Development Experience in the Caribbean

Arindam Banik


Once upon a time, protectionism and control were considered as powerful ingredients of economic development. Unfortunately, it didn’t work. Today a feeling is widespread that the process has had enhanced corruption and poverty.

The lesson of the economic development in the Caribbean tells us that successful development requires markets underpinned by solid public institutions. Ideally the institutions in turn protect property rights, regulate market participants, maintained macroeconomic stability provide social insurance and manage conflict. The Caribbean model fashioned their own workable model for development in implementing the mentioned parameters. It hardly followed the blueprints of development model. In contrast homegrown strategies adopted by the select Caribbean countries reveal their own model of successful not imitation of U.S. style capitalism.

In the case of the East Asia, the miracle or the success may be explained by development of high skill and quality education. This contrasts the traditional view of “ export is engine of growth” that often cited by the multilateral agencies. What are the factors that explain the recent East Asian economic collapse? The economists confront with the question. It is now generally accepted that institutional failure in managing the financial institutions are the root cause. That explains the rest: a short-term borrowing (for example working capital) diverted to long term borrowing particularly in the real estate by mass corruption. It was Central Bank and other institutions that failed to monitor.

The case of Barbados is an interesting aspect in the macroeconomic literature. The country inherited strong institutions from the British colonial era, including competent civil service and tradition of good economic management. The 1991 crisis and the policies adopted by the concerned government was undeniably a great success. It was perceived as a politically impossible step largely through government policies designed to reduce consumption and income. The leadership decided to preserve fixed exchange rate with U S currency. It didn’t follow the imported blueprints of currency management. Because in the context of Barbados a depreciation of the currency typically provides only temporary gains in export competitiveness due to the fact that nominal wages and prices rise rapidly to erase the real decline in costs. This diminishes the ability of the country to use exchange rates as a lever to undertake macro economic adjustment.

The traditional macroeconomic theory tells us to borrow when you have bad time to meet your shock. That simply explains either your poor financial management or failure to understand the future and uncertainty. The Barbados case is somewhat different. The western textbook does not guide it. Consider the contrasting point. A rational firm would be willing to borrow in order to meet uncertain future during good time. It is only possible if they could manage their own economy. This may explain borrowing with a lesser cost. What is actually fixed rate of foreign exchange? A fixed rate implies that the country’s central bank is committed to supplying foreign exchange for local currency at a fixed rate, but does not specifically link the volume of local currency to the bank’s foreign exchange reserves.

There is much to commend the role of market supporting institutions in Barbados in this context. The public institutions in this island country are deeply rooted. They are able to manage the distributional conflicts triggered by the external shocks. To quote Standard and poor (2001), “ A modest external debt burden and low debt service. The country’s total external debt is around 60 per cent of current account earnings, less than half the median value for similarly rated sovereigns. With total debt service at around 20 per cent of exports-less than half the median level in similarly rated countries- and foreign exchange reserves exceeding 300 per cent of short-term debt, Barbados enjoys comfortable external liquidity.”

The macroeconomic management of Barbados version may be a lesson to developing countries. They should avoid fads, put globalization in perspective and focus on domestic institution building. The “Caribbean miracle of macro management” is thus sustainable in the long run.

II

The development issues are unresolved. We all have intuitive notions of “ development”. When we speak of a ‘developed “society, we picture in our minds a society in which people are well fed and well clothed, possess access to a variety of commodities, have the luxury of some leisure and entertainment, and live in a healthy environment. We think of a society free from violent discrimination, with tolerable levels of equality, where the sick receive proper medical care and people do not have to sleep on the sidewalks. In short, most of us would insist that a minimal requirement for a “developed” nation is that the physical quality of life be high, and be so uniformly, rather than being restricted to an incongruously affluent minority.


Of course, the notion of a good society goes further. We might stress political rights and freedoms, intellectual and cultural development, stability of the family, a low crime rate, and so on. However, a high and equally accessible level of material well-being is probably a prerequisite for most other kinds of advancement, quite apart from being a worthy goal in itself.

The Caribbean experience reveals the above relationship in order to understand development in true sense. The policymakers at the initial stage of development targeted the formation of social capital in the region. That implicitly explains less demographic pressure. It was thus easier to educate the population with the help of state intervention. In the process social capital and trust made economic transactions more efficient by giving parties access to more information, enabling them to coordinate activities for mutual benefit, and reduced opportunistic behaviour through repeated transactions. Indeed, this played a significant role in shaping the outcomes of economic action at both macro and micro level.

The United Nations Office publishes “ Human Development Report” every year based on select socio economic indicators. The index, commonly known as Human Development Index (HDI index) is a composite index measuring deprivations in the three basic dimensions- longevity, knowledge and standard of living. The results are varied across island nations. But on the whole it appears that the region’s radical and innovative public support measures have played a substantial part in its achievement. In fact the Caribbean economies in general terms, to be in somewhat better condition than what might have been feared a decade earlier. While sustained growth has not been “beyond 6 percent”, there has been a clear tendency for real income per head to rise, unemployment to fall (partly as a result of significant rates of emigration), and investment levels to increase, even though the latter economic category is being partly driven by foreign capital.

The case of Barbados is quite revealing in this context. Its achievements in raising life expectancy and the quality of life should be the subject of development economics literature. The island nation is now the top ten countries in the world according to life expectancy (76.4 years). Indeed, its life expectancy is almost equal to that of USA (76.4) and UK (77.5) despite their remarkable economic expansion leading to high per capita income.
The female-male ratio is significantly lower than unity in many parts of the world. The ratio is around 0.93 or 0.94 in South Asia, West Asia and China. It is lower than unity –though not by much-in Latin America, and quite a bit less in North America. Given the natural, i.e. biological, advantages of women vis-à-vis men (when they receive the same nutritional and medical attention), this shortfall of women would tend to indicate a really sharp difference in social treatment (i.e. in the division of necessities of life such as food and medical attention). The shortfalls amount to millions of “missing women” in Asia and North Africa compared with what would be expected on the basis of the European and North American female-male ratio. The ratio is significantly greater than unity across all Caribbean island nations. This simply explains the success case of empowerment of women with the direct state support. The other indicators such as adult literacy, public health expenditure as a percentage of GDP, Public expenditure in education, energy consumption per capita shows the similar trend across the countries with particular reference to Barbados. On the whole the HDI index (0.864) has placed Barbados as top 31 countries in the world the top being Norway (0.939) in 2001.

History portrays the single most determinant factor in explaining Barbados’s success. The efficient and effective public intervention in education, health and related services contributed immense benefit to the quality of life of the country. These lessons have considerable bearing on future policy for developing countries since public support measures have been under severe scrutiny in Latin America and elsewhere. In fact the trend of grants and aids sanctioned by developed countries to the developing world has had been declining due to corruption.

The economic actions are guided by political action. But their success depends greatly on their political background. The success case of Caribbean is a test case of economic development in this context.

III

It may be useful to quote from Late Rajib Gandhi, “ If government sanctions Rs 1 for the poor, the poor beneficiary will get only 15 paise of the Rupee sanctioned”. In other words, the system will eat the remaining amounts in the form of transaction costs. This observation is common across most of the developing nations. This problem reminds us the weak role of institutional infrastructure required for a market economy.

Here-in lies the concept, “ government failure leads to market failure’. Government should have a role in this context. The state and the market are complements, and it is important that the state undertakes its “ responsibilities” and does so effectively and efficiently. The articulation of the theory of market failure, especially as applied to developing countries allows us to understand the appropriate role of the state.

Policymakers often debate about the appropriate role of the state in implementing development programmes. The government failure leads the funding agencies to explore the alternates, the non-government organizations (NGOs). Yet, one can reject most of the conclusions of “ trickle down economics” in developing countries with a few positive micro results in Asia and Latin America.

Good governance, institutional accountability, the integrity of the politicians sometimes can make the thing different. The experience in few Caribbean countries with particular reference to Barbados shows the NGOs are not alternates to the government. If government is really concerned with improving the living standards of its people, it can do so. Indeed, the experience suggests that rather than there being a conflict between governance and institutional accountability, the two should be complements. The island nation’s effective education policies, for instance, played a pivotal role in economic development. This has led to political and social stability, thereby creating a better investment environment.

It is imperative to mention that a decade ago donors tried to reduce poverty by delivering project with a high social rate of return. This approach encountered mixed results across countries. The social cost benefit analyses of the projects in the region reveals an interesting trend. Most of the aid and grant dominated projects failed in various parts of the world. In contrast, the implications of using aid in transforming society and human capital are commendable in the region.

How education policies and economic development are related? It is useful to conceptualize matters a bit. Think of what we consume as our income increases. Our first needs are for food and clothing. As we have more income to spare we switch to industrial products: radio, television, bicycles, automobiles, and the like. At a still higher level of income we begin to register a high demand for services; banking, tourism, restaurants, and travel. It is not surprising, then, that the developed countries allocate a large fraction of their non-agricultural labour force to the services sector. Countries such as Australia, the United States, Norway, and Sweden have about 70 per cent labour force in the services sector. In Barbados, for example , the data shows about 72 per cent of the total labour force engaged in the service sector in the year 2001.In recent time the region emerged as the major supplier of man power in the US entertainment industry.

Rich countries not only have access to a large stock of physical capital, but by investing time and money in education, it is also possible for these countries to produce a large stock of human capital: labour that is skilled in production, labour that can operate sophisticated machinery, labour that can create new ideas and new methods in economic activity. It is important to contrast this form of labour with unskilled labour. Developing countries are likely to have a shortage of the former and a surplus of the latter.

Under the changing scenario, skill development is not at all a static phenomenon. People face choices at different time periods. Today’s’ skill may be irrelevant tomorrow. Being l economies this aspect is important in the context of the West Indies. It is generally accepted now that a person with multiple skills will have more competitive edge over others.

In recent time foreign companies in USA are targeting developing countries for setting up international call centers (offshore call center). These companies hope to leverage the few developing countries’ clear advantage: a huge pool of English-speaking, computer literate, same time zone and relatively low-cost college finance, and computer graduate. The local companies eager to improve customer service and gain a competitive edge over rivals are also setting up domestic call centers. This has been a major sources foreign investment. Indeed, it has created a significant number of jobs in this region.

In a globalized world an economy with labour shortage can only sustain their economic development based on multiple skill and diversifying services. The future of Caribbean economies should be based on this principle. What is true of today’s advanced countries is also true of developing countries. Economic development ultimately derives from a homegrown strategy, not from world market. We know the Caribbean’s only through cricket but it is time to understand their successful development experience.