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The Options of Caribbean Regional Integration in the 21st Century

By Desmond Thomas
Guyana Journal, December 2008

Allow me to congratulate the organizers of this conference series, and to commend this initiative to mount a conference series to discuss important development themes. It is particularly fitting that you should choose to focus on regional integration which is, in my view, one of the principal imperatives of the 21st Century that countries, especially small countries have to at least consider. All around, countries, big and small, are forming economic alliances and integration arrangements (CARICOM, CACM, MERCOSUR, EU). Naturally, you would want to consider what direction is appropriate to sustain the goals of sustainable development for the Netherland Antilles. Consideration of the options of regional integration is timely as the Netherland Antilles contemplates changes in its internal constitutional arrangements.

An obvious aspect of analysis of regional integration for Curacao is to look at the experience of the Caribbean Community and Common Market (CARICOM), because of considerations of proximity as well as similarities of size and economic structure. I believe that this analysis must be based on a clear understanding of the main competitive strengths and advantages, and development challenges that the NA faces at this time. Armed with this knowledge, you would be able to evaluate how regional integration will benefit you and what advantages you bring to the regional movement. In addition, there must be a clear understanding of conditions and trends in the global economy, because ultimately regional integration is not an end in itself but a way to strengthen NA’s competitiveness and integration into the global economy.

To understand the CARICOM experience, it is necessary to consider the 3 main pillars of CARICOM integration:

1. economic integration,
2. functional cooperation, and
3. foreign policy coordination.

Since CARICOM is a form of economic union, its leading motivation is economic, i.e., the people of the region look to CARICOM integration as a tool to foster development, to stimulate development that would not occur if the countries operated individually. I think it’s fair to say that there has always been some dispute about how this additional development stimulus would come about. There is first of all the question of conventional theoretical gains from trade creation – integration fostering intra-regional trade in goods that are more price competitive than the goods previously imported from third countries – over trade diversion – the obverse situation. In principle, it is important for regional integration to be a tool for promoting competitiveness, not protecting and sustaining uncompetitive production.

Theoreticians in the region have never been comfortable with this framework as the basis of Caribbean integration. William Demas, in his seminal work, The Economics of Development in Small Countries, still one of the leading systematic analyses of the development challenges facing small countries, disputes the trade-creation, trade-diversion analysis on the grounds that it is too static, and its assumptions apply to countries at full employment, where the typical neo-classical assumptions about perfect competition, full information availability, etc. apply. He argues that the analysis of economic integration in small developing countries calls for a dynamic approach – an approach that incorporates a blend of infant-industry arguments and, in particular, takes into account the existence of substantial levels of unemployment and underemployment, and the realities of significant sub-regional disparities. Moreover, intra-regional trade would inevitably be limited because most of the countries produce similar goods, and by historical design, their main exports are for foreign markets. Demas and other economists studying the question of Caribbean integration were also skeptical about likely benefits from widening of the market from national to the regional market because they were conscious that together the countries would still be a very small market. Indeed, CARICOM is smaller than Peru in terms of population and market size. Consequently, Havelock Brewster and Clive Thomas, for example, argue in The Dynamics of West Indian Integration that the real value of CARICOM would come from integration of production activities that would allow firms in different countries to raise their competitiveness by combination of factors and resources.

The experience of CARICOM since its establishment has borne out the fears about the limited impact of intra-regional merchandise trade. After three and a half decades, intra-regional trade is still roughly 5 percent of total CARICOM trade. One thing that the scholars did not anticipate back in the 1960s is the drift of the economies toward services, mainly tourism. It is worth noting that for Barbados, CARICOM is its second highest source of tourists. Hence, intra-regional trade in manufactures was destined never to be a major driver of CARICOM.

Having said that, it must be stressed that we must not dismiss the value of intra-regional trade, i.e., the availability of access to the regional market. For small firms, the regional market can be a boost. This has been the case especially in the area of processed food and beverages, where intra-regional trade has expanded. Firms in Trinidad & Tobago especially have used the competitive edge from low energy prices to expand across the region. Also, the regional market has value as a springboard to international markets. One can cite the conspicuous example of Chubby which has broken into the wider international market.

The recent establishment of the CARICOM Single Market and Economy (CSME) is, to my mind, a step which offers the possibility of major gains from Caribbean economic integration. The main objective of the CSME is to deepen integration by liberalizing the movement of factors of production, labor and capital, within the region. I believe that liberalization of factor movement offers unprecedented economic benefits in the form of improved competitiveness of the regional economy. However, achieving these benefits will depend on the region overcoming traditional doubts and fears and putting in place the necessary complementary facilities (transport, communications, training and certification, dispute resolution mechanisms, etc.) to make the system work. Having put the system in place, it has to be executed!

Turning to functional cooperation, I have the impression that this has not, until recently, been given the attention and respect that it deserves. To a certain extent, functional cooperation was an extension of forms of cooperation that existed prior to CARICOM. Functional cooperation has been a big area of the Caribbean Community but CARICOM has only recently started to take a systematic look at the subject. Yet, I believe that functional cooperation provides considerable scope for further benefits from regional cooperation. There are many activities which are common to member states in areas of health, education, etc., that lend themselves naturally to joint action, where countries can benefit from scale economies and quality standards can be raised by such action. There is also the benefit of the Caribbean Regional Negotiating Machinery that uses the combined skills and experience of the region to shoulder the heavy burden of negotiations in several arenas, and mobilize capacity across the whole region.

What does all this mean for the Netherlands Antilles (Curacao)? Curacao has to consider carefully all its options to see what direction to take to maximize its benefits. Which group of countries should it seek to integrate with? In the case of CARICOM, the precedent exists of different special arrangements, at least for a time, to suit the circumstances. Also, whatever decision is taken, one must be prepared for difficulties that need to be overcome, such as air and sea transport. Also, the integration movement is only as strong as its capacity to EXECUTE. This has been a long acknowledged weakness of CARICOM. Finally, I would suggest that Curacao must be bold in its dealings with CARICOM. Curacao must be clear and vocal about what it hopes to achieve by any integration arrangement it enters, what it expects and what it has to offer. If all the CARICOM member states take this attitude, both they and their partners will benefit.

The role of the IDB
Curacao is not a member of the IDB. The IDB is constrained to provide development assistance only in its member countries. However, it may be recalled that, 11 years ago, an IDB team (of which I was a member) wrote a development program document for the NA government. I do not know under what arrangement that was made possible but would only mention this to indicate that if a way exists for the IDB to support development in this region, the IDB is prepared to seek it out.

I would also mention that the IDB is increasingly conscious of the regional dimension of its development assistance in this region. To this end, we completed a Regional Strategy last year the main thrust of which is to support the CSME, with the focus on measures to raise the international competitiveness of the region. In writing this strategy, we had no choice but to take into account aspects of countries that are not IDB member countries.

With that, let me congratulate you again and encourage you to continue the study and discussion of this important topic in order to decide what steps you need to take.

Desmond Thomas is a Senior Economist at the Inter-American Development Bank.
(Presented at the University of The Netherlands Antilles Conference, Willemstad, Curacao, 24 April 2008.)

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