toothpaste. It also reduced the number of items subject to
maximum markup from forty in 1983 to eighteen in 1985. Ceilings on maximum markup
remained on agricultural products, notably, potatoes, maze, rice, beans, garlic, turmeric, and
groundnuts.
All these policy changes had a positive effect on the expansion of EPZ firms. The EPZ's
value added in constant prices expanded at 16 percent per annum during 1981-86, whereas
D.C. firms expanded by only 3 percent per annum. The share of EPZ in total manufacturing
investment increased from 27 percent in 1979 to 52 percent in 1985. These firms created 30,000
new jobs a year during the 1980s, and EPZ growth was a major instrument for reducing
unemployment throughout the economy.
The Experience of Economic Reforms
The Process of Economic Reform
The reforms were by and large successful but the process was stressful. The weather
created havoc in 1980 and again in 1983-84. Cyclone damages made adjustment difficult. The
terms of trade also deteriorated in the early 1980s. But Mauritius was able to ride out huge
financial imbalances in the 1980s because of a substantial expansion in EPZ exports. As a
result of the performance of EPZ firms and the implementation of policy reformns, by 1986 the
balance of payments was in surplus and the budget deficit had diminished. The local
production of food items increased and less food was imported, all of which helped improve
the balance of lpayments. Reduced public expenditure in real terms from 1979 to 1982 played
an important part in stabilizing the economy.3
Many dramatic changes took place in the political scene during the reform period (1979-
86) but there was little basic change in the economic policy of the successive governments.
The sequencing of the policy package adopted by Mauritius had been discussed in detail by
govemment officials and the cabinet. Three different governments were involved in carrying
out the reforms, but continuity and political stability were maintained.
The government undertook the economic reforms in two steps. The first, carried out over
1979-82, was imainly concerned with introducing stabilization policies and controlling
aggregate demand. The second begun in 1983 tackled sectoral problems. The stabilization
policies were focused on rising unemployment, declining real wages, andi the reduction in
public expenditure. The second step was aimed at the sugar sector and the import protection
regime for manufacturing D.C. enterprises, nonsugar agriculture, and tourism.
3. Total government expenditure was almost constant in real terms during 1981-84 and increased by
only 3.4 percent during 1984-86. Current expenditure continued to rise on account of an increase in
debt-service payment. In 1984-86 the current expenditure in real terms also stabilized because the ratio
of most categories of government expenditure to GDP was significantly reduced over the reform period.
No new projects were started and there were expenditure cuts in health, education, and housing.
Investment in agriculture, tourism, and industry, constituted 20 percent of the total during the same
period.



Jayshree Sengupta  59
Sectoral Reforms
Mauritius, like the Caribbean countries dependent on sugar exports, wanted to diversify
agriculture away from sugar production, but the dependence on sugar exports remained
strong.4 During the 1960s, the government attempted to diversify by taxing sugar exports and
protecting import-substituting industries. A tax on sugar was introduced at a uniform rate of 5
percent of the gross value of exports in 1961. The rationale was purely fiscal. In 1975 the
sugar tax assumed a redistributive rationale in addition to the fiscal one. Small planters
were exempted, and the principle of progression was introduced in the rate structure. The
average tax rose from 6 percent in 1972 to 22 percent in 1979. In addition, estates were subject
to a corporate tax at the rate of 55 percent on income after the payment of dividends.
In the late 1970s the sugar sector was besieged by financial problems owing to the
collapse of world sugar prices and rising costs. The govermnent decided to revamp the sugar
sector and reduced the export duty on sugar in 1985 from an average rate of 23.5 percent to
about 19 percent in the case of planters who were also mnillers. The tax relief was earmarked
for investment in the sugar mills and other sugar-producing equipment. This increased the
fixed assets of sugar estates from 1984 on. The government's objectives for the five-year
period beginning in 1985 have been to rehabilitate and modernize sugar mills, strengthen the
financial performance of the sugar mills, improve the productivity of the sugar sector,
improve irrigation, promote the use of bagasse to generate power, improve small planters'
productivity, and provide better research and extension support. To a large extent the
government was successful in attaining these goals.
The government also aimed at reducing the dependence on imported food items. The
nonsugar sector-comprising largely tea, tobacco, food crops, fishing, and animal husbandry-
is dependent on the productivity of the sugar sector and the extent of land released from
sugar without reducing capacity output. Diversification was needed to achieve self-
sufficiency in a selected number of food crops and to reduce the dependence on imported meat,
fish, and milk. The government also wanted to improve marketing and other institutional
facilities to provide better support and security for producers. Because of the limited supply
of arable land, nonsugar production has been expanded by crop rotation, multiple croppintg,
interplanting other crops with sugarcane, and converting the land meant for sugar cultivation
to the production of other crops. The government's diversification has been successful in
achieving self-sufficiency mainly in potatoes and in increasing production in a number of
other staple food items.
The production of fish also improved as a result of government policies, which included
the construction of a fishing port, decontrol of fish prices, and the lifting of export
restrictions. Mauritius imported the bulk of its dairy products and meat (91 percent and 90
percent, respectively, in 1983). The aim of government policy has been to increase the market
share of local produce to 40 percent. In many of the products, this goal was not achieved,
although several policies have been implemented to this end-such as the control of cattle
movements to prevent illegal slaughter, the restocking of breeding stations, fodder plantings,
and an increase in cattle-feed subsidies.
The Government's Role in the Industrialization of Mauritius
The government played an important role in Mauritius's export growth. Unlike the
Caribbean countries, which have been relatively passive in international negotiations,
Mauritius fought for an increase in the sugar quota under the Lome Convention. The
government also actively supported export-led growth, encouraged agricultural
diversification, promoted the tourism sector, and undertook fiscal reform. Government's
activities in various sectors of the economy are detailed below.
4. The share oi sugar export to total exports declined from 60 percent in 1981 to 41 percent in 1985.



60  Mauritius: An Export-Oriented Island Economy
INFRASTRUCrURE. Even though the government has left the development of the industrial
sector to private initiative, it has helped provide the necessary infrastructure for export
promotion. The government has invested in the construction of industrial estates, which are
then leased to EPZ companies at concessionary rentals. The government's MEDIA has
managed industrial estates, coordinated information, and given official clearance for new
investors. The government has managed to convert Mauritius from a monocrop economy into
an industrializing middle-income country in two decades.
PROMOTION OF EPZ DEVELOPMENT. Much of the spectacular change in the Mauritian economy
was due to the contribution of EPZ firms that the government vigorously encouraged (see
Table 4.1). As a share of total value added of nonsugar manufacturing, the EPZ's contribution
rose from 33.4 percent in 1980 to 38.8 percent in 1983, 47 percent in 1984, and 55.4 percent in
1985. Total employment in the manufacturing sector benefited greatly over 1980-85 when the
share of EPZ rose from 59.7 percent to 85.8 percent and new jobs were created in textiles and
weaving apparel. The expansion of existing firms was responsible for 67 percent of the new
jobs (IMF 1986: 15). EPZ firms, although subject to the general laws governing imports, have
enjoyed exemptions from many regulations. For example, EPZ firms can fire workers without
giving them any severance pay and can reduce the number of jobs without advance
notification to the Board of Termination of Contracts. A by-product of the increased
employment expansion of female labor in the EPZ was a reduction in fertility rates.
TAX INCENTIVFS FOR INDUSTRIALIZATION. The government also tried to encourage domestic
industries engaged in import substitution to shift to export production. Tax incentives were
revised and standardized for all exporters in 1985-86. A graduated corporate tax reduction
was introduced for companies that shifted output 100 percent. Such units were to pay a
maximum corporate tax rate of 15 percent, the same rate as EPZ companies set up after
July 1, 1985.
BOOST TO TOURISM. The government also tried its best to boost tourism. After sugar and
EPZ, tourism is the third most important source of foreign exchange. Earnings from tourism,
after peaking in 1979, declined in 1982. The slowdown was due to the rise in air fares related
to the oil price increase and the subsequent recession in tourist-generating countries. There
was also an increase in competition from rival tourist destinations. But the sector's earnings
picked up in 1983 and 1984, when arrivals increased 4.6 percent and 12.8 percent,
respectively. This recovery reflected the general recovery in international tourism.
The government promoted two schemes to provide incentives for private investors. Hotels
and tourist-related facilities could be set up under the D.C. scheme or under the Hotel
Management Certificate scheme. These schemes allow the investor a reduced corporate tax
rate of 15 percent with dividends exempted from taxes over 10 years. The foreign investor is
also allowed to repatriate invested capital, and all investors under the scheme are able to
get local bank credit at preferential rates. Such incentives led to a 28 percent increase in the
number of hotels between 1980 and 1985. Air access, which is very important, has been
improved since Air Mauritius began providing access from Europe, Africa, and Asia.
ROLE IN WAGE POLICY. The government has played an important role in wage policy,
intervening in labor markets frequently to maintain the competitiveness of Mauritian
exports. The government could have crushed all militant trade unions but this was not
considered a desirable option because of the country's strong trade union tradition and
democratic political system. The Industrial Relations Act of 1973 instituted the system of
Remunerative Orders (ROs), the tripartite agreement between the enterprises, trade unions,
and the government on minimum wages, terms and conditions of employment, and job
specifications.
In 1974, a system of cost of living adjustments (COLAs), was superimposed on ROs. All
these labor policies applied to all economic sectors except EPZ firms. The impact of
government intervention was that the compensation levels in the early 1970s were highest in



Jayshree Sengupta  61
the government sector, sugar sector, and manufacturing firms catering to the home market and
were lowest in EPZ firms. The high compensation for govermment workers was designed to
attract people to the civil service, and the high compensation of sugar workers compared
with those in manufacturing was due to the large nonwage benefits won by the stronger trade
unions in sugar. The compensation in EPZ was low because it was excluded from labor laws.
INTERNATIONAL NEGoTIATIONS. The government was instrumental in negotiating various trade
preferences that helped the sugar sector, and its foreign exchange earnings, which were later
invested in the EPZ, facilitated the growth of manufactured exports. Before independence,
Mauritius already had a quota of 386,000 tons of sugar in the United Kingdom under the
Commonwealth Sugar Agreement. Under the Lome convention the government secured a quota
of 505,000 tons in the combined EEC markets. The government also secured a quota of 29,000
tons in the U.S. market. The gains proved to be large since prices in the EEC and U.S.
markets remained at a higher level than in the free market. During 1980-86 EEC sugar prices
averaged 54 percent above the free market price and the EEC dividend equaled US$ 800
million. In the absence of these preferences, Mauritius would have faced foreign exchange
problems that would have prevented the rapid expansion of EPZ.
BUILDING HUMAN CAPITAL. The government has also helped build up human capital and
impart skills to the labor force. It has provided free education at the primary and secondary
level since 1977, with the result that Mauritius now has a 90 percent literacy rate, and
technical training has been available at the Industrial Trade Training Centre. In addition a
new center and the Lycee Polytechnique have been in operation since the early 1980s to train
people in industrial and other skills. The University of Mauritius also provides courses in
various areas of agricultural administration and industrial technology.
INCENTIVES FOR THE DIVERSIFICATION OF AGRICULTURE. The government has introduced several
incentives for the diversification of agriculture, made possible through the release of land
from sugar production. The yield of small sugar producers rose.5 Self-sufficiency in food crops
has been sought on political grounds and aided with subsidies, even when the cost of
production was higher (as in the case of rice). Perhaps it would have been better to cultivate
cash crops for export, such as tropical fruits, vegetables, flowers, and potted plants. The
problem of mechanizing of agriculture remains largely unsolved (because of the rocky soil).
STABILIZATION MEASURES AND MAINTENANCE OF A CoMPErrrIvE EXCHANGE RATE. The government
has maintained a competitive exchange rate, a very important factor for competitiveness,
and has not resorted to exchange controls or import restrictions to the same degree as the
Caribbean countries. The government undertook various stabilization measures and was also
successful in controlling inflation. The short-lived surge in inflation during the early 1980s,
caused by the substantial depreciation of the rupee and sharp increase in import prices, was
subdued in 1985. Through appropriate fiscal and monetary policies, the government helped
exports to grow. It also reduced public expenditure and the budget deficit. The government
also tried to restructure parastatals by reducing the number of workers and by privatization.
But progress in this area has been limited. Many of the large parastatals continue to be a
substantial budgetary burden, and overstaffing remains the government's most difficult
problem.
Lessons and Applicability to Caribbean Countries
Even though Mauritius has emerged as an important exporter of manufactures, the range
of its products is limited by and large to garments and knitwear. In addition, its
5. Sugar production increased from 8.08 metric tons per hectare in the 1950s, to 8.88 metric tons in
the 1970s and to 9.90 metric tons in 1980s. Between 1977 and 1987, the area under cane cultivation
declined by 3.8 percent.



62   Mauritius: An Export-Oriented Island Economy
industrializing experience has been constrained by the narrowness of the market. About 90
percent of its EPZ exports go to the European Community and North America. In the past
few years, Mauritius has had to negotiate bilateral voluntary export restraint agreements
with Ireland, France, and the United Kingdom. In addition, Mauritius has export quotas in
the U.S. and Canadian markets. Mauritius will have to move into the second stage of
industrialization based on light engineering goods, high-tech products and also explore the
possibilities of higher value added. Thus far the EPZ firms have not been able to develop
many of the back(ward and forward linkages needed by the Mauritian economy to make the
transition into a higher stage of industrial development and sustainable growth. This means
that the EPZ failied to create processing firms and ancillary industries in the domestic sector
and that all the intermediate inputs were imported because of the special concessions
offered by the government.
The Caribbean countries can draw the following lessons from the Mauritian experience:
1. Unlike the Caribbean countries, Mauritius set out on a clear path of export-led growth
once it recognized that an import-substitution strategy was not going to lead to rapid
industrial growth. From the very outset, foreign capital was to play an important
role.6 Foreigners were attracted by the availability of cheap trainable labor, and by
the varioujs incentives and access to the EEC and the U.S. markets from plants
operated in Mauritius.
2. By developing agriculture at the same time and by giving price incentives, the
government was able to regulate the flow of agricultural labor into urban areas, thus
avoiding the problem of unemployment. Like the Caribbean countries, the Mauritius
government decided to diversify agriculture and improve the productivity of sugar
production. Mauritius successfully managed to release land for the production of other
crops and, through increased productivity, was able to reduce the country's
dependence on imported food.
3. Mauritius was successful in reducing its public expenditure. Although it also sought to
increase the efficiency of parastatals, it was only moderately successful in this task.
The government did succeed in narrowing the budget deficit but only through a
reduction in public expenditure and by giving the high fiscal incentives that
increased revenue. It thus avoided the problems of excessive external borrowing and
indebtedness faced by some of the Caribbean countries (notably, Antigua and Barbuda,
Guyana, and Jamaica). Of course, some Caribbean countries have improved the
management of public sector savings as a percentage of GDP, just as in Mauritius has
done.
4. By controlling wages through a unique system of tripartite agreements, Mauritius kept
its exports competitive. The growth of the EPZ exports, generated an inflow of foreign
exchange, which was reinvested in the sector. The high level of domestic investment
in EPZ firms is noteworthy. Mauritian nationals control nearly 50 percent of the
equity in export enterprises, a high percentage by international standards. However,
the diversification of exports from textiles and knitwear has not been achieved, and
the narrowness of the country's export products exposes it to protectionist barriers
among the industrial countries. The same is the case in Caribbean countries whose
exports of manufactures are concentrated (textile items) and go to a narrow range of
external markets.
5. Unemployment continues to be a major problem in the Caribbean countries, and is now
close to about 25 percent of the population. Mauritius, in contrast has almost full
employment and faces a labor shortage in many of its industries. Population growth
has been declining in Mauritius and is now less than 1 percent a year. In both
Mauritius and the Caribbean countries, future agricultural and industrial development
will depenrd on raising labor productivity.
6. There is some evidence of South African capital in the tourism sector of Mauritius. But the
success of the EPZ is largely due to indigenous capital and the hard work of the people of Mauritius.



Jayshree Sengupta  63
6. Mauritius, like the Caribbean countries, cannot pursue economic growth without
advanced technology. The influx of "footloose" textile firms attracted to the
Mauritian EPZ failed to stimulate the transfer of high technology. Without such
technology, the prospect of producing sophisticated products will be slim in both the
Caribbean countries and Mauritius.
7. Unlike Mauritius, where transportation costs have been relatively cheap, the
Caribbean countries face high freight costs. (The CIF freight rates are twice as high
for services to most of the island countries compared with the mainland countries.)
The small and fluctuating volume of trade generated in the small Caribbean countries
is outside the world trend, which favors containerization, mechanized terminals, and
few ports of call.
8. Both Mauritius and the Caribbean countries would need to introduce financial reforms
in order to finance the development of the real sector through the mobilization of
domestic resources. Mauritius has been under a restrictive financial system for a long
time, but the recent reforms, in the areas of interest deregulation, stock market
reform, off-shore banking, and leasing would remove the barriers to true competition.
For the Caribbean countries, too, the development of capital markets and elimination
of interest rate controls and distortions are other important adjustments they need to
consider. Financial reforms have become increasingly necessary to support other
adjustment policies.
9. The government of Mauritius maintained the competitive value of the rupee by
devaluations. In the case of the Caribbean countries, only the Dominican Republic and
Jamaica have undertaken real devaluation and even then did not do so until their
balance of payments became unsustainable. The result was a rapid growth of
manufacture exports.
10. Tourism will be important in the future in both the Caribbean countries and
Mauritius. It is the leading sector in the Caribbean but in Mauritius future growth
will depend on whether it is able to attract the elite group of tourists it wants to
attract (those who are affluent and come for an extended stay).
Policy Implications for Mauritius and Caribbean
Mauritius provides an important example for the Caribbean countries. In the 1970s and
1980s Mauritius implemented a program of stabilization and adjustment that succeeded in
creating an economic environment in which most of the preconditions for sustained, export-led
growth were satisfied. Thus, between 1983 and 1988, per capita income nearly doubled, the
current account deficit turned into a surplus, the debt-service ratio fell from 18 percent to
7 percent, gross domestic savings rose from 17 percent to 26 percent of the GDP, the fiscal
deficit declined from more than 8 percent to 3 percent of the GDP, and the rate of
unemployment fell from 19 percent to 4 percent as EPZ industries grew at an average rate of
28 percent. The contributory factors were the liberalization of trade and exchange rate
regimes, improved resource mobilization, restrained public expenditure, and infrastructural
and institutional development.
But Mauritius will have to diversify its exports and markets if it is to sustain its
impressive growth. It depends too much on trade preferences offered under the Sugar Protocol
and the Lome Convention for entry into sheltered markets. Since Mauritius is facing near full
employment, its future growth will also depend on how fast labor productivity rises.
Agriculture needs to be diversified in both Mauritius and the Caribbean. So far, Mauritius
has concentrated on self-sufficiency in food production but it also needs to cultivate other
crops for export. Although the growth of the EPZ is important for Mauritius, market
diversification is essential and the new provision calling for 10 percent of the country's
output to be sold in the domestic markets is going to help the EPZ firms. Technology transfer
will also be essential for both the Caribbean countries and Mauritius in the future.



Table 4.1 Mauritius Main Economic Aggregates of EPZ Enterprises, 1982-87
1986         1987
Unit        1982         1983          1984        1985        revised     preliminary
Number of establishments                  Numbers         122          129           179          244          365           500
Employment (September)                    Numbers    22,528         23,424         33,751       47,842      67,938        85,685
Compensation of employees                 Rs million      211          283           408          661          955
Value added (current prices)              Rs million      449          548           865         1,333        1,900        2,425
Value added (constant 1979 Prices)        Rs million      449          489           650          845         1,140        1,390
Exports                                   Rs million    1,235        1,307          2,151        3,283        4,951        6,700
Imports                                   Rs million      734          847          1,651        1,530        3,863        4,801
Investment (current prices)               Rs million       38          74            210          340          560
Growth rate of value added                 Percent        -2.8         89           32.9         30.0         34.9          21.9
Growth rate of Exports                     Percent        -5.7         2.0          33.3         33.8         40.0          24.0
Share of EPZ in GDP                        Percent        4.5          5.2            7.2         9.6         11.8          12.7
EPZ exports as percentage of total exports  Percent      31.0         30.1          41.4         49.5         54.7          57.8
EPZ imports as percentage of total imports    Percent    17.2         18.8          28.8         21.7         46.6          41.0
-: Not available.
Source: Mauritius: Central Statistics Office.



Jayshree Sengupta 65
References
Alladin, M.l. 1987. "Economic Development in a Plantation Economy: The Decline of the
Sugar Industry in Mauritius." Studies in Comparative International Development,
(Winter). Atlanta, Georgia.
Bheenick, R., and M. 0. Schapiro. 1989. "Mauritius: A Case Study of Export Processing
Zone." In Successful Development in Africa: Case Studies of Projects and Policies. EDI
Development Policy Case Series, Analytical Case Studies No. 1. Washington, D.C.:
World Bank.
Devaux, Michel J., and others. 1983. Mauritius: Recent Developments and Prospects.
Washington, D.C.: World Bank.
Findlay, Ronald, and Stanislaw Wellisz. 1988. "A Comparative Study of Five Small Open
Economies." Conference on Political Economy of Poverty, Equity and Growth, New
Delhi, January 1987. Photocopy.
Gulhati, Ravi, and Raj Nallari. 1990. Successful Stabilization and Recovery in Mauritius.
EDI Development Policy Case Series, Analytical Case Studies No. 5. Washington,
D.C.: World Bank.
International Monetary Fund. 1986. Mauritius: Recent Economic Development. Washington,
D.C.
Meade, J. E. 1961. "Mauritius: A Case Study in Malthusian Economics." Economic Journal 71
(September).
World Bank. 1988. The Caribbean, Export Preferences and Performance. Washington, D.C.
World Bank. 1989. Mauritius: Managing Success. Washington, D.C.
World Bank. World Development Report 1988. New York: Oxford University Press.






5
MANAGING ENTRY INTO INTERNATIONAL MARKETS:
LESSONS FROM THE EAST ASIAN EXPERIENCE
Yung Whee Rhee
Few would dispute that outward-oriented development strategies are the key to efficient
industrial development, which in turn is vital for increasing income, reducing debt, and
creating dynamics for growth in the developing countries of the world. However, how to
initiate outward-oriented industrial development-particularly in developing countries with
unfavorable start up conditions-is unclear. The success stories of the newly industrializing
economies (NIEs) of East Asia are well-known, but practical and specific lessons from their
success in world markets need to be articulated, particularly for the countries that lack
initially favorable conditions for entry into those markets. This chapter provides an
overview of such lessons.
The East Asian NIEs covered in this discussion are Hong Kong, Singapore, the Republic
of Korea and Taiwan. References to Japan's experience at the early stage of its export
development are included in relevant sections.
Initial Conditions in Developing Countries and Relevant Lessons in
Intemational Competitiveness
Many developing countries are at a significant competitive disadvantage because their
firms lack the know-how and information to compete in these markets; their internal policy
environments fail to ensure their firms will have equal footing with foreign competitors; and
their institutions and infrastructure are inadequate to support export and related trade and
production activities.
LACKOFCAPACnTYTroEXPORT. Firms in developing countries do not have the capacity to enter
world markets largely because exporters and their agents are still in their infancy. They do
not have the technical, marketing, and managerial know-how critical to starting up the
manufacture of exportable industrial goods or the ability to package the technical,
marketing, and managerial know-how with domestic resources and external resources.1 Nor
do they have adequate access to information and links to the world markets for
manufactured goods.
UNFAVORABLE POLICIES. Several policy factors are responsible for the failure to ensure
exporters equal footing with foreign competitors: unrealistic real exchange rates; inadequate
and difficult access to short-term trade financing at world market or domestic market interest
rates; restricted access to raw materials and intermediate inputs (and capital goods) at
1. For empirical evidence on the capacity to package the elements needed to enter the world
markets in eleven non-East Asian NIEs see Rhee and Belot (1989).
67



68   Managing Entry into International Markets: Lessons from the East Asian Experience
world market prices; and difficult access to investment licensing for the creation of export
production capacity, as well as to investment financing.
A fundamental objective of the export incentives of the East Asian NIEs has been to
ensure equal footing with foreign competitors to resolve the first three of these problems.
INSUFFICIENT INFRASTRUCrURE. The insufficient institutional and physical infrastructure for
supporting export and associated trade activities again reflects the infancy of export
development. The lack of funds and human resources to deal with externalities and
economies of scale are also hindrances. Developing countries need to sequence the necessary
policy reforms and infrastructure buildup efficiently because their limited resources and
other factors tend to constrain institutional and policy change.
RELEVANT LESSONS. A frequent question is whether the East Asian experience can be
replicated (or emulated) in countries with markedly different initial conditions. Most
observers of the East Asian NIEs during the 1950s noted their limited capacities and adverse
conditions, which were not unlike the elements that affect the performance of developing
countries toda,y. Thus, some lessons for the current situation can be gleaned from the main
factors that have contributed to the success of the East Asian NIE performance in initiating
outward-oriented strategies. An assessment of policies, institutions, and economic agents
critical for entry into the manufactured exports market can lead to an understanding of the
basic practical mechanisms for facilitating that entry. Consequently, the emphasis in this
discussion is on the East Asian experience in the 1960s and 1970s.
Combining Foreign and Domestic Factors
In the 1960s, the four East Asian NIEs-Korea, Hong Kong, Singapore, and Taiwan-
established outward-oriented development strategies based on manufactured exports. Each
developed its capacity to enter the world markets in a different manner, particularly in
combining foreign and domestic factors.
Hong Kong and Singapore
The outward orientation of Hong Kong and Singapore, two resource-poor city economies,
evolved from their status as regional entrepots under British colonial rule (Hong Kong
serving China, and Singapore the Southeast Asian region) in the nineteenth century. In the
early 1950s, Hong Kong adopted an export strategy for light manufactured goods since its
entrepot trade with China had ended. Singapore developed an export strategy in the mid-
1960s after becoming independent from Malaysia.
Two types of catalysts initiated the export of light manufactured goods from Hong Kong.
One was the Chinese businessmen who in the late 1940s fled to Hong Kong from Shanghai,
the industrial center on the China coast. These businessmen brought along skilled workers
and textile machinery and initiated textile production with refugee workers who thus
formed technical cadres. Generous bank loans (capital was abundant, with heavy inflows
from abroad) allowed them to increase the number of spindles from 8,000 units in 1948 to
210,000 units in 1951 and to raise employment in manufacturing from 47,000 workers in 1947 to
177,000 in 1959.
The second catalytic group consisted of the British and Chinese merchant houses of Hong
Kong, with their long-standing international commercial ties. They provided Hong Kong
textile products with access to markets in the United Kingdom and later in the United
States. Other multinational companies (MNCs) from the United States, Europe, and Japan
rushed to form joint ventures or subcontracting arrangements with the numerous small Hong
Kong firms. In turn, the many small Hong Kong trading companies, having learned the skills
and networks of the British and Chinese merchant houses, developed a strong capacity to
channel the manufactured products of their small producers into external markets.



Yung Whee Rhee 69
In the mid-1960s Singapore switched its development strategy from import substitution to
export orientation. The government acted on the belief that financial stringency and
economic realities required that experienced foreign companies be induced to come to
Singapore and develop manufactured exports. This would be more expeditious than waiting
for the slow buildup of local capital and capabilities (Geiger and Geiger 1975). The
government thus encouraged direct foreign investment (DFI) and joint ventures and used
government funds to acquire minority equity interests in new enterprises and to provide loans.
The Singapore Economic Development Board was the catalyst in attracting foreign firms into
export activities by offering various incentives and an attractive industrial environment.
Although MNCs have been the main agents for Singapore's outward-oriented strategy, the
government has continuously attempted to ensure that local firms play an effective
complementary role.
Taiwan and Korea
Taiwan and Korea experienced similar major external and internal events in the
twentieth century before initiating outward-oriented development strategies. Both were
under Japanese colonial rule from the first half of the century until the end of World War II
(Taiwan for 50 years, Korea for 35 years). Both were involved in military confrontations
(Taiwan had Kuomingtang confronting the mainland since 1949, and Korea the war from 1950
to 1953). In addition, both initiated outward-oriented development strategies in the late
1950s or early 1960s (the so-called 19 Point Reforms in Taiwan in 1959 and the policy reforms
of the Park Chung Hee regime in Korea in early 1960).
In Taiwan, the entrepreneurs who initiated exports of manufactured goods were
(1) merchants and industrialists who had fled the mainland; (2) expatriate Chinese who set
up factories in Taiwan; and (3) native Taiwanese, who learned how to conduct business from
the Japanese during the occupation or from the first Chinese entrepreneurs. Once Taiwan's
reputation for manufactured exports was established, MNCs from the United States, Europe,
and Japan became extensively involved in exporting from Taiwan through subcontracts with
small and medium-sized local firms on a original equipment manufacture (OEM) basis.
Although the role of foreign trading companies was dominant in marketing the manufactured
exports, the small Taiwanese trading companies also became important as they learned
trading skills and how to use the network (Chang 1987).
At the end of the World War II, Korea was left with industrial facilities, entrepreneurs
who had been exposed to Japanese technological organization and management, and a large,
educated workforce familiar with manufacturing (Jones and Sakong 1980). After Korea's
independence in 1948, after three years of a U.S. military regime, and even after the Korean
War, the country's close ties with the United States were an important source of modern
industrial skills (including organizational and managerial skills). When the government
adopted an outward-oriented development strategy in the early 1960s, Korea's chaebol
(conglomerates) played a role in initiating the export industry by expanding their
manufacturing facilities and upgrading localized production skills with the assistance of
domestic bank and foreign loans.p2Export marketing by foreign trading companies and buyers
supported the chaebols' efforts.
Some of these conglomerates became general trading companies (GTCs). Having learned
overseas marketing from the foreign trading companies, GTCs became actively involved in
channeling the exports of small and medium producers. Even in the early 1960s, Korea's
outward-oriented strategy enabled large private firms to use their capacity to package the
critical factors needed to enter world markets and to acquire the additional foreign know-
how for upgrading and diversifying export products and markets. These large firms relied on
2. Localized technology means technology that originally came from foreign sources but has been
well absorbed by local firms with or without some modifications. See Rhee, Ross-Larson, PurselJ (1984),
p. 42.



70   Managing Entry into International Markets: Lessons from the East Asian Experience
foreign buyers, foreign trading companies, foreign machine suppliers, skilled Korean workers
returning from overseas, and technical or marketing agreements with foreign firms to acquire
the factors needed to enter the world markets at an early stage (Rhee and others, 1984).
Japa n
Japan's leadership in outward-oriented development strategies in East Asia is rooted in
its experience as the first Asian economy exposed to Western industrialization. The Meiji
Restoration of 1868 paved the way for opening Japan to Western know-how and to foreign
trade.
In the first decade of Meiji rule, Western companies built textile, cement, and other
factories in Japan to Western specifications; Western personnel supervised their operation
until the Japanese were able to replace them. Private Japanese enterprises later took over
these factories (Woronoff 1986: 29). From this experience, Japan developed a capability for
borrowing foreign technology (Peck 1976: 527).
Also beginning in the Meiji period, the government encouraged Japanese companies to
replace the foreign trading companies. To do so, Japanese trading companies had to overcome
local ignorance of foreign markets and languages, but the Japanese were spurred on by a
desire to participate in the world economy. Some of the trading companies grew into
zaibatsu (large family-controlled business groups), the origin of Japan's GTCs, which were
catalysts in Japan's outward-oriented strategy (Krause and Sekiguchi 1976). The GTCs' role
in providing an "invisible link" between large modern factories and smaller subcontractors
has been as critical as their role as catalysts in penetrating overseas markets and
transferring foreign know-how (Yoshino and Lifson 1986).
Lessons for Developing Countries
Beginning with the European Industrial Revolution, the East Asian economies depended
on Western elements to initiate their industrial development and trade in manufactured
goods. Table 5.1 summarizes the primary foreign and domestic elements that were critical in
initiating outward-oriented development strategies. The East Asian experience provides
some lessons for developing countries regarding the ideal combination of foreign and domestic
elements needed to enter the world markets for manufactured goods.
CAPACn-YTOPACKAGE. The most important element in an outward-oriented strategy is the
capacity to use both local and external resources to package the technical, marketing, and
managerial know-how for entry into world markets. This capacity can be acquired only
through a long association with foreign and local companies that already embody this
capacity (i.e., through on-the-job training and learning by doing). Japan acquired its capacity
from Western companies; Korea and, to some extent, Taiwan initially acquired theirs (in
light manufacturing) from Japan during the colonial periods (Westphal, Rhee, and Pursell
1981). Hong Kong and, to an extent, Taiwan benefited from the inflow of Chinese businessmen
who had acquired their capacities through association with foreign managers and skilled
workers. Singapore, needing rapid capital and capacity accumulation, relied exclusively on
MNCs to package the critical elements for its export-oriented strategy. Most developing
countries with unfavorable initial conditions may be similar to Singapore in that direct
foreign investment (DFI) would be an expeditious way to obtain foreign "packages" at the
early stages of their export development.
FOREIGN ASSISTANCE WITH MISSING ELEMENTS. This capacity to package critical factors is
lacking in most developing countries at the early stages of export development. Thus, for
them, the lesson from Singapore is important. Other East Asian economies, with built-in
resources, used foreign and local know-how to package the elements they needed to enter
world markets. Korea relied on local technical and managerial know-how to manufacture



Yung Whee Rhee 71
light industrial items for export but used foreign sources for marketing know-how and access
to the world markets. Korea also sought foreign loans to finance production and investments
for exports. Hong Kong relied on local marketing know-how and access to world markets,
which it had gained through its entrepot trade experience. At an early stage, it also used
skilled immigrant personnel to gain the technical and managerial know-how for
manufacturing exports. Taiwan, like Korea relied on foreign sources for initiating external
marketing, and it followed both Korea and Hong Kong in employing local technical and
managerial know-how.
Table 5.1 Foreign and Domestic Elements That Were Critical In Initiating Manufactured
Exports In East Asian NIEs
Hong Kong        Singapore          Taiwan             Korea
Key Elements    (Early 1950s)     (Mid-2960s)       (Late 1950s)      (Early 1960s)
A. Technical
know-how         F(L)               F              L, F(L)              L
B. Marketing
know-how           L                F                 F                 F
C. Managerial
know-how        F (L), L            F              L, F (L)             L
D. Capital          F, Local            F               Local              F
E. Access to
overseas
markets            L                F                 F                 F
F. Capacity to
package (A),
(B) and (C)
with (D) and
(E)              L, F(L)            F                F(L)               L
Note: F = foreign source; L = localized source; and F (L) = localized foreign source.
Ensuring Free-Trade Status for Export Activities
An important means of eliminating the disadvantages of exporters in developing
countries is to guarantee unrestricted access to the imported inputs that generate export value
added at world market prices. Imports would be free of import and foreign exchange
restrictions as well as tariffs and indirect taxes. Indirect tax exemptions for exports achieve
a neutral status with respect to indirect taxes for domestic sales under the destination
principle as well as free-trade status. (Ensuring free-trade status for direct and indirect
export activities is acceptable to the GATT and to importing economies). In addition, free-
trade status for exports is a first step in completely liberalizing imports for the domestic
market.
The five main methods of achieving free-trade status for export activities are: (1) free
trade, (2) free trade zones (FTZs), (3) bonded manufacturing warehouses (BMWs), (4)
automatic import license and duty exemptions, and (5) automatic import license and duty



72   Managing Entry into International Markets: Lessons from the East Asian Experience
drawbacks. Table 5.2 provides a comparative overview of the methods of achieving free-
trade status in the East Asian NIEs.
Table 5.2 Overview of Methods of Achieving Free Trade Status of East Asian NIEs
Schemes            Hong Kong          Singapore         Taiwan        Korea
Free trade         Free trade         Free trade
from 1950s         After 1%7
Free trade         Commercial         Commercial         3 FTZs (1966,    2 FTZs
zone (FTZ)         FTZ until          FTZ until          1970,1971)     (1970,
1950               1960s                             1971)
Bonded                                                   336 BMWs       218
manufacturing                                            (in 1981)      BMWs
warehouse (BMW)                                                         (in 1981)
Automatic                             Used before        60 percent     Used
import license                        1967               used duty      before
and duty                                                 exemption      mid-1970
exemption                                               (in 1981)
Automatic                             Used before        40 percent     Used
import license                        1967               used duty      after
and duty                                                 draw-back (in    mid-1970
drawback                                                 1981)
Free Trade
Free trade status for exporters is ensured if a country adopts a free-trade policy for the
entire economy. Given the small size of their domestic markets, extensive involvement in
entrepot trade, and specialization in the final stages of production, Hong Kong and
Singapore were ideally equipped for free trade in virtually all commodities, including
imported inputs used for manufacturing exports. Until 1967, however, Singapore had a policy
of temporary protection (i.e., tariff and import restrictions) of imports sold domestically.
Given the prevalence of the tariff redundancy observed in 1967, it also appears that
Singapore used an outward-orientation strategy to buildup its internationally competitive
industries before it had completely eliminated its domestic market protection (Tan and Hock
1982).
Free-Trade Zone
A free-trade zone (FTZ) is a special industrial area located physically or
administratively outside a country's customs barrier and is devoted to the production of
exports. Transactions in FTZs are not subject to import restrictions and tariffs and therefore
escape the delays and administrative costs often associated with the duty exemptions or
drawback systems applied to firms outside FTZs. FTZs usually offer fully serviced land and
facilities, with easy access to ports and industrial plants. Good physical trade infrastructure
(such as parts, transports, and communication) is a precondition for any export including FTZ



Yung Whee Rhee  73
exports. FTZs are to attract foreign investment in their export industries. They usually offer
additional incentives, such as income tax "holidays" and unrestricted transfer of profits.
HONG KONG AND SINGAPORE. Commercial FTZs have been in existence in Singapore since
1819 and in Hong Kong since 1842. When Hong Kong and Singapore adopted their export-
oriented development policies in the 1950s and 1960s, they expanded their commercial FTZs
into countrywide industrial FTZs.
TAIWAN. The Kaohsiung FTZ, established in 1966 in southern Taiwan, was the world's
first FTZ for manufacturing. The Nantze and Taichung FTZs were established in 1970 and
1971, respectively. In 1987, 254 enterprises were located in the FTZs, and employed
approximately 94,500 people. In the mid-1980s, FTZ employment was 4.8 percent of the
economy's total manufacturing employment. Total exports from the zone in 1987 were US$2A
billion*, approximately 6.4 percent of Taiwan's total exports (ILO/UNCTAC 1988).
KOREA. Korea established two FTZs in the early 1970s as a part of its outward-oriented
industrial development strategy (Masan in 1971 and Iri in 1975). As of 1980, the zones had 94
enterprises, 72 of which were foreign-owned operations and 28 joint ventures. Employment in
the zones in 1987 was close to 39,000. However, employment in the FTZs has never accounted
for much more than 1.0 percent of Korea's total manufacturing employment. Exports from the
zone in 1986 were US$460 million, or 2.8 percent of Korea's total exports.
Although the Korean FTZs have not accounted for a substantial part of employment and
exports, it is believed that Korea benefited substantially from backward linkages with FTZ
operations. For example, the exports from the Masan FTZ had more than 50 percent local
content. Besides the two FTZs designed to attract foreign investments, by the mid-1980s more
than 3,000 export manufacturing factories were located in the 24 export processing estates
designed to provide infrastructure primarily for domestic firms (ILO/UNCTAD 1988).
Bonded Manufacturing Warehouse System
To allow companies outside the FTZs to bypass certain customs procedures when they
import inputs needed for producing exports, the East Asian NIEs established bonded
manufacturing warehouse (BMW) systems. The usual requirements for licensing BMWs are as
follows:
1. The firm's factories must engage exclusively in manufacturing commodities for export.
2. The firm's factories must have separate warehouses approved by customs for the
storage of imported inputs and finished commodities.
3. Customs officers must be stationed at the BMWs to inspect the imported inputs and
finished outputs.
In 1981, Taiwan had 336 and Korea 218 BMWs, which accounted for about 14 percent and
12 percent of total exports and about 10 percent and 6 percent of total imports, respectively
(Ministry of Finance, the Republic of Korea 1982).
Automatic Import License and Duty/Indirect Tax Exemption
To provide free-trade status for exporters outside the FTZs and the BMW system,
automatic import licensing and automatic exemption from foreign exchange restrictions (i.e.,
automatic access to the foreign exchange needed to pay for imports for exports) need to
precede the duty (and indirect tax) exemptions (sometimes called temporary import) or
drawback (sometimes called refunds). A duty (and indirect tax) exemption system exempts
exporters from paying duties (and indirect taxes) on imports used for export production.3
*Billion = 1,000 million.
3. The duty exemption systems in the East Asian NIEs are mainly related to Imports of raw
materials and intermediate inputs. However, even those East Asian NIEs that later adopted the policies
to promote domestic capital goods industries in the 1970s and 1980s had implemented the policies to



74   Managing Entry into International Markets: Lessons from the East Asian Experience
KOREA. Korea used a duty and indirect tax-exemption system until the mid-1970s. It had
two successful aspects. First, it ensured unrestricted choice between imported and
domestically produced inputs, while treating indirect exporters the same as direct exporters
in ensuring access to duty-free imports (and other export incentives). This policy extended
free-trade status to indirect exporters and resulted in efficient backward linkages. Second,
administrative efficiency was achieved through two major instruments: (1) pretabulated and
published physical input-output coefficients; and (2) the use of trade-financing procedures
and documents for duty-free imports.
Although Korea changed formally to the duty drawback system in the mid-1970s, it
supplemented this in the 1980s with an innovative duty exemption system-the imported
input stock accounting book method (see below)-mainly in the case of selected qualified
exporters. This innovation was based on lessons learned from the experience of Taiwan
(Ministry of Finance, the Republic of Korea 1982).
TAIwAN. The duty exemption system of Taiwan uses import and export entry accounting to
estimate outstanding duties associated with unfulfilled exports only at the end of certain
periods. This system requires effective monitoring of the maximum ceiling on input stocks
imported duty-free. As in Korea, successful implementation of the Taiwan system depended,
in part, on the effective use of pretabulated input coefficients. About 80 percent of the duty-
free imports in 1975 depended on the duty exemption system. Because of the parallel
implementation of the duty drawback system, the share of duty exemptions declined to about
60 percent in 1981.
Duty Drawback System
In a duty drawback system, exporters located outside FTZs or BMWs obtain refunds of
the duties (and indirect taxes) they have paid on imported inputs after they complete the
exports. There are two ways of making the refunds. Under the individual drawback systems,
duties (and indirect taxes) paid by firms are refunded on a case-by-case basis; this system
operates much like a system of exemptions. Under a fixed drawback system, the estimated
duties (and indirect taxes) that enter into the cost of producing export commodities are
refunded according to a preset schedule. Just as in the case of duty exemptions, without the
automatic import licensing and automatic allocation of foreign exchange needed to import
inputs for export production, a duty drawback system would fail to provide free-trade status
in an developing country with import and foreign exchange restrictions.
KOREA. Korea switched from a duty exemption system to a duty drawback system in the
middle of 1975 because of worsening balance of payments problems after the first oil crisis.
The government intended to institute a fixed drawback system, which might have meant a
less than free trade status for many exporters. When exporters were increasingly concerned
about the possibility of losing equal footing with foreign competitors, the government instead
introduced a duty-deferred payment system that was equivalent to an exemption system for
many exporters. It then modified the fixed drawback system by combining it with an
individual drawback system (only about 20 percent of Korean exports were subject to the
fixed drawback system in 1980).
While maintaining the duty-deferred payment system, the Korean government in 1981
implemented a new drawback schedule that combined the advantages of both fixed and
individual drawbacks: Wherever major imported items were involved, the highest priority
was to provide free trade status through individual drawbacks; in the case of miscellaneous
imported items, the highest priority was administrative simplicity through fixed
drawbacks. Subsequently, a two-step drawback payment system was implemented that
provide free trade status for capital goods imports at the early stages of export development in the
1950s and 1960s.



Yung Whee Rhee 75
provided immediate drawback payments after the exports were completed, based on rough
estimates, followed by careful accounting within a three-month period. Korea has also made
continuing efforts to streamline the administration of the input coefficients.
TAIWAN. Taiwan uses a drawback system mainly with exporters who are not qualified to
use the duty exemption system. About 40 percent of the duty-free imports in 1981 involved
the duty drawback system. Basically, Taiwan has a fixed drawback system. However,
exporters who can document that they actually paid duties exceeding more than 10 percent of
the drawback amount shown in the published schedule can use the individual drawback
system. There are two types of fixed drawback schedules: One specifies the drawback
amount (money value) per unit (i.e., physical quantity) of a designated export item; the
other specifies the drawback amount as a certain percentage of the money value of a
designated export item. The former (i.e., the quantity-based system) is generally used for
export items that do not need a large number of diversified imported inputs; the latter (ie.,
the money value-based system) is generally used for export items that need numerous
imported inputs. These fixed drawback schedules are published periodically. The input-
coefficient data are critical bases of the schedules.
Lessons for Developing Countries
Achieving free trade by eliminating the restrictions and duties (and indirect taxes) on
all imports is a desirable and rational long-term objective for developing countries. However,
often it cannot be achieved unless pursued gradually, since the initial conditions in these
countries are unfavorable. If adopted quickly, free trade would allow imports to displace
much domestic production, including infant industries that could otherwise become
competitive.
If not fully "compensated for" by exchange rate and associated real sector adjustments,
immediate across-the-board import liberalization also increases the balance of payments
deficits, worsening the already heavy external debt burden. Often the political and social
reaction to very rapid or ill-considered across-the-board import liberalization has resulted in
a regression to import and foreign exchange controls.
Nevertheless, developing countries should immediately implement the measures
designed to guarantee free trade status for all activities that generate export value added.
Such measures are acceptable under the GATT rules, and they are one of the minimum
conditions for providing exporters equal footing with foreign competitors. They also
constitute a first step in gradually implementing complete import liberalization.
FTZs . FTZs can be very effective in the early stages of an export drive as a means of
attracting foreign investors and demonstrating the country's export potential, especially in
countries that lack the capacity to package the critical elements needed to initiate an
outward-oriented development strategy. However, the development of infrastructure,
formulation of appropriate incentives, and other elements of the work environment must be
well-managed. It should be noted that where outward development strategies have been
sustained and reinforced, as in the East Asian NIEs, the relative importance of FrZ exports
has tended to decline as exports of other domestic industries have expanded under free-trade
status.
BMWs. A bonded manufactured warehouse system is quite advantageous for well-
established large firms that produce exports only. It is particularly desirable for such
products as electronics, which require numerous imported inputs, because it reduces the
administrative burden of estimating and monitoring input coefficients. These are the most
critical data in determining the effectiveness of a duty exemption or drawback system.
However, BMWs are impractical for small producers and indirect exporters, as well as for
producers selling in both the export and domestic markets.



76   Managing Entry into International Markets: Lessons from the East Asian Experience
Dury ExEMFrioNS. For countries in the early stage of exporting, a duty exemption system is
preferable to a duty drawback system for several reasons. First, although both systems
impose a similar administrative burden in terms of the need for input coefficients and other
data, the duty exemption system does not burden exporters with the working capital
requirements and interest rates associated with the duty drawback system. Second, both
systems require automatic import licensing and free access to foreign exchange for imported
inputs if the government wants to guarantee free-trade status (i.e., the duty drawback system
cannot succeed unless all the administrative arrangements needed for "temporary imports"
are in place). The reason is that the potential costs for exporters stemming from a failure to
resolve the restriction on imports and foreign exchange would be much higher than those
stemming from the failure to resolve the duties and indirect tax burdens for exporters in
countries with a highly distorted import regime. Third, the duty exemption system seems to
carry less risk ithan the duty drawback system does in terms of potential export subsidy
charges by importing economies.
The East Asian experiences provides a number of lessons concerning the effective
implementation of a duty exemption system:
1. The success of a duty exemption system depends on speedy processing based on a
transparent, nondiscretionary, and simple formula prepared in advance. The formula
does not come from a magic equation, but from systematic and careful advance
estimation of input coefficients by the government. The administrative costs of such
estimates are, however, much smaller than those exporters and the government face
under the ad hoc approaches many developing countries have been relying on, which
fail to ensure speedy processing to provide free-trade status.
2. Administrative efficiency can be achieved with duty exemptions by using the trade-
financing disbursement/liquidation mechanisms and instruments.
3. Indirect exporters and direct exporters should be treated equally in providing free-
trade status.
4. Capital goods should be included in the duty exemption system at an early stage of
export development, even if domestic capital good industries are competing with
imports.
5. The imported input stock accounting book method should be allowed for well-
established exporters.
6. The administrative burden of the duty exemption system can be reduced by
eliminating all redundant import and foreign exchange restrictions and tariffs and
gradually lowering import protections.
DurY DRAwBAcKs. The parallel use of a duty drawback system is desirable in developing
countries to allow firms that did not foresee exporting when they imported inputs to enjoy a
free-trade status while they were exporting. Under a fixed drawback system, the option of
an individual drawback is needed to safeguard exports from an excessive sacrifice of free-
trade status that may stem from the fixed drawback.
Ensuring Easy Access to Trade Financing
To ensure easy access to trade financing, policymakers must first understand the role of
trade financing in the economy (for a detailed discussion, see Rhee 1989).
The Role of Trade Financing
Exporters cannot respond to goods orders unless they have ensured access to trade
financing.4 Access to trade financing based on export orders and bills of completed exports is
4. Cooper (1987) noted the important consensus reached at the IMF-World Bank Symposium on
Growth-Oriented Adjustment Programs: In sequencing policy reforms aimed at resuming sustained
growth, developing countries need to assign a high priority to measures that ensure rational regimes for



Yung Whee Rhee 77
critical to realizing a supply response. Preshipment export finance is needed to pay for
imports of foreign raw materials and intermediate inputs, domestic raw materials and
intermediate inputs, domestic value-added components (wages, interest and rents) needed for
export production, and inventories of finished commodities to be exported.
Normally granted on export orders and normally provided for less than 90 days,
preshipment financing is particularly important in countries that have underdeveloped
money markets and segmented bank-lending markets. Export orders cannot be filled-and
existing export opportunities cannot be realized-unless exporters can meet their import,
domestic purchase, production, and inventory financing needs before shipment.
Short-term postshipment export finance is needed to finance export sales on credit.
Normally it is granted for up to 180 days on an accepted bill (an unconditional promise that
a bank or importer will make payment for the export commodities received by a definite
date). Medium- and long-term postshipment export financing, which finances export sales
(mostly of heavy industry products) on credit exceeding 180 days, is not as important at the
early stage of export development in most developing economies. To highlight the lessons on
trade financing from the East Asian experience, the focus here is on short-term preshipment
trade finance and short-term postshipment export finance.
Methods of Trade Financing
There are four methods of financing trade: company credit, bank credit, bank loans, and
self-financing. In addressing the issues related to financing under the different methods, it is
important to distinguish clearly between bank lending and bank credit and between bank
credit and company credit. When a bank provides a "loan," it lends actual money. When it
creates a banker's acceptance (BA)-its unconditional promise to pay a certain sum of money
at a definite date to the bearer-it lends "credit." The bank creates a BA strictly on the
basis of the expected revenue from a particular trade transaction: traders meet their trade-
financing needs through the BA discount market, part of the money market. Company credits
involve selling and buying between affiliated companies or between trading companies and
suppliers "on credit." The most elementary method is self-financing from retained earnings.
Choosing among these methods and enacting appropriate measures to resolve access
problems depend, among other factors, on the stage of development of the banking industry
and the money market, the structure of trading companies and export manufacturers, and the
percentage of trade financing to be met by retained earnings.
Intra-MNC Credit-Based Trade Financing
As shown in Table 5.3, Singapore has been the only East Asian NIEs to use intra-MNC
credit-based trade financing extensively. At the same time, the Singapore government has
not neglected the complementary role that bank loans can play. It introduced a preshipment
and short-term postshipment financing system known as "the rediscounting scheme for pre-
export and export bills of exchange" in 1975. Administered by the Monetary Authority of
Singapore, it has complemented the intra-foreign MNC credit-based financing system,
particularly in meeting the financing needs of local companies. Further, the Export Credit
Insurance Corporation of Singapore Ltd. has supplemented the intra-MNC risk taking
related to overseas buyer nonpayment. In 1985 it introduced a preshipment export finance
export activities, whatever other economic measures are taken. He noted that "this conference has
relied mainly on generalities. There have been few concrete suggestions . .. the really constructive
work involves getting down to operational details." In addressing the issue of ensuring equal footing
with foreign competitors in access to trade financing and to inputs at world market prices (in
compliance with GATT rules), as well as maintaining realistic exchange rates-the three most important
components of a rational regime for exporting-this discussion focuses on specific operational lessons
from the East Asian experience.



78   Managing Entry into International Markets: Lessons from the East Asian Experience
guarantee to ensure local companies access to preshipment financing. In 1986 the Economic
Development Board introduced the Small Industries Finance and Guarantee Schemes.5
Table 5.3 Comparative Overview of the Primary Trade Financing System of the East Asian
Economies
Exporter              Overseas Buyer
Nonperformance            Nonpayment
Primary                 Short-Term    Medium &       Risk Handling            Risk Handling
Trade-   Preshipment  Postshipment    Long-Term
Financing    Export       Export     Postshipment  Internalize by     a Internalize by     b
System     Finance       Finance    Export Finance  Firm or Bank  PEFG   Firm or Bank  ECIIG
Intra-MNC     Singapore   Singapore   Singapore      Singapore               Singapore
credit-based
Interfirm     Hong Kong   Hong Kong                  HongKong                Hong Kong
credit-based    Taiwan    Taiwan                                             Taiwan
Bank credit-    Hong Kong   Hong Kong                Hong Kong               Hong Kong
based
Bank loan-    Korea       Korea       Korea                        Korea                Korea
system        Singapore   Singapore   Taiwan                       Singapore            Singapore
supported     Taiwan      Taiwan                                   Taiwan               Taiwan
by the
government
Self financing  Taiwan
a. PEFG = preshipment export finance guarantee.
b. ECItG = export credit insurance and guarantee.
Interfirm Credit-Based Trade Financing
Japan's GTCs ensured access to trade financing for small producers, a role the commercial
banks would not undertake because of their aversion to risk. Because they knew the small
firms, the GTCs were able to internalize risk taking. Moreover, the GTCs themselves were
able to tap into major financing resources because of their close banking ties and because most
GTC credit to small, input- or output-supplying indirect exporters was tied to specific trade
transactions. Often the credit to indirect exporters was in the form of imported raw
materials on credit or advance payments for indirect export items, all provided before the
GTCs received payment from overseas buyers. The GTCs also provided loan guarantees for
small producers so that they could gain direct access to bank loans. In short, Japan's GTCs
provided a typical form of interfirm credit-based trade financing.
Many developing economies have attempted to establish Japanese-type GTCs in the
hope of providing a similar "invisible link" in expanding exports. Except for the Korean
trading companies, most such attempts have not been successful as the companies have
lacked the human and financial resources to carry out their diverse tasks. Moreover, in many
cases domestic policy has not fully supported an outward-oriented strategy, and cultural
factors have not been conducive to large GTCs (Ozawa, 1987). Even Korea's GTCs, which
have been successful in providing marketing and technical services to small indirect
5. This was in response to an assessment in the 1986 report of the Economic Committee, entitled
The Singapore Economy: New Directions, which stated that "local companies, particularly the small
ones, lack access to capital" (Ministry of Trade and Industry, Republic of Singapore 1986: 36).



Yung Whee Rhee 79
exporters, have not been active in credit-based trade financing. The reason is that Korea's
GTCs have been closely tied to the conglomerates, which have abundant human resources,
but they and the conglomerates have had to rely on banks and foreign borrowing for their
own capital.
Among the East Asian NIEs, Hong Kong and Taiwan have relied most on interfirm
financing to meet the trade-financing needs of numerous small manufacturers of exports
(Table 5.3). The small manufacturers have had to act as indirect exporters, relying on
trading companies for direct exporting and company credit-based trade financing for imported
inputs, even though the numerous Hong Kong and Taiwan trading companies also have been
small.
Trade Financing Based on Bank Credit
The origin of the trade-financing market was the discount market for trade bills in
England (a trade bill of exchange or draft is the seller's unconditional written demand for
payment).6 Hong Kong is the only developing economy whose trade financing evolved as it
did in England: from trade development to merchant banking to BA financing. In Hong Kong,
in the early 1800s, bill discounting, tightly linked with the economy's entrepot trade,
became the bread and butter of the large agency houses and the British and European
merchant banks, known as "eastern exchange banks."
The main reason for establishing the Hong Kong and Shanghai Banking Corporation, a
Shanghai bank with Hong Kong interests, was the comparative lack of enthusiasm among
the exchange banks for intra-China coastal business. The corporation also became heavily
involved in financing the entrepot trade, as was the case with its Anglo-Indian counterparts
(Ghose 1987). The bills and BA outstanding domestic export ratio ranged from 8 percent to
about 14 percent during 1980-85, the implication being that trade financing based on bank
credit probably met about one- to two-thirds of the trade-financing needs, assuming four or
five annual turnovers.
Although Hong Kong's BA-based trade financing may have evolved relative to other
developing economies, after 150 years of experience it has not reached maturity. One reason
is the absence of an active secondary market, a major obstacle to the development of money
market instruments. This problem is largely the result of the fact that Hong Kong does not
have a central bank that could provide direction and serve as "lender of last resort" through
a rediscount window. The Hong Kong Shanghai Bank, which acts informally as a central
bank, may not need a discount market or commercial paper for its own banking business. Since
a secondary market would help its competitors, it has not worked to develop one (Skully
1976). In 1985, the Bank of China advocated establishing a government-sponsored discount
window in Hong Kong to revitalize the secondary money market and to resolve the cash-
flow problems of local banks (Ghose 1987).
Trade Financing Based on Bank Loans
Exporters in most developing economies cannot meet their trade financing needs through
bank credit or company credit because they lack modern banks and trading companies that
can internalize the risk taking. Therefore, the immediate objective of ensuring access to
trade financing for all exporters with direct and indirect export orders must be met through
bank loans.
BAsic INSTRUMENTS. The bank loan financing system is based on a trio of instruments and
institutions: (1) transaction-based, self-liquidating mechanisms for trade financing (including
rediscount mechanisms of the central bank); (2) institutions that can deal with exporters'
6. In England, bill discounting was the original function of commercial banks before they engaged
in providing overdrafts and loans.



80 Managing Entry into Intemnational Markets: Lessons from the East Asian Experience
nonperformance risk (i.e., preshipment export finance guarantees [PEFGI); and (3) institutions
that can deal with overseas buyers' nonpayment risk (i.e., export credit insurance and
guarantees [ECI/G]).
HONG KONG AND SINGAPORE. Hong Kong's primary trade-financing system is characterized
by a mixture of bank and interfirm credit-based mechanisms. The only area in which the
government has been directly involved has been to provide ECI/G to complement firms' and
banks' internal handling of the risk of overseas buyers' nonpayment (Table 5.3). In contrast,
Singapore's primary trade-financing system is intrafirm credit within large MNCs. However,
given a parallel need to develop backward linkages with local enterprises, the trade-
financing needs of these firms have been met by the bank loan system supported by the
Singapore government. The system includes a PEFG and ECI/G that supplement the MNCs'
internal handling of exporter nonperformance risk and overseas buyer nonpayment risk
(Table 5.3).
TAIWAN. Among the East Asian NIEs, Taiwan has relied on the most diverse sources of
trade financing, excluding trade financing based on bank credit (Table 5.3). Bank loan-based
trade financing supported by the central bank has supplemented local and foreign company
credit-based trade financing, commercial loan-based trade financing of multinational banks,
and self-financing. (Chiu 1981; Biggs 1988).
JAPAN. A pillar of the Japanese govemment's first postwar economic plan was its carefully
created export policies and export institutions. The trade-financing system of the Bank of
Japan was one of the critical components of these export policies. In the absence of a well-
developed money market, the Bank of Japan implemented a preshipment export finance
rediscount system, the Export Advance Bill System. Until the value of exports exceeded
$1 billion, the system met more than half of the preshipment export financing needs. Even
though the outstanding loan amounts declined after 1970, as exporters turned to other
financing modes, certain exporters still use the system. The short-term postshipment
financing schemes used until the early 1970s were the Export Usance Bill System, Loan
Facilities for Export Time Bills, and the Foreign Exchange Bill Purchase System. The import
financing schemes were the Import Settlement Bill System, the Import Financing Loan, and
Import Usance Facilities.
KOREA. Korea's trade-financing system is composed of (1) the Bank of Korea's trade
transaction-based, self-liquidating trade-financing disbursement/liquidation mechanisms
(together with its rediscount system); (2) the Korea Credit Guarantee Funds' PEFG; and
(3) the Korea Export-Import Bank's ECI/G. The Bank of Korea's trade-financing mechanisms
have been a particularly shining example of successful trade financing based on bank loans.
They have made a more important contribution to the effective implementation of the
outward-oriented development strategy than any other export policy instrument.
Self-Financing
Traders meet some part of their trade-financing needs with their own funds. In fact, the
trade-financing system based on bank loans discussed above normally finances only 85 percent
to 90 percent of the value of trade transactions. The remaining 10 to 15 percent is self-
financed. For exporters who are denied access to trade loans because they fail to supply
collateral, and in the absence of a modemized export financing system, the only way to fill
export orders is to rely on self-financing. However, no developing economy has succeeded in
expanding its trade when it is based mainly on self-financing. The only developing economy
in which some exporters have relied significantly on self-financing appears to be Taiwan.
Many small and medium-size export manufacturers were able to use their high retained
earnings to supplement trade financing based on company credit and bank loans because of



Yung Whee Rhee 81
the unusually high savings rate in Taiwan. This stemmed from the cultural heritage and
favorable macroeconomic policies (Chiu 1981; Biggs 1988).
Lessons for Developing Countries
The export success of the East Asian economies has been facilitated by speedy and
undisrupted access to trade financing for all (direct and indirect) exporters based on
confirmed export orders or accepted bills of completed exports. Developing countries should
attempt to develop all four methods of trade financing: company credit, bank credit, bank
loans, self-financing-and combinations of these. Although the complementarity among these
methods has to be maintained, most developing countries must-in the absence of modem
domestic banks and trading companies that can internalize risk taking-start with foreign
bank credit, foreign company credit or intra-MNC credit, and bank loan finance. The East
Asian experience regarding bank loan trade financing yields a number of lessons for
developing countries.
IMPORTANCE oF AccEss TO TRADE FINANCING. For success in exports, short-term preshipment
and postshipment export financing is much more important than investment and general
working capital financing and longer-term postshipment financing. Short-term trade financing
based solely on confirmed export letters of credit (L/Cs) and other export orders, and
associated import or domestic trade and production transactions must be available if the
export potential of a developing country is to be exploited. In turn, the traditional analyses
that assume the only role of trade financing is to provide an interest subsidy fail to capture
the true objective of trade financing based on bank loans as demonstrated by the East Asian
experience. For example, Korea and Taiwan could have achieved their export successes
without export loan interest rate preferences (which were estimated to be 4.5 percent of
Korea's export value in 1968 and 0.2 percent of Taiwan's export value in 1976) even when the
interest rate preferences were the most extensive in these economies. However, Korea (and to
some degree Taiwan) could not have achieved a similar success without the bank loan
mechanisms that ensured easy access to trade financing based on export orders.
Modern trade finance consists of various mechanisms: bank credit instruments such as
L/Cs, domestic L/Cs, and BAs; export and associated import and domestic purchase
transaction-based, self-liquidating trade loan disbursement/liquidation mechanisms; lender-
of-last-resort facilities of central banks; institutions that deal with exporter nonperformance
risk; and institutions that deal with overseas buyer nonpayment risk.
Developing countries should give high priority to the first three of these mechanisms.7
Properly developed, a modern trade-financing system composed of these mechanisms, that
charges international or domestic market interest rates, and that covers all trade
transactions is completely different from the so-called sectorally targeted credit-rationing
mechanisms.
In fact, these three mechanisms are the first steps in developing the truly market-based
(i.e., money market-based) trade-financing mechanisms. In turn, developing countries should
implement a system of accepted export bill discounting (at world market rates) backed by
central bank rediscounting for short-term postshipment financing, even in the absence of a
money market. Further, trade transactions related to domestic sales should be treated the
same as those related to exports, in having access to the lender-of-last resort facilities of
central banks, as long as the domestic sales accompany the first two mechanisms as that
would eliminate the risk of loan misuse and cover a significant part of the supplier
nonperformnance risk.
7. Developing these three mechanisms is not so different from the British government's efforts in
the nineteenth century (in establishing the bill of exchange rediscounting of the Bank of England and
enacting the Bill of Exchange Act of 1882) and the BA rediscounting of the U.S. Federal Reserve Board.



82   Managing Entry into International Markets: Lessons from the East Asian Experience
As for the establishment of institutions to deal with exporter nonperformance risk and
with overseas buyer nonpayment risk, developing countries need to wait until the social
gains associated with the additional exports stemming from a PEFG and/or an ECI/G
outweigh the social costs of operating these schemes. In addition, the operational
effectiveness of and effective learning-by-doing in such institutions are critical for their
success. Actual beneficiaries of those schemes must cover the full costs of operating them in a
multiyear framework.
FOREIGN CuRRENcY LoAN SCHEME. When the domestic financial market is segmented and the
foreign exchange rate does not always reflect opportunity costs, and when external borrowing
plays a large role in financing development, the best way to ensure efficient management of
foreign exchange is to denominate all loans tied to the use of foreign exchange reserves in
foreign currency and to charge an international market interest rate plus some margin.
Foreign currency loans for imported inputs for export production must be included in this
category.
In the East Asian NIEs that have established correct priorities in foreign exchange
management, nothing has received higher priority than the allocation of foreign exchange
for importing the inputs needed for exports that earn additional foreign exchange. If foreign
exchange holdings are scarce, external financing to create a foreign exchange revolving fund
should receive priority. Between 1979 and 1983, Costa Rica, Mexico, Guyana, Jamaica,
Zimbabwe, and Yugoslavia, with the assistance of the World Bank, all established foreign
exchange revolving funds for foreign currency loans.
The "foreign exchange retention scheme" used in some developing economies as a means
of ensuring access to imported inputs is not a rational system, because current foreign
exchange needs usually do not match the past export performance of dynamic export
industries.
EFFICiENT ADMINISTRATIVE TooL FOR EXPORT INCENTIVES. Modern trade loan disbursement/
liquidation mechanisms that extensively use L/Cs, domestic L/Cs, and BAs also serve as
efficient mechanisms for administering such export incentives as duty-free indirect tax-free,
and restriction-free imports and indirect tax exemptions for all exporters. In turn, such
instruments as domestic L/Cs are very effective in extending export incentives-including
trade financing, duty-free imports and indirect tax exemptions-to indirect exporters. Such
extensions of export incentives are critical in developing backward linkages and local trading
companies in developing countries.
Maintaining a Realistic Exchange Rate
As I have pointed out elsewhere (Rhee 1985), the exchange rate is the most important
variable affecting the returns exporters realize in local currency for the foreign exchange
they earn through export value added. The determination of the real exchange rate depends
on a country's foreign exchange management regime and its stabilization policies. In turn, its
approach to foreign exchange management cannot be separated from financial market
development and the payment and trade regimes. Table 5.4 provides an overview of foreign
exchange and payment systems in the East Asian NIEs in the 1970s. A developing country
pursuing an outward-oriented development strategy can and should maintain a realistic
exchange rate whatever its regime of foreign exchange management. One criterion
distinguishing the different types of foreign exchange regimes is whether the regime is
based on a free foreign exchange market.



Yung Whee Rhee 83
Table 5.4 Overview of Foreign Exchange and Payment Systems of East Asian NIEs in the
1970s
Hong Kong         Singapore         Korea         Taiwan
1970   1979      1970   1979     2970   1979    1970   1978
Currency convertibility
Article VIII status     X      X         X       X
Article XIV status                                       X      X        X      X
Exchange rate flexibility
Par value               X                X                               X
Pegged rate (U.S. dollars)                               X      X               X
Composite currency rate                          X
Floating rate                  X
Payment restriction
On current account                       X               X               X      X
On capital account                       X               X      X        X      X
Surrender requirement
for export proceeds                         X               X      X        X     X
Source: International Monetary Fund (1970, 1979, and 1980).
A Foreign Exchange Regime Based on a Free Market
CuRRENcY CONVERTIBILIY. An economy cannot have a free foreign exchange market unless
the domestic currency is convertible (Article VIII of the IMFs Articles of Agreement defines
current account convertibility). Japan did not formally achieve convertibility until 1964,
while Hong Kong implemented Article VIII in 1961 and Singapore in 1968.
FINANcaAL MARKETS. The financial structure is the focus of analysis in choosing a foreign
exchange regime (Branson 1983). A free foreign exchange market requires mature financial
markets and institutions integrated with the international financial markets. Early British
connections and exposure to intemational trade-related activities gave Hong Kong and
Singapore ample opportunities to develop Western-style financial and trade-related
institutions. Because they were entrepot trade centers, their financial institutions developed
around international trade. As early as the 1850s, more than ten foreign banks representing
British, Dutch, French, and American interests were operating in Singapore and Penang.
Within a century the financial institutions and markets of Hong Kong and Singapore had
developed into international financial centers (Geiger and Geiger 1975). In 1980, Hong Kong
had 14 licensed banks with 1,123 branches operating within the territory, or about I branch
for every 4,000 people, a ratio exceeding that of many developed countries. However, Korea
and Taiwan's financial markets and institutions were not well-developed when they
initiated their outward-oriented development strategies in the 1960s.



84  Managing Entry into Intenational Markets: Lessons from the East Asian Experience
HONG KONG. Hong Kong's foreign exchange market became active after Hong Kong was
excluded from the sterling zone in 1972. The government ended the pegging of the Hong Kong
dollar to the U.S. dollar in 1974. Since that time, the Hong Kong dollar has floated
according to market conditions. However, the government has been active in the foreign
exchange markets through its commercial bankers, to the extent that portfolio management
of the Exchange Fund requires and to the extent that the timing of transactions can be varied
with a view to their impact on the exchange rate of the Hong Kong dollar. In short, Hong
Kong's foreign exchange regime has helped it maintain its competitive position as a major
exporter of manufactured goods.
SINGAPORE. Even though Singapore conformed to the IMFs convertibility requirements in
November 1968, it maintained control over foreign exchange transactions, including
restrictions on borrowing or depositing by Singapore residents in foreign currencies,
particularly Asian currency units. Singapore's foreign exchange market became much more
active after the Singapore dollar began to float in 1973. Its foreign exchange regime is a
successful example of an integrated strategy of monetary and exchange rate policies for a
small open economy (McKinnon 1982).
The centerpiece of Singapore's domestic monetary policy in the 1970s was the
stabilization of its exchange rate with respect to the U.S. dollar. Singapore's monetary base
was largely endogenized to maintain an orderly foreign exchange market. Instead of setting
firm internal rules for rates of monetary growth, Singapore allowed the monetary base to
reflect foreign exchange intervention. This policy maintained the stability of the exchange
rate even though the money supply fluctuated widely in the short run. Such short-run
fluctuations did not, however, endanger price stability in Singapore's open economy in which
domestic prices were completely dominated by imports and exports.
Managed Foreign Exchange Regimes
As already indicated, underdeveloped financial markets and financial institutions were
among the main reasons why Korea and Taiwan adopted managed foreign exchange regimes
in the 1960s and 1970s instead of relying on a free foreign exchange market. Although they
pursued financial maturity and rational trade regimes, the transitional status of foreign
exchange management was inevitable in these economies. Financial immaturity and
repression also are closely related to trade regimes. Capital constraints stemming from
financial market fragmentation explain the persistent use of import and payment restrictions
for infant industry support in developing countries (McKinnon 1971, 1979).
Unlike Hong Kong and Singapore, Korea and Taiwan did not have an early opportunity
to develop financial institutions specializing in trade financing and foreign exchange
transactions. Nor did they have the opportunity to develop modern financial markets and
institutions during the Japanese colonial period. Even Japan's financial markets were
noncompetitive and segmented, unlike the Western industrial economies at a similar stage of
development (Wallich and Wallich 1976). Consequently, managed foreign exchange regimes
in the 1960s and 1970s were integral to their managed financial systems.
The influence of the commercial banks and nonbank customers in creating a unified
market for foreign exchange, either spot or forward, is not as great under a managed foreign
exchange regime as it is under a free-market regime. Instead, the central bank has the most
influence. In other words, the role of the government in maintaining a realistic exchange rate
is more critical under a managed foreign exchange regime than under a free foreign exchange
market.
In contrast to other developing economies, Korea and Taiwan succeeded in maintaining
realistic and unified real exchange rates in the 1960s and 1970s, through their managed
foreign exchange regimes, while continuing to build financial maturity. Judging from the
success of Korea's outward-looking development strategy, which involved heavy external
borrowing, the country's managed foreign exchange system helped prevent capital flight,



Yung Whee Rhee  85
allowed selectivity in capital inflows, used a foreign currency loan scheme for exchange
reserves, and maintained stability in the real exchange rate or effective real exchange rate.
The successful macroeconomic stabilization policies in Korea and Taiwan as well as in
Hong Kong and Singapore, also helped these NIEs maintain realistic and unified real
exchange rates while initiating their outward-oriented strategies. The average annual
inflation rate in Hong Kong and Singapore in the 1960s was a mere 1 to 2 percent, and
Taiwan's rate during the same period was less than 5 percent. Korea's rate during that
period was more than 10 percent, in part because of the large devaluations carried out in the
early 1960s as part of the stabilization policy.
Lessons for Developing Countries
Achieving a free foreign exchange market is a desirable and rational long-term objective
for developing countries. While they pursue policies for building conditions in the financial
markets and the trade regimes needed to have a free foreign exchange market, they should
also try to achieve a realistic and unified real exchange rate without delay. This is possible
even under a managed foreign exchange regime. In achieving this objective, macroeconomic
stabilization should precede any other measures.8
Building Institutional and Physical Infrastructure
Because of externalities and scale economies in infrastructure investments and the
imperfect nature of information in the world markets, the physical infrastructure (ports,
transport, and communication) and institutional infrastructure needed for trade-oriented
development have to be built through a joint effort of the public and private sectors.
Physical Infrastructure
When the East Asian NIEs initiated their outward-oriented development strategies in
the 1950s and 1960s, a basic physical infrastructure was in place-left over from the entrepot
trade of Hong Kong and Singapore, and from Japanese colonial rule in Korea and Taiwan.
Subsequently, the NIEs devoted considerable resources to infrastructure investments (e.g., the
Hong Kong government constructed a major port for container shipping in the early 1970s).
Although all of Hong Kong and Singapore can be considered FrZs, the govemment-run
Hong Kong Industrial Estates Corporation and Singapore's Jurong Town Corporation have
developed industrial estates specifically to lease ready-built factory units at rents that
would recover the full costs. These zones have been important in attracting foreign companies
for export activities. Similarly, the three FTZs in Taiwan and two in Korea, established by
the public sector, played an important role in attracting direct foreign investment to these
economies in their early stages of export development. Industrial estates, export processing
zones, and science parks have provided the additional infrastructure needed to upgrade,
diversify, and expand industrial exports.
Institutional Infrastructure
It is equally important, however, to have an effective institutional infrastructure that is
able to deal with imperfect information and imperfect competition in the world markets.
8. See Cooper (1987), Lin (1987), Ozawa (1989), and Sachs (1987) on the East Asian experience
regarding the sequencing of liberalization in the various markets. The experience indicates that the
precondition for liberalization was macroeconomic stabilization.



86   Managing Entry into International Markets: Lessons from the East Asian Experience
Here, institutional infrastructure has a broad meaning, encompassing all the public and
private organizations and agents that are development players.9
ExPoRT MARKEING INSTITUTONS. As previously suggested in Table 5.1, in the 1950s and
1960s the East Asian NIEs generally relied on foreign trading companies for overseas
marketing know-how and for providing access to world markets (except Hong Kong, which
relied on local resources, namely, the British and Chinese merchant houses). As these
economies pursued more aggressive strategies for penetrating and explorating external
markets, they established public or semipublic marketing promotion institutions. Table 5.5
provides an overview of the export marketing institutions of the East Asian NIEs. However,
their role has been coordination, information-gathering, and dissemination rather than
direct marketing.
Table 5.5 Comparative Overview of the Primary Export Marketing Institutions of East
Asians NIEs
Institutional Role   Hong Kong        Singapore         Korea            Taiwan
Institutional   Hong Kong      Singapore Trade      Korea Trade  China External
support      Trade Develop-    Development Board   Promotion    Trade Develop-
ment Council      (established in     Corporation   ment Council
(established      1983)               (established   (established in
in 1966)                              in 1962)     1970)
Export       Merchant          MNCs; INTRACO        Korean      Japanese geneeral
marketing    houses; small                          general      trading companies;
channels     trading firms                          trading      small trading
companies   companies
TRADING COMPANIES. Korea appears to be the only developing economy that has succeeded
in emulating large, Japanese-type private GTCs based on existing conglomerates. Singapore's
GTC, INTRACO, is a public corporation. The trading companies in Hong Kong and Taiwan
comprise many small businesses. In recent years, about 50,000 Hong Kong manufacturers have
employed close to 1 million workers (fewer than 29 workers per firm). With more than
90 percent of Hong Kong's products being exported, more than 90 percent of its firms employ
fewer than 10 workers. In Taiwan, 99 percent of the more than 120,000 manufacturing firms
are small and medium-size operations (Medium and Small Business Administration 1987).
These small manufacturers are indirect exporters relying on trading companies for direct
exports and imports of raw materials. The numerous Hong Kong and Taiwan trading
companies supporting these small manufacturers are also small. More than 90 percent of the
28,000 trading enterprises in Hong Kong employ fewer than 20 people. The large trading
companies in Hong Kong that employ more than 100 people account for only 1.3 percent of
the total trading establishments (Chan 1987: 65). The more than 50,000 registered trading
companies in Taiwan are all small and medium-size, except for several big trading
companies being promoted by the authorities without much success (Chan 1987).
What have been the underlying factors enabling the small trading companies of Hong
Kong and Taiwan to succeed in linking small producers to overseas markets? How have they
9. Arrow (1974) and Stiglitz (1989) argue that the inequality in economic development stems largely
from the differences in organizations and institutions that deal with imperfect and costly information.



Yung Whee Rhee  87
been able to collect overseas information, provide the necessary financing, and take
considerable risks? Why has the size of Hong Kong and Taiwan trading companies differed
so markedly from that of Japan's and Korea's GTCs, which have exploited economies of
scale in overseas market intelligence, sales, and distribution and have been able to tap the
resources of the conglomerates?
The relationships between small traders and small manufacturers in Hong Kong and
Taiwan have worked well because of the strong trust developed through close personal
contacts, the flexibility and efficiency of small producers in meeting small orders and
changing their product composition, the lower management and operating costs of smaller
trading companies, and the smaller resource requirements for intra-firm credit-based trade
financing. These advantages have outweighed scale and financing limitations. Trust and
flexibility among family-related businessmen are also traditions in the Chinese culture. The
vitality and prevalence of small and medium-size trading companies might also be related
to a cultural preference for owning a business rather than being employed in a big
corporation.
Busumss-GovERNmENT PARTNERSHIPS. The East Asian culture and other unique institutional
underpinnings have forged effective partnerships between the business communities and
governments (frequently characterized as Japan Inc., Singapore Inc., and the like), while
basically private firms of the East Asian NIEs have carried out manufactured export
production and overseas sales.10 This relationship has been markedly different from the
more typical characterization of private versus public sector, or market versus intervention
dichotomy, and has been vital to successful implementation of the outward-oriented
development strategies in the East Asian NIEs.
Lessons for Developing Countries
Conditions in most developing countries offer neither the physical infrastructure found in
the East Asian NIEs in the 1960s nor the investment resources to create it. Consequently, the
concentrated development of infrastructure in a few FIZs is a key strategy these countries can
use to attract direct foreign investment. The experience of Hong Kong and Singapore in
developing industrial estates and factory units with proper cost-recovery leasing policies is
valuable in light of the capital shortages of developing countries and the fact that
subsidized rents alone would never induce such investment. Furthermore, the experience of
some Latin American FTZs (e.g., in Costa Rica and the Dominican Republic) that have
relied on private enterprises and capital (domestic or MNC) for establishing FTZs also is
valuable.
Imperfect information about external markets and technology as well as economies of
scale and external economies in overseas marketing justify institutional support for export
marketing. However, the creation of a trade promotion agency in a developing country does
not guarantee the level of success experienced by the East Asian NIEs. Efforts to improve the
efficiency of such an organization are needed as well. For example, the Hong Kong Trade
Development Council deliberately limited the share of expenses for personnel (to 30 percent)
to prevent overstaffing; its investment was directed toward more trade services. The
Singapore Trade Development Board was created (1983) by reforming the trade promotion
function of previous agencies. The role of a trade promotion agency as central coordinator of
the promotion activities of chambers of commerce, industry associations, trading companies,
10. President Park used Korea's "monthly trade promotion meetings" effectively to enhance public
awareness of the outward-oriented development strategy at Korea's early stage of export development.
This measure was a uniquely Korean adaptation of Japan's model, transposed to Korea's cultural
background and temperament. The other East Asian NIEs also used their unique institutional
mechanisms to induce collective efforts to implement their outward-oriented strategies.



88   Managing Entry into International Markets: Lessons from the East Asian Experience
and export manufacturers is even more important than its information-gathering and
disseminating functions.
A lesson for developing countries is that each culture has a unique institutional
infrastructure that can become a foundation for effectively implementing an outward-oriented
development strategy provided deliberate efforts are made to capitalize on the positive
aspects. For example, Korea capitalized on the pragmatism of Korean shamanism. Research
is needed to find, for example, the types of trading companies suitable for different cultures.
Conclusions
The emphasis in this chapter has been on the lessons from the East Asian NIEs that are
relevant to developing countries today. These countries should pay particular attention to
the NIEs' process of initiating outward-oriented development in the 1950s, 1960s, and 1970s.
Of course, the task may be more difficult for developing countries, given their initial
conditions and current world market environments. Such difficulties should not prevent them
from pursuing an outward-oriented strategy, however. The strategy can initiate dynamic
development in an outward-oriented direction, expand imports, and provide a more
competitive domestic industrial base. The sequencing of the reforms related to policies and
institutions and infrastructure building in the East Asian NIEs should be of special interest.
INMIATnON OF DEVELOPMENT. A developing country with unfavorable initial conditions, as
explained earlier, needs to bring in foreign parties and partners who can package the critical
foreign and domestic elements needed to enter the world markets and establish the minimum
policy and infrastructure environments that put domestic firms on an equal footing with their
foreign competitors.
DzFUSION OF DEVELOPMENT. Acquiring the capacity to enter the world markets by working
with MNCs is a first step in gaining the industrial competence needed to sustain an outward-
oriented development strategy. Development initiated through collaborative efforts with
MNCs needs to be transmitted efficiently to other domestic firms and throughout the
economy by taking advantage of the tremendous externalities that come from international
contacts and competition.
SEQUENCING OF REFORMS. Given its significant policy distortions, the underdevelopment of
its institutions (including markets), and its insufficient infrastructure, a developing country
can seldom afford to wait until perfect, rational policy, institutional, and infrastructure
environments exist before promoting outward-oriented development. It first must establish an
"equal footing policy" and institutional and infrastructure arrangements. These not only are
necessary conditions for encouraging foreign firms to participate and for initiating
development in an outward-oriented direction, but they also can be the first steps in
establishing perfectly rational policies, mature institutions, and rich infrastructure.
Upgrading the capabilities of institutions (such as banks, trading companies, and
government agencies) that implement the policies that provide equal footing with foreign
competitors will stimulate the government's willingness to extend export policy regimes to
nonexport activities.
The East Asian experience suggests that developing countries would have a better chance
of succeeding in their export policy reforms (i.e., free-trade status, easy access to trade
financing, realistic and unitary real exchange rates and so on) and of extending them to the
whole economy if these reforms were sequenced in parallel with the increasing industrial
and institutional competence gained through world market competition.
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6
THE APPLICABILITY OF THE EAST ASIAN EXPERIENCE
TO CARIBBEAN COUNTRIES
Winston H. Griffith
The newly industrializing economies (NIEs) of Asia-Hong Kong, Singapore, Taiwan,
and the Republic of Korea-which as late as the early 1950s were insignificant producers
and exporters, have had a miraculous post-World War II economic experience. Between 1965
and 1980, the average annual growth of exports of Hong Kong, Singapore, Taiwan, and Korea
was 9.5, 4.7, 27.3, and 19.0 percent, respectively; and for the period 1980 to 1986, it was 10.7,
6.1, 13.1, and 12.7 percent (World Bank 1988a). As the data indicate, between 1980 and 1986
the average annual growth of exports for Korea and Taiwan was much lower than during the
period 1965 to 1980, but their performance was much better than that of any industrialized
country. Compared with 1965, the value of their manufactured exports in 1986 is equally
impressive. In 1965 it was US$995 million, US$338 million, US$104 million, and US$187
million respectively; for 1986 the corresponding figures were US$32 billion, US$14 billion,
US$31 billion and US$35 billion. Some of their manufactured exports have risen so rapidly
that they threaten established producers in many countries. Many of their exports no longer
receive Generalized System of Preferences (GSP) treatment, and some Japanese producers are
asking the Japanese government to restrict imports of some manufactures from these countries.
The Organisation for Economnic Co-operation and Development (OECD) predicted that
some time in 1989 the total exports of these countries would reach, other things constant,
about 80 percent of Japan's. In Korea, the share of the manufacturing sector to gross domestic
product (GDP), which was almost 5.3 percent in 1954, rose to approximately 30 percent in
1986. For Hong Kong, Singapore, and Korea, the share of machinery and transport equipment
in 1970 was 16 percent, 28 percent, and 11 percent respectively; and for 1985 it was 21 percent,
49 percent, and 23 percent. During the period 1965 to 1986, the average annual growth rate of
the gross national product (GNP) per capita was 6.2 percent for Hong Kong, 7.6 percent for
Singapore, and 6.7 percent for Korea. These rates exceeded those of any of the industrial
market economies.
In 1986 gross domestic investment as a percentage of GDP was 23, 40, and 29 percent for
Hong Kong, Singapore, and Korea respectively; and the corresponding figures for gross
domestic savings for the same countries were 27, 40, and 11 percent. Whereas almost all
nonpetroleum exporting, developing countries have very limited foreign exchange assets, the
four leading NIEs of Asia have been accumulating foreign exchange, particularly Taiwan,
whose reserves in 1986 stood at US$50 billion. Taiwan has recently offered to make loans to
some U.S. companies "to help encourage U.S. exports and reduce the huge U.S. trade deficit
with the island" (journal of Commerce, 1989). With the exception of Korea, the external
debt of each of the other countries is less than US$2 billion. Their unemployment rates are
Billion = 1,000 million.
91



92   The Applicability of the East Asian Experience to Caribbean Countries
relatively low and other conventional economic indices of growth and development are also
impressive.
A number of writers have attempted to identify the causes of the post-World War II
economic success of the East Asian countries. Some of the causes they have pointed to are a
penchant for hard work and high savings, the geopolitical significance of the region to the
United States and most significant, their export-oriented production policies. Emphasizing
the contribution of export-oriented production policies to the postwar economic success of the
East Asian countries, proponents of the East Asian model state that an export-oriented
strategy of development tends to be positively correlated with better growth performance
(Balassa 1978: 54). They also say that export promotion is superior to import-substitution
policies (Krueger 1981). They argue that minimal government intervention in economic
performance is crucial to successful export-oriented strategies (Krueger 1985: 198).
It is doubtful that all less developing countries can successfully replicate the East Asian
export performance because the industrialized countries will simply not allow huge imports
of manufactures from the developing countries to disrupt their economies on a continuing
basis. If all developing countries adopt the East Asian model of export-oriented
development, they will capture about three-fifths of the share of manufactured imports by
industrial market economies (Cline 1982: 394). If one adopts an import penetration of 15
percent as a threshold beyond which the industrial countries would institute protectionist
barriers, then, according to Cline, "fully four-fifths of the industrial country markets for
manufactured exports from developing countries would be vulnerable to probable protective
action in the face of a flood of developing country exports, caused by a general adoption of
the Asian export model." Even if one ignores the possibility of import restrictions, it seems
unlikely that if all developing countries follow the East Asian model of export-oriented
development, the industrialized countries will be able to absorb all of their manufactured
exports.
This chapter hypothesizes that it may be difficult for the Caribbean Community and
Common Market (CARICOM) countries to replicate the East Asian experience. But this does
not mean that the Caribbean countries cannot gain any valuable lessons from the East Asian
experience. To determine what these lessons are, I first examine the contention that minimal
government intervention has been an important element contributing to the economic success of
the East Asian countries. The arguments are as follows: (1) with the exception of Hong Kong,
East Asian governments have played a very active role in their economies; (2) the
international environment in which the East Asian countries began their export drive is very
different from today's, in which CARICOM countries are being urged to pursue more export-
oriented production policies; (3) the implications of the new technology for CARICOM
countries is very different today; and (4) the infrastructure and certain social and
institutional parameters may also prevent countries in the region from replicating the East
Asian experience.
Laissez-Faire or Government Intervention?
Have East Asian countries been successful because their governments have played a
minimal role in the economy? Some economists seem to suggest that the developing countries
can realize high rates of growth and development by exposing their economies to free
market forces. But the governments in at least three of the East Asian countries did not
leave the development of the economy to the invisible hand. In 1973, for example, the
government of Korea introduced the Heavy Industry and Chemical Plan to force the
disproportionate growth of capital-intensive industries-shipbuilding, steel, machinery, and
petrochemicals. It increased the production of ships by about 15,000 percent despite a global
contraction. The Korean government also took over five leading commercial banks. In the
1960s and 1970s government spending was about 20 percent of the GNP and public investment
was about 40 percent of total domestic investment. In the early 1980s the government was



Winston H. Griffith 93
still busy forcing mergers and monopolies to reduce competition and obliging companies to
adopt a particular pattern of specialization.
In Taiwan, the government played an active role in economic affairs, although its
involvement might have been less pervasive than that of the Korean government. For
example, the Taiwanese government controlled most of the banks, and in the 1970s it
directed most of the loans to the public heavy-industry programs (Cline 1982:49). Chen
(1983: 8) notes that in Singapore the government owns or is a joint partner in "transportation,
communications, finance, construction, shipbuilding and repairing, electronics, engineering,
and other manufacturing activities."
International Environment
The late 1950s and early 1960s, when the East Asian countries began their export drive,
witnessed an unprecedented global economic expansion. According to Reynolds, (1980: 94):
From 1945 to 1973 the world economy grew as never before, confounding the prophets of
stagnation who had flourished in the 1930s. In the OECD countries, GNP grew at an average
annual rate of 5 percent per annum, and GNP per capita at close to 4 percent. These rates
were well above those for any previous period of comparable length.
In the two decades following 1953, total trade increased by about 8 percent per annum
and manufactures by about 11 percent per annum. According to Balassa (1981: 2), between 1973
and 1978 industrial countries' imports of manufactured goods from the developing countries
increased by about 10.2 percent a year.
In addition to being part of a rapidly expanding global economy, the East Asian
countries are situated in a region that assumed great geopolitical significance to the United
States in its confrontation with the Soviet Union after World War II. The Communists lhad
come to power in China and Western governments felt threatened by the growing
nationalism in Asia. The East Asian countries benefited from the Cold War as the United
States, the dominant hegemonic power at the time, extended them favorable trade
concessions as part of its global strategy of containing communism.
Given the geopolitical significance of Asia to the United States in the postwar period,
it should therefore come as no surprise that special privileges were granted to these
countries, such as the waiving of textile quotas. Korea exported to the United States about
25 mrillion pairs of shoes in excess of its quota (Balassa: 129), and U.S. customs showed
leniency toward Hong Kong, Korea, and Taiwan when, in clear violation of established
trade regulations, they used third countries to ship textiles, clothing, and footwear to the
UnitŽd States (Feijnzylber 1981).
('aribbean countries are being urged to pursue export-oriented policies in a global
envi onment completely different from the one in which East Asian countries began their
expcrt drive. During the period 1980-86 the average annual growth rate of global trade was
less :han 1 percent (World Bank 1988b: 2). The United Nations (1987: 59) has reported that
"dur.ng the period 1981-1985, exports of manufactures grew at 4.8 percent, compared with 7
percr nt during the 1970s and over 10 percent in the 1960s"; and that "trade remains a weaker
engiile of growth than in the past" (United Nations 1987: 51). Between 1980 and 1987, real
per tapita GDP in the industrial economies grew at about 1.9 percent a year (World Bank
1988a: 2).
Some believe that the Caribbean countries also have access to the world's richest
markets (the United States and the European Community) which consist of 500 million
consumers under Lome and Caribbean Basin Initiative (CBI) (Europe 1986: 27). But neither
the primary commodities of the region nor the manufacturing-export industries such as
textiles and apparel have unlimited access to the US-EC market. During the 1970s, for
example, the United States granted Caribbean countries the GSP, which gave duty-free
treatment to designated imports. Many CARICOM products enter the United States under
GSP. But the GSP has limits on duty-free benefits and excludes some products. For instance,



94   The Applicability of the East Asian Experience to Caribbean Countries
the United States withdraws the preference "when the specific export product is either half
of U.S. imports or exceeds about US$71.4 million in value" (World Bank 1988b: 8). Moreover,
as former Secretary of State George Shultz testified before the U.S. Senate Finance
Committee: "These (and other) limitations, and the whole complex structure of the GSP,
limit the ability of small and relatively inexperienced traders-which is often the case in
the Caribbean Basin-to take advantage of the GSP opportunities" (Shultz, 1982: 2).
Since a large number of regional commodities exported to the United States enjoy GSP
treatment, one should not expect the list of products benefiting from the CBI to be very long.
Indeed, the CBI excludes many products considered crucial to the long-run development of the
region. Some of the excluded products are textiles and apparel, footwear, work gloves,
handbags, luggage, petroleum, and sugar. The exclusion of the first two items has been
particularly disappointing to countries in the region because of their perceived potential as
employers of labor. The United States now allows some imports of textiles and apparel
under the CBI, and in 1989 it increased the quota for these products for two Caribbean
countries, Haiti and Jamaica (Caribbean Business 1988). But to be eligible for export textiles
and apparel to the United States under CBI, designated beneficiary CBI countries must sign
the Special Access Agreements that activate Guaranteed Access Levels; and only five CBI
countries have signed the Special Access Agreements.
Although regional textile and apparel exports to the United States have risen as a
result of the CBI (World Bank, 1988b: 13), Caribbean governments need not think that the
United States will continually increase its imports of these products. About four years ago, a
U.S. embassy official in Barbados, Gordon F. Dugan, warned CARICOM countries that
whereas textiles had started the industrial revolution in England, Japan, and Korea, they
would not be the catalyst for development in CARICOM countries. This is because the
external market necessary for their large-scale development would not be open to them.
Moreover, regional governments must remember that products now entering the United States
duty-free under the CBI may be subject to tariffs tomorrow (as were rubber wet suits produced
in St. Lucia by a U.S. firm).
The New Technology
The slow growth of world trade and manufactures as well as the protectionism in the
more developed countries may be important elements adversely affecting the ability of
Caribbean countries to replicate the East Asian experience. But a much more critical element
is not only reducing the ability of Caribbean countries to export to the markets of the more
developed countries but is also threatening development prospects and is rendering industrial
development plans obsolete. The new technological revolution is making conventional theory
and policy of limited value to the region, and unless Caribbean countries can devise new
industrial strategies, they will "industrialize to obsolescence." The influence of the new
technology will be global and the microelectronics revolution will be applied to virtually
all sectors of the economy and society. Its products, by being more reliable, cheaper, and
more durable, will penetrate all economies unless a country decides to maintain a full and
permanently closed economy.
All Caribbean governments say that they must have foreign investment to achieve high
levels of growth and development and that their countries must export to extraregional
markets. To attract export-oriented foreign investment, they have been offering foreign
investors various kinds of fiscal and other incentives. But the main export-oriented industries
that the Caribbean nations have been able to attract to the region are labor-intensive and
characterized by an assembly-type nature. Puerto Rico, which once led the region in such
activity, has given way to the Dominican Republic, Haiti and Jamaica. Assembly-type
activities have generated significant amounts of employment in some countries. In the
Dominican Republic free trade zones, for example, employment reached about 70,000
compared with 20,000 in 1984. Similarly, in Jamaica, employment in the 807 garment
assembly-type activity increased from about 2,000 in 1984 to almost 20,000 in early 1988.



Winston H. Griffith 95
Corresponding to such increases in employment have been increases in manufacturing
exports. For example, the World Bank (1988b: 17) reported that "the 807 exports of the
Dominican Republic, Haiti, and Jamaica have increased by more than 20 percent in the
1980s." Most of these exports are clothing, the largest 807 export category to the United
States. Between 1980 and 1986, the annual growth rate of textiles and apparel export items
to the United States by these three countries was 21.9, 10.9, and 38.8 percent, respectively
(World Bank 1988b: 13). At least in these three Caribbean countries, export-oriented apparel
production seems to have had some success. But will this kind of activity last a long time?
The vast majority of 807 Caribbean apparel exports, whether manufactured by foreign
firms or through joint venture relationships, consist of fabric cut in the United States. The
Caribbean conducts the assembly of the product. Although it gains in direct job creation, the
region loses secondary and tertiary employment as a result of being relegated to the lowest
level in the manufacturing hierarchy. Manufactures from industrial countries have been
locating their sewing operations offshore because the process is very labor-intensive and
labor in the industrialized countries is relatively expensive. In addition, sewing has proved
difficult to mechanize. But Technology Corp. (TC2), a combined effort of government,
business, and labor located at the Massachusetts Institute of Technology, has now developed
"a computerized production process with robots which will take cut fabric and fully
automate the manufacture of subassemblies. The cut fabric will be automatically fed into a
machine and, with a computer-aided vision system and robot, will sew, turn, and fold the
fabric" (US Congress, Office of Technology Assessment 1987: 70).
TC2 is also applying the new technology to knitwear-permitting automatic sewing of
knit parts. In addition to these developments, alternate technologies-gluing, fusing, and
welding of fabrics-may be developed and can be automated more successfully than sewing.
Japan is supporting such a high-tech venture. Caribbean governments must realize that the
eventual development of these technologies and their general diffusion may reduce the
attractiveness of the region as a garment-assembly production platform.
The new technology will also adversely affect the export of assembled electronic
products and semiconductors from the region. The number of semiskilled operatives is
declining relatively, if not absolutely. It may be useful to briefly examine this industry since
many governments are trying to attract more direct foreign investment in data processing
because of its perceived potential as an employer of labor. For example, AMR Caribbean
Data Services (CDS), a subsidiary of American Airlines, has a plant in the Dominican
Republic and in Barbados for processing its airline tickets. At its plant in the Dominican
Republic, CDS employs more than 300 persons (BusinessWeek, April 4, 1988). The plant in
Barbados employs a similar number of people. But Caribbean governments should not assume
that data processing will always be a labor-intensive activity. The new technology like the
"smart ticket" in which a machine reads and records data, will eventually reduce the
attractiveness of the region as place for offshore data processing.
Infrastructure
When the East Asian countries began their export-manufacturing drive, they had
abundant supplies of unskilled labor that helped to keep their manufacturing costs of
production internationally competitive. Today, an abundant supply of unskilled labor may be
an insufficient condition for a successful industrialization export strategy because direct labor
costs, as a percentage of the firm's total costs, are declining rapidly. Moreover, productivity
arising from the new technology as well as the broader restructuring process in many firms is
such that, despite relatively high wage rates, a firm onshore can still be competitive. If
U.S. labor is competitive with its offshore counterpart, it therefore makes sense for the
factory to be located in the market in which its products are consumed.
The East Asian countries have come to realize that economies of location based on
inexpensive labor are temporary. They remember that companies from industrial countries
moved plants to their countries to take advantage of their relative inexpensive labor; and



96   The Applicability of the East Asian Experience to Caribbean Countries
now that the cost of their labor is rising, they see that some of these companies are moving
operations to neighboring Asian countries. They have responded by using the valuable
expertise gained in the phase before the new technologies were acquired to produce products
based on such technologies. Some may argue that many manufactured exports from East
Asian countries are not national but are products of U.S. firms producing in these countries.
This, however, overlooks the fact that the leading NIEs of Asia are accumulating a pool of
national industrial entrepreneurs to help effect the transition to a high-tech society.
Daewoo, which used to be a subcontractor to U.S. companies for computers, is now selling its
own personal computers. A recent study by the OECD (1988) provides compelling evidence
that East Asian countries are making the transition to high-tech societies. In addition to the
four NIEs of Asia, the OECD included in its study Mexico and Brazil but, this does not
weaken the argument.
To ensure that they have the personnel to compete in a high-tech world, East Asian
countries have been spending large sums of money on technical education. Between 1976 and
1986 in Korea, for example, "the number of engineering graduates with advanced degrees
increased sevenfold. R & D was only 0.39 percent of GNP in 1970; by 1986 it had reached
2 percent, even as GNP soared. According to government plans, R & D spending will rise to
2.8 percent of GNP by 1990 and 5 percent by the year 2000" (Amsden 1989: 53). The
enrollment ratio at the tertiary level (i.e., the number of students enrolled at the tertiary
level as a percentage of the age cohort 20-24) is about 12 percent for Hong Kong and
Singapore and more than 30 percent for Korea (McIntyre 1988: 40). These figures compare
favorably with those in the more industrialized countries. In the Caribbean, however, the
enrollment ratio is about 5 percent or less (McIntyre 1988).
Caribbean countries do not have the national entrepreneurs who can help move the
region to a stage of development where it can produce high-tech products locally. The
dominant national entrepreneurial class is mercantile in outlook and seems reluctant to
undertake productive activities. Some time ago, Lewis (1950: 40) warned that the mercantile
class, instead of supporting, might even be hostile to manufacturing activity. Today many
writers share Lewis's opinion of the Caribbean mercantile class. Manley (1974: 78) accuses
the mercantile class of reinforcing the colonial tendency of the region toward export-import
orientation. The former Minister of Foreign Affairs of Trinidad and Tobago, Errol Mahabir,
said of local investors in that country, considered the most advanced in CARICOM:
[They] are very slow in arriving at decisions, and when they do decide, their decisions reflect a
short-term view, preferring a quick return rather than long-term growth; in other words, the
approach is largely that of traders rather than industrialists (Pryce, 1985: 247).
"Furthermore, in 1982, sixty percent of the gross profits turned over in Jamaica were
concentrated in commerce and real estate" (Stone 1987: 31). Merchant capital still dominates
national economic activity; but merchants trade in products as they find them and have
little incentive to revolutionize the means of production since their profits are not
significantly dependent on reducing the cost of production by raising levels of productivity.
The small national industrial class shows little willingness to promote the development
any kind of technology; instead its members seem content to rely on imported technologies. In
their study of vehicle assembly in Trinidad and Tobago, Farrell and Gajrai (1985: 199) have
noted that the "assemblers show no enthusiasm for attempting to escape . . . (their
technological) dependence." They added that such technological dependence might be in the
interest of the local capitalists. Likewise, persons entering the food-processing sector might
seek to manufacture a standard product for which a complete technological package is
available, being reluctant to enter into uncharted waters without having a firm foundation
in science and technology.
Even if one assumes that national entrepreneurs are willing to develop the new
technology-a very unlikely situation given the nature of merchant capitalists-one must
still ascertain whether they can. Developing the new technology is an expensive
undertaking. In 1986 U.S. firms in the computer industry spent about US$7.9 billion on



Winston H. Griffith 97
research and development and U.S. chip makers about US$1.3 billion. In the same year, U.S.
textiles and apparel industries spent about US$68 million on research and development
(Business Week, June 22, 1987). In 1985 the informatics industry in Brazil-the word
"informatics" covers the whole field of computing, including microelectronics, automation,
software, and peripheral equipment-spent about US$130 million on research and
development. Caribbean national entrepreneurs, individually or collectively, do not have
the ability to spend such sums of money on R & D.
Not only is the region short of the financial resources necessary to develop the new
technology, it is also short of the skills required to develop the new technology. The
manager of Intel, which closed its plant in Barbados a few years ago, complained, for
example, thIat it was unlikely to find a dozen electrical engineers in Barbados (Wall Street
Journal, March 18, 1985). But, when persons with the essential skills are available,
governments do not fully utilize their talents. Theoretically, CARICOM governments can
overcome the shortage of skilled personnel in the region by importing such skills and
devoting more expenditures to research at the university level. But they may be unable to
compete with the industrialized countries, where the skills needed for research on the new
technologies are scarce and are commanding relatively high salaries. Nor may regional
governments be able, under their political system, to divert financial resources away from
vital social services. Such action may result in political unrest and scare away foreign
investment, which said to be crucial to the long-run development of the region.
Caribbean countries will thus have great difficulty attracting high-tech firms. In
addition to other adverse elements, no foreign investor will locate in the region if the skills
necessary to produce some given product are unavailable or, if they are available, but are
not wage competitive. It is also pointless for Caribbean governments to talk about attracting
high-technology firms when they are reluctant, for whatever reasons, to give the University
of the West Indies the resources to restructure an educational system.
Institutionalization of Labor Relations
When they embarked on their industrial drive, the East Asian countries effectively
suppressed any inconsistency that arose between the demands of the collective objective, as
defined by the state, and the demands of political unionism that might have reduced the
profitability of capital below its opportunity cost and slowed the industrialization process.
East Asian states were able to establish an income distribution consistent with rapid
economic growth.
Caribbean governments have not been able to enforce an income distribution consistent
with the collective objective. This is due, among other things, to the close association
between trade unions and political parties. Close political and financial ties exist between
political parties and trade unions in virtually all Caribbean countries (Wallace 1977). But
this "endearing oddity" of Caribbean political parties in conjunction with the Westminister
model of government may often be a hindrance to long-run economic development. Demas
(1965: 98) writes:
The consequences of these social and institutional parameters (trade unionism and
Westminister-style political democracy) for the development process are not difficult to
discern. First, the existence of political democracy and the possibility of alternative
governments can bring to the forefront the quite justifiable demands of the population for
immediate and badly needed improvements, especially in social services; and since resources
are always limited, this can conflict with long-run objectives of promoting structural changes
in the economy. Second, the trade unions can and often do pursue policies which secure
short-term gains in real wages and working conditions for their membership at the expense of
the expansion of employment opportunities, capital formation, and government budget.
In a flourishing political democracy it may be difficult for governments to survive for
long should they adopt economic policies that do not have strong union support. However,
because they are conducive to long-run development, governments ought to consider such



98   The Applicability of the East Asian Experience to Caribbean Countries
policies. The alienation of the trade unions by the ruling party in Barbados and in Jamaica
contributed in some measure to the defeat of the governments in those countries in 1986 and
1989 respectively. The "Day of Resistance" in Trinidad and Tobago (Caribbean Contact April
1989) may portend trouble for the NAR regime in that country.
To identify the negative aspects of some institution is not to deny the positive
contribution it has made to the development process. Anyone familiar with Caribbean
development will not minimize the positive role that trade unions have played in
improving the welfare and working conditions of Caribbean workers. There may be a conflict
between the objectives of trade unions and the long-run objectives of govemments in a
political democracy where opposition parties are prepared to champion any cause that will
help them capture the government. They may, however, abandon the cause after capturing
the government, but in the mean time it may be difficult to resolve the conflict.
That Caribbean nations must have inflows of foreign investment to grow and develop is
the opinion of the majority of politicians and trade unionists of all persuasions. Although
they agree that foreign investment is indispensable to growth and development, some do not
seem to understand fully the conditions that appeal to foreign investment. Foreign
investment will gravitate toward those countries whose conditions facilitate the growth and
expansion of capitalist development. In the 1960s, when the East Asian countries began to
develop their export drive, foreign investors sought relatively inexpensive labor. Today,
many still do-as evidenced by the fact that the new NIEs of Asia are attracting factories
from the older NIEs whose industrial relations climate seems to be deteriorating. If
Caribbean nations assert that they must have foreign capital to attain their objective of
faster economic growth, they must create the regional conditions necessary to attract foreign
capital. For example, the wage-productivity ratio in the Caribbean must be such that-
given a favorable social and political climate-even with various disadvantages such as
higher costs, countries in the region will still be competitive internationally.
Conclusion
To argue that Caribbean countries may have difficulty replicating the East Asian
experience does not mean that Caribbean countries cannot gain any valuable lessons from the
East Asian experience. Balassa (1988) has shown that developing countries can learn a great
deal from the East Asian experience. But the Caribbean countries cannot however
manipulate certain variables that contributed to the success of the East Asian countries. For
example, they have no control over the slow growth of global trade; nor can they force the
more developed countries to lower their protectionist barriers. Caribbean governments are
being urged to become efficient and to turn over state-owned enterprises to the private sector
as a condition for rescheduling their external debt and for obtaining loans in international
financial markets. They must now compete in a world where high technology has become
the basis for a nation's competitiveness, where the life cycles of many products are no more
than three years, and where the new technologies are restructuring the international
division of labor and reducing the demand for direct labor and raw materials. They have to
compete in a world that is becoming more and more self-sufficient in everything except
petroleum and is thus reducing the need to depend on the less developed countries for most
products. Furthermore, it is difficult for the Caribbean countries to have the same high rates
of growth as East Asia because the social infrastructure, the political system, and labor-
management relations in East Asian countries are very different from those in the Caribbean.
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Economic Review 2 no. 1 (May).
McIntyre, Alister. 1988. "The University Revisited." Caribbean Affairs 1(4).
Manley, Michael. 1974. The Politics of Change: A Jamaican Testament. London: Andre
Deutsch.
Organisation for Economic Co-operation and Development. 1988. The Newly Industrializing
Countries: Challenge and Opportunity for OECD Industries. Paris.
Pryce, Everton. 1985. "Trinidad and Tobago: Special Report." South (September).
Reynolds, Lloyd G. 1980. "Economic Development in Historical Perspective." American
Economic Review 70 (2).



100   The Applicability of the East Asian Experience to Caribbean Countries
Shultz, George. 1982. "U.S. Approach to Problems in the Caribbean Basin." Current Policy
412. Washington, D.C.: U.S. Department of State.
Stone, Carl. 1987. "Running out of Options in Jamaica." Caribbean Review 15, no. 3 (Winter).
United Nations. 1987. World Economic Survey: Current Trends and Policies in the World
Economy. New York.
U.S. Congress, Office of Technology Assessment. 1987. The U.S. Textile and Apparel
Industry: A Revolution in Progress - Special Report. Washington, D.C.: Government
Printing Office.
Wallace, Elizabeth. 1977. The British Caribbean: From the Decline of Colonialism to the
End of Federation. Toronto: University of Toronto Press.
Wall Street Journal. 1985. "Barbados Finds Wooing Business Isn't Easy." March 18.
World Bank. 1988a. World Development Report 1988. New York: Oxford University Press.
. 1988b. The Caribbean: Export Preferences and Performance. Washington, D.C.



7
INCREASING INTERNATIONAL COMPETITIVENESS:
A CARIBBEAN COMMUNITY PROGRAM
Havelock R. Brewster
A normative element reflecting social and environmental preferences may be desirable in
targeting export industries for the Caribbean. Comparative advantage can be and, in some
countries, is being deliberately planned. Indicators of international competitiveness at the
industry and macroeconomic level should preferably convey analytic signals, useful in the
evaluation of alternative policy options. They should also be data manageable.
A distinction should be made between the gross and net value of exports, especially
when different categories of export goods are being compared and conclusions drawn about
the benefits of competitiveness and improved productivity. Competitiveness is most
relevantly tested not against lower wage exporters but against manufacturers in the United
States. Devaluation is not the proven cause of the increased exports of manufactured goods
from some Caribbean countries. More detailed, innovative research is needed.
Community institutions can assist in the task of enhancing competitiveness by
stimulating those directly responsible for implementation in government, business, and
training and research institutions. This approach should also be cost-effective. Four measures
would be helpful in this area: (1) regional consultations on macroeconomic management
(CONMEC), (2) the upgrading of technology and productivity in primary industries
(TECHPLAN), (3) targeting and promoting new export industries and services (NEXPRO),
and (4) research on future economic, social, and technological issues (CARIBFUTURES).
Social Preferences and Comparative Advantage
In an age in which export activities can, to a good extent, be targeted, Caribbean
societies should probably be cautious about leaving their social preferences to be
indifferently determined by an intrinsic comparative advantage. The physical and economic
characteristics of this incomparably beautiful region and the experience of so-called
successful exporting countries over the past 30 years underscore the need for this caution. The
very small, densely populated islands of the Caribbean can rapidly become environmentally
unsustainable. A stunning example of this occurred on an island roughly the size of
Hispaniola: "On April 1, Taiwan residents awoke to the news that air pollution across a
wide swath of the island exceeded acceptable levels and the Environmental Protection
Administration advised people to stay inside. With cases of cancer, birth defects and lung
diseases on the rise, urban residents don surgical masks to protect themselves" (IHT, 1989).
On a less spectacular scale, comparative advantage has decreed what, in retrospect, seems to
be a repugnant or precarious dependence on sweatshops, massage parlors, and package
tourism in some small countries.
A further caution is provided by the frightening relationship between space, density,
and the pursuit of wealth, as, for example, in Hong Kong or Japan. With per capita income
Havelock R. Brewster is with the UNCTAD Secretariat in Geneva.
101



102   Increasing International Competitiveness: A Caribbean Community Program
some 15 times that of most Caribbean countries, it is doubtful that important aspects of the
quality of life of the average Japanese are any better than those of the average Caribbean
person. In fact, Japan's GNP capita is 21 times greater than that of Jamaica. But the Human
Development Report (UNDP 1990, published subsequently to this seminar) gives Jamaica a
human development score of 82 percent compared with 99 percent for Japan which occupies
the first place.
Rates of unemployment are high in Caribbean countries but the absolute size of
available labor is minute and could be quickly exhausted. With open investment and
technology transfer regimes, the relative scarcity of capital and technology to labor becomes
a questionable guide to attainable comparative advantage and potentially exportable goods
and services (UNIDO 1986). Therefore it seems all the more advisable for Caribbean
societies to look before they leap into exports.
The Measurement of International Export Competitiveness: Traditional
Measures
A normative element may be desirable before determining the range of products in which
international export competitiveness is sought. For example, there may be little interest in
knowing that the Barbados holiday industry is not competitive with that of, say, Majorca
or Miami Beach, if Barbadians feel more at ease with their particular kind of tourism and
how they would like it to develop.
A measure of competitiveness should also convey information that is useful in selecting
policy actions aimed at making a potential export activity competitive. Thus it may be
pointless to know, for example, that China, as a result of very low wages, can export
garments at a better unit price than Jamaica. Garments of a similar description and quality
can be and are being sold at a wide range of prices, and countries can and have moved
virtually overnight from being successful low-price exporters to successful high-price
exporters. Moreover, no amount of devaluation or wage restraint can make Jamaica
competitive with China-its retained value added in manufacturing is one-fifth that of
China, while its wages are five times as high.
These perhaps extreme examples serve to illustrate why traditional measures of
international export price competitiveness of the kind apparently first used by Kravis and
Lipsey (1971) (K-L) and a variant of it suggested by Helleiner (1989) for the Caribbean may
be of limited usefulness. The K-L index is essentially a comparison for a given product of the
home country's price with the weighted average price of imports from other countries, using
a common currency.
That is,
e i ijP                                     (1)
hj
ei being the index of change in domestic currency cost of the currency of country i; P.. the
index of price change in country i for product j; Ph' the index of price change in the llome
country for product j; and wt. the share of country i ir the competing imports of product j.
Kravis and Lipsey usedl their index to compare the price competitiveness of industrial
products of the United States, in the mid-1950s to mid-1960s with that of several European
countries and Japan. In a context where all the countries being compared already have the
full range of industrial products and technological capacity, the index may be appropriate
(in any case, the K-L study found that price competitiveness was not the decisive factor in
explaining export success in industrial goods).
In more specific terms, the K-L index offers no guidance to countries like those of the
Caribbean where the interest is in finding new exportable goods, preferably those, as
suggested above, that are in tune with their social and environmental preferences. It is



Havelock R. Brewster  103
likely to be, if not a mere abstraction, a misleading indicator for the reason that, given the
relative importance of nonprice factors and their lack of correlation with prices, the
weighted average price of competitors' products may be badly skewed from the standpoint of
assessing the competitiveness of any particular exporting country. Such an index also says
nothing beyond what may, in any event, already be self-evident to manufacturers, whereas
the real need is for guidance on more specific actions to improve competitiveness. Finally,
the K-L index is industry-based and thus may not be the most appropriate measure of
international competitiveness for use by governments and the community for purposes of
macroeconomic guidance and coordination.
Alternative Approaches at the Industry and Macroeconomic Level
It would probably not be possible to monitor with acceptable accuracy and regularly over
time the prices of comparable manufactures of a range of competing exporting countries. As
mentioned above, prices of similar, and even identical, manufactured goods in the same place
vary greatly, while the performance of exporting countries seems to be affected
predominantly by nonprice factors. Moreover, with experience, competing exporting countries
are unlikely to supply at prices that are unnecessarily lower than the marginal cost of the
importing country. There may be a reasonable presumption, therefore, that, given acceptable
nonprice conditions, any manufactured product the supply price of which is comparable to or
lower than that of manufacturers in a selected importing country could be salable. This
makes possible and greatly simplifies the search for a usable index of international
competitiveness at the industry level. This may be expressed in the form of two
complementary indicators. First,
mla + V ji * e
c ji    p'.                                         (2)
where        mw = (r, + tid + fui +.*)
and          vji e=(wjj+sji+kj, +up1          )* e
where, for purposes of illustration, cji is the index of competitiveness of a targeted
industrial exportable (i) of Jamaica (j) conforming to explicitly chosen normative criteria;
mui is the share in price of material imports from the United States (u) for the manufacture
in Jamaica of exportable i; Vji is the retained Jamaican value added of exportable i; e the
rate of exchange of Jamaica for U.S. dollars; Pui is the US supply price of product i
manufactured in the United States; rui' tui' fui of U.S. raw and intermediate materials,
transportation, etc., and tariffs in U.S. dollars; w -jjs kji- u i  x i are respectively the share
in the price of Jamaican wages, profits, working capital cost, ufilities, and other goods and
services and taxes in Jamaican dollars.
Index (2) brings out several policy useful features. For example,
* To the extent that c1i > I it indicates that there may be a need to make the chosen
exportable competitive.
* It illustrates a possible feasible combination and range of policy actions that could,
over time, contribute to improving competitiveness, ranging from devaluation of the
rate of exchange and shifting to cheaper sources of materials, including domestic
production, to reduced unit wages/increased productivity and decreased taxes.
* It highlights a tradeoff between retained value added and international
competitiveness that suggests the need may be more to optimize cii than to minimize
it in relation to competitors, especially those such as Asian countries that have a
substantially higher retained value added. This point is particularly important in



104   Increasing International Competitiveness: A Caribbean Community Program
cases where increased productivity would not result in a commensurate increase, if any
at all, in  retained  value added-a  situation  that would  be even  more
disadvantageous if the increase in productivity required an increase in capital, or if
wage restraint would lower retained value added but would not itself be the cause of
increased exports. Or where devaluation would lower the supply price beyond that
which could suffice for a given expansion in export sales.
Second, it might also be useful to monitor changes in the competitiveness of an export
product through the use of a data manageable indicator that also conveys specific policy
signals.
= ( W.i )   I
cp=e  nj,LJ   L u                                    (3)
where Cji is the change in the index of international competitiveness, e is the change in the
index of the rate of exchange between Jamaican and U.S. dollars; wjij nji' Pui are,
respectively, changes in the index of Jamaican wages in export industry i, of Jamaican
productivity in export industry i, and of the U.S. supply price of product i. This indicator is
based on the experience that, at the level of a specific industry, especially one in which
wages are a large proportion of retained value added, prices rise by at least the difference
between the rate of increase of wages and the rate of increase of productivity. Again, for the
reasons given above, competitiveness is expressed in relation to the supply price of the goods
manufactured in the importing countries (not supply prices of so-called competing exporting
countries). It also does not require information about productivity increases in the importing
country's industry.
If Cji < 1, Jamaica is likely to be improving its relative competitiveness, given the
influence of nonprice factors. This indicator also suggests that it may be preferable to
optimize rather than to minimize cji. It illustrates, too, some of the main tradeoff
possibilities, particularly in a situation that actually has been characteristic of the period
since 1985, where Pui is very small.
At the macroeconomic level OECD in its biannual review, OECD Economic Outlook,
publishes a series of indices called "Competitive Positions" for its member states. These
indices are: manufacturing unit labor costs in local currency, relative unit labor costs in
manufacturing in a common currency, export prices of manufactures in local currency, and
relative export prices of manufactures in a common currency.
Other indicators relevant to the assessment of international competitiveness at the
macroeconomic level that are regularly monitored by the OECD include: year-to-year
percentage change in wages (composition per employee), year-to-year percentage change in
prices (GNP/GDP deflators), rates of exchange against the U.S. dollar, the effective
exchange rate, profit shares (gross operating surplus relative to value added), real rates of
return (gross operating surplus relative to the gross capital stock), pure profit rates (real
rates of return minus real interest rates), rate of investment, and interest rates.
In addition, more recently, a series has been published on the rates of growth of private
sector labor productivity, the rates of growth of private sector capital productivity, and the
rates of growth of private sector total productivity.
This comprehensive series of macroeconomic international competitiveness indicators
would probably set an overly ambitious standard for the Caribbean community and may not
be altogether necessary or even particularly relevant, especially in view of the limitations
of data and facilities. Although the concern in the Caribbean is not mainly (though it is to
some extent) with competition within the area, as it is in the OECD, it would also not be
possible to track the pertinent variables of countries that the Caribbean is supposedly
competing with.



IHavelock R. Brewster 705
A minimum program of macroeconomic monitoring of competitiveness for the Caribbean
might therefore be based on indices for the following key variables to be estimated for each
Caribbean country, with the United States as the most relevant reference country: real
output, the price of imports, wages, employment, the inflation rate, and the exchange rate.
The most relevant indicator of relative competitiveness for a Caribbean country, in view
of the limited scope for discretionary policy action on import prices, at least in the medium
term, would probably be
rrc = e                                                  4i) /Pu=e
where mc- is the index of change of macroeconomic competitiveness of Jamaica; e the index of
change o/ the rate of exchange between the Jamaican and the U.S. dollar; bc is the index of
change of labor compensation in Jamaica; b- the index of change of labor employed in
Jamaica; y. is the index of change of real GI4P/GDP; and Pu the index of change of the
GNP/GDPdeflator of the United States.
A complementary algebraic elaboration of the issues raised by wage, price, and
productivity relations in the macroeconomic management of structurally dependent economies
is given in Brewster (1969).
An application of equation (4) to Jamaican data leads to the conclusion that,
notwithstanding the relatively large devaluation of 1985, that country suffered a
substantial loss of competitiveness from 1984 to 1988, a period in which exports also fell by a
large amount-but not necessarily and wholly for that reason.
Devaluation and Competitiveness
The extreme structural dichotomy of most Caribbean countries poses a virtually insoluble
problem for exchange rate policies. On the one hand, the bulk of exports-traditional
tropical agricultural and mineral products of high retained value added-faces a more or
less fixed demand, with prices externally determined and quoted in foreign currency. On the
other hand, the production of manufactured goods for export is as yet minute, highly
dependent on imports, and thus composed of a very small retained value added. As for
Caribbean tourism, given its particular characteristics, import content, and lack of conclusive
evidence of sensitive relative price demand elasticities, devaluation cannot be viewed as
necessarily producing net beneficial results. (A comparison of the experience of Jamaica,
Barbados, Antigua, and the Bahamas in 1979-86 hardly supports the case for devaluation.)
On top of this, in these small societies of such patchy economic structure it would prove
extremely difficult to limit the transmission of devaluation to domestic prices, to the full
extent, if not more.
In Jamaica, Guyana, and Trinidad and Tobago, the devaluations that took place in the
1980s were more than offset, by a substantial margin, by the growth of inflation over a
period of one to three years (when U.S. producer prices were increasing by an average of less
than 1 percent a year).
There is a clear danger therefore of having the worst of all worlds-very high social
costs with little positive impact on export earnings (Bourne and others 1988). It is recognized
that devaluation entails transitional costs. However, the structural dichotomy referred to
above is extreme in the Caribbean. For example, in Jamaica the most structurally developed
of the community countries, exports of manufactured goods are about 5 percent of the total
value of exports when expressed in net terms. This feature of the economy, together with the
limited means available for mitigating social costs, suggests that the transitional period
would be both very long and very painful, even if devaluation ultimately were beneficial.



106   Increasing International Competitiveness: A Caribbean Community Program
However, external balance may well eventually be attained through the compression of
imports and the adjustment of the standard of living to a lower level reflecting the region's
economic realities. Whether one approaches the analysis as one of elasticities, absorption or
money supply, the same conclusions are reached.
In this context, it may be worthwhile to review some of the conclusions of the World
Bank (1988). Setting aside the fact that devaluation should be evaluated in terms of its
economywide benefits and costs (and ideally in relation to other alternatives), the point is
made that as a result of the depreciation over the period 1980 to 1986 of the export
weighted real effective exchange rate (REER) of the currencies of Jamaica and the
Dominican Republic (in contrast to other Caribbean countries), the exports of manufactures to
the United States of those countries greatly increased (in Jamaica from $21 million to $141
million and in the Dominican Republic from $302 million to $655 million).
The bulk of the increase in manufactured goods consisted of garments. Returning to a
point made earlier, it would be important in a deeper analysis to bear in mind, when
comparing export values of different categories of goods, that the retained value added of
garments is only about 20 to 25 percent of their gross export value. However, even without
undertaking such an analysis, one finds that in the case of Jamaica the big increase in
manufactured exports actually took place between 1984 and 1986 (from $40 million to $141
million). During this period there was no improvement in the (supposedly more sensitive
indicator of relative competitiveness) REER of Jamaica. Ironically, during the period the
nominal rate of exchange against the U.S. dollar depreciated by 40 percent but was exactly
offset by the increase in domestic prices. In the Dominican Republic, the REER appreciated
by 35 percent in the period 1980 to 1984, while its exports of manufactures to the United
States increased by 68 percent (from US$302 million to US$507 million). These exports
continued to increase by 29 percent (i.e. to US$655m) by 1986, by which time the REER had
depreciated by as much as 270 percent.
What these apparent anomalies in the cases of both Jamaica and the Dominican
Republic seem to suggest is the need for deeper research, greater care in analysis, and better
interpretation of results. Any number of nonprice explanations for the growth of exports of
manufactured goods could be put forward-ranging from the timing of the startup of factories
and the stimulation of entrepreneurship to the buoyancy of the growth of demand and
liberalization of access conditions.
For example, the impact of expansionary fiscal policies in the United States certainly
merits greater attention. Throughout the period 1980 to mid-1985, when the effective
exchange rate of the US dollar appreciated by 45 percent in relation to OECD currencies, and
to a lesser extent against the currencies of Hong Kong, South Korea, Taiwan, and Singapore,
the volume of U.S. imports of manufactures rose rapidly. And they continued to increase at a
fast, though slower, pace in the years following (1985-88) when the effective exchange rate
of the dollar declined as rapidly as it had risen in the earlier period.
The structural dilemma remains for the Caribbean. Resignation to unnecessarily heavy
transitional costs of adjustment is neither a comforting nor secure answer to the problem
posed by adherence to traditional economic policies. An important, innovative, indigenous
research effort is clearly indicated here.
Role of the Community Institutions
The role that Caribbean Community institutions can play in enhancing the international
competitiveness of the regional economies will depend to a good extent on the powers and
jurisdiction vested in them, and, of course, on the resources made available for the exercise of
their functions. The suggestions to be made below assume no significant upgrading of the
commitment to regional unity. They are thus essentially conceived as means by which the
individual member states could derive benefits from community facilities, in a regionally
harmonious manner. And the arrangements for executing them are heedful of the need for
economies and for making good use of those directly involved in the public or private sectors.



Havelock R. Brewster  107
How these arrangements fit into the institutional organization of the community is a matter
that has been left aside.
The institutions of the Caribbean Community can be of assistance in the task of
enhancing international competitiveness. They can do so by stimulating (1) improved
macroeconomic management and (2) technological and productivity upgrading of traditional
primary export sectors; (3) the identification and promotion of new export industries and
services; (4) research on the economic, social and technological challenges of the medium-
term future.
Consultations on Macroeconomic Management (CONMEC)
It would appear from occurences throughout the region that the improvement of
macroeconomic management now deserves high priority. This may need to be based more on
sound indigenous analysis and judgment rather than mere reaction to the advice of the
World Bank and the IMF. The centerpiece of CONMEC would be an annual Caribbean
Economic Survey and Outlook. The material could be thematically organized in a manner
relevant to the main macroeconomic problems of the regions, and in this context, individual
country experience and behavior could be analyzed. A special and recurrent theme of this
publication and its accompanying statistics could be competitiveness (for example, costs,
prices, and export performance). This publication could be the basis for an annual business-
like consultation among senior economic officials (from ministries of finance, planning and
development, and central banks). Such a Committee of Senior Economic Officials would not
be expected to reach agreed conclusions and policies but their exchanges of views could be
expected to be mutually beneficial and supportive. Gradually such a publication could
venture to project its analysis (not necessarily in a formal econometric sense) and to introduce
elements of policy orientation.
Even a modest macroeconomic monitoring program of the kind suggested in the previous
section of this paper would strain the regional statistical capacities. Timely and reasonably
accurate, comparable and comprehensive computerized statistical information are
indispensable for carrying out this task. It is a matter that requires the urgent attention of a
regional committee for statistics and data management. It would also require accelerated
training programs to be organized in collaboration with the regional universities and the
Economic Commission for Latin America and the Caribbean (ECLAC).
At the same time, there is also an immediate need for research on certain problems of
macroeconomic management. Following from the discussion in the previous section, research
would be useful on how to evaluate the prospective results of devaluation in a Caribbean
context and in relation to other policies. How could the net benefits of devaluation be
improved in the Caribbean context of structural bifurcation? Should the feasibility of dual
exchange rates be reevaluated, perhaps in the context of efficiently administered free-trade
zones for new export industries and services? Should more thought be given to the strategy of
implementing devaluation and to the deployment of more judicious complements of policies
and measures, accompanying and/or following devaluation? Would it, in any event, be
inevitable for Caribbean societies to find and endure a lower internal equilibrium consistent
with their external balance, and to begin rebuilding their economies on more structurally
durable foundations? How could the deleterious effects of such a transition be mitigated and
managed?
A related problem for research concerns intra-area exchange parities. The Caribbean
countries adjust exchange rates as a function of their extraregional disequilibrium but also
have as a principal objective the promotion of balanced intraregional trade. Could a general
framework of objective principles be devised that, while recognizing the circumstances of
individual countries, could allay apprehensions of unfair competitive advantage and
overcome the need to resort to countervailing intraregional trade restrictive measures?
In the interest of cost saving, the regular publication proposed as well as the ad hoc
macroeconomic policy research might be subcontracted to the regional institutes of economic



108   Increasing International Competitiveness: A Caribbean Community Program
research. And the annual meetings of the Committee of Senior Economic Officials might be
convened by individual member states on a rotation basis. Caribbean institutions could play
a useful role as promoters and organizers.
Plan for Upgrading the Technology and Productivity of Primary Export Industries
(TECHPLAN)
A thorough examination is now needed of the cost efficiency of each of the Caribbean's
principal primary export industries and services. On the basis of this examination, a plan
for technological and productivity upgrading could be drawn up where it is warranted. The
priority industries might be those subject to special protocols under the EEC-ACP Lome
Convention that could come under threat eventually, if not in 1992 when the EEC becomes a
single market, as well as those rapidly losing their market shares-for example, bananas,
sugar, cocoa, bauxite/alumina, tourism, fishery products, and timber.
Such an examination would need to pay attention to the cost-benefit expectations of
technology and productivity upgrading. As mentioned earlier in the chapter, there are
circumstances in which the benefits of productivity improvements do not accrue sufficiently
to the producing countries and in which they could even be made worse off. Investment of
upgraded technology in traditional industries could also in some circumstances be of dubious
economic merit in relation to investment in alternative projects. This examination might well
be the occasion, too, for studying the scope for and feasibility of gradually rationalizing the
geographical pattern of export production, particularly as it concerns bananas, sugar, and
cocoa.
TECHPLAN might be executed through a cooperative effort on the part of the industries
concerned themselves, mainly, but sometimes with the assistance of, specialized national or
associate regional institutions. Caribbean institutions could provide the political impulse
and could act as animators and organizers. The community might also play an effective role
in organizing and seeking on a regional basis external technology aid programs for exports
and in serving as a conduit of such aid directly to the industries concerned, whether under
public or private ownership.
Program for Targeting and Promoting New Export Industries and Services
(NEXPRO)
One of the first tasks of this program might be to consider the normative guidelines for
identifying new export industries and services. As mentioned earlier, intrinsic comparative
advantage need not be taken as an immutable indicator of export possibilities. These
guidelines would probably be concerned with the environmental, social, health, intellectual,
and aesthetic characteristics of industries and services, apart from their economic features.
Thus information on the apparent nonfeasibility of preferred activities is as important as
information on the feasibility of nonpreferred and preferred activities. The task should
therefore further include showing how, working backwards-by what combination of
dynamic cost-reduction operations-apparently nonfeasible activities, especially those with
high preference rankings, might be made exportable.
The execution of this program might be undertaken on a cooperative basis by the
relevant national and regional associate institutions. The national industrial development
corporations, development banks, manufacturers' associations, and chambers of commerce
mnight be encouraged to participate substantially. The community institutions are again,
viewed as providing the political impetus and organizational stimulation. In addition, once
NEXPRO has targeted a set of activities and established the prefeasibility conditions, the
Caribbean Development Bank, in collaboration with national and external financial
institutions, might play a more purposeful role in linking entrepreneurship with sources of
capital and technology.



Havelock R. Brewster 109
It would also be useful to undertake, on a continuing basis, direct, first-hand
examinations of the reasons behind the export performance of selected manufacturing
industries and firms.
Research Program Relevant to Caribbean Economic, Social, and Technological
Futures (CARIBFUTURES)
This task is aimed at preparing the Caribbean for the "precompetitive" emerging
international environment. In the past, despite clear signals, the Caribbean invariably
failed to anticipate the adjustments needed for future competitiveness. The dim future for its
principal traditional primary commodities was visible twenty-five years ago. Equally, the
Caribbean failed to take advantage of the bright prospects offered by expanding demand for
vegetable oils, rubber, fishery products, garments, electronics, plastic goods, and various
services.
It may therefore pay good dividends to monitor and coordinate research that may be
relevant to the future options of Caribbean societies. If possible, some research of this kind
may be undertaken, even if in many cases, original work may be beyond currently available
means and skills. None of the national or community institutions or associate institutions
would seem to be prepared for this task.
Issues deserving attention in a futuristic setting might be divided into three categories:
the quality of life, macroeconomic issues, and microeconomic ones.
Quality of Life
* Caribbean conceptions of well-being, and the harmonization of economic activity with
them.
* The physical environment, its protection and enhancement, and its integration into
the socioeconomic policy framework.
Macroeconomic
* Beyond debt, structural adjustment, and stabilization programs, what might be the
future for a "post equilibrium" that is capable of generating growth with equity and
full employment.
Microeconomic
* Possible implications for Caribbean economies of "precompetitive" developments in
the north, such as computer-integrated manufacturing (information technology and
telecommunications generally), biotechnology-based agroindustry, metal and waste
recycling and advanced materials, new energy systems and rational energy use, and
climatic change.
* Scenarios for a future without sugar, bananas, petroleum, bauxite, exports, labor-
intensive garments, electronics assembly, and services.
* Future of the tourism industry.
Caribbean institutions and national governments with their present and near-term
preoccupations understandably may not be able to find the time to consider such
precompetitive issues. Yet their neglect could mean a preempted future-and perhaps a
misused present. For example, a contemporary question concerns training and education for
international competitiveness. But in what? In the Caribbean, education, government, and
business objectives would have to be made more compatible.
One idea might be to organize CARIBFUTURES as a community task force, directed ex
officio by the head of an appropriate community institution or associate institute. The
Caribbean Community itself might be in a good position to promote a regional program of
external technical and financial assistance based on the needs identified by the task force.
Given the many elaborate developments in respect of future research in the European



110   Increasing Internafional Competitiveness: A Caribbean Community Program
Community-for example, Esprit, Eureka, Flair, and Eclair-at least some form of technical
collaboration might be possible.
The suggestions given above for a Caribbean Community program intended to assist in
upgrading the international export competitiveness of the regional economies have
deliberately avoided the traditional approaches of intergovernmental organizations based
on predetermined training and technical assistance. Although these ultimately remain
important aspects of such an effort-and are indeed of the four programs outlined, CONMEC,
TECHPLAN, NEXPRO and CARIBFUTURES-experience suggests that it would be more
effective if specific needs are identified by, and derived from, the operations of those
directly involved in the implementation.
References
Bourne, Compton, and others. 1988. Caribbean Development to the Year 2000: Challenges,
Prospects and Policies. London: Commonwealth Secretariat/Caribbean Community
Secretariat.
Brewster, Havelock. 1969. "Some Issues Raised by Wage-Price Analysis in Structurally
Dependent Economies: the Caribbean." British Journal of Industrial Relations,
London, 7(2).
Helleiner, G. K. 1989. "Increasing International Competitiveness: A  Conceptual
Framework." Toronto, photocopy.
International Herald Tribune (IHT). 1989. "Taiwan: A Confident Approach." Paris (April
20).
Kravis, Irving B. and Lipsey, Robert E. 1971. Price Competitiveness in World Trade. New
York: Columbia University Press.
OECD. 1988. OECD Economic Outlook. Paris (December).
UNIDO. 1986. Structural Change and Comparative Advantage in Manufacturing. Vienna,
(April).
UNDP. 1990. Human Development Report 1990. Oxford University Press.
World Bank. 1988. Caribbean Exports: Preferential Markets and Performance. Washington
D.C.



PARTICIPANTS
ALONZO, Oscar                 Export Development Corporation, Trinidad and Tobago
APPLEWHITE, Clyde             Sub-Regional Office for the Caribbean, Economic
Commission for Latin America and the Caribbean, Port of
Spain, Trinidad and Tobago
CATO, Randolph                Ministry of Trade, Industry and Agriculture, St. Vincent
and the Grenadines
CONNOR, Franklin              Ministry of Finance, Anguilla
COX, Winston                  Ministry of Finance, Barbados
FARRELL, Terrence             Central Bank, Trinidad and Tobago
GREAVES, Carlyle              Ministry of Planning and Mobilisaton, Trinidad and
Tobago
HARRIS, Carey                 Economic Development Unit, Dominica
HURST, Keith                  Ministry of Finance, Antigua and Barbuda
HYDE, Yvonne                  Ministry of Economic Development, Belize
JACOBS, Cecil                 Eastern Caribbean Central Bank, St. Kitts and Nevis
KING, Kurleigh                Central Bank, Barbados
MATHAVIOUS, Robert            Ministry of Finance, British Virgin Islands
MITCHELL, Carlyle             Organization of Eastern Caribbean States - Economic
Affairs Secretariat, Antigua
ROBINSON, Royal               Ministry of Development and Commerce, Turks and Caicos
Islands
ROBINSON, Rudyard              Ministry of Finance, Cayman Islands
illI



112   Increasing International Competitiveness: A Caribbean Community Program
SLUSHE, Alan                   Central Bank, Belize
SMITH, James H.                Central Bank, Bahamas
STEPHENS, Samuel               Western Hemisphere Department, International Monetary
Fund, Washington, D.C.
VENNER, Dwight                 Ministry of Finance, St. Lucia
WILSON, Laurie                 Ministry of Finance, Grenada



RESOURCE PERSONS
BLACKMAN, Courtney           International Business Consultant, Saratoga, Florida,
U.S.A.
BROWN, G. Arthur             United Nations Development Programme, New York,
U.S.A.
CHERNICK, Sidney             Economic Development Institute of the World Bank,
Washington, D.C., U.S.A.
GRIFFITH, Winston            Bucknell University, Pennsylvania, U.S.A.
HELLEINER, Gerald            University of Toronto, Canada
HOYTE, Desmond Cde.          Co-operative Republic of Guyana, Guyana
MARTIN, Juan                 Latin American Institute for Economic and Social
Planning, Santiago, Chile
McINTYRE, Alister            University of the West Indies, Jamaica
ROE, Alan                    University of Warwick, England
RAMLOGAN, Parmeshwar         Caribbean Development Bank, Barbados
RHEE, Yung-Whee              Industry Development Division, Industry & Energy
Department, Policy, Planning and Research Staff, World
Bank, Washington, D.C., U.S.A.
ST. ROSE, Marius             Caribbean Development Bank, Barbados
SENGUPTA, Jayshree           Economic Development Institute of the World Bank,
Washington, D.C., U.S.A.
WEN, Yin-Kann                Economic Development Institute of the World Bank,
Washington, D.C., U.S.A.
113



114   Increasing International Competitiveness: A Caribbean Community Program
WORRELI, DeLisle                  Central Bank, Barbados
WORRELL, Keith                    University of the West Indies, Jamaica



Distributors of World Bank Publications
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