The Caribbean Economies in an Era of Free Trade

Michael Witter

• Publisher: Routledge
• Year: 2017
• Topic: Business
• eBook ISBN:
  9781351147507
• Subtopic: Business generale
• Index: Business

This book is concerned with the impact of economic globalization and an unregulated global market system on the Caribbean economies. The book is in three parts. Part I examines theoretical issues and includes an assessment of recent globalization trends, the limits of globalization, and the question of uneven development. Part II considers alternative policy solutions including interventionist alternatives, effective monetary strategies and innovative tourism strategies. Part III focuses on Jamaica and the Bahamas. Overall, this book provides a rich menu for alternative economic policies in the Caribbean at the turn of the century.

Part I
Theoretical Issues

Chapter 1
Dependence, Cumulative Causation and the Caribbean

Nikolaos Karagiannis

Introduction

Historically, the Caribbean territories have had long political and economic associations with developed Western countries as colonies, protectorates and/or departments. In fact the Caribbean case of underdevelopment (i.e., the plantation system) has been conditioned by the development and expansion of the ‘Western’ dominant countries through the mechanisms of the international market. Political independence established national sovereignty in older and newer nations of the Commonwealth Caribbean when both groups were integrated into the international system. Consequently, the political process of national independence converted states, societies, and nations that had evolved as integral parts of the international system of empire into nation-states. The effect was to legitimise their ‘autonomy’ based on concepts of self-determination rooted in Western culture.

In the case of the newer nations, independence coincided with the post-war intensification of the internationalisation of capital, labour, production, class relations, and the state and nation-state. However, the political independence of Caribbean nations has not been accompanied by any significant advances in their national economies: foreign ownership, management and control of production; dependence on metropolises’ preferences for Caribbean services and exports; reliance on high levels of imports; and a dependent monetary system are among the outstanding features of Caribbean economies (i.e., the negative results of the foreign capitalist domination, and particularly the North American supremacy in the region). These Caribbean nations continue to be locked into a new economic oppression and rely on developed countries for transfers of income and capital, for banking and financial services, for business and technical skills, and even for ideas about themselves. The foreign trade sector is one of the spheres in which the dependence of Caribbean territories is most apparent. Largely, foreign decisions determine the growth of Caribbean economies while most Caribbean resources, natural, human and technological, remain basically underdeveloped.

The globalisation of modern-technology production is revolutionising the environment and conditions of international competition, and demands a rethinking of ‘traditional’ concepts of hegemony, national economic space and production, and the basic attributes of the nation-state – among other issues. Inadequate economic resources and skills, compounded by the size of scale on which Caribbean economies operate, and their high dependence on Western capitalist economies have convinced many that self-propelled economic development is not a feasible and realistic strategy.

The first main section of this chapter provides the main theoretical approaches to regional development and trade, and the second part evaluates these theoretical views while taking the reality into consideration. The final main section of the chapter provides notions for an alternative development policy framework while considering structural and functional problems of Caribbean economies.

Theory

It is possible to distinguish the following two main and very different sets of views on regional development: (1) orthodox views; and, (2) radical views.

Orthodox Views

The neoclassical approach suggests that, in equilibrium, there is an equalisation of returns to each factor of production. In the short run imbalances may exist; hence, resources may be unemployed because of unforeseeable random events or because market participants speculate that by holding resources off the market system today, they will get a better return tomorrow. Such considerations cause prices and quantities to deviate from their long-run equilibrium values (i.e., failure of prices to adjust). The geographical dimension of this view is based on the internal mobility of resources and implies that each region tends to specialise in producing what it is comparatively good at producing.

The neoclassical process focuses on the idea of marginal substitution between different factor inputs in response to relative prices. A depressed or under-developed region would face a low demand for labour and, consequently, would provide low wages. The equilibrating mechanism would include the movement of labour out of the depressed region(s) in search of high wages elsewhere and the inward movement of firms attracted by the low cost of labour. These movements would be expected to continue until wages were equalised across regions and, in effect, full employment restored through wage flexibility and factor mobility (Sawyer, 1989, pp.420-21). Hence, resources are viewed as moving in response to price signals, with resources moving into areas of high rewards and away from areas of low rewards (Sawyer, 1989, p.451).

Neoclassical theorists believe in the natural disappearance of spatial disparities. They generally assume perfect mobility of production factors between the regions of a given country or between nations. Wages will tend to equalise over regions or countries. A similar reasoning can be applied to capital movements, which will tend to equalise returns on capital over space. Hence, in the neoclassical analysis there is no room for spatial disparities, and disparities that may have occurred occasionally will be wiped out by movements of factors of production.

A similar result will be achieved even if factors of production are not mobile provided there is trade. In Heckscher-Ohlin analysis, exchange of goods between countries (or regions) leads to factor income equalisation: trade will equalise wages and capital income over space and provide convergence (this analysis assumes that all countries and, hence, their firms and regions, have equal access to technology and the rate of change of technology).

In the ‘traditional’ trade theory, regions or countries specialise in sectors and benefit equally from this specialisation, because all sectors are equally good for the economy. The ‘new’ theory of trade has provided a new argument for industrial targeting and added a concept of importance to this discussion: the notion of ‘strategic sectors’, i.e., strategic trade theory (Dixit, 1986; Krugman, 1986, 1991). Romer (1986) and Lucas (1985, 1988) consider that the national accumulation of knowledge, technology and R&D is basically endogenous (i.e., Schumpeterian ‘creative dynamics’). According to Lucas (1985, 1988) effort and know-how are very important and the growth rate of human capital is proportional to the time spent in training. Romer (1987) treats effort and knowledge as two important inputs into the production of knowledge and his research produced results which were exactly the same as in Lucas’ model. In addition, Becker et al. (1988) and Azariadis and Drazen (1988) offered similar contributions to the above literature by building models which were capable of several equilibrium paths while focusing on human capital investment.

In order to consider international trade, Lucas worked out a particular model to illustrate the ‘endogenous progress of comparative advantage’ and identified goods which are human capital intensive (i.e., high-technology products). His particular model suggests that the countries specialising in high technology sectors grow faster than others and thus reinforce their comparative advantage. Krugman (1990) added to these studies of endogenous innovation and concluded that international integration may encourage innovation and accelerate economic growth (see also Solow, 1991, 1994).

In summation, the neoclassical theoretical background of recent studies is either an extension of the traditional Solow model or the endogenous growth models. The former, the traditional view of differences in growth rates, suggests that the less advanced countries catch up to the leading ones and thus enjoy a faster rate of technological progress and growth. The latter supports the view that countries follow their own national growth paths and try to build their own technological capabilities with little tendency for convergence in income or productivity levels.

Radical Views

The dependency views of development and underdevelopment are different approaches to development and growth in which the expansion of the capitalist system is seen as an aspect of the movement of capital into areas of potentially high profits. Within the radical political economy tradition, this set of views finds expression in terms like ‘dependency’, the generation of ‘under-development’ and the relationships between the ‘centre’ and the ‘periphery’. The discussion of dependency theory and the related unequal exchange theory by analysts such as Baran (1957), Samir Amin (1974), Cardoso and Faletto (1979), Emmanuel (1972), Frank (1971), Wallerstein (1974), among others, is based upon the concept that the world economy is divided into a ‘core’ of dominant nations and a ‘periphery’ of dependent ones. These theories share the common feature that they stress the unevenness of development as the product and consequence of the capitalist mode of production (i.e., ‘the development of underdevelopment’), and that the relationship between the more developed and the less developed countries is one of the dominance of the former over the latter. This exploitative relationship takes place because advanced capitalist economies can use their economic and political power – and occasionally their military power – to structure the world economic system to their benefit.¹ As Baran (1957, p.28) argues, ‘the economic development in under-developed countries is profoundly inimical to the dominant interests in the advanced capitalist countries’.

Radical analysts have focused on the forms, mechanisms, causes, and, to a lesser extent, on the social-structural consequences of imperialism for both the dominant and the dominated nations, and have acknowledged structural rigidities and market failure due to social, institutional and political factors which usually act as bottlenecks to the process of development (their advocacy of state intervention and regulation of foreign trade and investment as a way out of these bottlenecks is well known). It is not just a case that the more developed economies have higher income levels than the less developed ones, but it also includes economic, political and cultural domination. Dependency theorists have also stressed that,

Dependency on foreign interests and foreign economic penetration keeps the state weak and prevents it from effectively playing its necessary role in protecting domestic industry and fostering economic growth (Barrett and Whyte, 1982, p.1072).

As a state’s contact with the world capitalist economy grows, one might expect to see the government participating less in its economy.

Myrdal’s well-known theory of ‘cumulative causation’ is another important, but quite different, contribution within the radical tradition. In fact, the process of cumulative causation can be advanced to account for the persistence of spatial differences in a wide variety of development indices including ‘per capita income, rates of growth of industrialisation and trade, employment growth rates and levels of unemployment’ (Myrdal, 1957, p.38).

According to Myrdal, the free working of the market system promotes an imbalance in regional resource use and the play of forces in the market normally tends to increase rather than decrease the inequalities between regions. Not only trade but also labour and capital are also attracted to some favoured areas – in what Myrdal describes as ‘the power of attraction of a centre’ (Myrdal, 1957, p.26). As a result, both economic and social forces tend to strengthen the disequilibrium situation by leading to cumulative expansion in the favoured region at the expense of other regions, which then become comparatively worse off, thus, preventing and/or retarding their future development The process is cumulative, not in the sense that all market forces influencing the spatial distribution of factors of production work in the same direction, but that an initial push or pull of factors to one region or area rather than another will tend to move factors increasingly towards them and away from others, improving productivity and efficiency and widening still further the competitive advantage of the growing region over the lagging regions.

Cowling (1987, 1990) extended the above idea on the effects of cumulative causation into the social and political arena. According to the author, inequalities in economic terms generate inequalities in political power, cultural domination, etc. A region which is relatively rich does not only have more economic spending power but may be politically more powerful and exert cultural dominance over the less prosperous regions.

The phenomenon of cumulative causation at the level of the firm leads to industrial concentration. Centripetalism arises from the interaction of firms and markets and relates to ‘the tendency for higher level activities and occupations to gravitate to the centre – to be lost to the regions; to be lost to the periphery’ (Cowling, 1990, p. 15). Furthermore, Cowling argues that strategic decisions with major implications for local, regional and national communities are being made outside those communities. The same centralising forces imply a transfer of resources to the centre, which reduces the capacity of the periphery to sustain its own economic, political and cultural development on which future self-determination is based. In fact the mode of production of material life conditions the general process of social, political and intellectual life. ‘Centripetal economic tendencies become centripetal political and cultural tendencies and the community enters a vicious circle of relative decline’ (Cowling, 1990, p.15). The prosperous regions and nations (i.e., centre) have economic power over the depressed regions and nations (i.e., periphery). Thus, production in the periphery may be controlled by the centre. In addition, this economic power is allied with political and cultural power and this cultural power may also be imposed on the periphery as a consequence of the economic power.

Facing the Reality: A Partial Critique

Historically, imperialism² (either economic concentration and centralisation of capital or the most ‘progressive’ mode of production) has resulted from capitalist economic necessity – structurally out of the economic imperatives of capitalism – a mode of production whose logic of internal development must inevitably lead to imperialist expansion, if it is to survive by warding off the unavoidable crises which quite often plague international capitalism. Sometimes, countervailing forces such as relative overpopulation, increasing depression and exploitation of labour power, the cheapening of elements of constant capital and foreign trade may result in a contemporary rise in profits. Nonetheless, there is an historical tendency for the rate of capitalist profits to decline generally or squeeze. It is this tendency that forces capitalists, or capitalist agents, agencies and corporations to search for profitable investment opportunities overseas. While searching for the ‘super profits’, the ruling classes of the dominant countries and their allies – i.e., social elites of less-developed and developing countries who have more in common with their counte...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• List of Figures
• List of Tables
• List of Contributors
• Foreword
• Preface
• Introduction
• PART I: THEORETICAL ISSUES
• PART II: POLICY ISSUES
• PART III: COUNTRY-STUDIES
• Index