Download THE IMPLICATIONS OF SELECT GLOBAL

I
ACLI-Stetson Caribbean Law Program at the Cayman Island
Law School
THE IMPLICATIONS OF
SELECT GLOBAL INITIATIVES
ON ECONOMIC
DEVELOPMENT IN THE
CARl BBEAN
Roger M. Groves Associ
Professor
Florida Coastal School of Law
WINTER 2011
/
—I
Zm
-Q
m
m
fl’,
.
‘Ii
I
a
-‘‘9
ci.
I.
I
ri.
137
4nn. Hum. Gene!. (2001), 65, 137—151
Printed iv Great Britain
MtDNA from extinct Tainos and the peopling of the Caribbean
C. LALUEZA-FOX’, F. LUNA CALDERON’, F. CALAFELL’,
B MORERA
3 AND J. BERTRANPETIT’
Secció Ant ropologia, Dept. Bioiogia Animal. Facuitat de Biologia, Universitat de Barcelona..
Barcelona. Spain
‘Depa4ta.mento de Antropoiogia Fi’sica, Museo del Hombre Dominicano, Santo Domingo,
Replblica Doininicana; Universidad T\Ta,cjo?jai Pedro Henriguez Ureña, Repüblica Dominica.na
Unita,t de Biologia. E’voiutiva, Faculta.t de Ciències de la Saint i de la Vida,
Universita.t Pompeu Fabra, Barcelona, Spain
(Received 10.7.00. Accepted
30.11.00)
SUMMARY
Tainos and Caribs were the inhabitants of the Caribbean when Columbus reached the Americas;
both human groups became extinct soon after contact, decimated by the Spaniards and the diseases
they brought. Samples belonging to pre-Columbiari Taino Indians from the La Caleta site
(Dominican Republic) have been analyzed, in order to ascertain the genetic affinities of these groups
in relation to present-day Amerinds, and to reconstruct, the genetic and demographic events that
took place during the peopling of the Caribbean.
Twenty-seven bone samples were extracted and analyzed for mtDNA variation. The four major
Amerindian mtDNA lineages were screened through amplification of the specific marker regions and
restriction enzymatic digestion, when needed. The HVRI of the control region was amplified with
four sets of overlapping primers and sequenced in 19 of the samples. Both restriction enzyme and
sequencing results suggest that only two (C and D) of the major mtDNA lineages were present in the
sample: 18 individuals (75 %) belonged to the C haplogroup, and 6 (25%) to the D haplogroup.
Sequences display specific substitutions that are known to correlate with each haplogroup, a fact
that helped to reject the possibility of European DNA contamination. A low rate of Taq
inisincorporations due to template damage was estimated from the cloning and sequencing of
different PCR products of one of the samples. High frequencies of C and D haplogroups are more
common in South American populations, a fact that points to that sub-continent as the homeland
of the Taino ancestors, as previously suggested by linguistic and archaeological evidence. Sequence
and haplogroup data show that the Tainos had a substantially reduced mt.DNA diversity, which is
indicative of an important founder effect during the colonization of the Caribbean Islands, assumed
to have been a linear migratory movement from mainland South America following the chain
configuration of the Antilles.
INTRODUCTION
When Christopher Colombus reached two of
the Greater Antilles (Bahamas and Hispaniola)
Correspondence: Jaume Bertranpetit Unitat de
Biologia Evolutiva, Facu]tat de Ciencies de Ia Sa]ut i de
Ia Vida, Universitat Poinpeu Fabra, C. Dr. Aiguader 80,
08003 Barcelona, Spain. Tel: (+3493) 542 28 40: Fax
(+3493) 542 28 02.
E-mail: jaume. bertranpetit@cexs. upf. es
during his first discovery voyage, in 1492, he was
greeted by indigenous people who called themselves Tairios. At that time, Columbus was
convinced of having arrived in either Japan or
China; later he changed his mind, and, believing
he had reached India, called the abor
igines ‘Indians’, a misleading name for the
Native Americans that has remained in use to
this day. Thus, the wrong and biased perceptions
138
C. LALuEzA-Fox AND OTHERS
of Westerners about Caribbean aborigines date
back to the very first moment both cultures
collided. However, we don’t really know what
the Tainos thought about the Spaniards, since
they were extinguished iii just one or two
generations after this first contact, decimated by
the harsh treatment of the Spaniards and the
diseases they brought with them. It is difficult to
know how many people were killed during this
process of extinction; according to different
authors they could have numbered between 2
and 7 million throughout the Caribbean
(Tjbelaker, 1992; Crawford. 1992). At the be
ginning of the 16th century, to replace the
decreasing Tainos as agricultural and mining
labour, the Spaniards brought African slaves
(Kiple, 1984), who came to constitute the major
present-day human substratum in the Caribbean.
Despite claims of Taino heritage survival in some
rural communities in the east of Cuba, it must be
concluded that, after 500 years of cultural and
genetic disruption, the original Caribbean people
have disappeared forever as a distinct human
group. The study of the so-called Black Caribs
from Belize (Monsalve & Hagelberg, 1997), a
population which is presumed to derive from the
admixture of Island Caribs with West African
slaves, illustrates the limitations of working with
the highly admixtured modern Caribbean popu
lations, since at least 16 of the 17 sequences
found were clearly of African origin. Therefore,
we need to rely on ancient DNA analysis if we
want to know the genetic affinities of these
groups in relation to the other peoples of the
Americas.
By the time of Columbus, and according to the
Spanish chroniclers, there were two main human
groups in the Caribbean, the Tainos, and the
Caribs (whose name is the source of the region’s
name). The Tainos inhabited Ia Hispaniola,
Puerto Rico, the east of Cuba, and probably
Jamaica, the Bahamas, and the Turks and Caicos
Islands, while the Caribs inhabited the Wind
ward Islands and Guadeloupe (Rouse, 1986,
1993). The latter group sometimes called Island
Caribs was culturally related to some mainland
American groups (called Mainland Caribs), that
—
—
were established mainly in Venezuela. The
Tainos consisted of hierarchical societies
organized into chiefdoms; they had advanced
agricultural techniques that allowed them to
establish some settlements of thousands of
inhabitants, with ceremonial squares and ball
game courts. In contrast, the Caribs were
ferocious nomadic. hunters that raided the Taino
villages, expanding from the South through the
Lesser Antilles. In addition to Tainos and Caribs,
there were other groups at Columbus’ times: the
so-called Arawaks, inhabitants of Trinidad and
the Guianas, and the Guanajuatabeys, inhabi
tants of West Cuba.
The names of the Caribbean groups and the
languages they spoke are a source of debate
among scholars; it seems that both Tainos and
Island Caribs spoke Arawakan languages that
belong to the Equatorial sub-family, in the
Equatorial-Tucanoan family (Ruhlen, 1991). In
contrast, the Mainland Caribs spoke Caribbean
languages, which are classified into the Macro
Carib subfamily, within the Ge-Pano-Carib fain
ily (Greenberg, 1987; Ruhlen, 1991). The exist
ence of some words with clear Caribbean origin in
the language of the Island Caribs poinìts to a close
relationship with the Mainland Caribs. The
original homeland of the Taino groups in main
land South America is more controversial.
Archaeological evidence shows that the
Caribbean area was already settled by 5000 B.C.;
however, it has been suggested that the direct
ancestors of the Tainos might have come from
populations that migrated from the Lower
Orinoco Valley, the Guianas or Trinidad and
Tobago, around 1000 B.C. Thereafter, they
undertook a long series of voyages, from one
island to another, progressing from the mainland
to the Lesser Antilles and from there to the
Greater Antilles, eventually mixing with or
pushing west the pre-existing populations, like
the Guanajuatabeys. The islands are so close to
one another that, with three exceptions, it is
possible to see the next island in the migratory
chain. If this hypothesis is correct. the peopling
of the Caribbean had to take place as a linear
migratory movement from South East to North
mtDI’L4 from extinct Caribbean Indians
West, following the chain configuration of the
Antilles Islands.
Therefore, whether or not the Caribbean was
peopled from South-America is a hypothesis that
can be reliably explored with ancient DNA
analysis. The vast majority of ancient DNA
studies have been based on the analysis of
mitochondrial DNA (mtDNA). This cytoplasmic
genorne has a better chance of recovery, since a
cell with a single copy of the nuclear genome can
contain several thousand copies of the mtDNA
genolne. MtDNA has been widely used as a
molecular tool for reconstructing the history of
present-day human populations, by virtue of its
special evolutionary properties, such as a rapid
mutation rate relative to nuclear DNA, lack of
recombination and maternal inheritance (Avise,
1986; Stoneking, 1993).
In the Americas, many studies have shown
that most of the mtDNA of Amerindian PoPu
lations falls into four major lineages (named ‘A’,
‘B’, ‘C’, ‘D’), primarily defined by specific
rntDNA markers (Schurr et al. 1990; Torroni et
at. 1992; 1993b, 1994; Horai et at. 1993).
Haplogroup A is defined by an HaeIII site at np
COII/tRNA’’ iiyler
663, haplogroup B by a 5
genic 9bp deletion, haplogroup C by an AiuI site
at np 13262 and haplogroup D by the absence of
the AluI site at np 5176. Sequence data show a
correlation between these lineages and particular
imitations in the Control Region I of the mtDNA
genome (Torroni et at. 1993o). An additional
residual fifth founding haplogroup, named ‘X’,
has been recently described (Bandelt et at. 1995).
This lineage, ancestrally related to the lineage X
found in some European populations, is charac
terized, at its basal level, by some RFLP and
control region markers, such as 1715 DdeI,
+ 16517 FIaeIII, and the 16223T-16278T substi
tutions; in the Americas. it has only been found
in populations from North America.
Greenberg et at. (1986) postulated that three
different migrations (Amerind, Na-Dene and
Eskimo-Aleut speakers) from Asia across the
Bering Straits peopled the Americas. However,
the first sequence data (Ward et at. 1991) showed
a rather high rntDNA diversity in one single
—
139
tribe, suggesting a much more complex scenario
than that expected from the three-migration
model. Subsequent genetic studies (Horai et al.
1993; Torroni et at. 1993a, 1993b) demonstrated
that the Native American rntDNAs clustered in
few, but relatively deep, lineages that were
widespread along the continent and not re
stricted to any particular ethnic group or
linguistic family. The ubiquity of the Native
American mtDNAs in Asia suggested that a
single initial migration into America, instead of
successive migration waves, was a more plausible
scenario (Merriwether et at. 1995; Merriwether &
Ferrell, 1996). From that common rnitochondrial
founding pooi, different demographic events
would have produced the differences observed
among present-day Native American popu
lations, thus complicating the interpretation of
both genetic and ethnohistorical data (Forster et
at. 1996).
The purpose of this study is to recover mtDNA
from pre-Columbian Taino remains from
Hispaniola (Dominican Republic) to ascertain
the genetic affinities of these groups in relation to
present-day mainland Amerinds and to recon
struct the irocess of peopling of the Caribbean
Islands, along with the possible existence of
demographic events during that process, such as
genetic drift or bottlenecks. The future aim of
this project is to analyse the genetic composition
of the pre-Columbian remains from other
Caribbean Islands. to provide a clear picture of
the whole migration process; if successful, this
can constitute a case study on ancient human
migrations similar to that of Polynesia, although
on a smaller scale.
MATERIALS AN]) METHODS
DNA extraction and amplificat ion
Twenty-seven bone samples from the pre
Columbian site of La Caleta (Repibliea
Dorninicana) were analyzed. The site is located
25 km east of Santo Domingo city, and is one of
the most important Taino necropolises in the
island; the bodies are buried with Boca Chica
style ceramics, ornaments and tools (unpublished
The Taino People of the Caribbean Are NOT Extinct
Last Edit: February 29, 2008, 08:39:44 pm by Bianca
Page 22 of 25
Report Spam
‘.
Logged
Your mind understands what you have been taught; your heart what is true.
Bianca
Ser,1çmber
Re: The Taino People of the Caribbean Are NOT Extinct
e
Reply #12 on: February 29, 2008, 08:44:51 pm
e
Posts: 41646
http://www. hartford-hwp.com/a rchives/41/O 13 html
A Note on Tainos: Whither Progress?
By José Barreiro,
from Northeast Indian Quarterly,
pp. 66-77
Fall, 1990
Author’s note: An appreciation is due John Mohawk, who contributed to an early version of
this article.
References in the body of the text refer to the Select Bibliography which follows this article.
All illustrations except the photograph on page 76 are taken from Onello Jorge Cardoso, Los
Indocubanos. Havana: Gente Nueva, 1982.
Christopher Columbus, whose name literally means “Christ-bearing colonizer,” wrote in his diary
shortly after the landfall that he and his sailors saw “naked men” (there were also women), whom
they found “very healthy-looking.” Landing at Guanahani, in the Bahamas, and sailing on to Cuba
and Bohio (Haiti/Santo Domingo), renamed Espafiola, Columbus soon noted a widespread language
and system of beliefs and lifeways. Conferring with various caciques (chiefs), he heard them call
themselves “Taino.” (Tyler 1988)
Taino culture was dominant throughout the Caribbean, a sea and island world that was in turn cradle
of Taino civilization. In agriculture, seafaring and cosmology, Ciboney and Guanahatabey (western
Cuba), Macorix and/or Ciguayo (Bohio) and even Carib (Lesser Antilles) all followed the material and
much of the psycho-spiritual framework of the Taino. The original Caribbeans spoke Arawak. The
people of the Arawak language family still comprise one of the more widespread American
Indigenous cultures, with relatively large kinship nations in the Amazon and Orinoco river basins of
South America. Throughout the Caribbean, usually in remote mountain ranges and coastal
promontories, remnant groups and communities of Taino-Arawak and Carib descendants survive to
the present. Aspects of the animistic and material culture of the Taino-Arawak have been adopted
by the mestizo populations of the Caribbean and are interwoven into the Euro-African fabric of the
islands’ folk universe.
The word Taino meant “men of the good,” and from most indications the Tainos were good. Coupled
to the lush and hospitable islands over millennium, and a half, the indigenous people of “La Taina”
developed a culture where the human personality was gentle. Among the Taino at the time of
contact, by all accounts, generosity and kindness were dominant values. Among the Taino peoples,
as with most indigenous lifeways, the physical culture was geared toward a sustainable interaction
with the natural surroundings. The Taino’s culture has been designated as “primitive” by western
scholarship, yet it prescribed a lifeway that strove to feed all the people, and a spirituality that
respected, in ceremony most of their main animal and food sources, as well as the natural forces
like climate, season and weather. The Taino lived respectfully in a bountiful place and so their nature
was bountiful. (Jane 1930)
Last Edit: March 01, 2008, 06:08:26 am by Bianca
e
http://atlantisonline.smfforfree2.comlindex.php?topic7559.0
Report Spam
Logged
11/11/2010
The Taino People of the Caribbean Are NOT Extinct
Page 23 of 25
Your mind understands what you have been taught; your heart what Is true.
Re: The Taino People of the Caribbean Are NOT Extinct
Bianca
Superhero Member
Reply #13 on: March 01, 2003, 06:09:40 am
rr.cJ’4’.
posts: 41646
The naked people Columbus first sighted lived in an island world of rainforests and tropical weather,
and adventure and fishing legends at sea. Theirs was a land of generous abundance by global terms.
They could build a dwelling from a single tree (the Royal Palm) and from several others (gommier,
ceiba), a canoe that could carry more than one hundred people.
The houses (bohios) were (and are today among Dominican and Cuban Cuajiros) made of palm tree,
trunk and thatch lashed together in a rectangle or sometimes a circle pattern. The islands still have
millions of royal and other useful palm trees, from which bohios by the hundreds of thousands could
be built. The wood of the Royal Palm is still today considered the most resistant to tropical rot,
lasting untreated as long as ninety years. 1
The Tainos lived in the shadows of a diverse forest so biologically remarkable as to be almost
unimaginable to us, and, indeed, the biological transformation of their world was so complete in the
intervening centuries that we may never again know how the land or the life of the land appeared in
detail. What we do know is that their world would appear to us, as it did to the Spanish of the
fifteenth century, as a tropical paradise. It was not heaven on earth, but it was one of those places
that was reasonably close.
The Taino world, for the most part, had some of the appearance that modern imaginations ascribe to
the South Pacific islands. The people lived in small, clean villages of neatly appointed thatch
dwellings along rivers inland and on the coasts. They were a handsome people who had no need of
clothing for warmth. They liked to bathe often, which prompted a Spanish royal law forbidding the
practice; “for we are informed it does them much harm,” wrote Queen Isabella. Their general
physical appearance was consistent with the appearance of other Indians of the Americas. They
were rarely taller than five feet six inches which would make them rather small to modern North
American eyes. They painted their bodies with earth dyes and adorned themselves with shells and
metals. Men and women chiefs often wore gold in the ears and nose, or as pendants-around the
neck. Some had tattoos.
Report Spam
Logged
Your mind understands what you have been taught; your heart what is true.
Re: The Taino People of the Caribbean Are NOT Extinct
Bianca
SuperheroMen-iber
‘4
a Reply #14 on: March 01, 2008, 06:11:13 am a
Posts: 41646
http://atlantisonline. smfforfree2.comlindex.php?topic7559.O
11 / 11/2010
The Taino People of the Caribbean Are NOT Extinct
Page 24 of 25
I
From all early descriptions the Tainos were a healthy people who showed no signs of distress
from
hunger or want. The Tainos, whose color was olive-brown to copper, reminded Columbus
of the
people of the Canary Islands, who were neither white nor black. He noted their thick, black
hair,
short in front and long in back, and that it fell over muscular shoulders. On some islands, the
wom
wore short cotton skirts after taking a permanent man but in others all the people went naked.
In
parts of Cuba and Santo Domingo, some of the caciques, village or clan and nation chiefs,
wore a
type of tunic on ceremonial occasions, but they saw no apparent need to cover their breasts
or
genitals and they were totally natural about it, The Taino had plenty of cotton, which they wove
ml
mats, hammocks and small sails and numerous ‘bejucos or fiber ropes. (Tyler 1988)
The Taino islands provided a vast array of edible fruits. The Arawaks made specific use of
many
types of trees and plants from an estimated floral and faunal range of 5,800 species. The jagua
trt
they used for dyeing cotton, the jocuma and the guama for making rope, the jucaro for underwate
construction, the royal palm for buildings and specific other trees for boats, spears, digging
tools,
chairs, bowls, baskets and other woven mats (in this art they flourished), cotton cloth (for
hammocks), large fishing nets and good hooks made of large fish bones. Inspecting deserted
seashore camps, Spanish sailors found what they judged to be excellent nets and small fishing
canoes stored in water-tight sheds. Further upriver in the villages, they saw large fields of
corn,
yucca, beans and fruit orchards covering whole valleys. They walked through the squares
of villag
all recently swept clean, where they saw many kinds of drying tubers, grains and herbs,
and
sunlight-tight storage sheds with shelves packed with thousands of dried cassava (casahe
or cazat
torts. In one village, sailors found large cakes of fine wax, a local product. (Rivero 1966)
The Taino were a sea-going people and took pride in their courage on the high ocean as well as
thi
skill in finding their way around their world. They visited one another constantly. Columbus
was
often astonished at finding lone Indian fishermen sailing in the open ocean as he made his
way
among the islands. Once, a canoe of Taino men followed him from island to island until one
of thel
Report Spurn
Logged
Your mind understands what you have been taught; your heart what is true.
Sweeten your business cards
Personalized MY M&M S
Candie
t4
Aø
Pages: [1] 2 3
4
Go Up
PRINT
<<
Jump to:
=>
previous next
the Bahamas, Bermuda, Cuba & the West Indies
http://atlantisonline.smfforfree2.comlindex.php?topic7559.0
11 / 11/2010
Page 4 of 7
kwabs.corn,caribbean history, tainos, caribs
gained his freedom and the right to live with his followers in the
Bahoruco mountains which are now part of the South East Department
of Haiti. The name of the town associated with this piece of Tainos
history is Anse a Pitres. It is near Jacmel. In Cuba, some groups of
people of Taino descent.have been identified through antropologic
;—$- F-:c1
research.
.
However, those pockets of survivors do not make the broader picture of
the near extinction obsolete because one cannot negate the fact that
there was a very rapid decline of the Arawak population of the West
Indies. It fell from a probable 2 to 3 million to a few thousands by the
early 16th century. By the end of that century, island Arawak were in
fact nearly extinct. The main element governing this catastrophic
mortality rate was the arrival of Columbus and the Spaniards. For the
Arawak/Tainos, the Spanish conquest was an ecological, political and
sociological disaster. Aside of the pressure exerted on them by the
destruction of social structures, the disruption of their food supply,
slavery, Spanish brutality and massacres that followed each revolt, the
Arawaks had to face the European diseases for whom they were not
immunologically prepared.
The Arawaks were part of the global native American population and as
every native American they had no previous contact with the pathogens
that came from Europe with the Spanish. They lost the biological and
political war against the European. By comparison, the Blacks slaves
that came from the west coast of Africa have been in contact with most
of the European disease and even came with new one, such as yellow
fever, that killed lots of European in the Caribbean.
Before the Spanish conquest, the large-island ecosystems, offering
bountiful harvests and abundant fish, combined with the compact and
stable island populations, permitted the development of an elaborate
political and social structure. A class of hereditary chiefs ruled three
other classes, the lowest of which was composed of slaves. Conflict
between classes was apparently minimal. In this matrilineal society,
rulers were succeeded by their eldest sister’s eldest son. Religion
offered a hierarchy of deities parallel to the social structure.
The Arawak tribes of South America were able to survive the European
contact a little more than their Caribbean brother because their groups
were smaller and more scattered. Their social structure was also
matrilineal but much less complex. Mainland Arawak traded with the
Dutch and English. In the 17th and 18th centuries they made a
transition to plantation agriculture. Arawakan-speaking groups are
widespread in lots of parts of South America.
back to Tainos/Caribs directory
back to Caribbean directory
THE CARIBS
httw //wwwkwahs.com/tainos
caribs.html
11/11/2010
/,
kwabs.com,caribbean history, tainos, caribs
Page5of7
Caribs Indian still living
in the Caribbean
KARIBS I CARIBS or KARIBE tribe of Native American of the
Caribbean linguistic stock, occupying various regions of South and
Central America. The Caribs, who probably originated in the valley of
the Orinoco River, were noted for their ferocity.
.During the late 15th century the Karibs inhabited most of the islands of
the Lesser Antilles and the coast of what is now Venezuela, territories
from which they had expelled the Arawak Indians.
From Caniba or Canima to Caribs, Cannibal, Caribbean.
Columbus talked about the Caribs in his log of Sunday, November 4,
1492. On that day, the log says, he showed some gold and pearl to the
Indians. He was told that an infinite amount of gold could be found by
going to the southeast in a place called Bohio. The first mention, all be
it vague, about the Caribs came immediately after in the next sentence
of the log which says the following:
“I also understand that, a long distance from here, there are men with
one eye and others with dogs’ snouts who eat men. On taking a man
they beheaded him, drink his blood and cut off his genitals.”
The next reference about the Caribs is a little more specific. It is part of
the log book entry of Tuesday, December 111492, which speaks about
a continental land behind La Espagnola where the people of Caniba
lived. The entry in the log is the following:
“They (the Tainos of Hispagnola/kyskeya, Bohio, Haiti) indicate that
there is a continental land behind La Isla Espagnola, which they called
Caritaba. They say that it is of infinite extent, which supports my belief
that these lands may be harassed by a more astute people, because
the inhabitants of these lands live in great fear of the people of Caniba.
So I repeat what I have said before, the Caniba are none other than the
people of the Great Khan, who must be very near here. They have
ships that come to these lands to capture these people and take them
away. Since the people never return, it is believed that they have been
eaten.”
The name Caritaba which Colombus referred to as the land of the
Caniba was in fact the land surrounding Cap Haitien in Haiti. The chain
of islands forming the lesser Antilles where the Caribs lived starts
beyond La Espagnola and the the island of Boriken (Puerto-Rico). The
mistakes of Columbus about the Caribs people were due to the
erroneus context governing his interpretation of the facts. He thought he
http ://www.kwabs.comltainos caribs .html
11/11/2010
CHAPTER
4
FARMER POWER
1956 IN MON
tana, working for an elderly farmernamed Fred Hirschy. Born in
Switzerland, Fred had come to southwestern Montana as a teenager in the
1 890s and proceeded to develop one of the first farms in the area. At the
time of his arrival, much of the original Native American population of
A TEENAGER, I SPENT THE SUMMER OF
hunter-gatherers was still living there.
My fellow farmhands were, for the most paErt, tough whites whose nor
mal speech featured strings of curses, and who spent their weekdays work
ing so that they could devote their weekends to squandering- their week’s
Wages in the local saloon. Among the farmhands, though, was a member
of the Blackfoot Indian tribe named Levi, who behaved very differently
from the coarse miners—being polite, gentle, responsible, sober, and well
spoken. He was the first Indian with whom I had spent much time, and I
came to admire him.
It was therefore a shocking disappointment to me when, one Sunday
morning, Levi too staggered in drunk and cursing after a Saturday-night
binge. Among his curses, one has stood out in my memory: “Damn you,
Fred Hirschy, and damn the ship that brought you from Switzerland!” It
Poignantly brought home to me the Indians’ perspective on what I, like
other white schoolchildren, had been taught to view as the heroic conquest
8c
‘3
8 6
•
GUNS, GERMS, AND STEEL
-
of the American West. Fred Hirschy’s family was proud of him, as a pio
neer farmer who had succeeded under difficult conditions. But Levi’s tribe
of hunters and famous warriors had been robbed of its lands by the irnrnj
grant white farmers. How did the farmers win our over the famous war
riors?
For most of the time since the ancestors of modern humans diverged
from the ancestors of the living great apes, around 7 million years ago, all
humans on Earth fed themselves exclusively by hunting wild animals and
gathering wild plants, as the Biackfeet still did in the 19th century. It was
only within the last 11,000 years that some peoples turned to what is
termed food production; that is, domesticating wild animals and plants
and eating the rçsulting livestock and crops. Today, most people on Earth
consume food that they produced themselves or that someone else pro
duced for them. At current rates of change, within the next decade the few
remaining bands of hunter-gatherers will abandon their ways, disintegrate,
or die out, thereby ending our millions of years of corrirnitment to the
hunter-gatherer lifestyle.
Different peoples acquired food production at different times in prebis
tory. Some, such as Aboriginal Australians, never acquired it at all. Of
those who did, some (for example, he ancient Chinese) developed it inde
pendently by themselves, while others (including ancient Egyptians)
acquired it from neighbors. But, as we’ll see, food production was indi
rectly a prerequisite for the development of guns, germs, and steel. Hence
geographic variation in whether, or when, the peoples of different conti
nents became farmers and herders explains to a large extent their subse
quent contrasting fates. Before we devote the next six chapters to
understanding how geographic differences in food production arose, this
chapter will trace the main connections through which food production
led to all the advantages that enabled Pizarro to capture Atahuallpa, and
Fred Hirschy’s people to dispossess Levi’s (Figure 4.1).
The first connection s the most direct one: availability of more consum-
-
Figure 4.1. Schematic overview of the chains of causation leading up to
proximate factors (such as guns, horses, and diseases) enabling some peo:
pies to conquer other peoples, from ultimate factors (such as the orienta
tion of continental axes). For example, diverse epidemic diseases of
humans evolved in areas with many wild plant and animal species suit
able for domestication, partly because the resulting crops and livestock
1+
FARMER POWER
‘
8 7
Factors Underlying the Broadest Pattern of History
Hasest
FACTORS
+
as
J
ease of species
spreading
/
many domesticated plant
and animal species
+
food surpluses,
food storage
+
large, dense, sedentary,
stratified societies
I
I
I
I
1.11.1
PRo)aJTE
FACTORS
horses
technology
guns,
steel
swords
oceangoing
ships
political
organization,
writing
epidemic
diseases
helped feed dense societies in which epidemic could maintain them
selves, and partly because the diseases evolved from germs of the domes
tic anjmils themselves.
15
8 8
GUNS, GERMS, AND STEEL
able calories mans more people. Among wild plant and animal species
only a small minority are edible to humans or worth hunting or gathering.
Most species are useless to us as food, for one or more of the following
reasons: they are indigestible (like bark), poisonous (monarch butterflies
and death-cap mushrooms), low in nutritional value (jellyfish), tedious to
prepare (very small nuts), difficult to gather (larvae of most insects), or
dangerous to hurtt (rhinoceroses). Most biomass (living biological matter)
on land is in the form of wood and leaves, most of which we cannot digest.
By selecting and growing those few species of plants and animals that
we can eat, so that they c9nstitute 90 percent rather than 0.1 percent of
the biomass on an acre of land, we obtain far more edible calories per
acre. As a result, one acre can feed many. more herders and farmers—
typically, 10 to 100 times more—than hunter-gatherers. That strength of
brute numbers was the first of many military advantages that food-produc
ing tribes gained over hunter-gatherer tribes.
In human societies possessing domestic animals, livestock fed more peo
ple in four distinct ways: by furnishing meat, milk, and fertilizer and by
puffing plows. First and most directly, domestic animals became the socie
ties’ major source of animal protein, replacing- wild game. Today, for
instance, Americans tendLto get most of their animal protein from cows,
pigs, sheep, and chickens, with game such as venison just a rare delicacy.
In addition, some big domestic mammals served as sources of milk and of
milk products such as butter, cheese, and yogurt. Milked mammals include
the cow, sheep; goat, horse, reindeer, water buffalo, yak, and Arabian and
Bactrian camels. Those mammals thereby yield several times more calories
over their lifetime than if they were just slaughtered and consumed as
meat.
Big domestic mammals also interacted with domestic plants in two
ways to increase crop production. First, as any modern gardener or farmer
still knows by experience, crop yields can be greatly increased by manure
applied as fertilizer. Even with the modem availability of synthetic fertiliz
ers produced by chemical factories, the major source of crop fertilizer
today in most societies is still animal manure—especially of cows, but also
of yaks and sheep. Manure has been valuable, too, as a source of fuel for
fires in traditional societies.
In addition, the largest domestic mammals interacted with domestic
plants to increase food production by pulling plows and thereby making
it possible for people to till land that had previously been uneconomical
for farming. Those plow animals were the cow, horse, water buffalo, Bali
HOW AFRICA BECAME BLACK
3 9 7
southern African areas unsuitable for Bantu agriculture. The southernmost
Bantu people, the Xhosa, stopped at the Fish River on South Africa’s south
coast, 500 miles east of Cape Town. It’s not that the Cape of Good Hope
itself is too dry for agriculture: it is, after all, the breadbasket of modern
South Africa. Instead, the Cape has a Mediterranean climate of winter
rains, in which the Bantu summer-rain crops do not grow. By 1652, the
year the Dutch arrived at Cape Town with their winter-rain crops of Near
Eastern origin, the Xhosa had still not spread beyond the Fish River.
That seeming detail of plant geography had enormous implications for
politics today. One consequence was that, once South African whites had
quickly killed or infected or driven off the Cape’s Khoisan population,
whites could claim correctly that they had occupied the Cape before the
Bantu and thus had prior rights to it. That claim needn’t betaken seriously,
since the prior rights of the Cape Khoisan didn’t inhibit whites from dis
possessing them. The much heavier consequence was that the Dutch set
tlers in 1652 had to contend only with a sparse population of IChoisan
herders, not with a dense population of steel-equipped Banns farmers.
When whites finally spread east to encounter the Xhosa at the Fish River
in 1702, a period of desperate fighting began. Even though Europeans by
then could supply troops from their secure base at the Cape, it took nine
wars and 175 years for their armies, advancing at an average rate of less
than one mile per year, to subdue the Xhosa. How could whites have suc
ceeded in establishing themselves at the Cape at all, if those first few arriv
ing Dutch ships had faced such fierce resistance?
Thus, the problems of modern South Africa stem at least in part from a
geographic accident. The homeland of the Cape Khoisan happened to con
tain few wild plants suitable for domestication; the Bantu happened to
inherit summer-rain crops from their ancestors of 5,000 years ago; and
Europeans happened to inherit winter-rain crops from their ancestors of
nearly 10,000 years ago. Just as the sign “Goering Street” in the capital of
newly independent Namibia reminded me, Africa’s past has stamped itself
deeply on Africa’s present.
TN AT’S HOW THE Bantu were able to engulf the Khoisan, instead of vice
Versa. Now let’s turn to the remaining question in our puzzle of African
Prehistory: why Europeans were the ones to colonize sub-Saharan Africa.
That it was not the other way around is especially surprising, because
8
•
GUNS, GERMS, AND STEFL
Africa was the sole cradle of human evolution for millions of years, as well
as perhaps the homeland of anatomically modern I-fomo sapie,js. To these
advantages of Africa’s enormous head start were added those of highly
diverse climates and habitats and of the world’s highest human diversity
An extraterrestrial visiting Earth 10,000 years ago might have been for
given for predicting that Europe would end up as a set of vassal states of
a sub-Saharan African empire.
The proximate reasons behind the outcome of Africa’s collision with
Europe are clear. Just as in their encounter with Native Americans, Euro
peans entering Africa enjoyed the triple advantage of guns and other tech
nology, widespread literacy, and the political organization necessary to
sustain expensive programs of exploration and conquest. Those advan
tages manifested themselves almost as soon as the collisions started: barely
four years after Vasco da Gama first reached the East African coast, in
1498, he returned with a fleet bristling with cannons to compel the surren
der of East Africa’s most important port, Kilwa, which controlled the Zirn
babwe gold trade. But why did Europeans develop those three advantages
before sub-Saharan Africans could?
As we have discussed, all three arose historically from the development
of food production. But food production was delayed in sub-Saharan
Africa (compared with Eurasia) by Africa’s paucity of domesticable native
animal and plant species, its much smaller area suitable for indigenous
food production, and its north—south axis, which retarded the spread of
food production and inventions. Let’s examine how those factors oper
ated.
First, as regards domestic animals, we’ve already seen that those of sub
Saharan Africa came from Eurasia, with the possible exception of a few
from North Africa. As a result, domestic animals did not reach sub
Saharan Africa until thousands of years after they began to be utilized by
emerging Eurasian civilizations. That’s initially surprising, because we
think of Africa as the continent of big wild mammals. But we saw in Chap
ter 9 that a wild animal, to be domesticated, must be sufficiently docile,
submissive to humans, cheap to feed, and immune to diseases and must
grow rapidly and breed well in captivity. Eurasia’s native cows, sheep,
goats, horses, and pigs were among the world’s few large wild animal spe
cies to pass all those tests. Their African equivalents—such as the African
buffalo, zebra, bush pig, rhino, and hippopotamus—bave never been
domesticated, not even in modern times.
HOW AFRICA BECAME BLACK
•
3 9 9
k’s true, of course, that some large African animals have occasionally
been tamed. Hannibal enlisted tamed African elephants in his unsuccessful
war against Rome, and ancient Egyptians may have tamed giraffes and
other species. But none of those tamed animals was actually domesti
cated—that is, selectively bred in captivity and genetically modified so as
to become more useful to humans. Had Africa’s rhinos and hippos been
domesticated and ridden, they would not only have fed armies but also
have provided an unstoppable cavalry to cur through the ranks of Euro
pean horsemen. Rhino-mounted Bantu shock troops could have over
thrown the Roman Empire. It never happened.
A second factor is a corresponding, though less extreme, disparity
between sub-Saharan Africa and Eurasia in dotnesticable plants. The
Sahel, Ethiopia, and West Africa did yield indigenous crops, but many
fewer varieties than grew in Eurasia. Because of the limited variety of wild
starting material suitable for plant domestication, even Africa’s earliest
agriculture may have begun several thousand years later than that of the
Fertile Crescent.
Thus, as far as plant and animal domestication was concerned, the head
start and high diversity lay with Eurasia, not with Africa. A third factor is
that Africa’s area is only about half that of Eurasia. Furthermore, only
about one-third of its area falls within the sub-Sabaran zone north of the
equator that was occupied by farmers and herders before 1000 B.C. Today,
the total population of Africa is less than 700 million, compared with 4
billion for Eurasia. But, all other things being equal, more land and more
people mean more competing societies and inventions, hence a faster pace
of development.
The remaining factor behind Africa’s slower rate of post-Pleistocene
development compared with Eurasia’s is the different orientation of the
main axes of these continents. Like that of the Americas, Africa’s major
axis is north—south, whereas Eurasia’s is east—west (Figure 10.1). As one
moves along a north—south axis, one traverses zones differing greatly in
climate, habitat, rainfall, day length, and diseases of crops and livestock.
Hence crops and animals domesticated or acquired in one part of Africa
had great difficulty in moving to other parts. in contrast, crops and ani
mals moved easily between Eurasian societies thousands of miles apart but
at the same latitude and sharing similar climates and day lengths.
The slow passage or complete halt of crops and livestock along Africa’s
north—south axis had important consequences. For example, the Mediter
1j
4
0 0
‘
GUNS, GERMS, AND STEEL
ranean crops that became Egypt’s staples require winter rains and seasonal
variation in day length for their germination. Those crops were unable to
spread south of the Sudan, beyond which they encountered summer rains
and little or no seasonal variation in daylight. Egypt’s wheat and barley
never reached the Mediterranean climate at the Cape of Good Hope until
European colonists brought them in 1652, and the Khoisan never devel
oped agriculture. Similarly, the Sahel crops adapted to summer rain and to
little or no seasonal variation in day length were brought by the Bantu into
southern Africa but could not grow at the Cape itself, thereby halting the
advance of Bantu agriculture. Bananas and other tropical Asian crops for
which Africa’s climate is eminently suitable, and which today are among
the most productive staples of tropical African agriculture, were unable to
reach Africa by land routes. They apparently did not arrive until the first
millennium A.D., long after their domestication in Asia, because they had
to wait for large-scale boat traffic across the Indian Ocean.
Africa’s north—south axis also seriously impeded the spread of livestock.
Equatorial Africa’s tsetse flies, carrying trypanosomes to which native Afri
can wild mammals are resistant, proved devastating to intoduced Eur
asian and North African species of livestock. The cows that the Bantu
acquired from the tsetse-free Sahel zone failed to survive the Bantu expan
sion through the equatorial forest. Although horses had already reached
Egypt around 1800 B.c. and transformed North African warfare soon
thereafter, they did not cross the Sahara to drive the rise of cavalrymounted West African kingdoms until the first millennium A.D., and they
never spread south through the tsetse fly zone. While cattle, sheep, and
goats had already reached the northern edge of the Serengeti in the third
millennium B.C., it took more than 2,000 years beyond that for livestock
to cross the Serengeti and reach southern Africa.
Similarly slow in spreading down Africa’s north—south axis was human
technology. Pottery, recorded in the Sudan and Sahara around 8000 n.c.,
did not reach the Cape until around A.D. 1. Although writing developed
in Egypt by 3000 B.C. and spread in an alphabetized form to the Nubian
kingdom of Meroe, and although alphabetic writing reached ‘Ethiopia
(possibly from Arabia), writing did not arise independently in the rest of
Africa, where it was instead brought in from the outside by Arabs and
Europeans.
In short, Europe’s colonization of Africa had nothing to do with differ-
HOW AFRICA BECAME BLACK
•
4
0 X
ences between European and African peoples themselves, as white racists
assume. Rather, it was due to accidents of geography and biogeography—
in particular, to the continents’ different areas, axes, and suites of wild
plant and animal species. That is, the different historical trajectories of
Africa and Europe stem ultimately from differences in real estate.
r)
0)0
D(D
D.
-3
(Dr+
‘I-
—
(Pb)
5:0
0)
Cr,
C}IAPThR 4
THE RECEPTION OF ENGLISH LAW AND ITS
SIGNIFICANCE TO CARIBBEAN JURISDICTIONS
...
—
of lea1 systems In the
See the discussion in Chapter 2 (‘Legal traditions types
legal systems.
Commonwealth CarIbbean’s Sea, also, the exceptions made for ‘hybild’
SeeChapter2.
11955] All ER 646, CA, p 653.
Allot, AN, The Lire ji qfLaw, 1980, London: Eutterwoeths, pp 109—10.
(1821) 2 Nag Con 371, p380
[19701AC1111,p 1116,
...
belong essentially
As discussed previously, the legal systems in the Caribbean
s to the civil
to the common law legal tradition, with some historical linkage
nce of
tradition. These legal systems were born out of the experie
law legal 1
the region. This
colonialism, during which law was transplanted to
tion of the doctrine
transplantation process is important, since it is the founda
of the reception of law.
y legal
The reception of law doctrine describes the process whereb
consciously
phenomena which were developed in a given environment are
ates from our
exported to another environment. This definition elimin
particular country
discussion the influences from other legal traditions in any
2
which result from mere contact or interplay with each other.
e to Caribbean
Before examining the applicability of the doctrin
n the very
jurisprudence, the reader must be aware that some writers questio
be labelled the
nomenclature of the term ‘reception’, clhning that it should
3
Nyali Ltd nAG,
.
doctrine of ‘Inipoaltion’ or even ‘transplantation’ instead In
on’. Indeed, the
for example, Lord Denning used the term ‘transplantati
te record of the
description ‘imposition’ is more in keeping with an accura
benevolent. Allot
history of the Caribbean, which was neither peaceful nor
upon the colonies:
contends, for example, that the common law was forced
ed in such cases, it
If we analyse the legal reasons why the common law migrat
declared
is that the metropolitan legal system for its own purposes and reasons
migrated
this to be the governing metanorm. At bottom, then, these laws
niigrate
because they were made to 4
of the Rolls,
This view is supported by a 1792 Memorandum by the Master
affirmed by Lord StoweU in Rudling v Switck
the
When the King of Ongland conquers a country the Conqueror by saving in
people;
lives of the people conquered gains a right and property In such
consequence of which he may impose on them what laws he pleases.
6 Lord Diplock explained that ‘in the case of
Similarly, In Kaadesevaren v AG,
is incorporated as
most former British colonies the English common law
I
3
2
4
5
6
Commonwealth Caribbean Law end Legal Systems
part of the domestic law of the new independent State because It was imposed
upon the colony ...‘.
We see, therefore, that English law was Imposed on the Commonwealth
Caribbean. In St Lucia and Guyana, civil law was also imposed and retained.
The reader should further note that in the case of Trinidad and Tobago,
Guyana and Jamaica, traces of Indian law were also received. This mainly
occurred during the time of Indian indentureship. The reception of other legal
traditions has left some impression on Commonwealth Caribbean legal
7 Hindus are allowed to marry
systems. For example, as we saw previously,
according to the tradition and customs of their own law. Some of these
traditions have even been incorporated into local legislation. In the main,
8 and the English common law
however, this is of cosmetic effect only
tradition can be seen to be the dominant one in Commonwealth Caribbean
jurisdictions. The discussion on reception thus centres around the
transplantation of the English common law.
The attitude toward the reception or imposition of English law is
important in deciding to what extent English law informs or should inform
the law of the Commonwealth Caribbean in form and substance. In particular,
the dynamic potential of legal sources in Commonwealth Caribbean legal
systems is considerably influenced by the view that Commonwealth
Caribbean judges and law makers take in relation to the reception question.
This is particularly so in relation to judicial precedent and the constitution,
discussed in later chapters. While the original dependency and ‘Britishness’ of
our law and legal system is accurately attributed to the colonial policy of
imposition, it cannot fully excuse the continuance of these attitudes in
modem, independent societies.
SETfl.ED COLONIES AND CONQUERED COLONIES
Chapter 1.
WIth the esception of the civil law in St Lucia and Guyana. See Chapter 3 (‘The hybrid
legal systems of St Lucia and Guyana’).
For the purposes of reception, there is no practical distinction between conquered and
ceded territories.
Since the doctrine of reception or imposition is closely related to the historical
background of the region, it is important to make a distinction between those
9 The
territories which were conquered or ceded and those which were settled.
process of political transformation was directly related to the manner in which
law was received and implemented. This has further implications for how law
is interpreted.
7
8
9
•
•
The Reception of English Law and its Significance to Caribbean Jurisdictions
-
One interesting difference is the right to land. In Levy and Wood v
10 a case from the Cayman islands —a
Adminisfrtitor of the Cayinan Islands,
settled territory, still a British colony the Court of Appeal held, in a contest
for title to land, that ‘ownership by the Government was the natural
consequence of the introduction of the common law of England by the first
11 This was precisely because the Cayinan islands was a
settlers of the Islands’.
settled colony. Accordingly, there was no evidence of land being previously
occupied by anyone.
The settled territories of the Commonwealth Caribbean include Anguilla,
Antigua, the Bahamas, Barbados, British Virgin Islands, Montserrat, and St
12 These countries received the English common law at the end of the
Kitts.
17th century. A settled colony is commonly described as one where there was
no previous inhabitation by indigenous or ‘civilised’ peoples, or which had
been inhabited by peoples from imperialist countries who had subsequently
3 Nevertheless, when one
abandoned the territory or had been destroyed.’
considers the historical reality of the Commonwealth Caribbean, which
acknowledges the existence of indigenous Amerindian peoples, the very
definition is suspect. Conversely, the concept of a conquered territory refers to
that which was first held by one imperialist power and which was
subsequently transferred to another imperialist, conquering power after
battle. In the Commonwealth Caribbean, the term ‘imperialist powex’ usually
refers to the English, French and Spanish, who fought several battles for
14 The total contempt with which conquerors
ownership of the region.
regarded ‘uncivilised’ peoples and their laws betrays the biases inherent in the
reception of law doctrine.
The conquered territories are Dominica, Beliae, Guyana, Grenada, St
Lucia, St Vincent and Trinidad and Tobago. The status of Jamaica is
controversial, It can be considered as conquered since, at the time of the
arrival f the British, there were Spanish settlers there, albeit without any
rational institutionalisation of law. However, with regard to the reception of
English law, it is best regarded as settled, as discussed below, p62.
The reception doctrine and process is more complex in the cases of St
Lucia and Guyana. There, the common law was imposed on essentially civil
law systems. This was a difficult infusion as the civil law endured. This
10 11952—?9]CILR42.
11 Ibid,p45.
12 See Patchett, KW, ‘The reception of law in the West IndIes’ [19731 JLJ 17 for an
authoritative hisloricnl account of the reception of law in the region.
13 See Tucker, SC fed), B1ackstvne’ Cainmentnries 1803, Vol 1,1969, New York Keuey.
14 In the case of St Lucia, ownership actually changed hands between the French end
English 14 times.
Commonwealth Caribbean Law and Legal Systems
s, is
endurance, which was the impetus for the creation of hybrid legal system
chapter,’
discussed in a separate 5
THE METHOD AND DATE OP RECEPTION
...
—
onwealth
The English common law was introduced into the Comm
Caribbean by two methods:
so
(a) With respect to settled colonies, the colonists carried with them only
n
much of the English law as was applicable to their own situatio and the
condition of the infant colony. The date of the establishment of the colony
was the date of reception.
(b) For conquered territories, the colonists retained the existing legal system
g
only in so far as it was not repugnant to natural justice. The existin
system was retained until such time as other arrangements could be made
for English law to be intnxluced. If we consider St Lucia, for example, it
the
was this arrangement of convenience which made it possible for
on is the
hybrid legal system to emerge. In such cases, the date of recepti
date which the Crown directed that English law come into operation.
e the
These are the orthodox English roles on the reception of law. In practlc
ant as most
distinction between conquered and settled territories is less import
scope of the
countries have introduced legislation defining the date and
not without its
reception of the common law. Still, as we will see below, this is
own difficulty.
Two types of English law were imposed on the Caribbean. They were the
h
English common law and English statute law. This imposition of Englis
common law was achieved via two maia methods:
tion of a
(a) The use of the incorporation clause this is where the legisla
territory makes specific provision that the common law of England,
y.
existing at a particular date, shall be deemed to be in force in the territor
les
(b) By way of proclamation: t)ominica, St Vincent and Jamaica are examp
:
of reception by proclamation as evidenced by the 1763 Proclamation
ution
All person inhabiting in our colonies may confide in our royal prosec
Jl’
for the enjoyment of the benefits of the laws of our realm of England
See, also, Anthony,
15 See Chapter 3 (‘The hybrid iegai systems of St Luda and Guyana’).
lth
KD, ‘The reception of the common law by clvii law systems in the Commonwea
Juridiques,
Caribbean’, in Doucet, M and Vanderlinden, J (eds), La ltde9lfion des Systlmcs
1994, Brussels: Bruylant, p 15.
v Hall (1779) 1 Comp 204, dinised
16 Op cit, Tucker, fn 13, pp 196-07. See Campbell
further below, p 61, wluih affirmed this latter rule.
17 RevIsed Laws of Domlntca 1961.
60
ean Jurisdictions
The Reception of English Law and its Significance to Caribb
cation,
ry
The reception of English law was, however, subject to statuto modifi n law,
that is, that a territory may enact legislation which abrogates the commo
to the
and the further requirement that all law received must be suited
circumstances or needs of the colony.
said to have
Two prerequisites must be present before English law can be
the Crown’s
been received. First, the territory must have been brought within
shed, that is,
dominion. Secondly, the settlement must have been establi
ents and annexation
Crown authorisation, recognition of unauthorised settlem
of inhabited areas must have been forrnalised.
ture before one
It was also necessary to have some semblance of a legisla
have been a
could describe a colony as established or settled. There should
te. This is not
constitution or some authority which had the power to legisla
Virgin Islands,
without historical contradiction. For example, in the British
up until 1774. It is
colonists arrived in 1666 but the legislature was not set
were without
nevertheless accepted that this does not mean that the Islands
view may be that
law or legal authority during the interim period. The better
the colony had
the term ‘established colony’ refers to the situation where
ion and some
‘some adequate communal organisation to call for legal regulat
18
form of governmental and legislative control was set up’.
control by
Jamaica provides a unique example, since it came into British
of goverament
force of arms which destroyed completely the previous system
us system to continue
and law. It was therefore not possible for this previo
Vaughan’ and Campbell v
until further arrangement could be made, lit R v 9
cal fact has been
20 the island was treated as settled and this histori
Hall,
Jamaica. Part of the problem with Jamaica
accepted by the Supreme Court of 21
such, the Crown
was that it was one of the first colonies to be conquered. As
extended. The Crown
was uncertain how far its prerogative or royal power
after a grant of
did assert the right to legislate for the colony even
form of selfrepresentative institutions had been made allowing a
that its legislative
government. Afterwards, however, the Crown conceded
d in 1620.
power had been lost when the Representative Assembly was restore
e of the Crown’s
Therefore, the common law came to Jamaica via the exercis
that time onward,
prerogative in the proclamation of 14 December 1661. From
could not be altered
the basic law and the right to a representative legislature
colony.
’
by the Crown and it was to be treated as a settled 2
on the legal historian, Roberts
18 Op elf, Patchelt, In 12, p 18. For this assertion, he relies
1.
5
Wray, IC, Commonwealth Colonial Law 1966, London: Stevens, pl
Morrison, El, The reception
22 For further discussion of the particular rage of Jamaica, see
of law In Jamaica’ (19791 2WILJ 43.
19 (1769)4 Barr 2492, p 2500.
20 (1770)1 Coomp 294, p212.
21 Jocquet v Edwards, 1 Jam SC DecIsions 414.
61
Commonwealth Caribbean Law and Legal Systems
containing immutable legal principles. This is the common law which
Commonwealth Caribbean jurisdictions received.
While the theory may be a legal fiction, Lt does present a certain
Intellectual difficulty for Caribbean jurisprudence. It presumes that it is only
English courts and judges which have the authority to find and declare these
common law principles. Taken to its logical conclusion, Caribbean judges and
courts do not possess the flexibility to adept the common law to local needs.
Rather, (hey are tied to these rigid principles of the common law as declared
in England. This is as true for judicial precedent as it is for the interpretation of
the constitution, as we shall see later in this book.
The difficulty inherent in the doctrine of reception, in deciding how much
of the common law was transplanted to any particular territory, is ably
illustrated by the abstracts from the following cases.
Ideally, although we have received English law, or rather It has been
imposed upon us, this should not restrict us in our formulation of a Caribbean
jurisprudence to reflect our own needs. Rather, reception of the common law
should be viewed merely as a foundation upon which to build, and where
necessary to deviate from, moulding the common law to suit our societies.
This view has not always found favour with Caribbean judges. Consider the
restrictive view of Wooding J In Johnson v R,
28 a trial for murder. The difficulty
with the decision lies in its reasoning, which was based on an English case
that the judge saw as imposing both English statute and common law, as
defined by the English courts, on the West ladies. Wooding I saith
...
In view of s 3 of the Offences Against the Person Ordinance and a 12 of the
Judicature Act which incorporates as part of our lalv the common law of
England, and since any decision of the House of Lords must be regarded as the
prevailing law and, in so far ait interprets it, the common law of England, we
must, whatever our own view, accept its judgment as declaratory of the law
29
here.
The problem of Commonwealth Caribbean judges binding themselves to
precedents by courts, such as the House of Lords, which lie outside the
hierarchy of Caribbean courts, is discussed in Chapter 17 (‘The office of the
Ombudsman’). Here, it is enough to note that this was a post-independence
case, yet the issues of the effect that political independence might have on the
reception of English law, and the attitude toward accepting that English law
as binding on West Indian courts, were not addressed. The Johnson court
clearly accepted that what was received and binding was not merely a
common law tradition, but common law legal principles, both precedent and
statutory interpretation, as defined by the English courts.
28 (1966)IOWJR4r32.
29 Ibidp415.
64
The Reception of English Law and its Significance to Caribbean Jurisdictions
0 Here the issue was whether sIB of the
Consider, further, Jemmot v Phang.
Gaming Act of the IlK applied to Trinidad and Tobago. The court held that
the Act should apply. Section 12 of the Trinidad and Tobago Judicature Act of
1962 provides that
Subject to the provisions of any enactment in operation on the first day of
March 1848 end to any eoactment passed after that date the common law
doctrines of equity and statutes of General Application of the Imperial
Parliament that were in force In England on that date shall be deemed to have
been enacted and to have been in force in Trinidad.
This, therefore, was a reception of law clause embodied In the Trinidad and
Tobago legislation. The court found that the Gaming Act was a statute of the
Imperial Parliament in force in England on 1 March 1848 and that it was a
statute of general application which had not been abrogated by local
legislation.
31 did not agree with
The court in the case of Persaud v Plantation Versailles
this restrictive view of the doctrine of reception. The relevant issue in this case
was whether the remedy of unjust enrichment was part of the law of Guyana.
Money was being deducted from the wages of employees to support payment
of goods from a recreation dub even after the club was closed down.
Although the court did decide that the remedy was part of th law in Guyana,
the attitude of the judges was clearly different to that exhibited in the Johnson
and Jennnot cases. Crane J, for example, noted that the English courts were
unclear as to whether the principle of unjust enrichment existed in English
law, but also found that the duty of a court in an independent country was to
3
formulate a jurisprudence to ‘suit the needs of our ever-changing society’.
For him, the date or consequence of reception was secondary to this judicial
duty.
The contrast between the above cases should, therefore, be noted and is a
good example of the debate on the question of the relevance of reception to
West Indian jurisprudence. it is a debate which still rages today. Indeed, in
1823, the Attorney General for Dominica said that the rule relating to
reception was ‘so vague and so little understood in the colonies, that decisions
contradictory’. While he was concerned with
founded upon it will be often 33
the relevant data of reception, the substance of his complaint holds true for
more general matters on reception. The confusing situation today is hardly
different We are still faced with the ultimate question, to what extent has
English law been received in the territories?
30 (l%3)6W1R36.
31 (1970)17WIR 107.
32 Ibid. pill. See the discussion of this and other cases in the context of the bindingnature
of case law in Chapter 7 (‘The common law and the doctrine of judicial precedent).
33 Second Report of the Commissions of Inquiry on the Administration of Civil and Civil
Justice in the West indies, 1626, First Series, p61.
65
COMMERCE OR
ISOLATION: THE
DECISION TO TRADE
‘36
INTERNATIONAL
BUSINESS
TiNsAcTIoNs:
A PROBLEM-ORIENTED
COURSEBOOK
Tenth Edition
I..
By
Ralph H. Folsom
Professor of Law
University of San Diego
Michael Wallace Gordon
John H. and Mary Lou Dasburg Professor of Law
University of Florida
John A. Spanogle, Jr.
William Wallace Kirkpatrick Professor of Law
The George Washington University
Peter L. Fitzgerald
Professor of Law
Stetson University College of Law
AMERICAN CASEBOOK SERIES®
WEST®
A Thomson Reuters business
Mat #40703398
CnAITER
1
CoMMERcE OR ISOLATION: THE
DECISION TO T1]E
Long after the creation of the world, three identifiable societies began
to emerge in different locations on the planet. In Westia there were
reasonably good natural resources. The climate was temperate and the
people quite industrious and independent. For as long as anyone could
remember, there had been an allocation of the society’s resources on the
basis of each individual’s efforts. Some of the people worked for others,
and were paid for their efforts. Some became quite wealthy, others poor.
But the society made everyone contribute some of what they produced to
assist those unable to work. No one in Westia had ever ventured beyond
its ocean borders.
-
South of Westia some several hundred miles lay Tropica, a large
island nation stretching across the middle of the planet. It had many
natural resources, more than Westia. The climate was extremely hot. Most
of the population was involved with small scale agriculture. A few persons
had accumulated considerable wealth, but Tropica was mainly a poor
island where people worked hard to survive. There was much disease in
Tropica, far more than in Westia. Families, rather than the leaders of the
society, tended to provide for those who were unable to provide for
themselves. But there were far more poor than in Westia. As in the case of
Westia, no person in Tropica had ever ventured beyond the island.
To the east of Westia, on the third major land mass, was Egalia. The
climate and amount of natural resources were similar to Westia, but the
society’s distribution of resources and ownership of property was very
different than in either Westia or Tropica. In Egalia, everything was
owned collectively by the group. Each person was entitled to receive what
was needed to live, and each was expected to produce according to his or
her maximum capacity. The mass of the population existed with adequate
food, housing and medical care, with no one having very much more than
anyone else. But the governing elite seemed to live quite well. Egalians
were as little traveled as Westians and Tropicians; none had ever ventured
beyond Egalia.
2
CiI.1
Tm
DECISION TO TnE
3
As the people of Westia became more affluent, with a significant and
comfortable middle class, they had time to devote to activities other than
providing for necessities. Culture and thought occupied the time of a
number of Westians. New ideas of exploration caused small delegations to
be sent across the oceans in search of what lay beyond. When a group of
Westians arrived in Tropica, they were surprised to discover a population
living in much less affluence than in Westia.
Tropicians were very interested in the better quality garments and
farm instruments possessed by the Westians. They asked if they might
obtain some of them. It took a Tropician five days to make a garment, but
the same garment of better quality could be made in Westia on something
Westians called looms in only a half day. At first the Westians offered to
give the Tropicians some garments; both peoples were quite friendly
towards each other. The Tropicians accepted several, but said they would
like to be able to obtain many more for their people. The Westians had to
gather together and think what this meant. Westia would have to increase
its production of garments to satisfy the demand of Tropica. If they did
that they would have to stop producing something else. So they talked to
the Tropicians. The Tropicians said that although the tools of the Wes
tians were very useful in design and quality, the metal was very soft and
they discovered that Westian tools did not last long. The Westians agreed
that was a problem with their tools. The Tropicians showed the Westians
some of the minerals found in many places on their island in great
abundance. One mineral was very hard and after some experimentation
the Westians learned that they could add it to their metal and make very
strong tools. So the Westians had found something to receive from Tropica
in exchange for their garments. They would take so many kilos of the
Tropician mineral for each garment. And so the nations began to trade.
Westia received something it did not have and Tropica received something
it had not been able to produce as well as Westia.
Labor costs of production might have equalized in the two societies,
but people of Westia were reluctant to move to Tropica, and Tropicians
generally felt the same about moving to Westia. Furthermore, each nation
had placed limits on immigration. This had a tendency to preserve labor
differentials in the production of goods.
Later the two societies discovered that Tropica made a wonderful
wine, and they did it with much less labor than the wine produced in
Westia. It took a Westian ten days to produce a barrel, while a Tropician
could do the same in two days. It seemed appropriate for Westia to trade
some of its garments for Tropician wine. Westia had a “comparative
advantage” in producing garments, Tropica in producing wine. And so
they traded more. And they began to discover that Westia produced some
other items more efficiently than Tropica, while the latter produced nearly
as many goods more efficiently than Westia.
One of the items which Westia produced more efficiently was dishes.
The firing kilns were vei’y advanced in Westia. There was also a dish
-33
4
Tm DEcISION TO TinE
PT. 1
leaders. The
industry in Tropica. It was owned by relatives of some of the
Westia, the
from
dishes
dish producers said that if Tropica imported
now that
that
said
also
Tropica producers would go out of business. They
how to
learn
the two countries traded, the Tropician dish producers would
n
Westia
the
make better dishes and soon would be able to compete with
allow
will not
dish producers. So the Tropician leaders said to Westia, “We
our infant
protect
must
we
e
becaus
y
countr
your dishes to come into our
were the
Nor
happy.
not
were
ers
produc
dish industry.” The Westian dish
with
goods
all
trade
should
es
leaders of Westia. They said the two societi
ians
Tropic
the
But
trade.
no restrictions. They referred to this as free
sold
be
to
boats
ian
pointed out that the Westians would not allow Tropic
boats
,
dishes
unlike
in Westia. Westian officials responded by saying that
that special
were necessary for survival of Westia and it must protect
dish industry
industry. Westians asked Tropica when it thought the infant
a thought it
would mature, and be able to compete with Westia. Tropic
n dishes’
Westia
no
time
that
until
that
would take ten years and suggested
were
dishes
their
that
out
d
would be imported. When Westians pointe
that
ted
sugges
a
Tropic
of
finer in quality than the Tropicians, the leaders
so
of
quota
a
sh
establi
some would be allowed in, but that they would
would
that
ted
many thousand per year. Some critics in Tropica sugges
. But after
allow the governing elites of Tropica access to the finer dishes
raise some
thinking more about the idea, Tropica decided that it could
learned
also
They
.
dishes
ed
import
on
tax
needed revenue by placing a
ers
produc
dish
n
Westia
s
variou
,
that when news of quotas reached Westia
of
idea
the
ed
discard
a
Tropic
began arguing for quota allocations. So
They
dish.
n
Westia
each
quotas and placed a tariff of four pellos on
as would
estimated that the same number would enter by paying the tariff
e. The
revenu
have with the quota, but that using a tariff would raise
roads and
revenue was needed because the nation was trying to build
from Westia
ports to help its trade. But it seemed to be buying more goods
it ought to
r
whethe
d
debate
Westia
a.
than Westia was buying from Tropic
wished to
leaders
Its
not.
did
it
retaliate against these new tariffs, but
not
would
trade
that
er,
pursue free trade. It seemed inevitable, howev
limit
to
ions
regulat
s
really be free, but that officials would create variou
ts of their
trade when limitations were believed to be in the best interes
nation.
ged
When goods were first traded between the two areas, they exchan
many
so
for
goods for goods, so many minerals or barrels of wine
ge goods for
garments. But as the years passed they had begun to exchan
pello would be
currency. At first the societies agreed that each Tropician
ment would
govern
each
that
agreed
worth one Westian dollah. They also
nation
other
the
when
cy
support its currency by buying its own curren
pellos
of
surplus
a
ulated
wished to sell. For example, if Westia accum
back.
them
buy
beyond what it needed, the Tropica Central Bank would
They
?
dollahs
But what would they buy them with if they did not have
to about the
agreed to use gold, which was a very scarce commodity mined
ground, and
same degree in each nation. It was very hard to find in the
CH.1
‘he
;he
iat
to
an
ow
Lflt
;he
ith
tns
old
ats
ial
ry
it
aes
ere
aat
so
Lild
ter
me
ied
ers
of
iey
ild
‘he
Lnd
tia
• to
to
aot
nit
.eir
ed
my
for
be
ild
Ion
los
ck.
iey
Ihe
nd
Tm
DEcIsIoN TO T1DE
5
had long been highly prized by both nations. This currency arrangement
worked for a number of years, but Tropica was concerned that its gold
reserves were diminishing. Trade was favoring Westia and it seemed that
whenever there was some accounting to be done, it was an exchange of
surplus pellos in Westia for Tropician gold reserves. Tropica had what
they called an unfavorable trade balance.
One Friday afternoon the Tropician government announced that they
were devaluing their currency, that they would now give two pellos for
each dollah. Westia and its producers did not like this. Westian officials
said it was a “beggar thy neighbor” policy, that it attempted to correct a
domestic problem by causing harm to one’s neighbor. Immediately goods
from Tropica became more attractive to buyers in Westia, and some goods
from Westia were now too expensive for Tropica buyers to consider. But
over time, Westia became more efficient and the imbalance in its favor
occurred once again. This time Tropica did not devalue. It was nearly out
of gold. It decided that it would no longer exchange gold at a fixed rate for
its own pellos. And it would not support the pello. It would allow the
currency to float, and if there was no confidence in the pello, it would drop
in value compared to the dollah. That is what began to happen. The pello
had become a “soft” currency. The dollah was “hard”
Sellers in Westia now wanted only Westian currency for their goods.
Tropician pellos were not worth anything in Westia. Westian workers
making goods to export to Tropica would not accept pellos. They could no
longer take the pellos to the Westian bank and be assured of receiving
dollahs in exchange. And of course they had to buy their food and other
items with dollahs. So when a Westian seller agreed to sell to a Tropica
buyer, the buyer was required to obtain dollahs. Dollahs were available
from the Central Bank of Tropica, but often the supply was low. Some
times the Tropician buyer received dollahs for selling goods to Westia. It
may have seemed strange to some observers, but Tropicians were more
willing to accept Westian dollahs for the sale of Tropician goods, than
were Westian sellers wiffing to accept Tropician pellos for the sale of
Westian products.
After a couple of years the Bank of Westia discovered that it had
many pellos which it had received from its producers, who had exchanged
the pellos for dollahs. One day the Central Bank of Tropica said it did not
have any dollahs to give to the Bank of Westia in exchange for the pellos
the latter bank had accumulated. There had never been such a problem
before. So the government of Westia began to loan dollahs to the govern
ment of Tropica. In time the amount of dollahs owed by Tropica to Westia
became very high, and Westians were concerned that they might never be
paid. Some Tropician politicians suggested that the nation should default,
but most believed that would be very harmful to the country and that
extensions should be sought for paying the debt. Westia agreed, but
demanded that Tropica take certain steps to diminish the prospects that
the same problem would arise in the future.
6
Tm DECISION TO TRADE
PT. 1
While early trade between Westia and Tropica was limited to the
exchange of goods, ultimately Westia learned that some of the products it
produced could be produced more cheaply in Tropica. Westian producers
transferred the knowledge of how to manufacture some of its products to
producers in Tropica, calling this a transfer of technology. Later Westian
producers actually established their own Westian owned plants in Tropica
to manufacture various products, what they referred to as foreign direct
investment. Sometimes the Westian producer owned the entire Tropica
entity, but at other times it jointly owned the entity with some Tropicians.
The Tropicians were also becoming concerned that as the decades
passed many Westian companies had bought not only goods from Tropica,
but entire companies which produced those goods. Tropicians were not
sure that this should be allowed. They were also concerned that although
the quality of life in Tropica had improved, in Westia it had increased even
more rapidly, and that the disparity of income which was only modest
when the societies began to trade, was now very great. Only two decades
ago a garment from Westia cost only one barrel of wine, but now it cost
two. And this was particularly true of the natural resources of Tropica.
Their price had deteriorated compared to the price for finished products
from Westia. Westia was now a manufacturing nation, while Tropica was
still an agricultural community with much production of natural resources
by Westian owned firms.
Tropician officials were not sure that the idea of trading on the basis
of comparative advantage was working. They thought that free trade had
caused them considerable harm because the industries of Westia had
started out more efficient. Tropica had limited free trade to protect infant
industries, as had Westia for national security. Both nations occasionally
used tariffs and quotas, and more recently they found other ways which
seemed to reduce trade. Often containers had to meet certain regulations.
Labels had to be in the importing society’s language and goods had to be
tested locally; only certain small ports could be used for the entry of
designated goods. The governments of each society were subsidizing
production of certain products on the one hand, and adopting Buy Westia
or Buy Tropica rules on the other. Permits were required to import, but
they were difficult to obtain. Both nations had become protectionist in
different degrees.
But there was cultural, educational and scientific cooperation between
the two societies. One cooperative project was to explore the uncharted
areas east of Westia. To their amazement they discovered a third society—
Egalia. It was a strange society to them. It did have a temperate climate as
in Westia, and considerable resources. And it had much gold. But it had
not advanced very much in the time that Westia and Tropica had been
trading with each other. All of the means of production and distribution
were owned by the government, not by private individuals. When Westian
and Tropician traders began to talk to several Egalians about goods made
in Westia and Tropica, they were told that all trade would have to be
negotiated through a central society or State Trading Organization (STO).
Cii. 1
1
1
t
S
S
I
I
t
Y
e
g
a
a
a
d
-
S
d
a
a
e
e
).
Tm
DECISION TO TRADE
7
Everything seemed to be centrally planned in Egalia. The government
decided how many boats to produce, as well as how many pairs of shoes.
The market—forces of supply and demand—played little role. Cost meant
little. The government provided for all the needs of its citizens who
worked for the benefit of the group, not the individual. Often there were
shortages of certain products, while others were over-produced. Egalia was
determined to be an industrial nation, and it diverted much of the
resources of the nation to that end. It was not satisfied with being an
agricultural nation.
If certain items were not on the Egalian five year purchase plan, then
the STO officials said they were sorry but there was no reason to discuss
trade of those items. But Egaiia did want to trade with the two other
societies. When the price was discussed, Westia said they would accept
some Egalian kupecks, but Egalia said its currency could not be taken out
of the country. Egalia insisted that the other societies take goods manufac
tured in Egalia in trade for products it desired. Westian and Tropician
officials thought privately that this was barter, which they did a very long
time ago, but the Egalian officials insisted on calling it “countertrade”.
They were also not willing to allow Westian or Tropician persons to own
equity in investments in Egalia, where all of the means of production and
distribution was owned by the state with the exception of one province of
Egalia, where it was owned by the workers in each plant. Westia and
Tropica began to trade with Egalia, but it was quite limited. Westia was
much concerned with the concept of state ownership in Egalia, and was
wary of this new society.
Through the years the three societies developed different ways of
gaining advantages in their trading relationships, and in minimizing the
disadvantageous effects of the others’ trade activities. The nations had all
originally been agrarian economies, beginning to produce other items only
when they developed more efficient forms of farming. When one family
could produce enough for two families, one family could begin to make
other goods, such as pottery or tools. But the idea of owning land
remained important to them. It always seemed to dominate the policies in
Tropica, where land reform tended to reduce the development of economi
cal agricultural production. But Tropica also had higher population
growth rates than Westia and Ega]ia, and there were thus more mouths to
feed. Ultimately Tropica followed a pattern of encouraging extensive
industrial production, and moved first to produce goods within Tropica
which they formerly imported. This became known as “import substitu
tion” and reduced the need for Tropica to use some of the scarce hard
currency of Westia they possessed to import these items. Of course the
Westian producers disliked the loss of their export market of these items.
Sometimes Westian capital would enter Tropica to produce the items
locally, but Tropica made it difficult for foreign. capital to invest locally
once Tropica realized that the profits from the sales continued to benefit
the Westians. The only apparent benefit they saw to Tropica was the
employment of some Tropicians making the products in Tropica. Tropica
I
3)
8
Tm
DECISION TO TRADE
PT.
1
first thought it would acquire new technology, but soon discovered that
the technology introduced tended not to be the most advanced possessed
by the Westian companies.
Import substitution worked well in some instances for Tropica, but
they soon began to feel that to be like Westia they must produce for
export. Westia had grown to be a rich nation partly because of its exports
to Tropica and more recently to Egalia. No one could quite explain how all
nations could be net exporters, but Tropica was determined to export
larger amounts of production. But they then realized that their restrictive
investment policies, which had long protected Tropician industries, had
caused the perpetuation of highly inefficient Tropician producers. They
were unable to produce goods which could compete with Westian products
either in the Westian market or in Egalia. It seemed the “terms of trade”
were not improving. The nation once had to trade one (and later two)
barrel of wine for a Westian garment. Now it had to trade four barrels for
the same single garment. But garment production was moving to Tropica.
Tropician labor was cheaper than that of Westia and Egalia. Tropica was
developing a comparative advantage in producing garments and it was not
long before a great many of the garments bought in Westia bore a made in
Tropica label. The use of Tropica labels was somewhat new. When Tropica
products first reached Westia, disgruntled Westian producers who were
forced to compete for the first time with foreign products tried to wage a
campaign that Tropician products were inferior solely because they were
Tropician. At first it worked and Westia even passed laws requiring the
origin of the goods to appear on the label. But many persons bought the
goods anyway, and learned that they were not all inferior. In time, the
label “Made in Tropica” even gained a measure of quality and status.
As the decades passed, additional exploration resulted in the discovery
of many more societies on the planet. Many were like Westia, others like
Tropica and still others like Egalia. Alliances were formed based mainly on
political views, but to some degree also on levels of development. There
was a Westian alliance composed of the nations which were called “devel
oped nations”, or “capital exporting nations”, or sometimes “market
economy industrialized nations”. The Tropician alliance became known as
the Group of 77, or the South (when used in conjunction with what was
referred to as the North—South dialogue, which involved discussions
between the Westian and Tropician groups regarding how to help the
latter develop more quickly). The Tropician alliance nations were usually
called “developing” or “less developed”. Some broke the group down even
further. The first. were the least developed nations or dependent nations.
They were the poorest societies on the planet. Then there were the
developing nations, and finally the newly industrializing countries (NICs),
or advanced developing countries (ABCs). They were the most developed
of the developing societies.
The Egalian alliance included nations with centrally planned econo
mies. They were often called “nonmarket economies” (NMEs) or, to refer
to them according to political rather than economic form, socialist or
CH1
d that
sessed
:
a but
ice for
xports
Elow all
export
brictive
s, had
They
oducts
trade”
r two)
rels for
‘ropica.
ica was
vas not
aadein
Iropica
LO were
wage a
.v were
ght the
ne the
sttus
scovery
rs like
tinly
There
“develmarket
iown as
at wa.s
ussions
elp the
usually
vn even
iations.
ere the
(NICs),
veloped
econoto refer
alist or
I
Tm
DECISION TO TIDE
9
communist nations. Some of the smaller nonmarket economies were
trying to decentralize their economies, and allow market forces to play a
greater role. But Egalia, the strong power in the alliance, looked upon
such changes as dangerous to the security of the alliance and sometimes
stopped these changes. Nor did Westia like to see Tropician alliance
nations shift loyalty to the Egalian group. Westia often tried to stop this
shift. Interrelationships between politics and trade were very complex.
Change was not only an attribute of Egalian and Tropician alliances
nations, but also of Westia. Some members of the Westian alliance
adopted central planning and even brought under state ownership some of
the largest industrial companies, such as those manufacturing airplanes
and automobiles. This was often called nationalizing, and it was also done
to airline services, port facilities, telephone and telegraphic facilities and
even banking. When nationalization resulted in the takeover of foreign
owned property, many difficulties ensued. For example, when Westian
properties were nationalized by Tropica, the owners demanded that the
properties be returned, or that “prompt, adequate and effective” compen
sation be paid. If the owners tried to seize property of Tropica located in
Westia, the Tropician government said it was “sovereign” and thus
immune from such challenges, or that the taking was an “act of state”
and the courts in Westia should not consider the matter. Usually several
years passed and then the two societies sat down and resolved the issue by
a lump sum payment.
Both the Egalian and the Westian alliances competed for dominance
over the Tropician societies. Revolutions and civil wars occurred in several
of the latter nations. The result was often a shift in allegiance from Westia
to Egalia, and sometimes back again. It was a subject of conflict between
Westia and Egalia and of considerable concern on the planet.
Tropician alliance nations were progressing quite well until they and
lenders from Westian alliance nations realized that the debt of the former
nations was so excessive that it probably could never be paid. The refusal
of Westian nations to loan more caused the Tropician nations to realize
that they must achieve economic development through a less restrictive
policy towards investment and imports. Although they earned hard for
eign currencies from tourism, it was not enough. Many of the Tropician
nations began to sell off state owned companies, a process called “privati
zation.” They also opened up to more investment from Westian nations
and sometimes converted their debt to equity.
At the same time, Egalia and many of the Egalian alliance nations
underwent a major transformation in their fundamental economic philoso
phy. They moved away from strict economic planning and allowed market
forces to enter and establish prices. One area of Egalia far on its eastern
edge, called Oriente, was quite different in its population and history in
contrast to much of the remaining parts of Egalia. Oriente once had a
highly developed society, a very rich culture of art and production of
exquisite fabrics. But internal strife caused it to look inward and adhere to
3
10
TIlE DECISION TO TiDE
PT. 1
strict nonmarket economy rules, trading little with the rest of the world,
even other parts of Egalia. But Oriente made a bold and quite dramatic
move. It opened the nation to significant trade and foreign investment,
but retained a very centrally planned government. With the largest
population of any nation, and a poor but increasingly skilled labor force
ready to work for a small fraction of the wages in most of the rest of the
world, Oriente quickly developed into the world’s largest producer of
many products.
As Oriente began to play a very major role in world trade, there
seemed to be a convergence in the economic philosophies of much of the
Egalian alliance and Tropician alliance nations. Nations of both alliances
were trying to become more like the Westian nations. The former nations
pursued this goal of assuming market characteristics by such domestic
measures as privatization of state property, allowing inefficient businesses
to be dissolved, reducing the size of state bureaucracies, opening their
nations to more trade by reducing tariffs and quotas, and repealing laws
imposing restrictions on foreign investments, especially allowing very
large investments in projects to develop natural resources. But all foreign
investments were not always welcome in other nations. An increasing
concern of many citizens of a few Westian and Tropician alliance nations
was the loss of their national culture. Westian nations were viewed as
concerned only with profit making, and Westian foreign investments in
Tropician nations, as well as the trade of some goods, sometimes was
viewed to have damaging affects on the recipient Tropician alliance
nation’s cultural heritage, such as its music and literature. Additional
concern was expressed that the national language was being “Westian
ized.” Westia saw this concern solely as a new trade barrier, and was
determined to stop it. But Westia did not have the support of some very
large Westian alliance nations. Furthermore, they were trying to join
Westian created multilateral trade organizations which were founded
upon market principles. They often were surprised to discover, however,
that when they did join a multilateral trade agreement, the Westian
alliance participants used a variety of non-tariff barriers to restrict trade
and protect national industries. Some Egalian and Tropician nations
wondered why, after they had adopted more open trade policies, they still
had difficulty penetrating Westian markets. The former nations thought
they must learn how to use these trade barriers, and began to bring their
own dumping and countervailing duty actions. Westian nations did not
like this.
Many of the nations of the Westian and Tropician alliances, and some
of the nations of the Egalian alliance, created a new world trade organiza
tion to move even closer to a global free trade society. This new trade
organization replaced an older one (formed after a war principally among
Westian nations) which by periodic meetings of the members called
“rounds” had achieved considerable success in reducing tariffs and abol
ishing quotas, as well as eliminating many non-tariff trade barriers. The
newer organization additionally addressed several areas previously politi
CH.l
Tm
DECISION TO T1DE
11
cally impossible to consider, including agriculture, services, investment
and intellectual property.
Where these unilateral rules were not thought sufficient to generate
sufficient free trade, smaller groups of nations formed free trade areas,
generally based on geographic considerations. Trade in these areas was
not always absolutely free, but the purpose of the alignments was to
increase trade and move more towards the characteristics which had
always distinguished Westia, and away from the collective characteristics
of Egalia, or the restrictive characteristics of Tropica. A few of these
mostly regional trade associations agreed to considerably freer trade than
was true of the much larger world trade organization.
The people of Westia and some of the Westian alliance nations seemed
to have very inventive characters. They developed many products which
were unlike any others. The inventors were given protection by Westian
laws, so they might profit from their ideas. These laws were grouped
together and called intellectual property laws, and protected a great range
of creativity. But many of the Tropician and Eastian alliance nations were
concerned that the Westian nations refused to allow access to some needed
goods, such as pharmaceuticals, without very high and unfair payments.
Tropician and Eastian alliance nations often copied the ideas from the
Westians, without paying any compensation. Although the recently formed
world trade organization had tried to deal with this issue, there remained
many abuses. It was a continuing issue between many of the nations of
the world.
The changes in the world seemed to be bringing many people,
regardless of their alliance affiliation, closer in thinking about trade. The
centuries before had seen isolation caused by lack of communication
among societies change to trade which increased as the three different
societies began to think more alike. Nations increasingly felt interdepen
dent, although there remained many forms of national restrictions on
trade and investment. It seemed fair to say that trade had become the
norm. Not free trade without restrictions, but rather a complex trade
matrix which was often quite difficult to understand. There were those
who sought to try to understand and to advise on matters of international
trade. And they were called international business lawyers. They were not
always well liked, and they sometimes seemed to function without ade
quate rules of conduct. Much more admired were those lawyers who
remained in the academy—the professors at the nations’ law schools.a
These law schools taught courses in international business transac
tions.
QuEsTIoNs AND
CoMivnwrs
1. Jeffrey Garten, Under—Secretary of Commerce for International
Trade in the first Clinton Administration, commented on the impact of
a. If any reader has not yet realized the fictional character of this chapter, this sentence will
assuredly establish that fact.
12
Tm
PT.
1
culture by exporting nations affecting the capital and goods receiving nations.
See Business Week, Nov. 30, 1998, at pg. 26. Noting that superpowers have
always spread their culture, whether Italian Renaissance by Lorenzo De
Medici or Disney images by Michael Eisner, he stated:
Americans should not have difficulty empathizing with foreign fears
of cultural invasion. Recall U.S. anxieties a decade ago when Sony Corp.
bought Columbia Pictures and Mitsubishi Corp. purchased New York’s
Rockefeller Center. Now reaction against American “cultural imperial
ism” is building. Just a few years ago, France almost torpedoed the
Uruguay Round of global trade negotiations because it wanted to limit
the activities of U.S. entertainment companies. Last spring, a multilateral
treaty on investment rules was derailed in part because of a spat between
Brussels and Washington over protection of Europe’s cultural industries.
In August, Canada called together 19 other governments to plot ways to
ensure their cultural independence from America. Mexico is considering
legislation requiring that a certain percentage of its media programming
remain in the hands of its citizens.
Suggesting that the United States ought to pay some attention to these
warnings, he further commented:
recognize that strong cultures abroad are in
The U.S. should
the disorientation that comes with globali
Amid
self-interest.
American’s
national communities grounded in history
cohesive
need
countries
zation,
in place can they unite in the tough
these
with
Only
tradition.
and
societies. If societies feel under
modern
building
to
necessary
decisions
to policy paralysis, strident
leading
magnified,
be
will
insecurities
assault,
nism.
anti-America
and
nationalism,
GaLrten suggests the United States might allow some quotas and subsidies
abroad when nations wish to protect their cultures, such as TV and film. He
worries that the protection of national culture might become a defensive
“rallying point” for developing nations overwhelmed by the process of globali
zation, and that a more sensitive approach might help U.S. exports in the long
run.
This spread of U.S. culture is sometimes referred to as Macdonaldiza
tion. How do you view the increasingly protective responses from abroad—
more as trade barriers, or as a justified reaction to seriously threatened
culture? Garten’s comments address the issue of the impact of a nation’s
culture abroad. In the next chapter we will see the issue of culture return,
but this time addressing how we need to understand foreign culture
(which may not be the same as respecting it) in order to successfully
engage in international business.
...
H
DECISION TO T1DE
TRADE AND ECONOMIC GLOSSARY OF TERMS
Balance of Payments. A tabulation of a county’s credit and debit transactions with other countries and
international institutions. These transactions are divided into two broad groups: Current Account and
Capital Account. The Current Account includes exports and imports of goods, services (including
investment income), and unilateral transfers. The Capital Account includes financial flows related to
international direct investment, investment in government and private securities, international bank
transactions, and changes in official gold holdings and foreign exchange reserves
Balance of Trade. A component of the balance of payments, or the surplus or deficit that results from
comparing a country’s expenditures on merchandise imports and receipts derived from its merchandise
exports.
Barter. The direct exchange of goods for other goods, without the use of money as a medium of
exchange and without the involvement of a third party.
Beggar-Thy-Neighbor Policy. A course of action through which a country tries to reduce unemployment
and increase domestic output by raising tariffs and instituting non-tarriff barriers that imede imports, or
by accomplishing the same objective through competetive decalitation. Countries that pursued such
policies in the early 1930’s found that other countries retaliated by raising their own barriers against
imports, which, by reducing export markets, tended to worsen the economic difficulties that
precipitated the initial protectionist action. The Smoot-Hawley Tarriff Act of 1930 is often cited as a
conspicuous example of this approach.
Bilateral Trade Agreement. A formal or informal agreement involving commerce between two
countries. Such agreements sometimes list the quantities of specific goods that may be exchanged
between participating countries within a given period.
Comparitive Advantage. A central concept in international trade theory which holds that a country or a
region should specialize in the production and export of those goods and services that it can produce
relatively more efficietly that other goods and services, and import those goods and services in which it
has a comparative disadvantage. This theory was first propounded by David Ricardo in 1817 as a basis
for increasing the economic welfare of a popultaion through international trade. The comparative
advantage theory normally favors specialized production in a country based on intensive itilization of
those factors of production in which the country is relattively well endowed (such as raw materials,
fertile land or skilled labor), and perhaps also the accumulation of physical capital and the pace of
research.
Countertrade. A reciprocal trading arrangement. Countertrade transactions include:
A) Counterpurchase obligates the foreign supplier to purchase from the byer goods and services
unrelated to the goods and servise sold, usually with a one-to five-year period.
B) Reverse countertrade contracts require the importer (a U.S. buyer of machine tools from
Eastern Europe, for example) to export goods equicalent in value to a specified percentage of
the value of the imported goods—an obligation that can be sold to an exporter in a thrid
country;
C) Buyback arrangements onligate the foreign supplier of plant; machinery or technology to buy
from the importer a portion of the reultant production during a 5-25 year period.
D) Clearing agreements between two countires that agree to purchase specific amounts of each
other’s products over a specified period of time, using a designated “clearing currency” in the
transactions;
E)
“Switch” arrangements that permit the sale of unpaid balances in a clearing account to be sold
to a third party, usually at a discount, that may be used for produ8cing goods in the country
holding the balance;
F) Swap schemes through which products from different locations are traded to save transportaion
costs (e.g., Soviet oil may be “swapped” for oil from a Latin American producer, so the Soviet oil
is shipped to a country in South Asia, while the Latin American oil is shipped to Cuba);
G) Barter arrangements through which two parties directly exchange good deemed to be of
approximately equilavent value without any flow of money taking place.
Countervailing Duties. Special duties imposed on imports to offset the benefits of subsidies to
producers or exporters in the exporting country. GATT Article VI permits the use of such duties. The
Executive Branch of the U.S. Government has been legally empowered since the 1890s to impose
countervailing duties in amounts equal to any “bounties” or “grants” reflected in products imported into
the United States. Under U.S. law and the Tokyo Round Agreement on Subsidies and Countervailing
Duties, a wide range of practices are recognized as constituting subsidies that ay be offset through the
imposition of countervailing duties. The Trade Agreements Act of 1979, through amendments to the
Tariff Act of 1930, established rigorous procedures and deadlines for determining the existence of
subsidies in response to petitions filed by interested parties such as domestic producers of competitive
products and their workers. In all cases involving subsidized products from countries recognized by the
United States as signatories to the Agreement on Subsidies and Countervailing Duties, or countries
which have assumed obligations substantially equivalent to those under the Agreement. U.S. law
requires that countervailing duties may be imposed only after the U.S. International Trade Commission
has determined that the imports are causing or threatening to cause material injury to an industry in the
United States.
Devaluation. The lowering of the value of a national currency in terms of the currency of another
nation. Devaluation tends to reduce domestic demand for imports in a country by raising their prices in
terms of the devalued currency and to raise foreign demand for the country’s exports by reducing their
prices in terms of foreign currencies. Devaluation can therefore help to correct a balance of payments
deficit and sometimes provide a short-term basis for economic adjustment of a national economy.
Developed Countries. A tern used to distinguish the more industrialized nations—including all OECD
member counties as well as the Soviet Union and most of the socialist counties of Eastern Europe—from
“developing” —or less developed—countries. The developed countries are sometimes collectively
designated as the “North,” because most of them are in the Northern Hemisphere.
IL4
Developing Countries (LCD5). A broad range of countries that generally lack a high degree of
industrialization, infrastructure and other capital investment, sophisticated technology, widespread
literacy, and advanced living standards among their populations as a whole, The developing countries
are sometimes collectively designated as the “South, “because a large number of them are in the
Southern Hemisphere. All of the countries of Africa (except South Africa), Asia and Oceania (except
Australia, Japa and New Zealand), Latin America, and the Middle East are generally considered
“developing countries, as are a few European countries (Cyprus, Malta, Turkey and Yugoslavia, for
example). Some experts differentiate four sub-categories of developing countries as having different
“
economic needs and interests: 1) A few relatively wealthy OPEC countries—sometimes referred to as oil
exporting developing counties—share a particular interest in a financially sound international economy
and open capital markets; 2) Newly Industrializing Countries (NICs) have a growing stake in an open
international trading system; 3) A number of middle income countries—principally commodity
exporters—have shown a particular interest in commodity stabilization schemes; and 4) More than 30
very poor countries (“least developed countries”) are predominantly agricultural, have sharply limited
development prospects during the near future, and tend to be heavily dependent on official
development assistance.
Exchange Rate. The price (or rate) at which one currency is exchanged for another currency, for gold, or
for Special Drawing Rights (SDRs).
Free Trade. A theoretical concept that assumes international trade unhampered by government
measures such as tarriffs or non-tarrif barriers. The objective of trade liberalization is to achieve “ifreer
trade” rather than “free trade, “it being gfenerally recognized among trade policy officials that some
restrictions on trade are likely to remain in effect for the foreseeable future.
International Monetary Fund (IMF). An international financial institution proposed at the 1944 Bretton
Woods Conference and established in 1946 that seeks to stabilize the international monetary system as
a sound basis for the orderly expansion of international trade. Specifically, among other things, the Fund
monitors exchange rate policies of member countries, lends them foreign exchange resources to
support their adjustment policies when they experience balance of payments difficulties, and provides
them financial assistance through a special “compensatory financing facility” when they experience
temporary shortfalls in commodity export earnings.
Least Developed Countries (LDCs). Some 36 of the world’s poorest countries, considered by the United
Nations to be the least developed of the less developed countries. Most of them are small in terms of
area and population, and some are land-locked or small island countries. They are generally
characterized by low per capita incomes, literacy levels, and medical standards; subsistence agriculture;
and a lack of exploitable minerals and competitive industries. Many suffer from aridity, floods,
hurricanes, and excessive animal and plant pests, and most are situated in the zone 10 to 30 degrees
north latitude. These countries have little prospect of rapid economic development in the foreseeable
future and are likely to remain heavily dependent upon official development assistance for many years.
Most are in Africa, but a few, such as Bangladesh, Afghanistan, Laos, and Nepal, are in Asia. Haiti is the
only country in the Western Hemisphere classified by the United Nations as “least developed.” See
developing countries.
Most-Favored-Nation Treatment (MFN). The policy of non-discrimination in trade policy that provides
to all trading partners the same customs and tariff treatment given to the so-called “Most-FavoredNation.” This fundamental principle was a feature of U.S. trade policy as early as 1778. Since 1923 the
United States has incorporated an “unconditional” Most-Favored-Nation clause in its trade agreements,
binding the contracting governments to confer upon each other all the most favorable trade concessions
that either may grant to any other country subsequent to the signing of the agreement. The United
States now applies this provision to its trade with all of its trading partners except for those specifically
excluded bylaw. The MEN principle has also provided the foundation of the world trading system since
the end of World War II. All Contracting Parties to GATT apply MEN treatment to one another under
Article I of GATT.
Multilateral Agreement. An international compact involving three or more parties. For example, GATT
has been since its establishment in 1947, seeking to promote trade liberalization through multilateral
negotiations.
Non-Market Economy. A national economy or a country in which the government seeks to determine
economic activity largely through a mechanism of central planning, as in the Soviet Union, in contrast to
a market economy that depends heavily upon market forces to allocate productive resources. In a “nonmarket” economy, production targets, prices, costs, investment allocation, raw material, labor,
international trade, and most other economic aggregates are manipulated within a trade, and most
other economic affrefates are manipulated within a national economic plan drawn up by a central
planning aurthoriey, and hence the public sector makes the mahor decisions affecting demand and
supply within the national economy.
Protectionism. The deliberate use or encouragement of restrictions on imports to enable relatively
inefficient domestic producers to compete successfully with foreign producers.
Retaliation. Action taken by a country so restrain its imports from a country that has increased a tariff or
imposed other measures that adversely affect its exports in a manner inconsistent with GATT. The
GATT, in certain circumstances, permits such reprisal, although this has very rarely been practiced. The
value of trade affected by such retaliatory measures should, in theory, approximately equal the valie
affected by the initial import restriction.
Subsidy. An economic benefit granted by a government to producers of goods, often to strengthen
their competitive position. The subsidy may be direct (a cash grant) or indirect (low-interest export
credits guaranteed by a government agency, for example).
Tariff. A duty (or tax) levied upon goods transported from one customs area to another. Tariffs raise
the prices of imported goods, thus making them less competitive within the market of the importing
country. After seven “Rounds” of GATT trade negotiations that focused heavily on tariff reductions,
tariffs are less important measures of protection than they used to be. The term “tariff” often refers to a
comprehensive list or “schedule” of merchandise with the rate of duty to be paid to the government for
importing products listed.
Terms of Trade. The volume of exports that can be traded for a given volume of imports. Changes in the
terms of trade are generally measured by comparing changes in the ratio of export prices to import
prices. The terms of trade are considered to have improved when a given volume of exports can be
exchanged for a larger volume of imports. Some economists have discerned an overall deteriorating
trend in this ratio for developing countries as a whole. Other economists maintain that whereas the
terms of trade may have become less favorable for certain countries during certain periods—and even
for all developing countries during some periods—the same terms of trade have improved for other
developing countries in the same periods and perhaps for most developing countries during other
periods.
Transfer of Technology. The movement of modern or scientific methods of production or distribution
from one enterprise, institution or country to another, as through foreign investment, international
trade licensing of patent rights, technical assistance or training.
World Bank. The International Bank for Reconstruction and Development (IBRD), commonly referred to
as the World Bank, is an intergovernmental financial institution located in Washington, D.C. Its
objectives are to help raise productivity and incomes and reduce poverty in developing countries. It was
established in December 1945 on the basis of a plan developed at the Bretton Woods Conference of
1944. The Bank loans financial resources to credit worthy developing countries. It raises most of its
funds by selling bonds in the world’s major capital markets. Its bonds have, over the years, earned a
quality rating enjoyed only by sound governments and leading corporations. Projects supported by the
World Bank normally receive high priority within recipient governments and are usually well planned
and supervised. The World Bank earns a profit, which is plowed back into its capital.
SISIND 1VIDNVNIJ
1V9019 3HI JO NOIIVDI1dLAJI
]NV S3flSSI ADNEINNflD IN3NNflD
FOREIGN EXCHANGE TRANSACTIONS
§101
3
§101 FOREIGN EXCHANGE TRANSACTIONS
Money and Currency
[11
Throughout much of human history, trade did not involve money or currency
but occurred through barter, the direct exchange of goods and services Even
today, international barter, called cou’ntertrode, is an important segment of
global commerce, particularly for countries that lack a widely acceptable
currency But barter and countertrade create two serious econormc
inefficiencies (1) trade is limited to partners who both want and have specific
commodities, and, (2) production cannot be specialized because many items that
cannot be acquired by trade must be made locally
Money, of course, has replaced barter in the vast majority of domestic and
international transactions Money performs three basic functions it is a medium
of exchange that may be used to acquire goods and services from anyone who is
willing to accept it, it is a store of wealth that may be accumulated for future
transactions, and it serves as a unit of account for determining the relative value
of different commodities and services For example, the relative values of a book
and a haircut is established by the fact that the book costs twenty dollars and
the haircut thirty
Until relatively recently, most of the money used in mternational trade
consisted of metal coins
typically gold or silver
that had a measurable
intrinsic value However, growing commerce involving larger transactions at
longer distances required governments and banks to substitute paper bills for
heavy coins that were difficult to transport and protect Over time, national
governments assumed sole responsibility for issuing money, and the paper bills
and coins circulated by a country’s government constitutes its currency
—
—
Initially, paper money was acceptable as medium of exchange only if people
were confident that the issuer would eventually convert it to gold or silver
Indeed, until 1933, the U S Treasury would exchange gold coins for paper
dollars upon demand The convertibility of paper dollars into gold ended,
however, with the economic reforms enacted during the Great Depression Since
that tune, creditors in the U S must accept paper currency in settlement of
debts (t e it is legal tender), without the ability to convert it to gold This is true
for most of the world’s monetary systems, the value of a nation’s currency is
determined by government actions and policies rather than by reference to gold
or silver
,
The institution with the sole authority to issue a nation’s currency is referred
to as its centml bank Central banks also regulate the supply of credit in a
country’s economy Examples of central banks are the U S Federal Reserve,
the Bank of England, the Bank of Japan and the German Bundesbank The
European Central Bank, located in Frankfurt, acts as the central bank for the
European Monetary System
The central bank of the United States is the Federal Reserve System (the
Fed), consisting of a seven-member Board of Governors m Washington, D C, 12
regional Reserve Banks, and national and state chartered member depository
MONEY, CURRENCY AND FINANCE
4
CH. 1
institutions. The Fed controls the nation’s monetary policy by managing the
supply of money, setting interest rates and supervising the banking system. It
also manages international monetary affairs by establishing and maintaining the
value of the U.S. dollar in global markets.
The Federal Reserve usually increases or decreases the domestic money
supply through open market operations that are directed by the Federal Open
Market Committee (FOMC). The FOMC directs the New York Federal
Reserve Bank to buy or sell securities (government and other kinds) to control
the amount of money and credit in the economy. When the FOMC purchases
securities, new money and credit are introduced into the banking system, and
economic expansion is fostered. Conversely, if the FOMC sells securities, money
and credit are taken out of the system and economic activity is slowed.
[2]
Foreign Exchange
International transactions are often complex because they involve the
currencies of more than one nation. Ordinarily, this means that the transaction
will require one party to convert its nation’s currency into the national currency
used by the other party. For example, if a U.S. importer of Chilean wine must
pay for the goods in Pesos, the importer must use its dollars to buy Pesos from
a currency dealer or bank. If payment is made in dollars, the Chilean exporter
must convert the dollars to Pesos if he is to spend the money in Chile.
Another country’s currency is called foreign exchange and the price of one
currency in terms of another currency is called the foreign exchange rate. In the
U.S., the exchange rate usually is stated as how many units of a specified foreign
currency will be received for a dollar. Thus, if the wine importer must pay one
dollar to receive five pesos, the foreign exchange rate is 5.00. It is important to
know foreign exchange rates in order to compare the international prices of
goods and services. For example, if the wine importer wants to compare the
prices in dollars of Chilean and Italian products quoted in their home
currencies, he must know the exchange rate for Chilean pesos and Italian
Euros.
Foreign exchange may consist of cash, credit and debit card funds, traveler’s
checks, bank deposits, and other short-term rights to funds. For larger
transactions, such as those conducted by banks and foreign exchange dealers,
the transactions usually are conducted by trading bank deposits denominated in
different national currencies. For example, a dealer-to-dealer sale of dollars for
pesos is conducted by exchanging a dollar bank deposit for a peso bank deposit.
As discussed in § 1.O1[4j[c] below, world trade now operates under a system
that does not permanently fix exchange rates between currencies, but allows
most currencies to fluctuate (float) in accordance with market conditions. In a
floating rate system, many factors affect the exchange rate of a nation’s
currency, including the relative value of imports to exports, the amount of
investment capital attracted, government monetary policies, domestic political
and economic stability, and inflation and interest rates. Ultimately, the value of
a nation’s currency is determined by private traders in the global foreign
exchange market.
§ 1.01
FOREIGN EXCHANGE TRANSACTIONS
5
The most important factor affecting the value of a nation’s currency is the
international demand for the goods and services it produces. One nation’s
currency is simply a commodity in other countries, so that its price (exchange
rate) depends upon the demand and supply of the currency on the foreign
exchange market. If Americans buy more items from foreign countries
(imports) than they sell abroad (exports), eventually the supply of U.S. dollars
will exceed the international demand and the exchange rate for the dollar will go
down.
Changes in currency exchange rates directly affect the relative prices of
foreign goods and services. Continuing the wine importer example, a decrease in
the exchange rate of the peso from 5.00 to 4.00 per dollar results in a 25 percent
increase in the cost to import Chilean wine. A bottle of wine priced at 20 pesos
previously cost four dollars (20 / 5), but now costs five dollars (20 / 4). When the
dollar price of a foreign currency increases, the dollar is said to depreciate and
the other currency is deemed to appreciate.
In theory, an efficient, free market should restore the exchange rates
between currencies to their equilibrium point. Depreciation of the dollar with
respect to another currency means the dollar price of that currency (e.g., peso)
rises; it takes more dollars to buy a peso. Conversely, the peso price of the
dollar falls; it takes fewer pesos to buy a dollar.. As a result, Chilean goods
become more expensive in the U.S. and U.S. products become cheaper in Chile.
Absent other factors affecting prices, the lower cost for U.S. goods should
increase demand for them in Chile, increasing the demand for dollars, which in
turn will cause the dollar. to again appreciate against the Peso.
[3]
Foreign Exchange Markets
Currencies are traded in a number of financial markets centers around the
world, including New York, Chicago, Los Angeles, London, Tokyo, Singapore,
Frankfurt., Paris, Zurich, and Milan. Most market participants are commercial
and investment banks throughout the world that are linked to each other by
electronic means such as computers and telephones. The basic transaction
between these participants is the purchase of a bank deposit denominated in a
specific currency. Thus, a Japanese Bank that buys dollars is really buying a
dollar denominated bank deposit in the U.S. or a foreign bank’s claim to dollar
deposits in a U.S. bank.
Because the foreign exchange market operates in different time zones, a
twenty-four hour market has developed in which financial institutions are
trading currencies every hour of every day and night. Exchange rates fluctuate
all day long in response to global developments, so that market participants
must carefully monitor exchange rate changes. Market information is
simultaneously received by dealers around the world, resulting in an exchange
rate for the key currencies that usually is the same in all financial markets. Any
differences between the rates would allow for arbitrage, which is the buying and
selling of identical securities in two markets to take advantage of price
differences. Discrepancies that arise between exchange rates in different
markets are quickly eliminated by arbitrage transactions that use fast
technologies and communications to find rate inequalities and instantly buy and
MONEY, CURRENCY AND FINANCE
6
CH. 1
sell the currencies in two different locations. This fast, low risk profit source
ensures that currency rate discrepancies do not exist for long.
Although hundreds of currencies are in use around the world, most exchange
the dollar, yen. pound sterling,
transactions involve only a few key currencies
and euro. By far, the dollar is the most widely traded currency, accounting for
nearly 90 percent of foreign exchange transactions. Much of this dollar trading
arises from transactions in which it is used as a vehicle for trading other
currencies. For example, parties wishing to exchange Brazilian reals for
Hungarian forints are likely to sell the reals for dollars and then sell the dollars
for forints. This is because an active market and ready price are available
between dollars and reals and dollars and forints, while a direct market and
accurate price between reals and forints would be difficult to find. Although the
dollar is the most used vehicle, other currencies such as they yen and euro also
are used for this purpose.
—
[41
Eurodollars
Eurodollars are bank deposits denominated in dollars held in banks outside
the U.S.’ This type of deposit originally developed in Europe but is now found in
major financial centers around the world, including many Asian and Caribbean
nations. The deposits, which may be owned by individuals, corporations, or
governments, are called Eurodollars regardless of the country where held.
Eurodollars do not represent actual U.S. dollars deposited abroad, but
merely change the ownership of dollar deposits located in the U.S. For example,
a U.S corporation that writes a $10 million check on its U.S. bank to deposit in
a foreign bank changes ownership of the U.S. deposit from itself to the foreign
bank. The foreign bank treats the transaction as if it acquired the $10 million
deposit in the U.S. bank as a new asset and a new liability of $10 million to the
U.S. corporation. The U.S. bank records the transaction as a shift in its $10
million liability from the corporation to the foreign bank.
The Eurodollar market has growii rapidly because it is generally free of
government regulation. Eurodollar deposits are simply obligations of the banks
that accept them and are not guaranteed by any government. The lack of
regulation makes Eurodollar deposits more profitable for banks than deposits
subject to U.S. banking requirements (such as minimum reserves and Federal
Deposit Insurance premiums) and interest rates on Eurodollars generally
exceed the yields of other money markets.
A major portion of global financial transactions is conducted in Eurodollars.
The market is huge, consisting of many trillions of dollars deposited by large
corporations, central banks, supranational institutions such as the Bank for
International Settlements, and wealthy individuals. The maturity on deposits is
generally short term, often less than six months. Most Eurodollar loans are
Non-U.S. residents also may conduct Eurodollar transactions at International Banking Facili
ties (IBFs) in the United States. See Goodfriend, Eurodollars, Federal Reserve Bank of Richmond
(1998).
1.01
FOREIGN EXCHANGE TRANSACTIONS
7
quite large, going to corporations funding foreign operations, and foreign
governments funding national projects or balance-of-payment deficits.
Eurobonds. Eurobonds are bonds denominated in a different currency than
used by the country in which they are issued. Most Eurobonds are issued by
international syndicates and are classified by reference to the currency of
denomination. For example, a Japanese company may issue a eurodollar bond
(i.e., a bond denominated in U.S. dollars) in any country other than the U.S. and
a Euroyen bond (denominated in yen) in any country other than Japan.
Eurobonds are attractive financing instruments for several reasons. A
Eurobond allows the issue to denominate its obligation in a preferred currency.
The instruments also allow an issuer to offer bonds in a country without regard
to many of the regulations applicable to bonds denominated in the local
currency. Generally, Eurobonds have low par values that make them highly
liquid.
Global Bonds. Unlike Eurobonds, Global Bonds can be issued in the same
currency used by the country of issuance. For example, a global bond
denominated in U.S. dollars can be issued in all countries, including the U.S.
Thus, Global bonds can be issued in several markets simultaneously. However,
the offering must satisir the financial regulations of the currency denomination
country, so that such offerings may be quite complex. Accordingly, Global bonds
usually are issued by very large organizations with high credit ratings.
[51
Regulating Foreign Exchange Rates
National and international policies and agreements that regulate the
exchange rate between different national currencies are referred to as exchange
rate systems.. Although many systems have been adopted over the centuries,
most fall into one of two categories: fixed or floating exchange rates systems. In
a fixed exchange rate system, a nation’s currency is set at a predetermined
exchange rate that does not change in response to supply and demand for the
currency. Usually, a country’s central bank accomplishes this by fixing the
exchange rate between its currency and a commodity (such as gold), or a specific
foreign currency (such as the dollar). In afloaling exchanie rate system, the
central bank allows its currency exchange rate to be determined by supply and
demand through trading in the foreign exchange market.
In either system, a nation’s currency will appreciate or depreciate when its
value changes relative to another currency. A currency appreciates when one of
its units can buy more units of another currency and depreciates when one of its
unit can buy fewer units of another currency. In a floating rate system, these
value changes are determined by market forces. In a fixed rate system, a nation
may deliberately devalue its currency through a downward adjustment to its
official exchange rate set or “pegged” to a standard such a gold or the U.S.
dollar. Conversely, a government can revalue its currency by an upward
adjustment of the pegged exchange rate.
Freely. convertible currencies that are not expected to depreciate greatly in
the near future are referred to as hard currencies. These include key currencies
such as the dollar, yen, pound and euro. A currency is convertible if it can be
L:,3
MONEY, CURRENCY AND FINANCE
8
CH. 1
readily exchanged for other currencies without excessive government controls
or restrictions. By contrast a currency that cannot be readily exchanged is a soft
currency. A number of governments impose foreign exchange controls that
restrict the purchase and sale of foreign currencies by residents or the purchase
and sale of domestic currency by foreigners.
Advocates of fixed exchange rates (like the gold standard described below)
argue that history shows that they provided a long period of exchange rate
stability for most trading nations. Under this view, the fixed rate standard
provides a simple, automatic mechanism for adjusting trade imbalances without
government interference. Supporters believe that a fixed exchange rate system:
•
prevents governments from adopting inflationary monetary policies;
•
promotes international coordination of monetary policies by removing
the ability to adopt independent monetary policies, and;
•
enhances international trade and investment by eliminating exchangerate risk.
Although a dedicated band of “gold bugs” continues to argue for restoration of
the gold standard, that seems unlikely to occur anytime soon.
Many disagree that the fixed rate gold standard enhanced economic well
being. They argue that during the Great Depression the fixed rate system
prevented governments from taking economic measures to restore beleaguered
economies, decrease unemployment and enhance domestic living standards.
Proponents of floating exchange rates hold that these systems:
•
enhance optimal resource allocation in the world economy;
•
allow for policies that help internal economic conditions without
disrupting the balance of payments, and;
•
reduce the need for unproductive foreign exchange reserves to support
the fixed rate.
As described in the following sections, most of the exchange rate systems used
today combine elements of fixed and floating rates.
[a]
The Gold Standard
From the mid-1800s through the start of the First World War in 1914, most
of the world’s major trading countries used the gold standard of fixed currency
exchange rates. The United States began to apply the gold standard in 1879,
and formally adopted it by legislation in 1900. Under the gold standard, each
participating country defined the price of gold in terms of its domestic currency,
and promised to convert its paper currency to gold on demand at the central
bank of the issuing country. Under this system, a U.S. exporter of goods to
Chile could take payment in pesos, exchange the pesos for dollars at his U.S.
bank, which would then exchange the pesos for dollars at a U.S. Federal
Reserve bank. The Federal Reserve would ship the pesos to Chile in exchange
for gold, thus increasing the U.S. gold supply and decreasing Chile’s gold
supply.
§ 1.01
FOREIGN EXC}IANGE TRANSACTIONS
9
Because each unit of currency was backed by a specific amount of gold, a
nation’s money supply increased or decreased directly with the gain or loss of
gold. A country that spent more for imports than it earned from exports (ie., a
balance of payments deficit) had to ship gold abroad to cover the deficit. The
decrease in the nation’s gold stock required a reduction in its money supply,
resulting in lower domestic prices and wages (deflation). A nation that exported
more than it imported (ie., a positive balance of payments) received additional
gold and expanded its money supply, resulting in higher domestic prices and
wages (inflation). Theoretically, these wage and price increases or decreases
would create shifts in trade that would automatically adjust the imbalance of
payments to equilibrium and restore each country’s gold and money supply. In
practice, however, these automatic adjustments frequently did not occur
because countries adopted policies inconsistent with a gold standard to avoid
domestic unemployment or inflation.
During the First World War, many European counties stopped exchanging
gold for currency and adopted floating exchange rates. After the war, the
exchange rate of many European currencies fluctuated widely and steeply lost
value against the U.S. dollar. Because of their weakened economies and large
war debt burdens, returning to the gold standard was infeasible. The dollar
became an attractive currency for international transactions because it was still
convertible to gold and backed by a strong U.S. economy. Although Great
Britain and other European nations reverted to the gold standard for a brief
period in the 1920s, the financial strains of the Great Depression forced them to
abandon it again during the early 1930s.
The Great Depression upset foreign exchange markets and devastated the
international monetary system, which depended upon international cooperation.
Many nations adopted unrealistic measures to restrict imports and enhance
exports. Thçse included high tariffs, trade restrictions, foreign exchange
controls and steep currency devaluations. A breakdown of confidence in paper
currency incited a demand for gold that central banks could not meet, requiring
many nations to abandon the gold standard. As a result, trade became
increasingly difficult between the many nations that abandoned the gold
standard and the few, like the U.S. that continued to use it. Indeed, some
governments encouraged barter arrangements as a means of avoiding
international exchange transactions altogether. The resulting chaos in exchange
rates contributed to a precipitous decline in international trade, which dropped
by almost 65 percent between 1929 and 1932. The economic rivalries of the 1930s
provided the stimulus for the economic reforms and monetary cooperation that
would be implemented after the Second World War.
[hi
The Bretton Woods Agreement
Toward the end of Second World War, the U.S. and Great Britain organized
an international conference at Bretton Woods, New Hampshire, to plan the
political and economic arrangements that would govern the post-war era. The
participating nations generally agreed that chaotic international monetary
conditions were causative factors in the Great Depression that subsequently led
to the war. As a remedy, the U.S. and Great Britain proposed a new global
t;5
MONEY CURRENCY AND FINANCE
16
CM. 1
An option that grants the right to sell a currency is a put option. A seller of
a put option must buy the currency at the strike price if the option is exercised.
Typically, put options are purchased by holders of a currency who seek
protection against a fall in its price. The option will be exercised if the put price
is greater than the market price of the currency.
Like futures, currency options are traded on organized exchanges. These
include the Philadelphia Stock Exchange and the Chicago Mercantile Exchange
in the U.S. and a number of exchanges abroad such as in Singapore,
Amsterdam, Paris, and Brussels. Exchange-traded options are traded in
contracts that are standardized for the amount of currency, exercise price, and
expiration date. Each exchange operates a clearinghouse which guarantees that
a contract party will not sustain a loss if the other party fails to perform its
financial obligations. No margin requirement is imposed on the option buyer,
who must only pay a premium for the contract. However, the option writer does
bear a financial risk on the contract and is subject to the exchange’s margin
account requirements.
In addition to foreign currencies, exchange-traded option contracts are
written on many of the same kinds of commodities and financial assets involved
in the futures markets. Options are also traded over-the-counter by banks and
other financial institutions. The two basic forms of options are the European
style option that may only be exercised on the expiration date, and the
American style option that may be exercised at any tune before or on the
expiration date. Most over the counter options are European style, while most
options traded on exchanges are American style.
The regulatory agency responsible for a currency option depend upon the
exchange on which the option is traded. Foreign currency options traded on
national securities exchanges are regulated by the Securities and Exchange
Commission (SE C). Foreign currency options traded on other exchanges are
regulated by the Commodity Futures Trading Commission (CFTC). The
regulatory agency responsible for other types of options depends on the
underlying asset. Stock options and options on securities are governed by the
SEC, while commodity options are regulated by the CFTC.
§ 1.02 REGULATION OF INTERNATIONAL FINANCIAL
TRANSACTIONS
[1]
Overview
An international financial transaction occurs when some aspect of a payment,
investment, or financial contract involves people or institutions located hi
different countries. This occurs when loans are sought and extended, or
securities are marketed and sold, across national borders. Usually, parties
engage in international financial transactions to obtain bona fide economic
advantages. In some cases, however, a transaction may be purposefully
structured abroad to avoid a home country’s banking and securities regulations
or taxation.
MONEY, CURRENCY AND FINANCE
18
CR. 1
and related financial instruments these institutions owned or insured. The
distress of the U.S. financial institutions inevitably spread to financial markets
abroad.
The severe losses sustained by global financial institutions, and the
consequential lack of trust in debtors, limited their abifity and willingness to
make new loans. Accordingly, little credit was available to businesses for
conducting their operations or to consumers for houses, cars, necessities, and
luxuries. The result was a massive contraction in business and investment
activity, record low consumer confidence, high unemployment, and falling stock
market prices throughout the world. Companies that relied on consumer credit,
such as the automobile industry, fared most poorly.
[a]
Causes
A major cause of the economic decline was the collapse of the real estate
price “bubble” that began forming in the mid-1990s. The continual increase in
house prices fed expectations of future increases, even in the last years of the
bubble when prices had peaked. By 2006, the inflation of housing prices far
exceeded the levels of household income required to make. homes really
affordable.
The rapid price inflation of residential real estate was exacerbated by a vast
increase in the issuance of sub-prime mortgages to home buyers that could not
qualify for regular loans. Most of these loans entailed little or no down-payment,
low initial interest rates that substantially increased in later years, and high
prepayment penalties that made it costly to refinance when interest rates
declined. Many home buyers did not understand these onerous terms or were
persuaded that ever-increasing house prices guaranteed a later sale of the house
for a profit.
Generally, the initial mortgage lenders did not hold these sub-prime
mortgages but sold them,through the banking system, to the governmentsponsored institutions created to purchase mortgages. These institutions, called
Fannie Mae and Freddie Mac, in turn sold the mortgages to investment banks
that bundled thousands of such loans into a mortgage-backed security (MBS).
This process continually provided the funds mortgage lenders required to make
new loans. Because ever-rising property values seemed to indicate little chance
of default, rating agencies such as Standard & Poor’s and Moody’s generally
gave high grades to these securities mistakenly identifying them as relatively
safe investments. Thus, an MBS, or parts of one, could easily be sold to
institutional or private investors as a low-risk security.
—
Commercial and investment banks also packaged pools of sub-prime
mortgages with other asset-backed securities into Collateralized Debt
Obligations (CDO). These financial investment products divided the pool of
loans into different slices or tranches having different default risks and interest
rates. The tranches with the lowest default risk were assigned the highest
rating by the credit rating agencies, while tranches with more risk (and higher
interest rates) received lower ratings.
§ 1.02
REGULATION OF INTL FINANCIAL TRANSACTIONS
19
This ordering of risk and ratings made CDOs attractive to different kinds of
investors with different risk tolerances. The higher rated CDO tranches were
considered conservative investment choices and were included in the portfolios
of many asset managers, including hedge funds, insurance companies, banks
and pension funds. This vast amount of funding from institutional investors
provided continuing support for new subprime mortgages, further increasing
housing demand and prices.
To further decrease the apparent risk to CDO and MBS holders, insurance
companies and other financial institutions began issuing instruments called
credit default swaps (CDS) that, for a premium, guaranteed losses from a
default of a CDO or MBS. The CDS, however, soon evolved from a guarantee of
an existing debt to a highly speculative investment vehicle. By purchasing a
CDS on securities they did not own, speculators could profit from increases in
the default rate even if they sustained no loss on the default. Although this huge
speculative market generated huge profits for the CDS issuers, the potential
losses from a substantial increase in the default rate were far greater than they
could possibly cover. In 2008, more than $60 trillion of CDSs were outstanding.
The dangers posed by mortgage backed securities were not generally
apparent while housing prices were increasing. Mortgage debtors could resolve
any personal financial difficulty by borrowing against their home equity or
selling the house at a profit. Thus, defaults on home loans were unusual and
unnecessary. The rapid and unrealistic increase in house values was fueled by
low interest rates and a speculative flurry of buying predicated on the
assumption that prices could only go up never down. These conditions existed
in many parts of the world, so that real estate bubbles were evident in many
parts of Europe, South America, and Asia.
—
But, of cburse, the housing bubble did burst and an alarming number of
mortgage borrowers began to default. Housing prices declined severely and
rapidly, particularly in rapidly growing areas such as Arizona, California,
Florida, and Nevada. The default rate for sub-prime mortgages increased
rapidly and soon spread to prime mortgages as the economy deteriorated. New
buyers could not get loans or were reluctant to purchase while prices were still
falling. Existing homeowners could not refinance at more favorable rates
because the value of their houses were less than the amount they owed.
As delinquencies and defaults on mortgages increased, the credit rating
agencies downgraded their ratings of most CDOs backed by this collateral.
Obviously, these agencies, as well as the CDO issuers and investors, greatly
miscalculated the risks inherent in CDOs and in the CDSs that purported to
guarantee them. The defaults and rating downgrades produced a massive
decline in value of the CDOs held by major financial institutions throughout the
world, drastically reducing the capital required for their lending operations and
reserves.
Because the depth of the financial decline was unknown, financial institutions
could not quantify the decreased value of the asset-backed securities they
owned or guaranteed. Similarly, they could not determine the true financial
condition of the other institutions they dealt with in the marketplace. This lack
MONEY, CURRENCY AND FINANCE
20
CH. 1
of confidence rapidly spread through the global financiai system, freezing the
flow of credit that underpins modern economies.
Without credit, businesses could not fund their operating expenses and
consumers could not purchase houses, cars, vacations, and other discretionary
items. Thus, the problems of the housing industry rapidly spread to most other
areas of business and commerce, resulting in the most severe decline in
economic activity since 1929. Unemployment skyrocketed and a plunging stock
market wiped out a decade of gains. The decline in stock values decimated
pension plans, resulting in a huge loss of wealth by millions of baby-boomers
who would soon need that wealth to fund their retirements. A perception grew
that the economy was not merely in recession, but on the verge of another 1929style Great Depression. It was the greatest loss of wealth in history.
[bi
International Response
The severity of the economic problems became apparent to the public when
the largest, best-known fmancial companies in the U.S. began to fail. Reduced to
a fraction of their value, these companies were taken over by others, went out of,
business or were bailed out by massive capital infusions and guarantees from,
the U.S. Treasury and Federal Reserve Bank. Essentially, all the independent
investment banks on Wall Street disappeared through merger, bankruptcy or
transformation into regulated deposit-taking banking companies.
These problems were not limited to the U.S., which became evident as many
major European financial companies began the same process of merger, failure
or government bailout. With varying degrees of severity, banks failed and credit
disappeared in the U.}C, France, Spain, Ireland, Germany, Belgium,
Luxemburg and Netherlands. A shocking failure of banks in Iceland led to the
virtual bankruptcy of that formerly properous country.
The initial response of most governments was massive intervention in their
national financial systems and economies. The basic policy tools were low
interest rates, expansion of the money supply, tax rebates, and enormous
government spending programs. In the United States, the Federal Reserve
reduced short-term interest rates to zero and pumped more than $1 trillion into
the economy through purchases of securities and loan guarantees. The Treasury
Department used a $700 billion allocation from Congress (initially intended for
purchases of toxic assets from financial institutions) to inject capital directly into
more than 200 financial institutions in exchange for ownership interests.
Hundreds of billions in tax refunds were mailed to households and more billions
provided through tax credits and rebates to purchasers of houses and cars.
Billions more were allocated to bail out major U.S, automobile manufacturers.
Similar policies were adopted across the globe. European govermnents
provided hundreds of billions to buy all or part of domestic banks and to
guarantee their loans. The European Central bank coordinated substantial
interest-rate reductions with the central banks of most European countries.
Over opposition from Germany, which called for fiscal restraint, European
governments created huge public-spending programs to stimulate their
economies.
REGULATION OF INTL FINANCIAL TRANSACTIONS
§ 102
21
Although most Asian banks did not incur major losses from investments in
asset-backed securities, Asian economies suffered greatly from declining
exports to the U.S. and Europe. Japan, stung by its highest unemployment rate
since WW II, instituted a massive economic stimulus package. In China, a rapid
decline in the rate of economic growth resulted in massive layoffs across its
export-oriented industries. The government slashed interest rates and
instituted a $600 billion economic stimulus program.
[ci
Recovery and Reform
By late 2009, the U.S. and global economies appear to have stabilized and a
slow period of recovery is likely. Governments and international agencies are
now considering the causes of the economic crisis and the reforms needed to
prevent recurrence. The economic analysis and political debate are focused on
the following issues:
“Too Big to Fail.” This phrase refers to the necessity for government
intervention to prevent failure of a large, interconnected financial firm
that poses systemic risk
ie., its failure would cause major damage
throughout financial markets. Opponents of such interventions argue
that bail-outs of financial institutions create moral hazard
i.e., it
encourages risky behavior by creditors and investors who believe that
governments will protect them against loss. To minimize systemic risk
and the need for intervention, governments will grant central banks and
regulators broad authority over troubled financial companies whose
failure would cause widespread harm to the entire financial system. This
resolution authority will allow regulators to act to preserve these firms
as going concerns or to rapidly close or wind them down. Other rules
may ‘require these firms to reduce the complexity of their group
structures or mandate stand-alone subsidiaries.
—
—
Regulation of Credit Rating Agencies. Because of their complexity
and limited public information, investors in CDOs and other assetbacked securities relied on credit rating agencies such as Standard &
Poor’s and Moody’s to determine the risks associated with these
instruments. The fact that the high ratings afforded these securities
were woefully inaccurate has led to calls for regulation of the credit
rating process. These regulations would restrict conflicts of interests
created when a rating agency has other business relationships with the
institution seeking the rating, as well as changes to the rating
methodologies.
Regulation of Credit Derivatives. As noted above, the proliferation of
mis-priced Collateralized Debt Obligations (CDO) and Credit Default
Swaps (CDS) was a significant cause of the financial crisis. These
instruments were specifically removed from regulatory oversight by the
Commodity Futures Modernization Act of 2000. New legislation and
regulation will make these transactions more transparent and provide
for oversight of the derivatives market. See discussion below.
22
MONEY, CURRENCY AND FINANCE
CH. 1
Compensation Reform. Compensation practices at major financial
institutions significantly contributed to the 2008 financial crisis by
encouraging excessive risk-taking by senior executives and traders. New
international compensation standards have been proposed to align
compensation with creation of long-term value rather than excessive
risk-taking. Specific rules may include:
o
Eliminating multi-year guaranteed bonuses.
o
Reduction in total compensation in firms that have negative
financial performance, including reductions in previously earned
amounts through clawback arrangements.
o
Compensation of senior executives and employees whose actions
materially affect a firm’s risk exposure must be deferred over a
period of at least 3 years and relate to their individual
performance.
o
A substantial proportion of the compensation tb senior executives
and employees must be awarded in shares or share-linked
instruments whose value is aligned with the firm’s long-term
growth.
Risk Management and Capital Requirements. New regulations will
mandate substantial increases in the amount and quality of capital
maintained by banks engaged in international transactions. This will
require revision of the Basel II capital framework discussed in § 1.02[4]
below. The new Basel II rules will include:
o
Significantly higher capital requirements.
o
Requirements that banks build capital during profitable periods
that can be drawn upon during economic downturns.
o
Higher quality capital reserves such as common shares and
retained earnings.
o
Full disclosure of each bank’s capital base and risk exposure.
Restructuring Global Imbalances. Many economists believe that the
underlying cause of the financial crisis is the imbalance between savings
arid investment in major national economies. This imbalance is reflected
in the large trade deficit of the United States and the large trade
surpluses of developing countries such as China. These imbalances stem
from government policies that encourage unrealistic currency exchange
rates, low interest rates and excess borrowing for consumption in the
U.S., and excess savings and lack of domestic consumption in China and
other emerging-market economies. This underlying problem must be
addressed through multi-lateral agreements that encourage sustainable,
balanced national growth patterns. The challenge to the international
community is to avoid booms and busts in asset and credit prices by
promoting balanced global supply and demand in most areas of trade. It
is unclear if such global macroeconomic cooperation is feasible in the
near future.
§ 1.02
[2]
REGULATION OF INTL FINANCLAL TRANSACTIONS
23
Financial Derivatives
A derivative is a financial instrument that takes its value from the value of
another underlying asset such as a commodity, mortgage, corporate stock, bond,
or currency. Derivatives are designed to shift some of the risk associated with
the underlying asset from one party to the agreement to another. For example,
assume that the buyer in an international sales contract must pay for the goods
at a future date in a foreign currency. To hedge the risk that the foreign
currency will increase in cost, he may purchase a futures contract that provides
a right to buy the currency at a future date at a set price. The futures contract
is a derivative that shifts the risk of any increased currency cost to the other
party. In addition to hedging risks, derivatives often are used for speculative
purposes.
One class of derivatives, called swaps, are custom, privately negotiated
contracts in which the parties agree to exchange an asset or cash at a future
time. Because swaps are not traded on exchanges, they are called over-thecounter (OTC) derivatives. Another class of derivatives comprises standardized,
exchange-traded contracts called futures. Many different kinds of contracts,
with varying degrees of complexity, are available in both classes.
In recent years, the huge amounts invested
iii
complex derivatives created
substantial and misunderstood risks in financial markets. During the 1990s,
some of the dangers associated with derivatives were revealed by a number of
highly-publicized cases involving substantial losses on derivative investments.
For example, a major British Bank, Barings PLC, was bankrupted by losses
sustained by one of its traders on Nikkei index futures and options. Similarly,
Orange County, California, one of the richest areas in the U.S., became
bankrupt in 1994 because of a $1 billion loss on its investments in derivative
instruments. These transactions reflect the overuse of derivatives as a means of
speculation, rather their more appropriate role as a hedge against the risks
inherent in a transaction..
The 2008 Financial Crisis. Clearly, failure to understand the risks posed by
financial derivatives was a major cause of the 2008 global financial crisis.
Sophisticated financial institutions and investors poured trillions of dollars into
complex OTC derivatives such as Collateralized Debt Obligations (CDO), and
Credit Default Swaps (CDS), that they thought were insured against major loss.
Until the crisis emerged, this vast portion of the global fluianeial market was
unregulated by any government agency.
The true risks of these derivatives became clear in 2007, when a decline in
U.S. home prices caused a concomitant decline in the value of the hundreds of
billions of mortgage backed securities owned by domestic and foreign financial
institutions. Although these investors believed that their hedging derivative
contracts would provide protection, the huge volume of losses was far greater
than the contract guarantors (“counterparties”) could cover. The lack of
transparency in the unregulated derivatives market led many large,
sophisticated investors to misunderstand the true risk of loss they incurred,
which, in turn, created enormous systemic risk throughout global financial
markets. It is likely that new international treaties and domestic legislation will
MONEY, CURRENCY AN]) FINANCE
24
CR. 1
provide for regulation of OTC derivatives to prevent these transactions from
creating excessive risk to the entire financial system.
[a]
Futures and Swaps
Futures contracts, which include most options, are always traded on
exchanges anj contain standardized terms for delivery dates, volume, trading
procedures and credit allowances. Although the parties bear the risk of loss on
the underlying transaction, the only credit risk (i.e., risk of non-payment) is that
exchange’s clearinghouse will default. Exchanges generally reduce this credit
risk by mark-to-market accounting which adjusts the value of an investors
account each day to reflect profits and losses. An investor that has a loss may be
required to provide an additional cash payment to ensure that the loss is not
shifted to the exchange. Generally, futures transactions are regulated by the
rules of the exchange and by government agencies, such as the Commodities
Futures Trading Commission.
By contrast, the terms of a swap contract are privately negotiated by the
parties and the contracts are privately traded over-the counter. In addition to
the risk of loss on the underlying transaction, each party to a swap contract is
exposed to the credit risk of the counterparty’s default on its payment
obligation. Substantial lobbying by the financial industry resulted in the
Commodity Futures Regulation Act of 2000, which prohibited government
regulation of swap transactions. The financial crisis of 2008 exposed the need for
regulation of these transactions and this is likely to occur soon.
—
[bi
Swaps
A swap is a contract between two parties, called counterparties, to exchange
specified cashfiows at predetermined future times. The amount of cashilow that
each counterparty will exchange usually is determined by reference to a
hypothetical amount, called the national amount, and an underlying market
(e.g., foreign exchange, securities, or commodities) or financial index (e.g.,
LIBOR or the Consumer Price Index). Although these transactions are tailor
made to fit the specific needs of the counterparties, there are two basic
categories of swaps: interest rate swaps (the most frequently used type), and
currency swaps. A transaction that combines both of these variants is referred
to as a cross currency swap.
Swaps are derivatives that are frequently used by large companies to lower
borrowing costs and to hedge risks associated with changing interest rates or
foreign exchange rates. Most swap transactions are arranged through
commercial banks, utilizing customized contracts that are not traded on
exchanges. A standard form contract has been developed by the International
Swaps and Derivatives Association (ISDA), that establishes the parties’
responsibilities upon default or premature termination. The key contract terms,
such as price, duration, and quantity are not standardized, but are written for
each transaction. Generally a swap contract is not tradable or assignable
without both parties’ consent. The transaction is not guaranteed by a
clearinghouse so that each party bears a credit risk that the other party will not
perform it financial obligations.
THE URBAN CARIBBEAN:
TRANSITION TO THE NEW GLOBAL
ECONOMY
The Inform& Economy:
Industriai Districts And
M iroenterprises
r
FOREWORD
BRYAN ROBERTS
University of Texas—Austin
This volume marks the successful conclusion of an unusual and innovative
multinational project. Alejandro Portes, with the support of the Social
Science Research Council and Andrew W. Mellon Foundation, brought
together researchers from five countries of the Caribbean basin—Costa
Rica, Haiti, Guatemala, the Dominican Republic, and Jamaica—to plan a
joint study of urbanization in the region. I enjoyed witnessing the project’s
evolution through invitations to meetings filled with lively debates over
research questions and methods. The end result was to forge a common
methodology that is remarkably sensitive to national differences in culture
and political context. This methodological achievement alone would make
this a valuable contribution to comparative studies of development. Since
generalizations about urbanization in Latin America and the Caribbean
have been mainly based on the experience of the large countries, this
volume makes a significant substantive contribution by focusing on some of
the smaller countries of the region. Apart from their relatively small size,
the countries of the Caribbean basin have certain geopolitical and econom
ic similarities that give their comparative study an especial significance.
Historically, they have been economically dependent on the export of
primary products, they are geographicafly close to the United States, and,
with the partial exception of Jamaica, the United States is their primary
market both for exports and for international migration.
The five countries composing this study are, however, diverse in their
political systems, economic structures, and culture. It is this diversity that
underlies the comparative methods of small numbers and maximum differ
ences that are outlined in the first chapter and skillfully used throughout the
volume. Thus, the authors of these chapters use the considerable differ
ences among the five countries to help distinguish the general trends in
urbanization from those that are context-specific. This analysis is reported
in chapter 2, identifying similar trends in the five countries with respect the
xi
xii
Foreword
spatial polarization of the urban social classes and the informal economy.
Other trends (such as that of the primacy of the urban system) are more
inconsistent and context-specific, and the comparable data collected for
each case enables the editors and authors to weigh the economic, political,
and geographical factors that lead to declining primacy in one country and
not in another.
The fieldwork and data gathering for the case studies were carried
out
during a time of relative economic crisis. The authors emphasize,
however,
that these years of crisis signify a basic restructuring of the urban econom
ies
of the region. In these five countries, as elsewhere in Latin Ameri
ca and the
Caribbean, the 1980s marked the definitive shift away from
economic
regimes based on import-substituting industrialization (isi) to ones
based on
the lowering of tariffs, less direct state control of the internal
economy, and
an emphasis on export-oriented industrialization (EoI).
This shift has far-reaching implications for politics and social welfar
e as
well as for employment. These implications can be summarized
as follows:
The state’s capacity to extend patronage and social welfare dimini
shes as
state employment declines in relative terms and subsidies to
urban consumers are withdrawn, Increased import competition in the interna
l market and
the emerging opportunities in the export market restructure
labor markets
geographically and in terms of supply and demand. The locatio
ns of the
export industry, including tourism, are frequently located
away from the
previously dominant urban centers. The new export industries
demand a
mix of workers that often differs from that of traditional industr
ies in terms
of gender and skills. Many plants assembling products for export
, for exampie, have a high proportion of women employees and an interna
l labor
market polarized between a small proportion of highly skilled worker
s and a
mass of semi- and unskilled workers (Fernández-Kelly and
Sassen 1993;
Standing 1989; Shaiken 1990). The move toward more open
markets also
drastically changes the situation of nationally owned finns,
both in manufacturing and the services. Imports of consumer goods, the arrival
of foreign
mass-retailing firms or fast-food chains can force even large
local firms out
of business or make them raise productivity through laying
off workers or
subcontracting less profitable parts of their business, often
to firms operating
informally,
One of the great values of this volume is that it is the first
to examine,
systematically and with empirical data, the consequences
for urbanization
of this new international economic context. The value of
this examination is particularly apparent in the discussion of the inform
al economy in
chapter 2 and in the country case studies that follow
. The issue of the
informal sector acquires a new salience in the contem
porary period be-
cause of
the shift
econom’)
conduct
had olig
concentr
ated sma
providin
small fin
expenses
The c
context
cheap in
enterprii
garment
lessenin
lessens t
regulatic
dynamis
vertical
1
ing or be
to surviv
the abil
purchasi
workers,
services
tute the
This
tion ant
contrib
present
arising a
an urget
tries diff
the cen
security
part oft.
the 194
counter
fiscal dii
need to
Foreword
al classes and the informal economy.
Lmacy of the urban system) are more
id the comparable data collected for
iors to weigh the economic, political,
:leclining primacy in one country and
for the case studies were carried out
isis. The authors emphasize, however,
restructuring of the urban economies
is elsewhere in Latin America and the
lefinitive shift away from economic
industrialization (ist) to ones based on
control of the internal economy, and
strialization (rot).
dons for politics and social welfare as
:ations can be summarized as follows:
iage and social welfare diminishes as
terms and subsidies to urban consum
3mpetition in the internal market and
port market restructure labor markets
y and demand. The locations of the
ire frequently located away from the
The new export industries demand a
that of traditional industries in terms
mbling products for export, for examen employees and an internal labor
)ortion of highly skilled workers and a
(Fernández-Kelly and Sassen 1993;
move toward more open markets also
ationally owned firms, both in manu
consumer goods, the arrival of foreign
is can force even large local firms out
ictivity through laying off workers or
their business, often to firms operating
ume is that it is the first to examine,
:a, the consequences for urbanization
context. The value of this examina
iscussion of the informal economy in
tudies that follow. The issue of the
rice in the conternporary period be-
xiii
cause of the dramatic changes in the macroeconomic context entailed by
the shift from 1t to EOI regimes. Yet, our understanding of the informal
economy in Latin America and the Caribbean derives mainly from studies
conducted under isi regimes. Under those regimes, the large national firms
had oligopolistic positions in the internal market that permitted them to
concentrate on the sale of high-cost goods and services. Informally oper
ated small firms were left with the less profitable niches, such as that of
providing basic goods and services for the low-income population. These
small firms could profitably exploit these niches mainly by avoiding the
expenses of state regulation.
The country case studies bring out many of the factors that create a new
context for the informal economy. In the new export-oriented regime
s,
cheap imports of basic goods threaten the viability of the small inform
al
enterprise whose prices cannot match those of the mass-produced footwe
ar,
garments, and other basic goods imported from Asia. At the same time,
the
lessening of worker protection in the large enterprises through deregulation
lessens the advantages that small firms once derived from avoiding
state
regulation. in this situation, it is likely that the informal economy loses
dynamism and its capacity to act countercyclically. It becomes either
more
vertically dependent on firms in the formal economy through subcon
tract
ing or becomes more clearly an economy of subsistence that enables people
to survive in the absence of jobs in the formal sector. Even in this latter case,
the ability of the informal economy to absorb workers depends on
the
purchasing power generated by the formal economy, because formal
-sector
workers, living in low-income neighborhoods and purchasing goods
and
services from corner shops, street-sellers, or construction workers, consti
tute the major market for the informal sector.
This volume, through its comparative analyses of community participa
tion and of perceptions of state provision of services, also makes a major
contribution to current debates over social policy and citizenship. The
present period is a turning point in these debates: new social needs
are
arising as economic and political changes question old certainties, creatin
g
an urgent need to broaden the range of policy alternatives. Though coun
tries differ considerably in the extent and timing of social security progra
ms,
the centralized provision and management of social welfare, with social
security linked to formal employment, has been a relatively unquestioned
part of the development policies of most Latin American governments
from
the 1940s onward (Mesa-Lago 1978, 1991). Currently, various trends run
counter to these topdown approaches to social policy. In the face of the
fiscal difficulties of many Latin American governments and their perceiv
ed
need to retrench state expenditures, the continued extension of the
cen
xiv
Foreword
tralized provision of social security by governments is unlikely. In some
countries, notably those of the Southern Cone, the fiscal burden of existing
social security obligations is already a cause of serious concern for governments and international development agencies. Current policies of economic liberalization weaken state oversight of social welfare; thus, various
Latin American governments have adopted policies of labor deregulation
to stimulate the freer movement of capital and goods. Many small- and
medium-scale enterises are threatened by competition from imports, creating job losses that are not compensated by job increases in the large
coorations and that add to infoal and unprotected fos of work. At
the same time, it is likely that noneconomic trends make social rights,
particularly those to health and adequate living conditions, a matter of
increasing public concern.
As the chapters in this volume suggest, the chaos of the cities, which
jwctaposes rich and poor and areas of adequate infrastructure with those
having none, underlines for everyone the need to find collective solutions.
The increasing presence of nongovernmental organizations throughout
Latin America, both religious and secular, working to help local populations demand their rights, inevitably increases demands from below. This
presence also weakens the state’s ability to co-opt local populations or
suppress their demands.
In this situation, urban social policy needs to take account of the limitations and possibilities that face the contemporary urban community as a
source of informal care and as a unit of political participation. The local
residential community is, after all, the place that determines the quality of
access to many social rights, whether those of health care, education, or an
adequate envirbnment. We know from many urban studies that family and
community networks of mutual aid made the neighborhood a source of
social support and welfare during the period of rapid urbanization in Latin
America and the Caribbean from the 1950s to the early 1980s. The neighborhood also represented the most accessible unit of political participation.
It was also a basis of collective mobilization, even though that mobilization
was often of limited duration, as the literature on urban social movements
makes clear (Blondet 1991; Castells 1983; Touraine 1987). It is an open
question whether the urban community continues to function in these
ways, given contemporary changes in the structure of urban economies,
urban spatial organization, and migration patterns. We thus need more
studies, such as those of this volume, that look at the impact of the new
context of urbanization on the caring capacity of the local community and
on local-level political participation. The urban space once available for
invasion and self-construction of housing is now less available and the
problems of P°’
solved by the in
The five case
in social policy
Guatemala, in’
population hav
extreme are th(
istotjcallY, p0]
Dominican Re]
how these dift
explain the s
affecting housi
ment, and, of c
are, however,
extend social
of the study, c
ployment. In
cohesion and
of family and
economic libt
political patti
One impo’
mented in se
international
carrying cap
Haiti is now
has documer
times, organ
communit
volume mak
f political i
0
organizatiot
local comm
tmsted forr
mined, hov
text permit
I
ThiS VOl
paths takei
seek to acc
encourage
project dei
r
Foreword
y by governments is unlikely. In some
:hem Cone, the fiscal burden of existing
y a cause of serious concern for govern
ient agencies. Current policies of eco
versight of social welfare; thus, various
adopted policies of labor deregulation
)f capital and goods. Many smalland
ened by competition from imports, cre
)ensated by job increases in the large
al and unprotected forms of work.
At
neconomic trends make social rights,
[equate living conditions, a matter of
uggest, the chaos of the cities, which
of adequate infrastructure with those
e the need to find collective solutions.
iernmental organizations throughout
ecular, working to help local popula
r increases demands from below.
This
bility to co-opt local populations or
;y needs to take account of the limita
:ontemporary urban community as a
of political partiipation. The local
place that determines the quality of
those of health care, education, or an
n many urban studies that family and
made the neighborhood a source of
period of rapid urbanization in Latin
95 to the early 1980s. The neigh
l
0s
essible unit of political participation.
tion, even though that mobilization
terature on urban social movements
1983; Touraine 1987). It is an open
iity continues to function in
these
the structure of urban economies,
don patterns. We thus need more
that look at the impact of the new
apacity of the local community and
Fhe urban space once available for
sthg is now less available and the
xv
problems of providing infrastructure are more complex and less easily re
solved by the initiative of individuals or even of individual communities.
The five cases explored in this volume provide interesting contrasts both
in social policy and citizenship. At one extreme are the cases of Haiti and
Guatemala, in which both the political rights and the social rights of the
population have been minimal and bitterly contested by elites. At the other
extreme are the cases of Costa Rica and to a lesser extent Jamaica, where,
historically, political and social rights have been relatively extensive. The
Dominican Republic is the intermediate case. The case studies make cleat
how these differences in the historical constitution of citizenship help
explain the spatial as well as the social configuration of the five cities,
affecting housing provision and spatial segregation, the structure of employ
ment, and, of course, the nature of political participation. All five countries
are, however, currently facing difficulties in finding the fiscal resources to
extend social rights. They all, though to varying degrees, were, at the time
of the study, experiencing economic instability and rising rates of unem
ployment. In this situation, the disruptive effects of poverty on family
cohesion and on informal support networks undermine the caring capacity
of family and community. The chapters report some of the consequences of
economic liberalization for access to social services and for the evaluation of
political participation as a means of improving the social situation.
One important change in the meaning of the local community is docu
mented in several of the case studies: the significance of remittances from
international migrants for the welfare of many urban inhabitants. The
carrying capacity of the “local” neighborhood in both Santo Domingo and
Haiti is now clearly a transnational one. Indeed, as Robert Smith (1994)
has documented for Mexicans in New York, international migrants can, at
times, organize more effectively to influence the politics of their home
communities than those who have stayed at home. The case studies of this
volume make clear that the urban neighborhood remains the preferred basis
of political participation. Despite the variations among the cities in spatial
organization, in economic structure, and in the numbers of rural migrants,
local community organizations, not national political parties, are the most
trusted form of political participation. Levels of participation are deter
mined, however, by the national political context and whether that con
text permits space for popular participation.
This volume is an incentive to other collaborative efforts to chart the
paths taken by the countries of Latin America and the Caribbean as they
seek to accommodate to the new global political and economic context. To
encourage further research along this path, the editors have made the
project detail available to the public. The data files (sr’ss 6.1 and text file
xvi
Foreword
format) can be accessed through the Internet at http://www.jhu.edu/soc/
s.iuc),
1
kidark.html, site of the Latin American Development Archive (in
of
Sociology.
Department
based at the Johns Hopkins University’s
The message of the volume is a convincing one. Because of similarities in
the trends affecting countries of the region and policy debates, each country
can benefit from the experiences of the others. However, the differences in
political structure and in the nature of citizenship mean that social and
economic policy debates must take into account the national context.
References
Blondet, Cecilia. 1991. Las Mujeres y El Poder. Lima: Instituto de Estudios Peruanos.
Castells, Manuel. 1983. The City and the Grassroots. London: Edward Arnold.
Fernández-Kelly, M. Patricia, and Saskia Sassen. 1993. “Recasting Women in the
Global Economy: Internationalization and Changing Definitions of Gender.” Russell Sage Foundation Working Paper No. 36. New York: Russell
Sage Foundation.
Mesa-Lago, Carmelo. 1978. Social Security in Latin America: Pressure Groups, Stratification and Inequality. Pittsburgh: University of Pittsburgh Press.
• 1991. “Social Security and Prospects for Equity in Latin America.” World
Bank Discussion Paper No. 140. Washington, D.C.: World Bank.
Shaiken, Harley. 1 99D. Mexico in the Global Economy: High Technology and Work
Organization in Export Industries. San Diego, Calif.: Center for U.S.-Mexico
Studies, University of California.
Smith, Robert C. 1994. “Los Ausentes Siernpre Presentes: The Imagining, Making
arid Politics of a Transnational Community between New York City and
Ticuani, Puebla.” Ph.D. diss., Department of Sociology, Columbia UniverSit’,’,
Standing, Guy. 1989. “Global Feminization through Flexible Labor.” World Development 17 (7): 1077—97.
Touraine, Alain. 1987. Actores Sociales y Sistemns Politicos en America Latina. San•
tiago: PREALC.
The research
1
the Andrew
ered the enti
chapter 1). T
the five Card
this process
Foundation
tude for theii
Without the
would have
Man otl
entire proje
numerous tC
collaboratec
and Caribh
hosted the
Latin Ame
Republic,
and A. Do
of the first:
1
to the live
faculty o
data-collec
Atthis
study in Jr
leagues an
Universit’,
Robothart
auspicious
book is de
and his fe
Regional Studies
Page 1 of 43
2.
3
5
6
7
8
9
EMPLOYMENT ANTI WAGE DYNAMICS IN ITALIAN
10
INT)USTRIAL DISTRICTS
ii
12
13
14
15
16
17
18
19
20
Alessandro Muscioa and Michele Scarpinato
Abstract: This paper is concerned with the analysis of differences in
employment
and wage growth rates inside and outside Italian industrial
districts. On the basis of national statistical data, we compare employment
2
and wage differentials in mani4facturing industries between district and
non-district areas. The aim is to investigate whether the industrial disimict
model generates better labour conditions for sustaining employment
3
pemformnance and wage levels.
I
Keywords: industrial districts, employment, wages
H42.
JEL Classification: J21, .139, RI], R12
44
45
46
47
48
49
50
51
52
53
Dipartimento di Scienze Economiche e Aziendali (DPTEA) Università Luiss Guido
Carli, Via 0. Tommasini, 1 00162 Roma (Italy), Tel: ÷ 39 06 86506530, Email:
[email protected]
Università dell’Insubria Facoltà di Economia, via Ravasi, 2 21100 Varese (Italy)
Tel: +39 0332 215410, Email: [email protected]
—
56
57.
-
—
-
60E
1
http:/lmc.manuscriptcentral.comlcres Email: regional.studies©fm.ru.nI
Regional Studies
1
2:
3
7
8:
9
10
1
INTRODUCTION
The large quantity of empirical evidence on industrial districts (IDs) has
shown that they can be highly competitive and generate steady economic
15
16
17
18
growth (FORTIS, 2000; GUERRIERI and TAMMARINO, 2003). Yet very
little is known about the quantitative aspects of labour dynamics arising
from this complex model of industrial organisation.
21
22
23
Following the conditions set by Piore and Sabel’s model of flexible
specialisation in industrial organisation (PIORE and SABEL, 1984),
underlying the district theory is the idea that this model can generate
employment and create the opportunities for good pay and optimal social
conditions (PYKE and SENGERBERGER, 1996).
However, the reasons why such a model of territorial development is better
able to mobilize human resources have not been systemically analysed in
the literature. In fact, the literature offers no clear explanation of why the
43
district environment may generate favourable employment dynamics
(BRUSCO et al., 1996; PffGO et al., 2001). Furthermore, the
48:
empincal evidence on employment dynamics in districts obtained through
50
damic comparison of employment performance in firms located inside
and outside districts is very limited.
55
: 5B
57::.:
58
60
http:!Imc.manuscriptcentral.com/crL Email: regionaI.studiesfm.ru.nI
Page 2 of 43
Regional Studies
Page 3 of 43
2
3
4
:5
6
Therefore, the gap we address in this study is substantive in terms of both
7
method and relevance. In terms of method, there is no extensive statistical
analysis of employment and wage differentials between district and non-
12
13
14
district areas and of how such differences vary over time. Also, we do not
know whether a distnct s employment and wage growth levels are
accompanied by different firm growth trends. In other words, we do not
20
21
know whether eventual differences in employment levels correspond to new
finn formation or consolidation processes.
2
In terms of the relevance of the subject we find that the topic of employment
performance in IDs is generally underestimated. First, evidence of any
positive impact of the district model on employment and wage levels would
obviously strengthen the argument of supporters of this model of territorial
development that industrial policies should be more locally oriented.
Secondly, evidence of the ability of districts to survive periods of general
4.
•
economic downturn, generating growth, or at least keeping employment
45
levels constant would introduce new perspectives into the ongoing debate
47
on the decline of districts. Some of the literature is providing evidence that
IDs may not be equipped to face the new competitive pressures (AIvIIN
1999; BELUSSI 1999; GAROFOLI, 2002) and their potential advantage
52
with respect to non-clustered industnes may have been exaggerated
(ENGELSTOFT et al
2006) However despite this in some contexts
58
59
60
—
http IImc manuscriptcentral comIcres Email regional studies@fm ru nI
Regional Studies
7 ;..
districts may still have competitive advantage compared to isolated firms in
facing increasing compefition. In other words, in Italy and other countries,
districts may be in decline, but their growth performance might still be
14
stronger than in the rest of the economic context in which they operate.
Therefore, evidence must be provided of how non-district areas in the same
18
1g
2o:
21
22
23
national context and in the same industry, perform over the same period of
time.
Given the above, the purpose of this paper is to investigate the dynamics of
employment and wages in firms located inside and outside Italian IDs. We
use Italian national statistical data to test whether distncts offer better labour
conditions in terms of employment and wage levels.
I
The paper is organised as follows: Section 2 discusses the theoretical
:4
background and the research hypothesis; Section 3 reports the empirical
evidence. Concluding remarks follow.
2
53
2.1
THEORETICAL BACKGROUND
Definition of industrial district
The interest in IDs has been carned on the wave of the ability of such local
productive systems to achieve outstanding economic success and to generate
http IImc manuscriptcentral comIcrs Email regional studies@fm ru ni
Page 4 of 43
Regional Studies
Page 5 of 43
2.
3
4
6
7
sustained development processes (BECATTINI, 1987, 1989; BRUSCO,
1989; GAROFOLI, 1989, 1992). Over the last two decades significant
empirical evidence has shown how districts specialised in producing high
14
quality products, have become competitive players in international markets
(FORTIS,
2000;
MAZZONI,
2001;
NADVI
id
HALDER
19
20.:
21
RABELOTTI, 1999; SAXENLkN, 1994; STORPER, 1993).
I
By defimtion the ID is
2002;
a socioterritorial entity which is characterised by the active
presence of both a community of people and a population of
firms
in
one
naturally
and
historically
bounded
area
(BECATTINI, 1990: 38).
District firms are generally small in size and, within one district, are
4specialised in the production of the same product’s. They share a common
45
social and cultural background which facilitates complementanty between
46
47
activities and division of labour among local actors. In IDs technical and
socio-cultural aspec are closely inteoven with the life of the community.
52
The existence of this strong relationship between social and technical
54
factors allows the co-estence of complex dynamics of cooperation and
competition between local firms (BECATTINI, 1990).
58
*59
60
5
http llmc manuscriptcentral comicres Email regional studiesfm ru ni
Page 6 of 43
Regional Studies
4
5
7
The competitiveness of districts relies on the collective efficiency of the
local system, in which each firm exploits dynamic competitive advantages
14:
15
deriving from the existence of external economies and collective action
(BELLANDI, 1992; GAROFOLI, 1989; SCI{MITZ, 1999). A high degree
19
20
21
of production
generates
specialisation
continuous
improvements in
technology and production organisation (GOTTARDI, 2000). These
improvements have multiplicative effects on the local system and are
determined by continuous
competitiveness
feedback effects
of individual
firms
and
between
the
system
the
increased
as
a whole
(GAROFOLI, 1989). As a result, districts are regarded as places where
close
inter-finn
communication,
socio-cultural
structures
and
the
institutional environment may stimulate socially and telTitorially embedded
collective learning and continuous innovation (ASHEIM and ISAKSEN,
2002).
4-
42
43
‘--44
45
2.2
Employment dynamics in industrial districts
The results of the empirical studies on lBs have had an enormous impact on
51
52
53
regional development policies. Research on districts has led to a general
consensus among economists and policy makers that the territorial
dimension plays a key pa in economic development processes, and that
58
59
districts may offer new opportunities for economic growth in both
60
‘1
6
http IImc manuscriptcentral comlcres Email regional studles@fm ru nI
Regional Studies
Page 7 of 43
2
5
6
industrialised and developing countries (HUMPHREY and SCHMITZ,
7
1996; McCORMICK, 1999; NADVI, 1999; NADVI and SCIITZ 1999;
SCHMITZ, 2000).
12
13
14
Underlying, this interest in the district model and the adoption of what in the
policy makers’ jargon is termed the ‘cluster approach’, there is the idea that
20
21
clustering of firms producing similar products may generate wealth and
offer new opportunities for policy intervention. Clustering is seen as setting
new frontiers for industrial development planning in offering new
opportunities
to
set
‘high
roads
to
development’
(PYKE
and
SENGEN]3ERGER, 1992). There is general agreement that the organisation
of production in districts sustains employment performance and wage
levels. According to Glaeser et al. (1992), cluster firms should exhibit
higher employment levels and higher rates of employment growth compared
4
to production that is not clustered.
4
Studies on districts have also underlined that, compared to other forms of
45
small firm orgamsation, distncts seem to have the capability of providing
47
good wages and social conditions (CASAVOLA et al. 1999; SOLINAS,
1991). This aspect of the district model has been of special interest for
international organisations such as the International Labour Organization
52
53
(ILO) (COSSENTINO et al., 1996; PYKE et a!., 1990) and more recently
the Umted Nations liidustnal Development Organization (UN1DO) (NADVI
-
7
http IImc manuscripteentral comicres Email regional studles@fm ru ni
Page 8 of 43
Regional Studies
r7
7
a
and BARRIENTOS
2004 TJNIDO 2001) which have identified new
perspectives for industrial development for countries and regions with
economies essentially based on small and medium sized enterprises (SMEs).
13
14
Indeed, the ID literature puts great emphasis on the key role of human
19
20
21
capital
in
distncts’
competitiveness.
According
to
PYKE
and
SENGENEERGER (1996), job creation in most Italian districts has been as
good as or better than the national average. Unemployment is generally
lower and wage levels are generally reported to be at least equal to, and
2
often above national levels. Evidence from industrial clusters in other parts
of the world also seems to confirm these trends (ISAKSEN, 1996; MARTIN
3
and SUNLEY, 2003; NADVI, 1999; KARLSSON and KLAESSON, 2000).
Other authors point out the abilities of districts to quickly and efficiently
react to external challenges. This allows them to minimise the negative
4,
effects of changes in market demand, or economic downturns, on district
performance and therefore on employment (GAROFOLI, 2002; NADVI and
45
SCHM1TZ 1999)
46
47
Confirming these insights, some authors argue that the efficiency of SMEs
in discts also stems from good worng conditions (BRUSCO et al., 1996;
th
SIGNORINI, 2000) especially for highly skilled workers (BRUSCO, 1991;
53
54
OCCARI and TATTARA, 1997). According to BECATTINI (1987) several
mechamsms such as information sharing in relation to workers personal
http:!Imc.manuscriptcentral.comlcrL Email: regionaI.studiesfm.ru.nl
Regional Studies
Page 9 0143
.2
3
4
5
6
7
and professional qualities, and employment as a factor of attraction to (and
retention in) the district of the best qualified workers.
Similarly, SIGNOR1NI (2000) argues that in IDs wage levels are normally
13
14
15
higher than in larger firms, and higher than the national average. However,
in the Italian context some studies have suggested that the relationship
between wage levels and districts is controversial (De BLASIO and DI
19
20
21
22
23
ADDARIO, 2002; PIflNGARO et al., 2001; TATTARA, 2001).
In summary, several studies make reference to the relevance of district
effects on employment. It is argued that the district model can and does
guarantee good socio-economic conditions in the form of higher salaries and
sustained employment performance. However, there is no conclusive view
about the factors that converge to the competitive advantage of distcts.
Similarly, there is no systematic empincal evidence of the extent to which
3
employment and wage levels are effectively higher in districts and of
whether
45
-
eventual differences between district and non-district areas tend to
diverge or converge over time.
47
In our view there are several factors, which jointly may contribute to befter
employment performance and better salaries in districts:
52
53
-
54.
55
57r
58
http:I/mc.manuscriptcentral.comlc!L Email: regional.studiesfm.ru.nl
Page 10 of 43
Regional Studies
2
3
4
6
7
1.
Agglomeration economies. Agglomeration economies and economies
of
scale
and
scope
(BELLANDI,
2002)
generate
superior
competitiveness in local systems, which in turn leads to higher
employment performance and better wages;
14
2.
Near-perfect information regimes. Local knowledge spillovers
stimulate flows of information on available positions and available
19
20
21
workforce in the district area. Information flows on demand and
supply of labour in the local labour market generate the efficient
allocation of human resources and reduce the costs to finns of finding
appropriate labour (AUDRETSCH and FELDMAN, 1996);
•
3.
•
Microeconomic effects of demand for labour. High employment
rates increase the price of labour as companies offer higher wage
levels in order to fill vacant positions. In some cases these
employment dynamics can ‘heat up’ the local labour market and the
unemployment rate can approach near-frictional levels (MUSCIO,
2006a).
45.
47
4.
Demand for skilled labour. Districts are knowledge intensive
environments where firms introduce innovative and qualitatively
advanced products (GOTTARDI, 2000; MASKELL, 2001; MUSCIO,
2006b). The competitiveness of the local system is sustained by the
use of skilled workers, who are rewarded with higher pay than they
would receive elsewhere.
58
5;.•
http:IImc.manuscriptcentral.comIcs Email: regionalstudies©fm.ru.nl
Regional Studies
Page 11 of 43
I
.2
.3
4.
5
6
7
5.
Reduction of wage disparities. High employment rates
and
continuous information flows help to reduce wage disparities within
9
districts. The efficient circulation of information on wages offered in
the local system and the dynamic nature of the local labour market
.15:.
generate a continuous optimisation of human resources allocation.
L.
1 8.,
ió
20
21
22
23
These factors reduce wage disparities and generate stable social
conditions.
In addition, the well-documented competitiveness of districts is also said to
translate into favourable work conditions. Efficient utilisation of resources
provides evidence of the endogenous nature of this model of territorial
development and its effectiveness as a viable solution in economic planning.
:
:
The district model can offer extraordinary opportunities for provision of
satisfactory social conditions and is rightly seen as a sustainable approach in
3
4
the development of SMEs systems in the development context (NADVI and
BARRIENTOS, 2004).
47
The scope of this work is to provide a systemic analysis of employment and
wage dynamics inside and outside Italian s. On the basis of national
52
53
statistical data, this study provides evidence of the recent dynamics of
labour in Italian firms in different manufacturing industries. We test the
following research hypotheses:
8.
60
nuscriptcentral.com/cie Email: regional.studiesfm.ru.nl
1
http://mc.ma
s
:::i
Regional Studies
2:.
3
4.
5
6
7.::
Hypothesis]: there are
,-elevant static and dynamic differences in
employment and wage levels between ID and non-ID areas.
13 :
1 4.
Hothesis 2: the ID model sustains firms’ competition allowing better
19
20
21
employment levels.
In the following sections we analyse the differences in employment and
wage levels between ID and non-ID areas taking into consideration different
industry sectors, geographic areas (north, central and southern Italy), firm
size and employee qualifications. We also test via econometric analysis the
3
impact of the ‘district effect’ on employment growth in Italy over the period
1991-2001.
42
3
EMPIRICAL EVIDENCE
43
45
47
48
3.1
Introduction to the research methodology
In the empincal evidence we refer to two different data sources:
49.
50
51
1.
Employment data obtained from the Italian statistical institute, Istituto
54J
Nazionale di Statistica (ISTAT) and which refer to the 1991 and 2001
5&.
.57
59
60
http IImc manuscripteentral comIce
s Email regional studiescfm ru ni
2
Page 12 of 43
RegonaI Studies
Page 13 of 43
1
2
3
4.
5
.6
Censuses. We considered data for all manufacturing sectors. We
7
8
10
11
12
excluded public institutions from our analysis.
2.
Data on wages were obtained from the Italian social security agency,
Istituto Nazionale di Previdenza Sociale (INPS). INPS data used here
14
15
16
refer to four macro- manufacturing industries and consider both “white
17
18
19
20
21
22
23
collar” and “blue collar” workers. INPS data are available for the
period 1994-98.’
We use here the definition of IDs proposed by ISTAT in its 1991
classification of districts. ISTAT has not issued an updated classification of
districts on the basis of the 2001 Census data. ISTAT identifies as districts
2
199 Local Labour Systems (LLS), with a total of 5,110,930 employees.
I
Table 1 reports the regional distribution of districts and non-district LLS. It
can be seen that the majority of districts are concentrated in northern and
central Italy.
42
43
44
45
46
47
48
.49..
50
51a
52
H
53
54•
p.-.
H
The criteria followed by ISTAT in the identification of IDs in Italy are built on the basis
of the conditions set in 1993 by the Ministry of Productive Activities (MAP). These
conditions focus on LLS, which are groups of neighbour communes where labour mobility
is self-contained. MAP identifies as industrial districts those LLS areas that meet the
following conditions:
a) employment share in manufacturing activities above the national average:
b) employment share in SMEs above the national average;
c) employment share in the main manufacturing activity above the national average;
d) employment share in SMEs in the main manufacturing activity above the national
2
average.
nuscriptcentral.comIcê Email: regional.studiesfm.ru.nI
3
http:/lmc.ma
s
Regional Studies
7
8
TABLE 1
9
10
11
12
We split Census data on economic activities into two groups: firms located
13
14
in IDs and firms located outside IDs. Section 3.2 presents a comparison of
employment dynamics in district and non-district areas over the period
19
20
21
1991-2001. Data on employment performance was weighted based on the
number of employees in 1991. Differences in performance between district
and non-district areas were tested using an independent samples T-test.
Section 3.3 adopts the same methodology for the analysis of differentials in
terms of wealth and productivity between the two areas. In Section 3.4 we
used INPS data to estimate differences in the growth and dispersion of
salaries inside and outside IDs in selected manufacturing industries. INPS
reports salary data filed by economic sector and Italian administrative units
3 Finally, Section 3.5 presents the econometric analysis of the
(provinces).
4,
•
impact of the ‘district effect’ on employment growth.
3.2
Employment dynamics in districts
In 2001 in Italy there were 1 ,342,000 local units in district areas (28.8% of
total local units), employing a total of 5,111,930 staff (31.5% of total
national employment) (Table 2). In the manufacturing industry there were
Provinces correspond to NUTS 3 units in the Eurostat classification of administrative
units in Europe. The average dimension of Italian provinces is 2,926.6 Km2.
http:I/mc.manuscriptcentraI.com/cs Email: regional.studiesctm.ru.nI
Page 14 of 43
Small-Firm Networks
—
Charles Perrow. 1992. LLSmall Firm Networks.”
..
“The firms are usually very small say 10 people. They
interact with one another, sharing information, equipment,
personnel, and orders even as they compete with one
another. They are supplied by a smaller number of
and financial service firms.”
business service firms
ID is one type of small-firm network (SFN) of cooperating and
competing small-medium enterprises (SME) in a geographic area.
I
SMEs mostly light manufacture consumer goods:
ceramics, clothing, cutlery, food, furniture, leather
goods, shoes, small machinery, toys, utensils
SMEs use flexible-specialization (artisanal crafts)
for customized, small-batch production runs
Personal trust & reputation are critical to maintain
long-term relations, avoid deceitful double-dealings
Classic SFNs located in IDs of Southern Germany & Third Italy
Clustering for Competitiveness
Michael Porter identified the competitive cluster as a geographic
location wfth sufficient resources and competences to give its
businesses a sustainable competitive advantage over other places.
‘I
Cluster: “geographical concentration of interconnected
companies, specialized suppliers, service providers, finns
in related industries, and associated institutions (e.g.,
universities, standard agencies, trade associations) in a
particular field that compete and also cooperate.”
-
Techno Clusters high technology-oriented, well adapted to the knowledge
economy, typically including universities & research centers
-
Historic Know-How Clusters based on more traditional industrial activities
that maintain knowledge advantage over decades or centuries
increasing the productivity of companies in the
cluster
driving innovations in the industry or sector
attracting & stimulating new businesses to the
A cluster can achieve competitive advantages by:
-
-
-
La Terza Italia
Contrast to poorer Southern Italy & Sicily’s
noncooperative “amoral familism” culture
These historical regions evolved from local
ethnic communal cultures of trust & cooperation
among firms and between bosses & workers
Industrial districts of the “Third Italy” are located primarily in Northeast
(Veneto., Friuli) and Central Italy (Emilia-Romagna, Tuscany, Marches)
-
Extensive social capital ties support a “local
custom of reciprocal cooperation
the real axis
of social culture of the district” (Dei Ottai 1994)
Institutional structures & politics underpin Third Italy’s IDs:
Governments, laws give regulatory exemptions, low taxes, loan guarantees
Public research institutes & service centers offer customized business services
Voluntary self-help associations & producer cooperatives foster innovations
IDs & the We w’ Itallan Econ Geography
Fabio Sforzi describes how competitive advantage depends less on
large firm size “than on how production is organized locally and interacts
with the social and productive environment in which it takes place.”
—
—
“A system of values and norms dominated by a spirit of
initiative and largely reflected in the principal aspects of life,
like work, consumption, saving, attitudes to uncertainty
produces a cultural environment favourable to economic
enterprise, influencing industrial relations and the activities
local government and administration.” (Sforzi 2002:442)
Local territory, not firm or industry, is the key economic unit of analysis:
> Technical division of labor plus local external & internal “scale economies”
> High & variable demand for nonstandard goods (upscale I luxury)
> Global competitive advantages in org’l intelligence, talent, innovation
Local society dominated by small entrepreneurs & extended families
Such local economies very difficult to “transport from place to place”
Are Italian IDs becoming less competitive in the global economy?
F
2
UrboRizatioll iii t[ic Caribbcon Bosin
Social Change during the Years or the Cri5is
ALEJANDRO PORTES, JOSÉ ITZIOSOHN,
and CARLOS DORE-CABRAL
In this chapter, we review the principal theoretical perspectives that domi
nated the study of Latin American urbanization in the past, their revisions
on the basis of more recent empirical material, and theit bearing on the
evolution of Caribbean Basin cities during the lsst two decades. We use
material from the first phase of the project described in chapter 1 to exam
ine consistencies and variations of central features of urban development in
the region. The backdrop is the revolutionary transformations that oc
curred in the economies of these small countries during this period and the
ways in which they affected civil society. A fundamental theoretical ques
tion that we seek to answer is the extent to which such changes are a
reflection of the new insertion of these countries into the international
economy and the extent to which they obey characteristics of their domes
tic politics and economies. This analysis, in turn, sets the stage for the
presentation of individual country results from the second phase of the
study.
Theoretical Overview
The abundant literature on Latin American urbanization until the late
1970s and even later painted a fairly coherent picture of its evolution. It
emphasized the uniformity that the process had acquired throughout the
continent. First, the population of Latin America was becoming rapidly
Urbanization in the Caribbean Basin
17
urbanized, but the process was distorted by the region’s underdevelopment.
The migration of the nsral population toward the cities did not occur in a
gradual manner but as an explosive influx toward a few receiving centers. In
most countries, a single city simultaneously played the role of political
capital, main site for industry and commerce, and place of residence of the
dominant classes. The condition of urban primacy—gigantic heads of
dwarfish national bodies—was not new to Latin America, but the rural
migrant flows of the mid-twentieth century accelerated it and suggested an
inexorable increase in the disparity between the largest metropolitan ag
glomerations and the rest of the urban system (Breese 1966; Beyer 1967;
Hardoy 1975; Portes and Johns 1989).
Second, within the large cities, rapid demographic growth combined
with highly unequal income distribution to produce other distortions. The
advent of the automobile allowed the wealthy to escape the peasant crowds
by moving to remote suburban locations. The political power of urban elites
then compelled city govemmenrs to extend services to these areas. At the
opposite extreme, incressing tents and housing scarcity drove the poor to
create their own shelter solutions in irregular settlements. These were also
built in the urban periphery, but in directions generally opposite to the
exodus from the central ciry of the well-to-do. The outcome of these cen
trifiigal forces was growing spatial polarization of the classes: rich and poor
lived in increasingly different worlds, even if formally they shared the same
city (Amato 1969; Hardoy, Basaldiia, and Moreno 1968; Portes and Walton
1976).
Third, the disintegration of traditional agriculture in Latin American
rural areas took place without creating sufficient capacity to absorb labor
either in the new modernized farms or in urban industry. The first type of
scarcity caused nsral outmigration; the second led to the growth of a vast
‘marginal mass” in the cities that survived by inventing employment in the
fringes of the urban economy (Nun 1969; Garcia 1982). Yet unemployment
remained low because the urban poor could not afford nor to work in the
absence of welfare protection. Instead, the typical profile of Lsrin American
cities featured low rates of unemployment combined with high rates of
casual or informal employment that ofren absorbed half or more of the
urban labor force (Tokman 1982). Regardless of the label applied to it,
irregular work was perceived by many analysts as a countercyclical mecha
nism. This view was frequently discussed by economists associated with the
International Labour Office (no) and its Latin American offshoot, the
Regional Employment Programme for Latin America (s’ssaAcc) (Bairoch
1973; Lagos and Tokman 1983; rRaAcc 1982; Marshall 1987).
Together, accelerating urban primacy, spatial polarization of the classes,
18
Alejans-fro Portes, Jose Itzigsohn, and Carlos Dore-Cabral
and high informal employment constituted the cento-il features
of Latin
Americas-i urbanization prior to the l9SOs. The research literature
describ
ing these features also provided a fairly coherent explanation
of their causes
on the basis of a common condLtiors of external dependency.
Industrializa
tion as it took place in the region was
highly centripetal in its consequences
because the largest industries, many subsidiaries of
transnational corpora
tions, concentrated in the main urban centers.
Added to the consistent
decline in trditional agriculture, this concentration
naturally gave rise to
rapid rural migration toward the few places where
industrial employment
could be found. But industrialization under foreign control
created a mis
match between the resource endowments of these countries,
abundant in
labor and short on capital, and the labor-saving
character of imported
technologies (Eckstein 1977; Tokmari 1982). The inability
of urban indus
try to absorb the mass of rural migrants gave rise
in turn to a growing
segmentation between a sector of modern,” protected, and
relatively wellpaid employees and a vast informal economy in which
most migrants sur
vived on the basis of invented jobs of minimal
productivity (i’aeALc 1981;
Marshall 1987; Poi-tes and Johns 1989).
The poverty of most rural migrants due to their lack of
suitable employ
ment barred them from access to market-provided housing
and created the
conditions for the emergence of vast shantytowns on the
periphery of most
large cities. Their sheer number in turn led elite
sectors to escape the city
toward ever more remote suburban enclaves. These twin
processes acceler
ated the spatial polarization observed, with almost
monotonous regularity,
in most large cities of the region (Leeds 1969;
Goldrich 1970; Cornelius
1975; Eckstein 1977).
During the mid-1980s, we conducted a study of recent
Latin American
urban trends based on firsthand studies of three South
American capitals
plus secondary material for the rest of the region (Fortes
1989). The study
found plenty of evidence of urban primacy, spatial
polarization, and a large
urban informal economy, but along with them, it also
discovered notable
departures from conventional wisdom. First, the seemingly
inexorable in
crease in urban primacy had decelerated and even
reversed itself during the
preceding decade in a number of countries; second, the
great physical
distances separating rich, middle class, and poor in most
metropolitan areas
appeared to have diminished significantly in several
cities as a result of
novel rearrangements of the urban population; third, a
number of urban
labor markets registered vast increases in open
unemployment question
ing the assumed countercyclical role of the informal
sector during eco
nomic downturns. Open unemployment rather than
informal employment
emerged as the key adjustment mechanism at the height
of the crisis,
Urbanization in the Caribbean Basin
19
contradicting the earlier assumption that, in the absence of welfare cover
age, the poor must find some form of employment.
These trends represented not only empirical departures from past theo
ries but contained important lessons for their revision. Each trend appeared
to reflect, in its particular way, the rapid adjustment of Latin American
countries to the debt-induced economic crises of the mid-1970s and early
1980s and their changing insertion in the global economy. We summarize
next the specific ways in which this societal adjustment affected each aspect
of urban development and formalize the three alternative theoretical
propositions that they suggest.
Beginning with the regionwide economic downturn prompted by the
increase in oil prices in 1973, Latin American countries turned increasingly
toward export promotion as a means to alleviate balance-of-payments defi
cits and service a growing foreign debt. The process accelerated during the
early 1980s, when a second major increase irs oil prices was accompanied by
the resistance of international banks to cover the deficit with fresh loans.
After the Mexican debt moratorium of 1982, country after country em
barked in a painful process of economic adjustment under close monitoring
by international financial organizations. The details are well known and
have been examined at length in the specialized literature (Massad 1986;
Eci.Ac 1988; Inter-American Development Bank 1990). Less well noticed
have been the effects that the rapid shift from the previous importsubstitution model of development to the new export-oriented model had
on civil society.
An unanticipated consequence of this shift was the rechanneling of
domestic migration flows toward the new growth areas created by export
agriculture, export fisheries, and export platform industries. Together with
the decline in employment opportunities in the old import-substitution
industries, concentrated in the large cities, the new migration patterns led
to the rapid growth of many secondary cities and to the slowing down of
growth in several metropolitan areas. Hence, export-oriented development
(Eoo) may reduce or even arrest urban primacy to the extent that the new
export industries are located away from the major cities and hence induce a
centrifugal pattern of domestic migration. The argument can be formalized
in a first proposition:
1. The greater the shift from iniporr-subsdtuiion toward an export oriented model
of development, the greater the probability of secondary city growth and a decline in
urban primacy.
The economic adjustment programs inspired by international finance
organizations to deal with the debt crisis led to the exacerbation of the
20
Alejandro Fortes, José ltzigsohn, and Carlos Dore-Cabral
already marked income disparities in most Latin American countries
(Iglesias 1985; PREALC 1987). In the large cities, this trend suggested the
acceleration of the pattern of spatial polarization present even before the
onset of the crisis. The contrary results found in the previous study (Fortes
1989), emerged as the outcome of two previously unnoticed processes.
First, middle-class urban groups, hard pressed by the economic situation,
breached the geographic divide separating them from poor settlements in
search of affordable housing. In the Colombian capital of Bogoté, for exam
ple, this phenomenon took the form of a massive displacement of middleincome groups toward the south of the city, formerly the preserve of the
urban working class and the marginalized groups (Carrier 1988). Second,
there was a simultaneous growth of irregular or squatter settlements near
high-income residential areas. This displacement was prompted by the
search by the poor for some sort of employment—usually informal vending
and odd jobbing—whose markets are among higher-income groups. The
result of these twin processes was the partial rearrangement of the urban
spatial order leading to greater intermingling of the classes. Kowarick,
Gambier Campos, and de Mello (1990), who observed the same phenome
non in São Paulo, labeled it “perverse integration” because the spatial
convergence between rich, middle class, and poor was not prompted by a
better distribution of income but rather by the generalized impoverishment
of the urban population.
Similar events reported in cities as dissimilar as Montevideo, Lima, and
Rio de Janeiro (Fortes 1989; Kowarick, Gambler Campos, and de Mello
1990) suggested a regional trend summarized in a second proposition:
2. In.creases in poverty and incsnse disparities produced by economic adjusrment
programs led to a reduction of spatial polarization in Latin American cities as an
outcome of the suwival srraregies of both middle-class and law-income sectors.
The crisis of the 1980s brought a contraction of formal employment and
a significant reduction of urban wages that, according to earlier explana
tions of the role of the informal economy such as those advanced by ILO and
PREALc analysts, should have produced large increases in irregular employ
ment. Out earlier study did find that the urban informal sector expanded in
moat countries but that, relative to the magnitude of the economic down
turn, the growth was modest. According to estimates by PSEALC, it averaged
about 20 percent for Latin America during the early l980s. Underemploy
ment, another indicator of informality, did not increase significantly in
most countries according to the information available (Fortes 1989: 24—
27). By contrast, open urban unemployment increased rapidly teaching
record levels in Colombia, Peru, Honduras, Chile, and Venezuela. For Latin
Urbanization in the Caribbean Basin
21
America as a whole, unemployment increased from an unweighted average
of about 6 percent of the economically active urban population in 1974 to
some 14 percent in 1984 (eclc 1986: 23).
The significant growth of unemployment at the height of the crisis
provided evidence against dualistic theories of Latin American labor mar
kets that assumed the informal sector would function as a compensating
mechanism to absorb surplu labor, Its failure to do so supported instead the
argument advanced originally by Roberts (1976, 1978) and expanded in
Portes and Walton (1981) concerning the profound articulation of formal
and informal activities as part of unified urban economies. Informal pro
ducers and vendors—defined as those who operate outside the pale of state
regulation—do not live in a world apart from the firms that are so regulated.
Instead, the two types of enterprises are closely intertwined through a
variety of arrangements, providing goods and markets for each other (Be
neria 1989; Fortuna and Prates 1989). For informal entrepreneurs, in partic
ular, the larger firms are a key source of demand, both directly, through
subcontracting agreements, and indirectly, through the buying power of
formal workers’ wages.
When formal firma cease to exist as during the economic crises of the
l980s, demand for informal goods and services also drops. Although more
people are available to engage in informal activities, their remunerations
rapidly approach zero as labor supply vastly outatripa demand. The outcome
is the rise in open unemployment observed in a number of countries during
these years. The argument can be formalized in a third proposition:
3. The formal and informal sectors are inte gral parts of the same urban economies.
Hence infossnal employnsenrfunctsons only impeifectly as a countercydical mecha
nism. During severe recessions, open unemployment wi
11 rise reflecting the limited
absorptive capacity of irregular activities.
Urbanization in the Caribbean Basin
In the rest of this chapter, we examine the validity of these hypotheses in
a regional context different from the one that gave rise to them. In the past,
theories of Latin American urbanization based on the experience of the
larger countries have been applied by extension to smaller ones, such as
those of the Caribbean Basin. Our study focuses explicitly on urban trends
in this region.
As indicated in chapter 1, the countries selected for the study were Costa
Rica, the Dominican Republic, Guatemala, Haiti, and Jamaica. Although
these countries do not encompass the entire region, they do form a signifi
F
22
7c9
Alejandro Portes, José Irzigsohn, and Carlos Dore-Cabral
_5
U
o
cant proportion of its total population and illustrate the great diversity ‘of
historical experience found in the area.
The principal differences between these five countries are summarized in
table 2.1. They include the richest and most politically stable nation in the
region (Costa Rica) and the poorest and most unstable (Haiti). Politically,
there are two stable democracies, albeit with different political regimes
(Costa Rica and Jamaica). The other counties range from a strong presi
dentialist incipient democracy (the Dominican Republic) to fragile politi
cal systems that have experienced repeated military interventions (Gua
temala and Haiti). In terms of size, they include the largest Central
American country (Guatemala) and, with the exception of Cuba, the
largest island-country (the Dominican Republic).
The urbanized populations range from less than one-third of the total in
Haiti to mote than half in Costa Rica, the Dominican Republic, and Jamai
ca. Given other economic and political differences, it is possible to expect
that utbanization pattems will differ across the five countries. ‘What these
differences are and how they bear on the above propositions is the purpose
of the study. The collaborative character of the project, described in chap
ter 1, called for the same three themes—urban primacy, spatial polariza
tion, and the informal economy—to be covered by each report so that
systematic comparisons could be conducted. These data findings are cited,
where appropriate, in ensuing sections of this chapter. They are supple
mented by other secondary data to provide the most up-to-date portrayals
of urban systetna in the region.
U
• .1
:;ir
-6
.6
o
S
,
•
-a.6
.6
H
gass2
D
9t1
-Icc
‘8
,,
1°
a-c--
a
-e
U)
-a 9t
g
1
go
0
1
2
E t
E2c8 .2c3
5
U’
U)
o
-
a a
0
o
0
U)
0
r—
5-
U)
0
0’
—
—
U)
-,
0
g
au..9
—
e
g .5
o
U)
C
w
-C
U)
0
o
0
fl
,—
U)
,-
—
,.,
0
r,
a
U)
The evidence from the five countries on our first proposition is mixed. In
some nations, there has been a deceleration of primacy; in others, there has
not. The observed intraregional differences tend to agree, however, with
the logic of the hypothesis. The shifr toward coo is cleat and is exemplified
by the rapid growth of export production zones (Ens) throughout the
Caribbean Basin. Table 2.2 presents illustrative data for four of the five
countries studied. The consistent growth of cars and export assembly plants
documented by these figures is a direct consequence of the search for new
sources of foreign exchange, coupled with the favorable tariff regime cre
ated by the new Caribbean Basin Initiative.
Without doubt, the principal stimulus for foreign industries to transfer
operations to the Caribbean has been low labor costs. In 1988, the hourly
manufacturing wage was estimated at US$1.00 in Costa Rica, $0.6 1—0.88
I
-
-t
Urban Primacy
0
O
2
-t
e
e
.5
D 1
U)
c0
C
C
5
6
U)
,-
0
0
0
0
0
0
a
o
e
.61
0
I
-
I
e
5
5-
:
5g
sos
CC
C
-C
.6
C
p
I
I I
6-S
S
S
o
I
S
0
0
0
.5
S
C
2
a
9
-a
5
a
a
.a
.9-I
.
-C
‘-5
e
S
-
‘8
.1
j
-
r
Alejandro Porces, José Iczigoohn, and Carlos Dore-Cabral
24
Table 2.2 Export Production Zones (cr’zs) in Selected Caribbean Countries
and Ocher S,port Manafacturicy Employment
1975
1990’
en
Number of
Zones
1973
19901
Number of
Plants
cx. 1980
cx. 1990’
Export Manufac
turing as Percent
age of Total
Employment in
Manufatruting
19901
1975
1%)
(%)
Costa Rica
0
4
0
89
0
11,470
0
7
Dominican
Republic
2
26
88
419
6,900
111,000
5
43
Haiti
1
1
13
154
25,000
43,000
20
35
Jamaica
1
2
25
26
6,100
8,000
8
7
Soaeces. Schoepile and Peeer-Lopm 1989; Lomno and Duane 1991;
Direction General de Essodisrics y Cema
de Cosea Rica 1991, Coepoexcion de Is Zoos Pmnco de Espanacian 1991;
bantam de Esmdios Doroinicar,xs
1992; sod Cooseix Nacional de Zonas b’cancas de Exportation 1992.
I. The data foe Haiti and Jama,ca are from cx. 1986.
in Guatemala, $0.44—0.88 in the Dominican Republic, and $0.36 in Jamai
ca. Coats of labor and overhead associated with the assembly of women’s
garments were estimated at $4.75 per unit in the United States, $2.20 in
Hong Kung, and $1.66 in the Caribbean (Schoepfle and Perez-Lopez 1989:
135—136). Guatemala (excluded from the table because of the absence of
ens) has recently established a large zone in Puerto Barrios and has
begun
fostenng the growth of export gannenr assemblies on the basis of extremely
low labor costs (Pdrez-Sainz 1992).
Yet the effects of export-platform industrialization on Caribbean primate
cities are not even because there are three additional factors: (1) the physi
cal location of the export zones; (2) their relative viability; (3) the growth
of other foreign-oriented sectors, especially export agriculture and tourism.
These factors determine variations of urban development around a com
mon pattern dominated by the tendency to rechanrsel internal migration
toward new areas of tourism and export manufacruring.1
Of the five countries under study, Jamaica is the one that has experi
enced most clearly a reduction in primacy. As shown in table 2.3, the
primacy index declined from 7.2 in 1960 to 2.2 in 1990. This result
was
associated with the expansion of the tourist industry in the northern coast
of the island, the revival of bauxite production in the interior, and the
growth of satellite cities in the vicinity of the Kingston metropolitan area
(irMA). The latter process is exemplified by the rapid
population increase of
Urbanization in the Caribbean Basin
25
Spanish Town to the northwest of the capital. Under the effect of expanded
tourism, cities like Montego Bay and Gcho Rios also grew at a very fast clip
durinE the last decade.
With the return to puwer of the Jamaica Labour Party in 1980, under
Edward Seaga, the island became transformed into an expurt-orienred open
economy, a process completed under Seaga’s successor, the People’s Nation
al Parry’s Michael Manley. This led to growing capital investments both in
tourism and export platform industrialization (Gordon and Dixon 1991).
The decentralizing potential of EPZ industries is partially neutralized be
cause the largest export-production zone is located in Kingston itself. How
ever, a second en is located in Montego Bay and, along with the phenome
nal growth of tourism in this and other northern cities, has led to significant
reductions in the former hegemony of Kingston.
The Dominican Republic has experienced a similar rapid expansion of
both tourism and export industries. By 1985, receipts from tourism had
surpassed the sum of the three main traditional agricultural exports—sugar,
coffee, and tobacco. About the same time, receipts from the export zones
also started to climb rapidly. In the Dominican case, the centrifugal poten
tial of export oriented industrialization was not partially neutralized as in
Jamaica because most of the epzs are located outside the capital city of
Santo Domingo. The latest census figures indicate that the fastest urban
growth during the last intercensal period (1970—931 took place in La Ro
mana, the city where the first EPZ was established and that also was the
recipient of significant tourism investment.
The rate of growth of Santo Domingo has declined significantly during
the same period, falling behind that of all three secondary cities. By 1993,
the capital’s urban primacy had declined to 2.0 The growth rate of Domin
can secondary cities during the 1980s has been explosive, driven by tourism
and the continuing expansion of export manufacturing. Tourist develop
ment has centered on a city on the north coast, Puerto Plata, in a pattern
very similar to Jamaica’s Montego Bay, and on all-inclusive, enclave resorts
in La Romana.
As seen in table 2.2, export-oriented industries expanded fivefold be
tween 1973 and 1990 and their labor force grew by 1,500 percent. This
rapid expansion has continued unabated during the early 1990s. By 1992,
for example, employment in export-manufacturing plants was estimated at
134,100, a 21 percent increase in just two years. With the exception of the
San Crisrobal export zone, located near the western fringe of the capital,
most manufacturing for export and ancillary economic activities are lo
cated in secondary cities such as Santiago, La Rumana, and San Pedro de
Macoris (Guarnizo 1992: chap. 2). These cities have experienced a rapid
-J
C,
s-J
Santo Domingo
Goaremala City
Port-au-Prince
Kingston
Domintran Repablsc
Guatemala
Haiti
Jamaica
Spanish Town
Montego Boy
Mop Pen
Cap Hoitien
Gonalves
Caym
Qaetaltenango
Escointla
Puerto Barrios
Santiago
San Pedro de Macotis
La Romona
Limssn
Panta Arenm
Canago
Three Neet Largesr
Ciriea, 1980—90
8.8
5.6
6.1
10.4
0.9
10.1
5.0
5.0
11.5
4.1
5.5
4.5
2.2
10.3
6.3
6.1
559.1
118.8
87.1
50.8
376.5
14.7
23.6
14.1
.—
1,143.6
89.2
58.3
62.5
2.3
1.4
0.9
1.4
4.6
5.0
5.4
6.0
3.3
15.8
16.0
13.4
(%)
458.6
45.6
28.7
22.6
4.9
6.2
4.8
3.1
8.4
6.5
6.5
7.8
5.9
(%)
2.2
3.7
0.1
940.5
1,555.7
488.3
146.6
141.6
861.3
66.1
55.7
61.4
1980—90
lntercental
Growth Rate
4
Latest
1960—70
62.7
36.9
24.2
44.2
24.9
22.3
587.5
650
155
44
37
320.4
19.4
19.6
18.0
1960_70t
Popalarion
(ODDs)
7.2
2.7
6.4
2.7
5.4
1960
4.4
4.7
7.7
2.7
5.4
2.6
5.1
7.6
2.7
6.0
Urban Primacyt
1980
1970
2.2
5.4
—
2.0
4.7
1990
Sources: Lungo, Pétes, and Piedm 1991; Lossno and Doorre 1991; Péeee-Sdtne 1991; Manigas 1991; Gordon and Dioon 1991; United Nasiom 1988: table A-l0;
Encyclopaedia Beimnoicu 1991; Economic Commission fur Latin Ameeico and the Cacibbeon 1992: table 7; Panes and Walton 1976: table 2.
1. Calculated as the eutia of the largest city to the sam of the three neat largest.
2. For Costa Rica, Guatemsla, and Jamaica, estimate is for 1960; for the Dominican Republic and Haiti, 1970.
3. For Costa rico, Guatemola, and Jamaica, estimate is for 1990; foe Haiti, 1980—81; for she Dominican Repablic, 1993.
4. Poe Coasa Rica, 1984—90; she Dominican Republic, 1970—93; Goaremala, 1973—81; Hoiti, 1970—88; )amaica, 1970—90.
San José
Largest City
(Metropolitan Area)
Costa Rira
Country
Table 2.3 Urban Primacy
28
Urbanization in the Caribbean Basin
Alejandro Portes, José ltzigsobn, and Carlos Dore-Cabral
expansion of their urbanized perimeters as well as notable densificarion. A
recent study of Santiago, the country’s second largest city concludes: “The
city has grown in a chaotic way to the east in massive settlements in the
direction of Puerto Plara; to the south, advancing rapidly toward mral
zones, and to the southeast toward the mountains” (Santana 1992: 44).
This and similat reports indicate that, despite the dearth of official data,
urbanization patterns in the Dominican Republic are likely to follow those
in Jamaica, with an upsurge of smaller urban centers and a relative decelera
tion of the capital’s primacy.
Costa Rica, too, has been making significant investments in tourism and
export-platform industrialization. Unlike in the Dominican Republic, how
ever, neither sector has yet surpassed the dominance of traditional export
agriculture. In addition, export assembly remains a small percentage of total
Costa Rican manufacturing, still dominated by import-substitution indus
tries. As in other countries, these industries cluster in the largest city, in this
case the metropolitan area of San José (AxlsJ). Despite these trends, urban
primacy, which had been increasing steadily up to 1980, declined in the
following decade. As shown in table 2.3, this decline was atcompanied by a
halving of the tate of growth of San José along with very rapid increases in
the population of smaller cities. Among the latter are the two port cities of
Punta Arenas and Limon, suggesting that new export-oriented investments
in these areas ate beginning to have significant demographic consequences
(Lungo, Perez, and Piedra 1991). However, there is also a powerful countertrend to a mote balanced urban system because the largest sites of exportassembly manufacturing are located in Costa Rica’s central valley, in close
Table
2.4 Urban Growth in Guatemala, 1950—198 1
City
Guatemala City
Meoopsliran Areat
Qaezaltenango
Escuintla
Resalhalea
Paerre Bareies
Antigua
Mazarenango
Urban Total
Annual Grewrls Rate
1973—81
1950—64
1964—73
7.2
7.3
4.3
11.1
4.3
3.4
1.9
5.5
2.5
4.9
2.2
3.7
3.1
0.1
3.3
2.1
1.0
1.4
2.3
1.4
1.9
0.9
—1.5
—1.3
7.6
3.4
0.7
Saarce: Pérez-SSinz 1991: table 4.
I. Oaatnmala City and maeicipalitiea af Micra and Villa Naeva.
29
95
N
CARIBBEAN SEA
PACIFIC OCEAN
san Jaw Met,apalitan Aan
•
Main Cities
Figure 2.1 Location of Costa Rican Cities in Relation to the San Jead Metropolitan
Area. Seance: Longo, Perez, and Piedra 1991.
proximity to the AM5J. Despite government efforts to locate the eras in
coastal cities, moat export industry converged in the central valley, which
also concentrates a large portion of the tounat znfraattucture. As seen in
table 2.3, Cartago, a central valley city, grew very rapidly during the last
decade, as did Alajuela and Heredia, all urban areas in cloae vicinity to San
José. Their relative locations ate portrayed in figure 2.1. Combined with the
continuoua outward expansion of the capital, the growth of these satellite
cities threatens to atreat the reversal of primacy, recreating it on a larger
scale. The contours of a new megacity comptising the thirty-one central
valley contonca, or municipalities, and concentrating the majority of the
national population have begun to emerge (Lungo, Perez, and Piedra 1991).
Hence, despite the recent weakening of San José’s primacy and the rapid
growth of Costa Rican coastal towns, thete is a clear danger that the
decentralizing potential of the new export-oriented industries may be lost
30
Alejandro Portes, José ltzigsohn, and Carlos Dore.Cabral
as they reinforce rather than weaken the expansionary tendency of the
capital.
Guatemala has lagged behind most of its neighbors in both the establish
ment of export assembly industries and the development of tourist infra
structure. Prolonged political instability and generalized violence have
conspired against successful investments in either Sector. The country’s
entry into the new export-oriented model of development has depended, so
far, on the expansion of its agricultural exports. As noted by Amaro (1990:
13—29), coffee exports grew by almost 800 percent between 1950 and 1981;
cotton also has experienced a boom, beginning midcenrury.
Guatemalan urbanization patterns have reflected, with some lag, these
tendencies in export agriculture. The country’s urban primacy is among the
highest in Latin America because of the weakness of secondary cities. In
1980, the population of Guatemala City was more than seven times the
combined total of the next three cities. Nevertheless, figures in table 2.4
show that the second city, Quezaltenango, grew at twice the rate of the
capital during the last intercensal period, corresponding to its role as the
principal coffee center. The two cotton cities, Escuintla and Retalhuleu,
also grew rapidly during the period of this crop’s expansion; afterwards,
growth there leveled. The banana center, Puerto Barrios, stagnated during
the l970s and 1980s following the collapse of this sector.
Congruent with the absence of any significant economic innovation, at
least until the mid-l980s, Guatemala’s urban system has not experienced
any significant transformation. Primacy remained unchanged and the over
all rate of urbanization declined during the last intercensal period (table
2.4). The only signs of dynamism were the relatively fast growth of Que
zaltenango and the rapid increase of the population in municipalities adja
cent to the capital city. The suburban towns of Mixco and Villa Nueva grew
from a combined total of 15,000 in 1964 to 186,000 in 1981. These munici
palities by themselves are larger today than the sum of the next three cities
outside of the Guatemala Metropolitan Area (AMcz). Without them, the
AMOs primacy would have declined from an index of 7.6 to 6.1 (Pérez-Sáinz
1991: 23). These results are congruent with the subutbanization of the
metropolitan population and growth of satellite towns observed in other
countries. The question for the future is whether the establishment of new
EPZ5 and investments in tourism in the smaller cities would introduce a
second dynamic, so far absent in Guatemalan urban development.
The dynamic role of export-oriented manufacturing is much mote visi
ble in Haiti which was one of the first countries to take advantage of the
Caribbean Basin Initiative (Schoepfle and Perez-Lopez 1989). However,
the effects of the new industries have been the opposite of those anticipated
I
Urbanization in the Caribbean Basin
31
by the hypothesis of decelerating primacy. Political instability, lack of a
suitable infrastructure, and fear of AIDS have all but dismantled Haiti’s
tourist sector. Goods assembly, the country’s main export earner, was con
centrated in the late l980s in a single EPZ located adjacent to Port-auPrince’s airport. This location accelerated rural migration to the capital,
already stimulated by land scarcity and soil erosion (Manigat 1991; Miller
1984). The result was that Haiti continued to experience sustained in
creases in primacy along the pattern typical of earlier Latin American urban
development. Port-au-Prince’s annual rate of growth during the 1970s and
l980s, 8.8 percent (table 2.3), is the highest of all the cities studied.
The evidence in this section indicates that urban primacy is not declin
ing everywhere, but that the underlying forces identified as responsible for
its decline in the larger Latin American countries also operate in those of
the Caribbean Basin. Effects of the new export-oriented model of develop
ment on the urban system are not uniform: they depend on the location of
the new industries and their capacity for employment creation. When
sizable tourist and export manufacturing projects are located away from the
primary city, the urban system responds along the lines predicted by the
hypothesis (Jamaica and the Dominican Republic); when these same sec
tors are located in or near the capital city, primacy is exacerbated (Haiti); in
situations where export-oriented development is in its early stages, the
urban system remains unaltered (Guatemala).
The analysis also identified a second dynamic concerning the rapid
growth of satellite towns and suburbs—a tendency that runs contrary to the
decentralizing potential of export growth and that may negate its effect by
giving rise to future larger cities. The principal case in point is Costa Rica,
where the rapid expansion of the capital is fast linking with satellite towns
in which export assembly plants have clustered. The two forces affecting
the evolution of the urban system reinforce each other in this instance,
leading to the possible emergence of a new megalopolis in the country’s
central region.
Spatial Polarization
Our analysis of patterns of spatial distribution in the capital cities of the
countries studied does not support the hypothesis of a unifotm reversal
of class polarization. However, the changes observed accord with the under
five
lying rationale of our second proposition. These cities were generally less
polarized than their larger South American counterparts at the onset of the
economic crisis, in part because local elites were not sufficiently large to
32
Alejandro Portes, José Itzigsohn, and Carlos Dore-Calsral
Urbanization in the Caribbean Basin
33
occupy vast expanses of terntory. Instead, they cteated ptotected enclaves
in an utban landscape dominated by low-income neighborhoods and squat
ter settlements. This potttayal vatied, of cootse, with the level of economic
development, the topographical chatacterisrics of each city, and, above all,
the policies of the national government.
The most polarized of our five cities is Kingston, where the social config
uration resembles an inverted ice-cream cone: shantytown and workingclass neighborhoods at the base and elite settlements in the upper reaches of
the Liguanea Plain, on which the city is located. This patrem—alteady
observable in Cohn Clarke’s (1975) study of the city in the 1960s—
remained essentially unchanged into the l980s. Debates among Jamaican
urban specialists during the 1970s centered on the evolution of Kingston’s
“transition zone” of middle housing between the low lying shantytowns and
the elite high grounds (Norton 1978; Knight and Davies 1978). A second
debate was on the extent to which an inner ring of popular settlements
close to the wealthy foothills subverted Clarke’s portrayal of spatial polar
izatiori.
As shown in figure 2.2, the presence of these shantytown areas in the
mid-1970s did not really alter the overall tendency toward spatial segrega
tion. The latter was strongly correlated with different population densities.
Norton (1978: 100) noted that 41 percent of Kingston’s residential area in
the early l970s was occupied by 6 percent of the population living at
densities of Od persons per room, whereas 75 percent of the population
occupied only 33 percent of the residential area at average densities of 2
persons per room. Class differences were also superimposed on ethnic char
acteristics. As Gordon and Dixon (1991) observed, there was significant
overlap between the white/mulatto/black composition of Kingston’s popu
lation and the elite/middle-class/poor descriptions of locations for residing
in urban space.
Since the economic crisis of the mid-1970s, two novel tendencies in
Jamaica correspond fairly well with those observed in the larger South
American cities. First, the consolidation of new elite enclaves around the
shopping and business districts ofNew Kingston and Constant Spring Road
to the north has been partially counteracted by the rapid growth of innerring irregular settlements around the same areas. A report by the Statistical
Institute of Jamaica summarizes the resulting configuration as “an erratic
arrangement of residences; close juxtaposition of residences containing
opposite socioeconomic groups and the dispersed clusters of low-income
residences throughout the higher income areas; an increased tendency
towards peripheral location of lower income residences as they rival higher
income groups in search of accommodation” (cited in Gordon and Dixon
fIll]
jjJjJ
Irregular (squaiter)
neiilemenis esd
sery low Incomes
Low and medium
incomes
Medium-high
and high incomes
Figure 2.2 Residential Strata in Kingston’s Metropolitan Ares, ca. 1980. Source:
Adapted from Gordon sod Dixon 1991, bssed on official sources.
1991: 33). The crearion of these “suburbs of the poor” (Norton 1978) has
been followed by the still more notable displacement of middle-income and
impoverished groups out of Kingston proper and into the adjacent Sr.
Catherine Plain. The movement was accommodated in planned housing
estates such as Porrmore, Enson City, and others on the toad to Spanish
Town as well as in new, large shantytowns. Low-lying Portmore, across the
bay from Kingston, grew from a community of 5,000 in 1970 to 73,400 in
1982, equivalent to an annual growth rate of 25 percent. As shown in table
2.5, this new frontier of suburban projects and squatter settlements led to
the absolute decline of the population of Kingston proper, already observ
able in 1982 along with the growth of St. Catherine.
The spread of population across Kingston Bay was the outcome of two
sets of forces. First were efforts by the poor to escape the growing violence in
central Kingston, caught in the throes of fscrional wsrfare between rival
9
34
Alejandro Portes, José Itzigsohn, and Carlos Dore-Cabral
Urbanization in the Caribbean Basin
Table 2.5 Growth of Urban Population in the Kingston Region
Popalasion
Area
1970
1982
Change
Annaal Rate
of Growth
Kingston Merrepolirso
Kingston
Sr. Andrew Urban
St. Catherine Plain
473,715
111,897
361,818
63,263
524,638
104,04t
420,597
207,460
50,923
—7,856
58,779
144,197
0.90
—0.59
1.35
18.99
Sourre: Jamaica Srarisriral lnsrirure 1973, 1982.
political parties; second was the closure of opportunities for affordable
middle-income housing in the established northern suburbs. The first phe
nomgnon rs unique to Jamaica, but the second is similar to that observed in
Bogota, São Paulo, and other South American cities. In both instances, the
impact of the economic crisis forced large sectors of the urban middle class
to seek housing solutions in aress regarded previously as physically or social
ly unacceptable. The difference is that, whereas in South American capitals
the physical displacement of middle-income groups took place in the direc
tion of established working-class areas, in Kingston the middle classes and
the poor moved together—both heading toward previously unsettled land.
Along with the cxpansion of the “suburbs of the poor” toward the north,
this movement led to greater intermingling in urban space, and, hence, to a
partial reversal of the pattern of class polarization.
A similar trend is observable in Santo Domingo, although with other
variants. During the period of import-substitution industrialization (isi),
the Dominican capital grew rapidly. This gave rise to a new industrial zone
and working-class settlements toward the north and east of the Ozama
River and the displacement of elite sectors to the west. Sustained economic
growth under in during the 1960s and early 1970s generated new wealthy
groups and an urban middle class capable of fueling demand for luxury
housing (Ouarnizo 1992: chapter 2). This demand led to a rapid inflation of
land prices in the northwest quadrant of the city and the emergence of
exclusive residential neighborhoods such as Naco, Los Jardines, and Arroyo
Hondo. South of them, toward the Caribbean Sea, grew more-affordable
middle-class housing developments such as Miramar and Mirador Norte
(Lozano and Duarte 1991).
The same period wimessed the growth of a vast conglomeration of slum
dwellings and squatter settlements north of downtown and east of the
Ozama River around the area of Los Mina. The apparent polarization of
urban space into a westem frontier of elite and middle-income develop
ments and a northeast zone of marginalized population was interrupted by
35
the fateful decision of the national government to establish a new industrial
zone in the area of Herrera, in the westem fringe of the city. This industrial
zone and the working-class neighborhoods that grew around it effectively
bracketed the upper income residential developments, converting them
thto an elite enclave in the midst of a poor city and limiting their possi
bilities of expansion. This situation had important consequences for urban
development in the years that followed.
As in Kingston, the economic crisis in Santo Domingo saw the displace
ment of poor populations toward high-income areas in search of em
ployment and better housing. The movement took the form of increasing
occupation of publicly owned land in the interstices of middle- and upperincome developments as well as the rapid growth of the western fringe
around the Hertera industrial zone (Lozano and Duarte 1991). The process
reduced spatial polarization and, more significantly, further encapsulated
upper-income neighborhoods between two wide rings of impoverished pop
ulation. The wealthier groups responded by seeking even more remote and
exclusive locations in the northwest area, in developments such as Artoyo
Manzano and Altos de Arroyo Hondo. The emergence of these expensive
suburban divisions represents a clear attempt to maintain social distance
from the poor, but even here physical space has been increasingly contested
by squatter settlements moving north from the settled working-class areas.
Figure 2.3 portrays the relative location of socioeconomic strata in Santo
Domingo according to quality of dwellings and relative densities in 1990.
The map indicates two noteworthy features. One is the spread of irregular
squatter settlements throughout the entire urban area. Although concen
trated noeth and east of downtown, squatter settlements are also found close
to the rich suburban developments in the city’s northwest. A second feature
of note is the existence of a sizable middle-income area east of the Ozama
River and close to the largest poor settlements. The rapid growth of this
area in neighborhoods such as Los Trinirarios and Villa Faro is a recent
phenomenon that corresponds well to the trend already observed in other
Latin American cities.
In the Dominican case, this trend was prompted by the closure of the
western fringe to middle-class expansion and by the occupation of the
adjacent northwest by the wealthy. Predictably, urban densities and rents
increased in the old established, middle-class areas. In response, some
middle-claas groups breached the symbolic divide separating them from
working-class areas in search of affordable housing. In Santo Domingo, this
decision became known as “crossing the bridge” (across the Ozama) toward
the new residential developments in the east. This process is essentially the
same as that observed in Bogota and other South American cities. Along
C’s?
‘11
Urbanization in the Caribbean Basin
0
0
C
C
.3
S
‘a0
0
2
0.
-c
S
cc
0
0
C
S
0
C
vs
.5
53
C
S
-535
H
532
11
‘.55
a..2
36
37
with the displacement of the urban poot toward the west,
it has produced a
visible reintegration of the city, partially reversing
its past class polarization.
Port-au-Prince offers the most dramatic example
of transformation of
the urban spatial ordec In the Haitian capital, reversal
of class polarization
has been more marked than in Kingston or Santo Domin
go and it has been
entirely due to the migration of the rural poor. There
is no observable
movement of middle-class sectors in search of new housin
g, in part because
the urban middle class is so small. Instead, there
has been a thorough
invasion of urban space by impoverished masses migrat
ing from the coun
tryside (Manigat 1991). The counterpart of Port-au-Prince
’s sharp increase
in primacy, described above, is the emergence of vast bidonv
illes such as Cite
Soleil and the densification of formerly working-class
areas to near unbe
lievable levels (Duquella 1989).
The invasion of the city by the rural poor has not been
limited to the
crestion of irregular settlements but extends to the occupa
tion of free space
in residential districts. No upper-class area, no matter how
remote or exclu
sive, has escaped this invasion. The occupation
of urban space by the
migrant poor is not limited to vacant land but extend
s to the streets, several
of which have been turned into informal markets, blocki
ng vehicular traf
fic. The fragile infrastructure of public services has been
swamped by this
rapidly growing population, malcing access to water, drainag
e, and electrici
ty a privilege accessible only to a few. By 1988, 72 percen
t of the city’s
population lacked running water and 92 percent had
access only to basic
latrines (Manigst 1991).
In this context, the geadual displacement of rural migran
ts towatd for
merly elite areas, such as Petionville, Lsboule, and
Tomassin, has been
ptompted not only by the need for some form of emplo
yment but also by the
sesrch foe basic services. Deprived of legal access to
these services, the poor
have simply appropriated them thtough widesptead pitatin
g of water, elec
tricity and, in some ateas, even television cable.
In 1988, 80 petcent of
dwellings in Port-au-Prince had access to electricity,
but the majority ac
quited it thtough clandestine hookupa. ‘What has emerge
d, then, is a silent
struggle between the classes for open space, basic service
s, and even the
streets. Armed guseds ste commonly posted in front
of the tesidencea of the
well-to-do, seeking to prevent furthet encroachmen
ts by the poor.
Port-au-Prince today is best described as a few islands
of wealth sur
rounded by a sea of poverty. It tepeesenes an extrem
e case of “pervetse
integration” (to use Kowarick’s term), prompted by
the exacerbation of the
underlying social processes. In Haiti, the economic crisis
of the late 1970s
and 1980s took place in a context of declining ptoductivity
and employ
ment in agriculture, with no other industry emergi
ng to take its place.
38
Alejandro Portes, José ltzigsohn, and Carlos Dore-Cabral
Neither the new EPZ close to the capital, nor the city itself could cope with
the material needs of the vast wave of new rural migrants. As in other cities
affected by the crisis, the poor gravitated toward those areas where some
wealth existed, but, in this case, such areas were (and are) much smaller and
the needs and numbers of those seeking refuge in them much greater.
The two capitals in Central America—in Costa Rica and Guatemala—
represent exceptions to the patterns outlined above. Neither city has expe
rienced significant reversals of spatial polarization, in part because neither
was highly polarized to begin with. The reasons accounting for this lesser
segregation are quite different, however. In the Costa Rican capital—the
most socially integrated of the five cities studied—higher levels of econom
ic development were combined with state policies that sought to reduce
economic and spatial inequalities. State intervention in the development
ofSan José led to a relatively homogeneous urban space; there were neither
distinct elite enclaves nor a shantytown belt.
This outcome was the result of three types of state policies: (1) subsidized
provision of housing for lower-middle and low-income sectors, (2) rapid
response to land invasions through the relocation of invaders in state hous
ing projects, and (3) dispersion of these projects throughout the metro
politan area. As Lungo, Perez, and Piedra (1991: 117) note, “The state has
been the central agent in the development of metropolitan San JosC. Its
actions promoted the extension of the urban infrastructure of roads, water,
and electricity and the construction of good quality housing for the lower
These actions generated a more homogenous urban space
middle-class.
where state projects were interspersed with those of the private sector
preventing the radical spatial segregation found in other Latin American
cities.”
The economic downturn of the early 1 980s, coincided with the adminis
tration of Rodrigo Carazo (1 978—82) and led to a contraction of employ
ment, wages, and the ability of the state to intervene in the housing marker.
Urban shantytowns and land invasions proliferated, concentrating in spe
cific areas and threatening to initiate a process of spatial polarization. Both
the economy and the state investment capacity recuperated, however, by
the mid-1980s. During the administrations of Luis A. Monge (1982—86)
and Oscar Arias (1986—90), efforts were made to reestablish spatial equilib
rium. The government gave priority to the provision of housing solutions
through new programs of subsidized credit for the middle class, resettlement
of land invaders in new projects, and prevention of further land invasions
through an innovative sites-and-services program. By 1990, “the tendency
for a marked segregation of urban space that emerged in the early eighties
disappeared because the revamped housing market offered solutions which,
.
.
I
/ O)
Urbanization in the Caribbean Basin
39
although small, were accessible to an impoverished middle class” (Lungo,
Perez, and Piedra 1991: 126).
San José is primarily a middle-class city; Guatemala City, on the other
hand, is characterized by the opposite; namely, the feebleness of middleincome sectors. Guatemalan society is sharply divided between a wealthy
elite and a mass of impoverished people, mostly Indians. For the country as a
whole, 1.25 million families (83.4% of the total) were classified as living in
poverty in 1986—87; of these, 949,000(64.5%) lived in conditions of ex
treme poverty. Even in the capital city, where the situation was better, 56.3
percent were poor or very poor (Pérez-Sáinz 1991:53; Ruiz 1990). This class
structure has produced an urban landscape dominated by settlements of the
poor and the working class and shantytowns, with a well-defined elite
enclave in its midst.
Guatemala City is administratively divided into some twenty-five zones
that facilitate a more refined analysis of its spatial structure. In 1985, only
five of the twenty-five zones that comprise the metropolitan area could be
classified as middle-income or higher. The others had average family
monthly incomes of 800 quetzales (US$120 in 1985) or less. One of the
middle-class residential zones (#14) combined a population with average
family incomes exceeding US$300 with 36 percent of very poor families
whose incomes did not reach US$45. Even more remarkable, the middleand upper-income enclaves were not in the suburbs but in relatively close
proximity to the central city. Most of these areas are located south of
downtown in low-density residential developments such as Santa Clara and
Tivoli, established during the late l940s (Pérez-Sáirsz 1991: 31).
Figure 2.4 portrays the spatial distribution of socioeconomic strata in the
Guatemala Metropolitan Area. Two facts are immediately apparent. First,
shantytowns ate frequently located in central areas, in close proximity to
elite residential neighborhoods; zones 10 and 14, for example, are actually
shared by low-density residential housing and high-density working-class
and squatter settlements. Second, this spatial mix has not prompted upperincome groups to flee the city; there is no frontier of suburban elite develop
ments anywhere in the urban periphery.
The generalized and increasing poverty in Guatemala City during the
1980s and the close and visible presence of well-to-do neighborhoods
should have prompted the most deprived sectors to invade elite areas in
search of better employment opportunities. This phenomenon, observable
in Kingston, Santo Domingo, Port-au-Prince, and larger South American
cities, did not materialize in Guatemala City—a direct consequence of the
level of state-sponsored violence. An entrenched elite, willing to employ
any means in defense of its privileges, presents a major challenge to any
/01
Urbanization in the Caribbean Basin
t3 ,)
—
a.
a
act,
a
Egr .a
cc,.
‘
—
,
•oiii
g
i
.
:
g
f
-
5
,
.
a.
41
popular attempt at revind icat ion. Although working-class
occupations of
land near high-income neighborhoods is an everyday affair
in other cities, it
would be quite unthinkable, in the face of the violent
opposition, in the
elite urban zones of Guatemala (Jonas 1991).
This political simation also helps to explain the
peculiar absence of
reaidential segregation that is apparent in figure 2.4. In part,
there is no
spatial segregation of the classes because their social
segregation is so vast as
to render the proximity of the poor more a convenience
than a threat to
privileged groups. With the state’s means of violence at their
disposal and a
population intimidated by yeats of repression, there is little
incentive for
the well-to-do to escape the city. Instead, poor settlements
function mostly
as a convenient source of domestic labor and personal,sei-vices
for elite areas
(Roberts 1978).
In sum, the five capital cities provide evidence in favor of
the hypothesis
of reversal of spatial polarization, but there are also indications
of significant
variations and exceptions to the process. The comparison
highlights the
significance of the state in countermanding the tendency
of urban elites to
create exclusive residential areas and of impoverished
groups to try to settle
near them in search of better material opportunities.
In the two Central
American capitals in the study, these tendencies are absent,
in large part
because of state action. In one case, state policy attempted to
meet those
basic needs that lead the urban poor to invade elite
suburbs; in the other,
state repression foreclosed the possibility of such popular
actions, hence
removing one of the major incentives for elite flight from
the city.
The second rtend leading to the reduction of spatial
polarization (that is,
the movement of middle-class groups into formerly
low-income areas) is
observable in two of our five cities (Kingston and Santo
Domingo). In the
other three, either the middle class is too small (Port-au-Prince
and Gua
temala City) or it comprises the majority of the urban
population and has
been the recipient of state programs to meet its housing needs
(San José).
The Informal Economy and Unemployment
Our analysis of urban labor markets and of the role of the
informal Sector
seeks to understand the extent to which inegular forms
of emploent
played a countercyclical role at the height of the economic
crisis. This
analysis, guided by hypothesis 3 above, is limited to four
countries. Haiti,
the one excluded, is exceptional in that formal-sector
employment barely
exists; furthermore, the dearth of reliable statistics makes it
impossible to
detect short-term change) in a labor market that is overwhelmingly
infor
40
(9;L
42
Alejandro Fortes, José Irzigsohn, and Carlos Dore-Cabral
Table 2.6 Evolution of the Labor Market in Metropolitan San José,
GNP growth rate
Employment (000s)
Formal-sector employment (%)
Informal-sector employment 1%)’
Open unemployment (%)
Percentage of composition of tlse
informal sector
Informal owners (%)
Informal workers 1%)
Unremunerated family workers (%)
Self-employed (%)
Urbanization in the Caribbean Basin
1980—1989
1980
1981
1982
1983
1985
1987
1988
1989
0.8
210.9
71.6
26.7
5.0
100.0
—2.3
208.4
68.3
29.9
8.3
100.0
—7.3
219.5
66.7
30.5
11.3
100.0
2.9
221.9
67.9
30.3
8.5
100.0
0.7
240.2
68.9
29.7
7.4
100.0
4.9
248.6
68.8
29.7
4.8
100.0
3.8
253.5
70.7
27.6
6.6
100.0
5.0
265.7
70.7
27.5
2.7
100.0
11.2
35.6
6.0
47.2
8.1
38.0
6.1
47.8
9.4
37.5
5.3
47.8
9.7
32.2
2.4
55.7
7.7
36.5
3.5
52.3
7.2
32.6
2.9
57.3
11.5
33.6
3.2
51.7
8.6
20.9
2.9
67.6
So,arcr Tre
os 199L ruble 2.
1
1. Includes domestic service. Percentages of formal and informal employment do not add op to 100 became of
eocloslon of agricultuml workers.
2. Rounded figures.
mal. According to the International Labour Office, only 7.7 percent of the
Haitian labor force in 1987 held jobs that could be considered in any sense
regulated or formal, the bulk of the figure being formed by 32,000 state
employees (Manigat 1991).
Among the remaining countries, the best available information comes
from Costa Rica. Time-series data on the evolution of the labor market in
metropolitan San José are presented in table 2.6. During the crisis years of
198 1—84, open unemployment rose sharply and informal employment ex
panded only moderately. According to the figures, unemployment in the
metropolitan area of San José (AMsJ) rose 66 percent in 1980/81 and anoth
er 36 percent in 1981/82, coinciding with art aggregate decline of real gross
national product (GNP) of 9.6 percent in this two-year period. Informal
employment expanded more slowly, by 8.2 percent in 1980/81 and 2 per
cent in 1981/82. Unemployment remained high during the next three
years, then declined rapidly with economic reactivation in the late 1980s.
By 1989, unemployment was approximately half of what it had been at the
beginning of the decade. By contrast, informal employment remained
steady at about a quarter of the labor force. These contrasting trends indi
cate that adjustment to the economic crisis of the early 1980s occurred
primarily through open unemployment rather than a massive expansion of
the informal sector.
This is not the whole story, however. Additional evidence shows a
parallel rise in unstable and lower-paid jobs in both sectors of the San José
43
economy. Female labor market participation grew during the decade in
connection with the proliferstion of assembly-for-export plants in the AM5J.
Maquzkss, as these plants are known locally, more than tripled their employ
ment between 1984 and 1990, reaching 40,000 in the latter year: Most of
these jobs are unstable and pay low wages, employing mainly young women.
Part-time employment also grew, tos high of37.5 percent of the economi
cally active population by the mid-1980s. While the minimum wage recu
perated in 1989 to its full value at the beginning of the decade, earnings of
skilled and white-collar workers remained below the 1980 figure (Lungo,
Pmirez, and Piedra 1991). The informal sector registered a parallel evolution
in its internal structure. The better remunerated and more stable category
of informal entrepreneurs declined by 45 percent between 1980 and 1986,
recuperating only during the last years of the decade. Less stable and lowerpaid jobs such as odd jobbing and other forms of informal self-employment
grew, however, throughout these years. As seen in table 2.6, they rose 20
percent between 1980 and 1989, representing two-thirds of all urban infor
mal employment in the latter year.
2
These figures suggest a complex adjustment process of the Costa Rican
urban labor market. Governmental intervention was instrumental in
checking the rise of open urban unemployment during the 1980s and
preventing the deterioration of the minimum wage. Simultaneously, how
ever, there was a rise in lower-paid, more unstable employment in both the
formal and informal sectors. Part-time work and low-paid musquila employ
ment became more common among formal workers; whereas selfemployment (much of it in marginal odd jobbing) became predominant in
the informal sector. This development is consonant with our procyclical
hypothesis; it shows that the informal sector, instead of counteracting
trends in the formal economy, followed its evolution.
In contrast to San José, the labor market in Guatemala City has always
been highly informal. Among the five cities studied, only Port-au-Prince
has a larger proportion of the economically active population (EM) in the
informal sector. During the 1980s, however, figures for informal employ
ment in Guatemala City barely moved. Estimates based on the measure
ment criteria employed by the ILO indicate that the informal sector com
prised 30 percent of the urban EAP in 1980 and 33 percent in 1989.
Alternative figures, based on the proportion of the EAP working without
legally mandated coverage, yield a much higher estimate for 1980 (54.3%)
but coincide in showing little change during the decade.
4 As in San Jose,
adjustment to the crisis took place mainly through a significant rise in open
unemployment. Two sets of estimates are presented in table 2.7. They
coincide in showing that urban unemployment more than quadrupled be-
44
103
Alejandro Portes, José ltzigsohn, and Carlos Dore.Cabral
Urbanization in the Caribbean Basin
tween 1980 and 1983 and then remained at a high level during
the entire
decade.
Unlike the Costa Rican case, no significant government
intervention
took place to bnng down record unemployment, a pattern of
official policy
congruent with that observed for low-income housing in the
preceding
section. Hence, the presence of a large, urban, informal sector
in which
average wages were lower than among protected workers
did not suc
cessfully cushion the effects of the economic downturn. The
quadrupling of
open unemployment in Guatemala City during the l980s
is also congruent
with our hypothesis concerning the limits of the informal
sector as a coun
tercyclical mechanism.
As table 2.7 shows, the internal structure of the
informal sector in
Guatemala City appears to have evolved in a direction contrary
to that of
San Jose. In a comparison of estimates available for 1980
and 1989, the
relative representation of informal entrepreneurs seems to
have increased
and that of the self-employed to have declined. As in San
José, entrepre
neurs earned incomes significantly above the official
minimum and their
presence led to art improvement of average earnings in
the informal sector.
Table 2.7 Evolution of the Labor Market in Mertopol itan Guatemala
City,
Ca. 1980
Total employment (000s)
Formal-sector employment (%) i
Informal-sector employment (%)2
Open unemployment (%)3
Open unemployment (%)4 (1980
100)
Percentage of composition of the informal sector
Informal owners
Informal workers
Uriremunerated lhmily workers
Self-employed
Avenge wages
Formal sector
Informal sector
323.8
30 0
66.9
2.2
100.0
40
27 0
50
64.0
1982
—
—
—
9.9
450.0
—
—
1980—1989
1989
3227
33 0
53.5
62
545
9
28 7
—
—
511
US $148.9
US$102.6
Soa,ros. Pérea-Sdirsa 1991; Inter-America,, Development Bank
1990; Mesa-L.ago 1991; Economic
Commissio, for Latin America and the Caribbean 1992; pan.si.c
1986
Note; Dash indicates that data are unavailable.
I. As percentage of the urban nw, maci.e
2. As percentage of the urban nap without social security
protection:
3. From Economic Commission for Latin American and the
Caribbean 1992: table 14; total urban
unemployment.
4. From lntrr-Americun Development Bank 1990: table 10.
45
Yet, despite its apparent decline, in 1989, self-employment still represented
the majority of the Guatemalan informal labor force.
The Caribbean island-nations of Jamaica and the Dominican Republic
experienced a similar evolution of their urban labor markets in the 1980s.
Estimates for both countries indicate an expansion of informal employ
ment, especially in street vending and odd-jobbing, along with a contrac
tion of both formal employment and earnings. Despite the scarcity of data,
figures for the Dominican Republic are consistent in showing a significant
rise tn the jobless population, a sharp decline in formal sector wages, and an
increase in self-employment.
As shown in table 2.8, the proportion of the population entering the
labor force rose as real industrial and public-sector wages declined steeply.
Most of the increase in participation was concentrated in the cities, as
indicated by the rising representation of the urban labor force in the nation
al EAP. Self-employment increased during the last half of the 1980s, but the
proliferation of these informal activities did not prevent a sharp rise in open
unemployment, which doubled between 1977 and 1991. It appears that
efforts of Dominican households to compensate for declining wages with an
increased labor offer by the primary wage earner and/or other members of
the household met with a shortage of remunerated employment in both the
formal and informal sectors. Although street-vending and similar activities
Table 2.8 Evolution of the Urban Labor Market in the Dominican Republic: 1977—1991
Labor-force participation (%)i
Urban tar (%)°
Manufacturing wagesS
3
Export-once wages
Public-sector wages
3
Self-employment (%)5
Unremunerated family workers
Open unemployment (%)i
(%)5
1977
1979
1981
1983
1985
1987
1989
1991
32.6
56.1
149.0
161.2
57.4
20.4
1.8
13.7
33.3
58.8
142.0
155.2
83.7
16.2
1.6
18.6
34.5
59.2
129.4
123.2
85.1
18.5
2.4
20.7
35.3
60.7
128.4
159.0
74.0
17.6
2.2
21.7
35.0
63.8
92.1
74.0
72.3
39.1
64.6
99.1
80.8
68.0
40.0
65.0
87.6
88.5
54.1
—
—
—
—
—
25.7
25.6
41.9
64.2
75.6k
84.8
41.74
25.2
1.9
26.8°
Sosncos; National Statistical Office 1987, 1990; Dominican Documentation Center 1991.
Nate: Dash indicates that data are unavailable.
1. Notional figures, as percentage of the total population.
2. As proportion of total tar.
3. In cormorant pesos of 1977.
4. To August 1991.
5. In Santo Domingo, as proportion of urban tan’.
6. 1990.
—
25.6
46
Alejandro Porteo, José ltzigsohn, and Carlos Dore-Cabral
Urbanization
Table 2.9 Evolation of the Labor Msrket in Kingston, 1977—1991
1977
Formal-sector employment 1%)’
Pablic sector and servicm
Informal-sector employment (%)°
Vendon
Males
Females
Small services and ageicalture
Males
Females
Unemployment (%)3
Males
Females
Labor-force participation (%)3
Males
Females
60.4
23.7
17.4
4.1
8.8
10.7
8.6
1983
—
—
—
—
—
—
—
1989
53.3
14.0
26.0
5.8
12.5
6.8
7.7
17.5
29.9
21.0
35.3
11.4
21.8
82.9
70.1
83.5
71.1
78.1
64.0
Saarces: Gardan and Diaan 1991’ rabIes 5, 9; Andenon 1987.
Nose: Dash indicates that data see anavailable.
I. Formal-serene employment is defined as the sam sf gavemment, formal
services, white-collar, and regulated blae-cnllar emplnyrrsene.
2. lnfne,nal-secrsr employment is defined m anregolseed emplaymene in
domestic service, crafts, sod moesalaceoring, smeeee-eending, services, and
sabaeban agriculmee.
3. As percentage of the warbing-age papalasien.
rose, they could not absorb a tapidly increasing labor supply. Open unem
ployment teached recotd levels.
In parallel fashion, in the Kingston Metropolitan Area during the eco
nomic ctiais there were simultaneous increases in informal employment and
unemployment. The unemployment rate teached record levels between
1983 and 1985 and declined afterwards. However, this apparent improve
ment may mask a rise in the number of discouraged workers. As shown in
table 2.9, participation in the labor force actually dropped, suggesting that a
large proportion of prospective workers simply stopped looking for work. As
in San José, the internal structure of the informal sector evolved in the
direction of an apparent decline of small entrepreneurs and a rise in infor
mal self-employment. Informal street-vendors (male and female) increased
their participation in the Kingston labor force; meanwhile, entrepreneurial
activities in small-scale services and agriculture declined. The overall trend
was toward a simultaneous deterioration of employment opportunities and
earnings in both segments of the Kingston labor market.
in
the Caribbean Basin
47
Despite the scarcity and imperfections of official data, the figures indi
cate that urban labor markets in the smaller countries of the Caribbean
Basin adjusted to the economic crisis in a manner similar to their larger
South American counterparts. In both instances, adjustment involved a
combinatson of declining wages, declining formal employment, growing
informality, and record levels of unemployment. The growth of unemploy
ment, in all countries, clearly points to the limitations of the informal sector
as a labor-absorptive mechanism. Contrary to the dualistic conceptualiza
tion of Latin American labor markets proposed by analysts of the Ito and its
Latin American affiliate PREALC, there is no hydraulic relationship between
formal and informal sectors in which excess supply in one is automatically
absorbed by the other. The overall pattern of results seems more congruent
with the alternative view of unified urban economies in which both types of
activities coexist. In accordance with hypothesis 3, open unemployment
rises as a logical consequence of economic contraction. The contraction
reduces employment opportunities and earnings in both formal and infor
mal enterprise.
Summary and Conclusions
Overall, these results support the conclusion of earlier studies that
“something” significant has changed in Latin American urbanization dur
ing the last two decades. Though the three dimensions of urbanization
examined do not exhaust by any means all that there is to the topic, they
capture important aspects highlighted by a voluminous research literature.
The Caribbean findings presented in this chapter do not support such
simplified conclusions as “primacy is declining everywhere” or “class polar
ization is everywhere diminishing.” Indeed, the evidence from one or more
countries runs contrary to such assertions. Instead, what the pattern of
results shows is support for the theoretical logic behind each proposition:
primacy decelerates (or does not decelerate) depending on whether the
decentralizing potential of the new outward-oriented model of develop
ment is actualized; spatial polarization declines (or does not decline) de
pending on whether middle-class and poor sectors are able to implement
new strategies to cope with economic emergencies; the informal sector can
absorb more or less labor depending on the state of the economy and the
success of governmental efforts to reactivate it.
The contrasting empirical trends observed in the five countries, added to
those in our earlier South American research (Portes 1989), point toward a
second important conclusion. Earlier portrayals of the urban “explosion” in
F
48
Alejandro Fortes, José Iczigsohn, and Carlos Dore-Cabral
Latin America and of the homogenous characteristics of peripheral urban
izacion were flawed. Such generalizations may have played a useful role in
an earlier stage of conceptual devclopmenr, but they are out of atep with
current realities. Contempotary Latin American cities cannot be under
stood on the baaia of blanket notions about less-developed societiea, wheth
er they stem from orthodox neoclassical or unorthodox world-system theo
riea. Instead, the weight of the evidence pointa to a third theoretical
approach that combines global trends with specific national processes. A
number of similarities among Latin Ametican countries preclude the oppo
site extreme of aaserting that only national traits count. A mote useful level
of analysis would begin by focusing on the changing role of these countries
as they are inserted into the global economy and follow up with giving
attention to the specific characteristics of each, in particular ira prior level
of development and the type of state existing there. In an attempt to
reassert the importance of the state in the analysis of national development,
Evana (1989) has ptopoaed a typology of state aysrems, situated in a contin
uum from predorory to developmentol. Much of what he has to say about the
quality and effectiveness of state apparatuses bears on our results. All of the
countties studied confronted a similarly adverse extemal environment dur
ing the early 1980a and all moved in the direction of promoting exports in
otder to reactivate their economies. Howevet, in some instances, record
levels of unemployment lasted throughout the decade (Guatemala); in
others, these levels were promptly brought down by effective state interven
tion (Costa Rica). Similarly, the decentralizing potential of the new export
industries was fully actualized in aome cases (Dominican Republic); in
others it either did not exist (Guatemala) or it aggravated the preexisting
urban concentration (Haiti).
The effects of the crisis were also felt differently within each capital city.
In some instances, the absence or ineffectiveness of state programs led to
the exacerbation of the “pervene integration” already observed in larger
South American cities (Kingston, Port-au-Prince). In others, spatial polar
ization was kept at bay by strong state intervention. However, the character
of the latter ranged all the way from effective middle-class and low-income
housing programs that reduced the impact of economic inequality (San
José) to vigorous state repression that prevented popular sectors from imple
menting their own unorthodox solutions (Guatemala City).
These conclusions converge and reinforce similar trends in the analysis
of other aspects of national development. They support an emerging con
sensus that a proper analytic stance would be, not at the level of sweeping
global theories, nor at that of unique national or local traits, but in the
interaction between the two. The empirical results obtained in the first
-
Urbanization in the Caribbean Basin
49
phase of this project illustrate the advisability of this midrange perspective.
They will also serve to usher the presentation of derailed analysis of results
from each capital city in the ensuing chapters.
This still leaves for investigation how the people who have themselves
been subjects and parcicipann in these processes interpret them and how
they have coped with their consequences. Has life in the cities become
better or worse for its different inhabitants? Are state authorities at both the
national and local levels perceived as capable of coping with the effects of
the economic crisis? Or has this role devolved into community self-help
organizations? Are the proliferating informal enterprises crested by urban
dwellers mere survival strategies subordinate to the whims of the large
corporations? Or do they contain the seeds for autonomous economic
growth? These are some of the questions that the second phase of our
project sought to answer. The results for each city are presented in part 2.
Notes
This chapter is s revised version of an article originally published in the Loon
Ametican Research Review 29 (2) 1994.
I. A word must be said sbout the quality of data used to evslusre urbsn primacy.
Although all estimates are based on nsrionsl census dsta, definitions vsry from
source to source. Table 2.3 presents what sre, in our view, the bmt mrimsres
svsilsble. These figures must be interpreted with caution. In particular, minor
vsnsnons in urban primacy snd city size are best interpreted ass result of measure
ment error rsther than actual changes.
2. Informs? entrepreneurs hsve average esmings significsntly sbove the mini
mum; the self-employed tend to receive much lower esmings. In 1989, only 22.7
percent of informal entrepreneurs in the AMSJ received less than the official mini
mum. The corrmpondmg figure for the self-employed was 44.7 peecent (Trejos
1991).
3. The u.n Regional Emplo)-ment Programme for Latin Americs (iataALc) de
fines the informal sector as the sum of the self-employed, minus professionals,
unremunersced family workers, snd domestic-service worken. Estienstes for 1980
ste from P5BALc; estimates for 1989 ste from a survey conducted by the Latin
Americsn Faculty of Social Sciences (s’iscso). See Perez-Same (199?).
4. This estimating procedure is based on the definition of the informal sector as
income-esming sccivitses unregulated by the state. The empirical indicator is the
percentage of workers not covered by the cosintcy’s social security system. It is
derived from estimates provided by Mess-Lsgo (1991). Gn altemative definitions
of the informal sector, see Fortes and Schsuffler (1993).
5. The unemployment series is for the nsrionsl LAs’. Sepstste individual figures
indirste the same trends for the urban LAP and the capital city. Benveen 1980 and
50
Alejandro Porres, José Itzigsohn, and Carlos Dore-Cabral
1986, for example the unemployment rate in the capital increased by 29 percent;
by 1990, it stood at 20.3 percent, slightly below the national average for the year
(National Statistical Office 1990).
References
Amaro, Nelson. 1990. Descencralizacidn y Participaciôn en Guatemala. Ciudad de
Guatemala: ices’.
Amato, Peter. 1969. An Analysis of the Changing Patterns of Elite Residential Areas in
Bogoia, Colombia. Latin American Dissertation Series. Ithaca, N.Y.: Cor
nell University Press.
Anderson, Patricia. 1987. ‘Informal Sector or Modem Labour Market? Towards a
Synthesis.” Social arid Economic Studies 36 (3): 149—76.
Bairoch, Paul. 1973. Urban Unemployment in Developing Countries: The Nature of the
Problem and Proposals for its Solution. Geneva: International Labour Office.
Beneria, Lourdes. 1989. “Subcontracting and Employment Dynamics in Mexico
City.” Pages 173—88 in The informal Economy: Studies in Advanced and Less
Developed Countries, ed. A. Portes, M. Castells and L.A. Benton. Baltimore:
Johns Hopkins University Press.
Beneria, Lourdes, and Marts I. Roldan. 1987. The Crossroads of Class and Gender:
Homework, Suhcantracung, and Household Dynamics in Mexica City. Chi
cago: University of Chicago Press.
Beyer, Glenn H. 1967. The Urban Explosion in Latin America. Ithaca, N.Y.: Cornell
University Press.
Breese, Gerald. 1966. Urbanization in Newly Developing Countries. New York:
Prentice-Hall.
Carrier, William. 1988. “Urban Processes and Economic Recession: Bogotd in the
1980s.” Paper presented at the seminar on Latin American Urbanization
During the Crisis. Center for Latin American and Caribbean Studies, Ron
da International University.
Clarke, Cohn. 1975. Urban Decelopmentassd Social Change, 1692—1961. Berkeley:
University of California Press.
Consejo Nacional de Zones Franctu de Exportación. 1992. Data gathered and
compiled by José Iraigsohn. Santo Domingo, Dominican Republic.
Cornelius, Wayne. 1975. Politics and the Migrant Poor in Mexico City. Stanford:
Stanford University Press.
Corporacion do Ia Zorsa Franca de Exportación. 1991. Data gathered and compiled
by José ltzigsohn. San José, Costa Rica.
Direccián General de Estadistica y Censo de Costa Rica. 1991. Encuesta Nacional
de Hogares. Data compiled by José Itzigsohn. San José, Costa Rica.
Dominican Documentation Center. 1991. Series Estadisticas Sobre Empleo.
Comp. Edwin Croes. Santo Domingo, Dominican Republic.
Duquella, A. 1989. “La Popul;
eographed report. Port
Eckstein, Susan. 1977. The Pa
Mexico. Princeton: Prir
Economic Commission for Lat:
Statistical Yearbook of L
Nations.
1988. “Preliminary C
Notes on Economy and.
1992. 1992 Statistical
York: United Nations.
Encyclopaedia Bntannica. 19?
cyclopaedia Britannica
Evans, Peter B. 1989. “Predato:
psrative Political Econ
logical Fomm 4 (Decen
Fortuna, Juan Carlos, and So
malized Labor Relatioi
amy: Studies in Advanc
Castells, and L. A. Bei
GarcIa, Norberto E. 1982. “Dr.
ment.” CEPAL Review
Goldrich, Daniel. 1970. “Po
Poblador.” Comparativi
Gordon, Derek, and Cheryl
Years of Growth arid’
Urbanization in the C
tional University, Mia
Guarnizo, Luis E. 1992. “One
York and the Dominic
Johns Hopkins Univet
Hardoy, Jorge E. 1975. Urbam
Books.
Hardoy, Jorge, Raul Basaldila,:
Mecanismos parasu Rel
Instinito.
Iglesias, Ennique. 1985. “The L
Overview.” CEPAL R
Instituto de Esrudios Domini:
Dore-Cabral. Santo ID
Inter-American Developmen
America, 1990 Report.
Jamaica Statistical Institute.
—.
—.
Why Kenya’s Elkanah Odembo Believes All Roads Should Lead Investors to Affica: KnowledgeWharton
(htt:l/knowledge.wharton.uenn.edu/article.cfm?articIeid=264O)
kn\v1Ldc’’Vharton
Why Kenya’s Elkanah Odembo Believes All Roads Should Lead Investors to
Africa
Published : November 23. 2OO in KnowledgeiWharton
Africa today contributes some 1.5% to world trade and attracts little global
investment. Still, the continent sfuture is hardly as dark as that scenario might
suggest. Africa has a growing middle class; governments that are enacting laws to
stem corruption, and public andprivate institutions that are investing heavily in
infrastructure. According to Elkanah Odembo, Kenya ambassador to the US, in
another decade the continent will grow into a market ofone billion consumers. He
notes that companies that seize these opportunities today will reap dividends in the
future. Chinese firms, for example, have recognized this potential and are investing
in infrastructure projects all over Africa.
Odembo visited the University ofPennsylvania recentlyfor meetings arranged by
the UgA.—Keni’a (‘hainher of Gommerce and spoke with KnowledgeWharton
about the potential rewards and risks ofinvesting in Africa, including Vision 2030,
Kenya’c plan to become a middle income nation in the next 20 years.
The following are edited extracts from the conversation.
Part I:
Part II:
Knowledge@Wharton: What business opportunities does Africa offer and why do so many
companies overlook them?
Elkanah Odembo: At the moment, we contribute very little, about 1.5%, to global trade. For that
reason, to most investors and business people, Africa doesn’t appear to be particularly active in
terms of business and trade. But the fact is that in the filture all roads will lead to this continent
because of some things that are happening: A rising middle class, developing African governments,
and heavy investment in infrastructure. The continent also has commodities, which the world
economy values and requires to keep growing. We hope that with all the resources that we have
and know are precious to the world, the world will begin to turn its head toward Africa. We want
to make sure that we are ready to do business with the rest of the world and grow from 1.5% to
10% in the near future, because we have a lot to offer. The fact is that those on the continent who
are investing are doing very well.
Knowledge@Wharton: If you were to look into Africa from the perspective of somebody outside
the continent, what are the most promising regions in terms of investment?
Odembo: In terms of investment, I would, of course, favor East Africa because that’s where Kenya
is located. But you also must appreciate the fact that the continent is beginning to think collectively,
looking at Africa as an investment destination and a trading bloc. As such, we have segmented the
continent into regional economic blocs. By and large, the regional economic blocs are beginning to
do very well. Some are fairly young. The East African bloc, with a population of about 150 million
that’s Kenya, Uganda, Tanzania, Rwanda and Burundi offers a significant opportunity because
we have a customs protocol, which has increased trade between the countries significantly. A few
--
--
At
oopynght c/ the Wnartc.n Sch of the
s
of Per.kana.
Page 1 of 5
/0
Why Kenyas Elkanah Odembo Believes All Roads Should Lead Investors to Affica: Knowledge@Wharton
(htto:/Iknowlede.wharton.uenn.edu/artjcle.cfm?artideid=264U)
months ago, the five countries signed a free trade protocol, which now enables us to move goods,
services and people across our boundaries without any hitches. We are investing heavily in
infrastructure, with major roads coming from the ports on the Indian Ocean going all the way to
southern Sudan, Ethiopia, Rwanda and Burundi and to eastern Democratic Republic of the Congo.
The Southern African Development Community (SADC) is also doing equally well in terms of building
regional infrastructure, increasing trade and opening up the region. If you are doing business in one
country, you have access to the rest of the region as well.
By setting up shop and doing business with Kenya, you do not just have the possibility of [accessing] the
East African community but you also have the population of all of eastern and southern Africa, some
18 countries, with a population of 400 million.
...
KnowledgeWharton: What are the principal risks of doing business in Africa that international
investors should be aware of and how can they protect themselves?
Odembo: Whenever businesspeople venture outside their comfort zone, and their familiar
environment, they will face an element of risk. The kinds of risks that businesses and investors have
had to deal with on the African continent are related to the civil wars that we have seen come and
go. We have had risks related to unreliable judiciary processes, [involving] issues pertaining to
business contracts and so forth [and] the court procedures taking too long. But if you look at the
continent in the last few years, there are fewer civil wars compared to 10 years ago, when at any
given time, there were about 10 countries at war. The mindset [of some foreigners] about the
continent is often that, if there’s war in one country, there’s war all over the continent. That’s just a
geography lesson [about Africa’s] 53 countries.
If you look at what has happened in the last few years in terms of improved governance, many countries
are becoming more democratic. They’re having elections more regularly. The typical tensions that would
result in risk have been minimized to a great extent wars around the time of elections, civil wars
between different communities, fighting between one community and another over natural resources
we’ve overcome those challenges to a great extent. The continent is looking ahead to being a place where
there’s a certain amount of predictability. In the past, unpredictability was another risk.
--
--
Africa now has all the ingredients to minimize the risks that people feared before. One way to establish
that is for a prospective investor to talk to companies already doing business on the continent. They would
be able to tell you about changes that have taken place over the last five or 10 years, and how much we,
as countries and as regions, have managed to minimize risks to investors. We appreciate now that we’ve
been left behind and we must do what is necessary to create an enabling environment for private-sector
business and investment, both local and foreign direct investment.
KnowledgeWharton: How do you view China’s investment strategy in Africa? What does it mean
for investors from other parts of the world?
Odembo: I don’t know if I can talk about the Chinese investment strategy because I’m not privy to
[it], but I can discuss what I have observed. When the Chinese first appeared as investors on the
continent about 10 years ago, a lot of African countries were very uneasy about the manner in
which they were setting up businesses and the types of investments they were making. The Chinese
have become much more sophisticated in the last 10 years. They now have a strategy. It appears to
revolve around what they have studied extremely well on the continent. They know the
demographics: There is a rising middle class on the continent; there’s a very dynamic, young
population; and the continent is becoming increasingly urbanized. Therefore, there is a market and
purchasing power on the continent. One part of the Chinese strategy is based on the fact that they
are reading Africa very well in terms of where we are now and where we are likely to go to in the
next few years.
The Chinese also appreciate the riches that the continent has. Most other countries have known the riches
that exist here. Some northern countries from North America and Europe have already extracted the
valuable minerals and metals that they needed to develop their industries. The Chinese have figured out
that over the next 10 years or so, some of the most valuable commodities that the global economy
All
:
sty of
Prs\-3.
P?ç
2
E
Why Kenya’s Elkanah Odembo Believes All Roads Should Lead Investors to Afilca: KnowiedgeWharton
(htt://knowledoe.wharton.uenn.edu/articIe.cfm?articleid=264O)
requires are on this continent.
The Chinese are positioning themselves to do business with African countries, and have figured out that
in another 10 years, the continent will have a population of one billion people. That’s a very sizable
market for selling your products, not to mention the human resource capabilities for producing goods that
you might want to export to your own country. Again, I’m not sure what the strategy is, but I can imagine
that they’re seeing it putting them in a very good position in terms of who will benefit the most.
KnowledgeWharton: What implications will this have for investors from other parts of the
world?
Odembo: It’s a challenge. Investors will have to compete with somebody who already has a foot in
the door, investing heavily in developing infrastructure, which is where African governments will
tell you is where the greatest need has been infrastructure, infrastructure, infrastructure. In the
next 10 years or so, if this infrastructure has been developed, Africa is going to be able to trade
within itself quite significantly. We’ve learned this during the global recession, when our
commodities didn’t have a ready market because our traditional markets were experiencing the
crisis. We turned inward and started trading with each other.
--
Because of the potential for trading within the continent with a developed infrastructure, people investing
in infrastructure will stand to benefit very significantly because they will know the infrastructure very
well. Part of being a good business person and investor is knowing how the infrastructure is set up and
how things move from point A to point B.
KuowIedgeWharton: Turning now to Kenya, what is Vision 2030 and what opportunities does it
offer international investors?
Odembo: Vision 2030 is Kenya’s goal of making the country a middle-income country by the year
2030. This is a plan we developed over the last three or four years. We have traditionally planned in
five-year cycles, which correspond with each government in place. It occurred to us that this isn’t
making sense. If we are going to get out of the poverty we are in, we need to project beyond just
five years. We embarked on a national planning process involving stakeholders across the board
government and non-government, and the private sector was very central, because our government
made a commitment to make the private sector the engine of growth.
--
We also appreciate that if there’s going to be a movement from poverty to becoming a middle income
country, wealth will have to be created, employment will have to be created and the economy will have to
grow, and the private sector has a key role to play. The strategic thinking and planning process stretched
over a period of about a year and a half.
Vision 2030 is Keny&s vision of what a developed, middle-income Kenya would look like. We have
identified a number of pillars for getting us to become a middle-income country. There’s a very strong
economic pillar, [in which] the private sector very central. A good part of it was developed in partnership
with a number of foreign experts as well. It is about how to position the economy, manage
macroeconomics and get the economy to grow at least 10% consistently over a period of time.
We have a pillar that looks at all social aspects: Food production, food security, health care, education,
shelter, water and sanitation. It is very important that infrastructure development is a part of this. Then
there’s the political pillar, which is equally important because, as you asked earlier about risks that
investors fear when it comes to investing in the continent, the fact is that political instability has cost us a
lot. In the last 50 years of independence, the political instability that we’ve seen is to a large extent very
politically motivated. That’s now being managed.
Kenya promulgated a new constitution on August 27, which provides a framework for governance.
Within that political pillar, governance was big. We’re looking at corruption, for example one of the
variables not conducive to good business and investment. We can’t run away from that.
--
With the constitution, certain structures and institutions will enable a complete overhaul of the judiciary
over the next 12 months, because we appreciate that some of the problems with regard to prosecution, for
example, and due processes in the courts were a result of [a lack of an] accountable and effective
S
Vharton
eif eraIs copr;ght of the
Schoof of the Usersty of °er’.na.
Pege 3 of 5
Why Kenyas Elkanah Odembo Believes All Roads Should Lead Investors to Africa: Knowledge@ Wharton
(httn:I/knowIedcie.wharton.uJennedu/articlecfm?articleid=264O)
judiciary.
KnowledgeWharton: Will the new constitution help increase business transparency? It is a
matter of tremendous concern to international investors that there should be transparency.
Odembo: Absolutely. The first group of people in Kenya to react to the promulgation of the new
constitution was the business community. That says something. They came out and congratulated
Kenyans for this very historic achievement. They spoke about why they felt this was very important
and reiterated that there had been too many things in the environment that made businesses and
investors uncomfortable. A big part of it has to do with unpredictability and corruption. In the new
constitution, there’s even a chapter on leadership and integrity what we expect of our leaders.
New structures and institutions have been created to [encourage the private sector. There is a
round table involving business leaders and the prime minister’s office [to enablel regular contact
between the government and the private sector so concerns are continuously being communicated
to the government. That wasn’t the case before.
--
In many African countries, governments did what governments did and the private sector was busy doing
what they were doing, producing goods and services. That has now changed....
For example, with Vision 2030, there is a national economic and social committee that has ministers and
some key industry and private sector leaders. This is the oversight body monitoring and ensuring that our
efforts for Vision 2030 and becoming a middle-income country stays on track. A lot of business people
have a certain level of comfort with what the government is doing and the kind of environment that has
been created their doors are now open. Private-sector people no longer feel like adversaries.... I’m
seeing that happening in a number of other African countries. As leadership changes, you’re even having
leaders and heads of government who have a business background and appreciate the business
community and will do what is needed and necessary to provide an enabling environment for the business
community.
--
KnowledgeJWharton: You referred earlier to the social pillar. To what degree do you see micro
finance and social enterprise programs being set up in Kenya and have you seen any perceptible
impact on poverty as a result?
Odembo: Absolutely. Micro enterprise and credit programs are mushrooming everywhere. In
Kenya, we have certainly seen an impact. For the longest time, a lot of businesses and financial
institutions shied away from what they perceived as the poor, the unbankable, because it was
perceived that there wasn’t much business to do with that group. Because that is such a large
proportion of the continent, this phenomenon we now call micro finance and enterprise was really
started, interestingly, in the non-profit sector. The sector quickly appreciated that the very poor
people that they were working with also needed access to credit.
The first micro credit institutions is Grameen Bank model. Even that started as a non-profit organization
with the appreciation that we need to get money and credit into the hands of the poor, that the poor, when
they have access to credit, are able to do incredible things to improve their lot. The commercial banks and
all sorts of other micro fmance institutions have come in subsequently, such that you now have a fairly
significant micro finance sector. We need to make sure we maintain the focus on the poor and enabling
them. It’s not just about credit. Because what [non-profits] are able to do very well that traditional
commercial banks were not able to do is invest also in building the capacity of the people.
It’s one thing to make credit available. It’s another thing to make sure that the credit is going to be applied
properly, that people have good business plans and projections, and that they actually are making money.
The prospects are tremendous. We need to see more. I don’t think we can get enough micro finance and
micro enterprise programs on the continent. The continent must go in that direction because it is the way
we will be able to grow the economy, from the bottom.
Knowledge@Wharton: I believe that Africa and Kenya are at the forefront of using mobile
telephones for mobile banking.
Odembo: That’s a part of liberalizing the economy. Just 10 years ago, only 300,000 or so Kenyans
had access to a telephone. When we liberalized the telecommunications sector to the point where we
h
of the Vht
“‘ I’
Why Kenyas Elkanah Odembo Believes All Roads Should Lead Investors to Afiica: Knowledge©Wharton
(httø://knowledge.wharton.upenn.edu/artide.cfm?articleid=2640)
now have some four or five mobile telephone companies, we’ve gone from 300,000 Kenyans having
access to a telephone to close to 20 million. The innovations within that sub-sector are incredible.
That is where one of the leading mobile services providers, Safaricom, has invented a money
transfer system using the mobile telephone.
Studies at the Institute for Development Studies at the University of Nairobi which are not yet
conclusive are saying that the facility to transfer money that Safaricom provides to Kenyans may have
contributed more to national development than any other investment that the government has made since
independence [in 19631. Just the ability to transfer money from the people who have the money to the
people who do not most of whom are a rural, poor population who, of course, didn’t have banking.
Sending money from point A to point B was once such a chore. Money would get lost, all sorts of things
would happen. Those were disincentives for people working in towns, who needed to send money back
home to support their parents and siblings.
--
--
--
But now with 20 million handsets in the hands of Kenyans and a significant number of these people
being young and middle class with some disposable income the ability to take money out of the urban
centers into the rural peripheries of the country is changing the economies of traditionally poor
[househoidsi. And the sky’s the limit....
When the telephone companies began transferring more money than all the banks put together using a
mobile telephone, the banks quickly realized that rather than compete and put all sorts of obstacles in the
way of these money transfers using telephones, they said, “Let’s join them and see if we can find
opportunities for partnerships.”
--
--
Some of the large commercial banks are going into partnerships with mobile telephone companies to do
other innovative things so that people can now bank using their telephones. Again, the sky’s the limit
when it comes to these innovations, and young people, all of them well educated, are bringing about all
these innovations.
Know1edgeWharton: If you had a chance to address, say, a room full of Fortune 500 CEOs and
tell them why they should invest in Africa, and why in Kenya, what would you say?
Odembo: The number one reason would be if you want a place where your investment will bring
good returns, in a sustainable manner over a long period of time, and you’re willing to wait and
you do not want to make a quick dollar or a quick euro and repatriate the profits. If you’re in it for
the long haul, with the mindset that you want to make a profit, as a foreign investor but also to
support the development of the continent, then your timeframe must also be long term. None of
that in and out quickly. You might make your money, but you want to be in it for the long haul and
do it in a sustainable manner. And if you want a loyal partner and a loyal customer base, then the
continent is the place to go, because of the riches and the commodities, growing middle class, and
infrastructure we are investing in will make it possible for you....
--
Now why Kenya? An investment in Kenya is an investment in the entire continent. Within four hours of
Nairobi, you can fly to 24 capitals on the continent. That ought to be an incentive for any business person,
looking at the size of the market when it’s predicted that in five years, 10 years at the most, we will have
a population of one billion. If that isn’t market enough, I don’t know what is. All the ingredients are in
place for Africa to be where a serious investor should be.
This s a sirig!e’pesonal use copy of Knowledae@Wharton. For muItijle copies custom reprints, c-prints, posters or plaques. please contact
FARS International: reprintsoarsintI.com P. (212) 221-9595 x407.
elf
are-afs
oOvrt of rhe
-:“
Sctsf of the Jmesrtv Qf 5’;’
‘.:-
‘,,e
of 5
Il,
IMPACT OF WTO AND IMF
ON CARIBBEAN
ECONOMIC
DEVELOPMENT
AND GLOBAL GDP
CONSIDERATIONS
§ 1.03
THE INTERNATIONAL MONET&RY FUND
61
25 percent portion of its contribution is paid in hard currencies of other natIons
or in the form of special drawing rights (SDR), a unique international reserve
asset created and issued by the IMF. The SDR is a stable unit of account that is
assigned a value based upon an average of the world’s major currencies. It can
be used for transactions with the IMF, to settle international balances between
central banks, and to meet IMF membership subscription obligations.
In many cases, the IMF cannot effectively use the 75 percent of quota paid in
a member’s domestic currency because that currency is not readily acceptable in
international transactions. Generally, the IMP uses only 20 currencies during a
year, most of that in the form of major convertible currencies such as the dollar,
yen and euro. It is estimated that one half of the money contributed to the IMF
cannot be utilized in its operations. When the quota contributions are
insufficient to its needs, the IMF may draw on a line of credit called the General
Arrangements to Borrow, that it established with a number of governments and
banks.
[3]
Loans and Exchange Transactions
The IMF charter requires the Fund to provide temporary financial resources
to members having economic difficulties related to trade imbalances. These
imbalances arise in nations that do not receive enough foreign currency from
exports of goods and services and from tourism to pay for their purchases from
other countries. IMF help is needed by such nations to maintain a stable
exchange rate for their currencies without incurring severe domestic
unemployment or inflation or requiring significant reductions in imports.
Quota contributions are the primary source of currencies for IMP loans. The
quota contributions form a pool of currencies that can be borrowed by members
who need foreign exchange to fund their international obligations and restore
their balance of payments. The amount a member nation may borrow from the
IMP is based upon the quota it has contributed. If the member needs more
funds, the IMF has discretion to provide additional loans totaling up to three
times its quota over a three-year period.
Most loans are extended through IMP arrangements, which specify the
amount of SDRs or foreign currency to be provided and the terms and duration
of the loan. The IMP also provides concessional loans that are not related to a
member’s quota that support low income members efforts to deal with longterm balance of payment issues. These low interest loans and grants are
provided through an Enhanced Structural Adjustment Facility (ESAF) and a
heavily indebted poor countries (HIPC) debt initiative. In recent years, the IMF
has established new discretionary loans that may exceed these limitations for
member nations facing a sudden, disruptive loss of market confidence.
When the IMF allows a member to draw on resources related to its quota
subscription, the transaction is not cast in the form of a loan. Instead, a member
“purchases” another member’s currency or SDRs from the IMF with its own
currency, thereby obtaining needed foreign currencies, and agrees to later
repurchase its own currency within a specified time. Because a fee is charged by
the IMF and the member whose currency is borrowed, the transaction
‘4
MONEY, CURRENCY AND FINANCE
62
CH. 1
resembles a loan of the SDRs and usually is referred to as such.
Lending Criteria
{aJ
Many IMF loans are provided through longer term standby extended credit
arrangements. These arrangements allow members to draw upon IMF
resources up to a stated amount within a specified period. Typically, the standby
credit is established at the beginning of the loan period through a letter of intent
that commits the member to specific performance criteria regarding exchange
rates, public debt, privatization and the like. In effect, the standby arrangement
32 Stand-By
links IMF financial assistance to a nation’s economic policies.
12
months
to
18
is expected
extend
over
and
repayment
usually
Arrangements
within 3 to 5 years of each drawing. The TMF’s Extended Fund Facility (EFF)
provides longer term assistance and larger amounts than standby
arrangements. These loans are extended to remedy balance of payments
problems arising from structural problems that require a longer period to
resolve. These loans are disbursed over 4 to 5 years and repaid within 4 to 10
years of each drawing.
The IMF applies a range of lending criteria to different loan segments called
tranches, that equai one quarter of the borrowing member’s quota. Since one
quarter of each nation’s quota is contributed in SDRs or hard currencies,
members may freely draw upon the first tranche, referred to as the reserve
tranche. At any time, a member’s reserve tranche is the amount by which its
quota exceeds the amount of its own currency held by the IMF. A member may
draw the fu]i amount of its reserve tranche (by paying an equivalent amount of
its own currency) at any time simply by stating that it is required for balance of
payments purposes. Drawing on the reserve tranche is not considered an IMF
loan, and is not subject to fees or repurchase obligations.
Borrowed amounts above the reserve tranche come out of IMF resources and
are called credit tmnches. These loans are subject to the conditiona2ity
requirements discussed below. To draw the first credit tranche, a member must
show that it is making reasonable efforts to overcome its balance of payments
problem. Borrowing against upper credit tranches usually is subject to more
restrictive conditions and loan disbursements occur only as specified criteria are
satisfied.
[bi
Conditionality
When the IMF allows a member to draw upon the upper credit tranches, it
usually imposes stringent conditions based upon two standards. First, the
member must return the borrowed currencies as soon as its payment difficulty
is resolved. This ensures that sufficient currencies are available to meet the
needs of all members. Second, and most important, the member must describe
the economic reforms it will introduce to solve its trade imbalance problem and
demonstrate how the reforms will enable it to repay the loan within the agreed
time period. In effect, most IMF loans are made only upon comlition that the
32
See
SIIJELL,
ThE IMF
1D
Tnni>.Woau Poimc ItsmILrry: Is TsRE
A
Coscno? (198).
§ 1.03
THE INTERNATIONAL MONETARY FUND
63
member use the borrowed funds to meet specific economic criteria established
by the Fund.
This link between an IMF loan and the borrowers commitment to specific
economic reforms is called conditionality. The required reforms usually relate
to changed policies regarding government expenditures, interest and exchange
rates, price deregulation, consumer subsidies, trade barriers, money supply, and
similar matters. In recent years, however, the IMF has insisted upon more
comprehensive and long range structural transformations, such as privatization
of state owned enterprises, increased funding for social safety nets, health care,
and education, strengthening banks and banking supervision, and undertaking
effective measures to reduce corruption. The IMF is considering trade-related
conditionality that would link financial aid to trade liberalization. A member’s
trade policies would be reported on an index of trade restrictiveness and,
presumably, performance criteria would include adoption of specific free trade
measures.
IMF Loans and Balance of Payments. A nation’s balance of
payments (BOP) account records its economic transactions during a
year between its residents, including government, business and
individuals, and the rest of the world. The BOP consists of the following
elements:
(1) The current account, which measures the country’s net exports of
33 A nation that exports more than it imports
goods and services.
generates a surplus current account while a nation that imports more
than it exports generates a deficit current account. A country with a
deficit current account does not earn enough foreign currency from its
exports to pay for what it buys from other nations. In that case, the
deficit is financed either by spending the reserves of foreign currency
the nation has accumulated in the past, or by borrowing from other
countries.
(2) The capital account, which is the amount a country has borrowed
from other countries. For example, when a U.S. Treasury bond is sold to
a resident of Japan, the payment received from Japan is a capital inflow
that creates a credit in the U.S. capital account. The reverse is true, so
that a purchase of a Japanese bond by a U.S. resident is a capital outflow
that is a debit to the U.S. capital account. A BOP deficit arises when a
country’s total payments to foreign countries (imports plus capital
outflows) exceed its total receipts from abroad (exports plus capital
inflows). In that case, the nation must use its foreign currency reserves
to satisfy the unpaid amount.
(3) The nation’s reserves of foreign currency.
Other elements of the BOP are the nation’s capital aeeount and foreign currency reserves.
MONEY CURRENCY AND FINANCE
64
CE. 1
To illustrate how an IMF arrangement may deal with a BOP
imbalance, assume that Country X has a has a BOP deficit because the
amount of dollars it receives from exports to the U.S. is less than the
dollars it pays for imports from the U.S. If X has reserves of dollars in
its central bank, it can use these to meet the deficit until the reserves are
exhausted. If the BOP deficit is persistent, the foreign currency reserves
are likely to be expended fairly quickly. Instead, X can borrow dollars
from the IMP by exchanging its own currency for the dollars. The IMF
will extend the loan, however, only on condlition that X adopts specified
policies that will increase its exports and reduce imports to the point that
its DO? deficit is eliminated. Policies to reduce imports may include
reductions in total domestic demand induced by tax increases, reduced
government spending and credit limits. Policies to encourage exports
may include elimination of export barriers and currency devaluations
that make foreign goods much more expensive in the domestic market.
The IMF’s guidelines on conditionality require the Fund to respect its
members’ domestic social and political objectives and their economic priorities
and circumstances. Under these guidelines, conditionality is to be flexibly applied
and provide for on-going review and consultation. Generally, performance
criteria in standby or extended arrangement should be limited to economic
variables related to satisfying IMF supported programs. The required policy
changes are set forth hi a “letter of intent,” along with the performance criteria
the member must meet to receive periodic loan disbursements. The IMF
Executive Board regularly reviews the member’s progress toward achieving the
stated objectives.
Officially, a member’s assurances about economic reforms, even if expressed
in a letter of intent to a standby arrangement, is not a contractual obligation.
Accordingly, no legal action may be taken to enforce these assurances or
commitments. However, the IMF can indirectly enforce these agreements by
withholding funds to countries that do not satisfy the loan conditions and
restricting their access to future loans. Usually, the IMP will attempt to
persuade or pressure a wayward nation into compliance, and in extreme case, it
can expel a nation. In numerous situations, however, breaches of agreement have
been overlooked.
[ci
Criticisms of Conditionality
34
IMF lending policies have been the object of increasingly harsh criticism.
Some of the more common complaints about the IMF are summarized as
follows:
•
IMF secrecy about its activities makes it difficult for outsiders to
evaluate its policies. The Fund does not report the details of its standby
agreements with member nations nor the status of its loans.
umo Povxan: Te Woai.a B
See The JMF: A Record of Addiction and Failure, in FE
mx IMF, n mx DEvExwa Wov (Doug Bandow & Ian Vasquez, eds., 1994).
THE INTERNATIONAL MONETARY FUND
§ 1.03
65
The IMF voting system based upon monetary contributions does not
sufficiently account for the concerns of poor countries.
Many of the conditions and performance criteria the IMF imposes do not
foster economic growth and therefore, do not improve long-term
economic conditions. Moreover, otherwise beneficial conditions often are
ineffective because other national policies are not coordinated or work at
cross-purposes.
IMF conditions are not really enforced. In many cases, members that
violate their agreements are granted waivers, modified conditions or
newly negotiated loans. Thus, large sums have been provided to nations
that misspent prior loans which they are unable or unwilling to repay.
•
The IMF does not monitor its performance criteria uniformly, so that
great variations exist between programs.
•
Free-market solutions such as high interest rates to retain capital, and
currency devaluations and austerity programs to discourage imports are
overemphasized. These measures often result in high unemployment and
dramatic declines in living standards that weaken the nation’s political
structure and prevent meaningful reform.
•
The entire IMF lending program creates long-term dependency rather
35
than short-term assistance.
Less-developed countries increasingly rely on IMF loans for longer periods.
•
IMF loans cannot be shown to improve the borrowers’ economic
conditions. Most borrowers of conditional loans are economically worse
off than before the loan. It is unclear whether the decline is attributable
to the conditions themselves or to lack of adherence to them. It may be
both; most countries that meet IMF conditions outperform countries
that do not, but borrowers as a whole exhibit low economic growth rates.
•
Many criticisms are ideological, maintaining that the Fund provides too
little or too much support to non-market or socialist economic systems.
•
The IMF (and World Bank) is a tool of capitalism that operates to
maximize profits for big multinationals and maintain U.S. domination
over the world economy.
•
The IMF conditions harm poorer people of lesser developed nations by
requiring governments to privatize public assets and reduce
expenditures for social services such as health care, education, and
pensions. The poor bear a disproportionate burden of these policies. Of
course, the issue is whether the short term distress created by the
economic adjustments is necessary to achieve sustainable long term
growth. In this view, the groups most affected by the economic reforms
ultimately will obtain the most benefit from them. In response to this
criticism, however, the IMF has begun to focus on “safety net” programs
See
JowsoN u
UNIlEcEssY (1997).
SceweR, TIlE IN’rERNAT1oN MoT FUND: OuTnTEn, INEFFECTrVE, u
66
MONEY, CURRENCY AND FINANCE
CH. 1
that moderate the impact of economic reform on a country’s lower
economic classes.
Foreign multi-national corporations benefit more than the local
population from conditions that require a country to de-regulate its
economy by eliminating tariffs, trade barriers and subsidies to local
industries. Most profits of the multinationals are taken out of the
country.
•
Removal of restrictions on foreign investment allows multinationals to
destroy the environment and take advantage of cheap, sweatshop labor
conditions.
•
IMF programs result in lower wages and poorer working conditions in
developing nations, which indirectly decreases workers’ living standards
in the industrialized countries.
[4]
Other IMF Functions
[a]
Currency Exchange Rate Surveillance
As noted above, the IMF abandoned the gold exchange standard in 19’78 and
has since allowed each member to choose its own system for determining its
currency exchange value. Most of the major industrial countries have adopted
floating systems that allow the value of their currencies to be determined, with
little intervention, in the global market. A number of nations have floating rate
systems that they more actively manage by having their central banks buy or
sell their currencies in the exchange market. Stifi others have fixed rate systems
that peg the value of their currency to another major currency such as the
dollar.
Because of the variety of systems in use, the IMF has been given a
surveilla’nce and supervisory role regarding the currency exchange policies of
its members. The surveillance is designed to ensure that IMF members’
• implement economic policies that are consistent with their exchange rate
systems;
•
maintain adequate capital inflows;
•
have a strong banking and financial sector;
•
pursue sound economic policies, and;
•
provide the data needed for effective IMF surveillance.
In this role, the IMF may examine and monitor all aspects of a member’s
economy that affect the exchange rate of its currency and report its findings to
the membership. Generally, this bilateral surveillance occurs through annual
consultations between the Executive Board and staff with individual member
countries?
See IMF Charter Article IV.
U.
1.03
THE INTERNATIONAL MONETARY FUND
67
By making each member’s economic policies and conditions transparent, the
IMF hopes to avoid the kind of sudden loss of confidence in a nation’s currency
that led to economic crises in Mexico and Asia in recent years.
Effective surveillance requires that members provide their macroeconomic
and financial data to the Fund in a timely fashion. The IMF has developed
standards for providing such information to the Fund and to the public. The
Special Data Dissemination Standard (SDDS) sets forth the statistical
information and standards to be provided by members desiring access to
international capital markets. This information is posted on the IMF’s Internet
Dissemination Standards Bulletin Board (DSBB). The Fund has also
established the General Data Dissemination System, which is a general
standard for all IMF members in providing statistics and economic and financial
indicators.
The IMF consults with each of its members at least annually to ensure that
their currency policies are prudent and transparent and to obtain information
about their economic condition. The consultation is conducted by a team of IMF
staff that first collects extensive economic data about a member, and then meets
with its government officials to discuss the effectiveness of its economic and
currency policies during the past year and any new policies it intends to
implement in the next year. These policy discussions also may include social,
environmental, industrial, labor, and governance issues that affect the country’s
economic condition. A recent focus of the consultative discussions has been the
economic consequences of highly unequal income distributions. The staff
prepares a report for discussion by the Executive Board and the Board
forwards a summary of the discussion, with suggestions, to the member’s
government.
Special consultations are held with governments of members whose economic
policies greatly impact the world economy. These special consultations are held
to assess the global economy and forecast developments in the forthcoming
year. The IMF publishes these reviews twice a year in the World Economic
Outlook, which members can rely upon in setting their economic policies.
[bi
Technical Training and Assistance
The IMF provides training and technical assistance to its members in the
following areas:
•
fiscal and monetary policies;
•
institution building, such as central banks, treasuries, tax and customs
departments, and statistical services, and;
•
economic and financial legislation.
Specific areas of development have included financial analysis and policy,
balance of payments methodology, public finance, government finance statistics,
economic management, tax reform and administration, and central bank
development. The Fund also provides advice about money and capital markets,
banking interest rates, and how financial instruments are used in monetary
management. These technical assistance projects are becoming larger and more
9
68
MONEY, CURRENCY AND FINANCE
CE 1
complex, involving longer time periods and multiple sources of financing.
The IMF also provides numerous training courses for government officials at
its Washington headquarters, and at regional locations. IMF missions and
experts also are assigned to foreign posts to provide advice and support
regarding monetary, fiscal, and statistical problems that contribute to trade
imbalances.
§ 1.04 THE WORLD BANK
[1]
General Structure and Operation
The World Bank is the commonly used name for the International Bank for
Reconstrnction and Development that was established at the Bretton Woods
Conference in 1944. The Bank was created at the same time as the kternational
Monetary. Fund and both institutions work together in many areas. However,
the institutions have different roles: the World Bank acts principally to foster
economic development among its members, while the IMF acts primarily tp
maintain an orderly system of international payments between nations.
Bank policy is controlled by a board of governors comprising one governor
from each member nation. Daily operations are conducted by the Bank’s
twenty-two executive directors, headed by the World Bank president elected by
the board for a five year term. The President is neither a governor nor director.
Five executive directors are appointed by the five countries holding the most
capital shares in the bank. The remaining directors are elected by the governors
from the other members.
The Bank comprises the International Bank for Reconstruction and
Development (IBRD) and the International Development Association (IDA) and
is associated with a number of other agencies including the International
Finance Corporation. The institutions are legally and financially separate, but
share staff and administrative services. The Bank employs more than 7,000 staff
members and maintains 40 offices throughout the world. Its headquarters are in
Washington, D.C.
The World Bank’s initial task was to provide loans to Western European
countries to finance reconstruction of industries that were destroyed in the
Second World War. After completing that job, the Bank shifted its focus to
poorer, economically developing countries in Africa, Asia, and Latin America.
The Bank also provides a substantial amount of technical assistance to its
members, both in relation to a loan or as a separate undertaldng.
[2]
Lending Activities
The World Bank is owned by the governments of its member nations, all of
which also belong to the IMF. Members subscribe to, or purchase a minimum
number of shares determined by reference to the relative size of their
economies. The seven largest industrial countries together own about 45 percent
of the World Bank and are therefore, very influential in determining bank
policies. The U.S. is the largest shareholder at 17 percent. Because an 85
§1.04
THE WORLD BANK
69
percent vote is needed to change the Bank’s capital structure and Charter, the
U.S. maintains an important veto power. Most other Bank decisions, including
loans, are decided by majority vote.
A portion of each government’s subscription amount is paid immediately and
the rest may be called upon if required to meet the Bank’s obligations. Most of
the operating funds the Bank lends to members are obtained by issuing bonds
through world capital markets and directly to governments, agencies, central
banks, private institutions, and individuals around the world. The bonds are
highly rated (AAA) because the Bank’s member governments guarantee their
repayment. The IDA part of the Bank makes concessional, low interest loans,
that are financed by grants from donor nations. The bank’s lending activities are
generally profitable.
The bank’s main activity is to provide low interest loans to its member
nations that will finance specific projects. Loans are extended after the Bank’s
advisers and experts determine that the borrower can meet specified conditions
ensuring productive use of the funds and ultimate repayment. The project must
be feasible and economically sensible and the borrower must be unable to obtain
the loan from other sources. Periodic reports to the Bank are made by the
borrower and the Bank’s observers regarding the use of the funds.
Under the Bank’s charter, a loan can only be made for productive purposes
with due regard to the prospects for repayment. However, the Bank must
ascertain that the funds cannot be obtained elsewhere on reasonable terms.
Each loan must be for a specific project and guaranteed by the Government
involved. The loan terms cannot restrict use of the funds to purchases in a
particular country.
World Bank loans are made to governments of developing nations, their
agencies or to private businesses in their territories, with repayment
arrangements that are most favorable to the poorest countries. A developing
country with a per capita gross national product
37 (GNP) of about $1,300 or
more may borrow from the IBRD at an interest rate slightly above the market
rate for a 12 to 15 year period. These loans are funded by bonds saks. A poorer
country with a lower per capital GNP, currently around $900, may borrow from
the IDA interest free for a 35 to 40 year period. Essentially, these loans
constitute outright grants that are financed by credits contributed by a number
of wealthier member nations. Although the terms of IBRD and IDA loans differ,
both institutions apply the same standards in assessing a project’s viability.
During the first years of the Bank’s operations, most of its loans were
provided to fund infrastructure projects relating to electric power and
transportation for large cities. More recently, Bank support has focused on
projects that provide more direct benefits to poor people in developing
countries. For example, many transportation projects now concentrate on
bringing goods from farms to market and power projects on lighting for villages
and small communities. Many recent World Bank loans relate to agriculture,
Per capita GNP is determined by dividing the value of goods and services a nation produces in
a year by the number of people in the country.
70
MONEY, CURRENCY AND FINANCE
CH. 1
rural and urban development, water safety, waste management, health care,
family-planning, nutrition, education, housing and small enterprises.
[3]
Criticisms of World Bank Activities
Like the IMF, the World Bank has been subject to harsh criticism. Some of
the more common complaints about the Bank are summarized as follows:
•
Bank funded agricultural projects often harm small farmers and favor
larger producers. This occurs when projects encourage growing cash
crops that require fertilizers, pesticides and contribute to soil erosion.
Large irrigation projects, such as dams, usually benefit the large
growers that have political power.
•
The Bank has funded projects that harm the environment including
dams, mines, and logging ventures. Pollution control agreements often
are ineffective because developing nations resent restrictions on the use
of their resources that did not apply to the richer’ nations during their
early periods of economic expansion.
•
Bank policies favor the interests of the richest industrialized nations.
These countries require poorer nations to deplete their natural
resources, such as oil and lumber, in order to repay massive debt loads.
Environmentally harmful projects are shifted from richer nations with
substantial regulations to developing countries with less restrictive
standards. Unemployment and low domestic wages make these activities
attractive to poor countries despite the environmental hazards.
•
Loans to governments that violate human rights help maintain these
regimes in power. In such cases, a loan to a repressive government to
build a school releases other funds for the army and weapons purchases.
Some critics contend that the Bank has denied loans to countries, but
later approved funding for the same project when a more authoritarian
regime took power.
•
The Bank funds projects that require forced resettlement of native
inhabitants. This occurs when local populations are removed from the
land required for projects such as dams or roads and when urban
projects force residents to relocate. Often, the financial promises made to
induce a population to resettle are not kept. A number of dam projects
funded by the Bank have been harshly criticized because of the large
scale forced migrations involved.
•
Bank projects disproportionately impact indigenous populations tribal
land rights, ethnic identities, and cultural autonomy. Although the Bank
has adopted guidelines that allow tribal people a right to veto projects
that affect these matters, critics contend that there has been little
compliance.
•
Bank funded projects do not proportionately benefit women. This may be
true even for projects that have overall positive economic outcomes. For
example, a project that provides employment for women does not
account for the increased burden on a typical woman who must continue
§1.04
THE WORLD BANK
71
to perform all her homemaking duties in addition to the new job.
Bank projects support state sponsored development rather than private
initiatives. This often results in support for corrupt and ineffective
regimes. By sponsoring large projects that are controlled by
governments, the Bank encourages economic development that is highly
centralized and regulated.
•
Many projects the Bank and IMF supports create “moral hazard.” This
means that governments may undertake speculative and risky economic
projects because they know that the Bank or IMF will provide financing
to bafl them out.
Low interest loans to failing economies do not provide incentive to
establish a good credit rating. Indeed, nations with good credit can
obtain commercial loans at competitive rates, thereby making them
ineligible for loans from the World Bank.
Organisation for Economic Co-operation and Development
.3ANS>. rV)N
E)Nc Al.
T c i
co-c
Page 1 of3
ow
Economy: Developing countries set to account for nearly 6o%
of world GDP by 2030, according to new estimates
16/06/2010 The rapid growth of emerging economies has led to a shift in economic power: forecasts
based on analysis by late economist Angus Maddison suggest that the aggregate economic weight of
developing and emerging economies is about to surpass that of the countries that currently make up
the advanced world.
-
According to Perspectives on Global Development: Shifting Wealth, a new publication from the OECD
Development Centre, the economic and financial crisis is accelerating this longer-term structural
transformation in the global economy. Longer-term forecasts suggest that today’s developing and
emerging countries are likely to account for nearly 60% of world GDP by 2030.
-
Share of the global economy in purchasing power parity terms
2 ci:U
2010
o!r
While the 1990s was a lost decade for much of the developing world, growth rates picked up
significantly in the 2000s, with the number of developing countries beginning to converge strongly
with the affluent OECD countries leaping from 12 to 65 (Fre 2). The strong performance of China
and India has had a significant impact on the rest of the developing world.
Responding to this trend, the OECD has set out to strengthen its relations with major emerging
economies. It has strengthened its links with Brazil, China, India, Indonesia and South Africa and
recently welcomed Chile as its 31st member and it has extended invitations to join to Estonia, Israel
and Slovenia. Russia is also negotiating to become a member.
What does the rise of large developing countries mean for development?
In converging countries
Since 1990, the number of people in the world living on less than a dollar-a-day has fallen by over one
quarter approximately 500 million. So far, however, these reductions have mainly been concentrated
in one country China. Other countries have made progress but at a pace insufficient to counter the
effect of population growth. Poverty reduction still represents a major challenge for the developing
world. Inequality in many rapidly growing developing economies has also been increasing.
-
—
33 95945467980_i_i_i 1 ,00.html
9
264
htt://www.oecd.org/documentprint/O,3455,en_
11/1/2010
Organisation for Economic Co-operation and Development
Page 2 of 3
Thanks to the rapid growth rates in emerging economies, their governments can now afford to boost
public spending on social protection. This is a powerful tool to reduce inequality.” said Angel Gurria,
Secretary-General of the OECD (read the u!i sneech). “Investing in social infrastructure may also
contribute to diminish the propensity to save of these economies, contributing to a more balanced
global economy.” he added.
In poor and struggling countries
Due to their rapid growth and sheer size, India and China influence the key macroeconomic variables
that matter for poor countries: interest rates, the price of raw materials, and wage levels for ow-skill
jobs. They also have major impacts on global trading and investment patterns.
Poor and struggling countries will need national development strategies which respond to these global
trends to ensure that they thrive in a global economy in which China and India have greater weight.
The report finds that more could be made of the economic ties between developing countries. ‘South
South links” in trade, aid and investment are an increasingly important source of knowledge and
finance for development. For example, lowering tariffs on trade between developing nations to the
levels that prevail between northern countries would be worth almost double the gains achievable by a
similar reduction on North-South trade.
rure3
-
Potential gains from South-South trade liberalisation
• Pryv
ctc
I,IS fdL
Overall, shifting wealth is good news for development and good news for the global economy. Growth
in the developing world is an opportunity for the global economy to shift up a gear, which is confirmed
by the role some emerging economies are playing in the current economic recovery”, Mr. GurrIa
commented.
•
Read more about the report: Perspectives on Global Develonment: Shifting Wealth
Does the de’/eioonq world hold the key to building a stronner olobal economy ? (Article by Angel
Gurria)
For more information, journalists should contact Elodie Masson, ekcbemassonWoerd am, Tel;
+33 1 45 24 82 96
Also available:
d(;cnsn5e
(French)
;
Les pcys en ddveloppement repr&;eriterod prés de 5flJc du PlO rnondial en 2d30. scion de nouveles estfrrnOons
5 5,en 2649_3 3959454679801 111 ,00.html
4
htto://www.oecd.org/documentprint/0,3
11/1/2010
PART I
—
————————
CARICOM’s Total Trade with Principal
Trading Partners and the Rest of the
World
CARICOM’s TOTAL TRADE WiTH PRINCIPAL TRADING PARTNERS AND THE REST
OF TIlE WORLD: 1996 -2001
CARICOM’s TOTAL TRADE
CARICOM’s total imports expanded from ECS22.9 biUion in 1996 (twelve Member States reporting)
to EC$27.O billion in 2001 (eleven Member States reporting) at an average annual growth rate of 3.4%
over the period. CARICOM’s earnings from total exports moved from EC$l 5.5 billion in 1996 (twelve
Member States reporting) to ECS 17.9 billion in 2001 (eleven Member States reporting) at an average
annual growth rate of 2.9% over the period. Due to the different rates of growth of its imports and
exports, CARICOM recorded trade dejIcits throughout the period moving from ECS7.4 billion in 1996
to EC$9.l billion in 2001 (Tables 1.1(a) & (b)).
Major Contributors
The MDCs dominated CARICOM’s total imports and accounted for an average percentage
contribution of 83.8% over the period. Imports of the MDCs increased from EC$ 19.0 billion in 1996
(all five Member States reporting) to EC$23.l billion (four of five Member States reporting) which
accounted for 82.8% in 1996 and 85.3% in 2001 of CARICOM’s total imports. As a result the LDCs
contributed an average percentage contribution of 16.2% of CARICOM’s total imports over the period.
With regards to CARECOM’s exports, the MDCs dominated with an average percentage contribution
of 93.0% over the period. Exports of this group moved from EC$ 14.4 billion in 1996 (all five Member
States reporting) to EC$ 16.8 billion (four of five Member States reporting) which represented 92.7% in
1996 and 93.7% in 2001 of CARICOM’s total exports. The LDCs as such accounted for an average
percentage contribution of 7.0% of CARICOM’s total exports over the period (Tables 1.1(a) & (b)).
As it relates to the performance of individual Member States, Jamaica and Trinidad and Tobago were
CARICOM’s top importers over the period. Jamaica was the top importer for 1996, 1997 and 1999
and accounted for 34.4%, 31.4% and 30.6% respectively of CARICOM’s total imports. For 1998, 2000
and 2001, Trinidad and Tobago captured top spot with percentage contributions of 31.2%, 32.3% and
36.1% of CARICOJyI’s total imports. These two Member States together accounted for an average
percentage contribution of 62.9% of CARICOMs total imports throughout the period.
3
For exports, Trinidad and Tobago was CARICOM’s leading exporter throughout the period, with
percentage contributions of 44.6% in 1996 and 65.4% in 2001. Jamaica was the next highest exporter
for the period, with recorded percentage contributions of 24.1% in 1996 and 18.4% in 2001.
Collectively these two Member States represented an average percentage contribution of 72.9% of
CARICOM’s total exports.
CARICOM’S TRADE BY PRINCIPAL TRADING PARTNERS
Major Trading Partners
CARICOM’s trade by principal trading partiers did not change significantly over this period. Its major
sources of imports were the United States ofAmerica (USM, Latin American Integration ,4ssociation
(LAJA), the European Union (EU) and C4RICOM Siiig1 Market and Economy (CSME), which
collectively accounted for an average percentage contribution of 79.7% of CAlJCOM’s total imports
over the period. For exports, the trading areas That dominated CARICOM’s exports were the United
States of America (USA), CARICOM Single Market and Economy (CSME), the European Union (EU)
and Other Caribbean countries which collectively accounted for an average percentage contribution
of 82.1% of CARlCOMs total exports over the period (Tables 1.7 and 1.8).
Table 1 7 revealLd that ARICOM s
t4
souice for its imports was the USA which on aveiage
accounted for 43.6% of CARICOMs total imports over the period. The EU was next major sourãe of
the Region’s imports with an average percentage contribution of 13.1% followed by LAJA and CSME
with average percentage contributions of 12.4% and 10.6% of CARICOM’s total imports for the
period, 1996-2001. Canada. another source of CA.RICOM’s imports on average accounted for 3.3%
of CARICOM’s total imports over the period.
For CARICOM’s exports, the USA was the 1ding destination and on average accounted for 369% of
CARICOM’s exports over the period. CSME and EU were the next major destinations for
CAR1COM’s exports with average percentage contributions of 19.6% and 17.3% respectively over the
period. Other Caribbean Countries and Canada were also important destinations and acouned for
average percentage contributions 8.4% and 5.4% of CARJCQM’s exports (Table 1.8).
4
Cç
Table 1.9 revealed that CARICOM’s trade balance with its respective extra-regional trading partners
recorded deficits as well as surpluses over the period. The destinations with which the Region enjoyed
a positive trade balance throughout the period were Other Caribbean Countries, European Free Trade
Association and The Bahamas while it recorded deficits with other trading blocs.
Distribution of CARECOM’s Member States Trade with Major Trading Partners
The MDCs dominated CARICOMs trade with its major trading partners throughout the period 1996
—
2001. For imports this group accounted for over 75% of CARICOM’s total imports with most of its
trading areas while for exports, the MDCs registered more than 90% of CARICOM’s exports with
most of its trading partners.
Imports for Selected Years
1996
Jamaica and Trinidad and Tobago were CARICOM’s highest importers for 1996 and accounted for
41.0% and 31.0% respectively to CAR1COM’s total imports (Tables 1.10.1 (a)-(c)). With regards to
CARICOM’s major sources of imports, Jamaica dominated CARICOM’s imports from the USA and
CSME with imports of EC$4. I billion from the USA and EC$0.8 billion from C’SME. These values
represented 48.3% and 40.4% of CARICOMs imports from these respective trading partners. Trinidad
and Tobago was CARICOM’s top Member State to import from the EU and LA.LA with imports of
EC$1.0 billion and EC$1.4 billion, which accounted for 37.6% and 62.7% of CARICOM’s imports
from these respective trading areas.
1998
In 1998, Jamaica and Trinidad and Tobago continued to be CARICOM’s major importers. Jamaica ‘s
percentage contribution to CARICOM’s total imports declined to 34.0% while Ii-inidad and Tobago ‘s
percentage contribution expanded to 34.5% (Tables 1.10.3 (a)-(c)), Jamaica continued to dominate
CARICOM’s imports from the USA and CS/vIE with imports totaling EC$4.l billion from the USA and
EC$0.8 billion from CSME. These values represented 38.0% of CARICOM’s total imports from the
USA and 34.6% of CARICOM’s imports from cSME. Trinidad and Tobago continued to be
CARICOM’s top importer from the EU and LAJA with imports from EU amounting to EC$l .3 billion
5
while its imports from the LAIA totaled ECSI.5 billion, which accounted for 40.4% and 62.0% of
CARICOM’s total imports from EU and LAL4 respectively.
2000
In 2000, CARICOM’s leading importer was Thinidad and Tobago with percentage contribution of
34.0% followed by Jamaica with percentage contribution of 32.4% (Tables 1.10.5 (a)(c)). Jamaica
continued to top CARICOM’s imports from the USA and CSME with imports totaling EC$3.9 billion
from the USA and EC$l.l billion from CSME which represented 36.0% and 35.2% of CARICOM’s
imports from the USA and CSME respectively. Trinidad and Tobago continued to be the Region’s top
Member State to import from LAJA and EU markets. Its imports from LAL4 amounted to ECS2.9
billion, which accounted for 64.0% of CARICOM’s total imports from LAJA while its imports from the
EU stood at EC$l.0 billion which represented 34.4% of CARICOM’s imports from the EU.
2001
In 2001, Trinidad and Tobago and Jamaica continued as CARICOM’s two top importers which
accounted for 37.8% and 35.6% respectively of CAR1COM’s total imports (Tables 1.10.6 (a)
Jamaica continued to dominate CARICOM’s imports from the USA and CSME. Jamaica
—
(c)).
imports
from USA amounted to EC$4. I billion which represented 39.0% of the Region’s imports from this
trading partner. its imports from CSME amounted to EC$1.2 billion which accounted for 42.1% of
CARICOM’s imports from CSME. Trinidad and Tobago continued to dominate CARICOM’s imports
from EU and LAIA with imports from EU totaling EC$l.8 billion or 49.9% of CARICOM’s imports
from the EU. Imports of Trinidad and Tobago from LAJA amounted to EC$2.3 billion, which
accounted for 64.4% of CARICOM’s total imports from L.41A.
Exports for Selected Years
1996
Analysis of Tables 1.10.1 (c)
—
(g) revealed that Trinidad and Tobago and Jamaica were CARICOMs
leading exporters for 1996 and accounted for 55.1% and 29.8% respectively of CARICOM’s total
exports. Of CARICOM’s major export destinations, Trinidad and Tobago was CAR1COM’s top
exporter to the USA and CSME markets while Jamaica dominated the EU market. Exports of Trinidad
and Tobago to the USA and CSME totaled EC$3.0 billion and ECSI .7 billion, which represented
6
62.8% and 73.5% of CARICOM’s exports to USA and C’SME respectively. Jamaica’s exports to the
EU totaled EC$l .2 billion, which accounted for 50.9% of CARICOM’s exports to this market.
1998
In 1998, Trinidad and Tobago and Jamaica continued to be CARICOM’s leading exporters and
accounted for 48.7% arid 27.4% respectively of CARICOM’s total exports. Of the Region’s major
destinations, Trinidad and Tobago continued to dominate CARICOM’s exports to the USA and CSME
with exports totaling EC$2.3 billion and EC$2.0 billion which accounted for 50.4% and 71.4% of
CARICOM’s exports to the USA and CSME respectively. Jamaica continue to dominate CARICOMs
exports to the EU with exports amounting to EC$1.0 billion which represented percentage contribution
of 41.1% of CARJCOM’s exports to EU(Tables 1.10.3 (e)
—
(g)).
2000
In 2000, Trinidad and Tobago and Jamaica continued to dominate CARICOM’s exports with
percentage contributions of 63.0% and 19.1% respectively. Thnidad and Tobago remained
CARICOM’s top exporter to the USA and GSME markets with exports to these markets amounting to
EC$5.0 billion and EC$2.6 billion which represented 67.6% of CARICOM’s exports to the USA and
75.1% of CARICOM’s exports to the CSME. With respect to CARICOM’s exports to the EU market,
Jamaica continue to dominate with exports totaling EC$ 1.1 billion which accounted for 35.0% of
CARICOM’s exports to the EU (Tables 1.10.5 (e)
—
(g)).
2001
In 2001, Trinidad and Tobago and Jamaica maintained their positions as CARICOM’s leading
exporters with percentage contributions of 69.6% and 19.6% respectively. Trinidad and Tobago
continued to dominate CARICOM’s exports to the USA and the CSME with exports totaling EC$4.8
billion and EC$2.8 billion which represented 75.3% and 80.4% of CARICOM’s exports to the USA
and CSME respectively. Jamaica also maintained its position with its exports to EU amounting to
EC$l.0 billion which represented percentage contribution of 45.5% of CARICOM’s exports to EU
(Tables 1.10.6 (e)
—
(g)).
7
CARICOM’S TOTAL TRADE BY SECTIONS OF THE SITC
Machineiy and Transport Equipment was CARICOM’s highest imported commodity with average
percentage contribution of 29.3% over the period. For CARTCOM’s exports, MineralJi.iels, Lubricants
and related Materials and Crude Materials, inedible, except Fuels dominated the period with average
percentage contributions of 29.7% and 18.5% respectively (Table 1.11).
Major SITC Sections
A closer analysis of Table 1.11 showed that for imports, Machineiy and Transport Equpinent
reflected a percentage contribution of 28.0% in 1996. In 1997 the percentage contribution of this
commodity strengthened to 34.1% but weakencd thereafter to 31.6%, 28.9% and 27.6% in 1998, 1999
and 2000. For 2001, its percentage contribution advanced to 29.4%, which resulted in an overall
increase over the period. Manufactured Goods classified chiefly by materials was the second highest
imported commodity during the period 1996
—
1999 while Mineral ,ñtels, Lubricants and related
Materials captured this position for the remainder of the period.
For exports, the percentage contribution of Mineral fuels, Lubricants and i-elated Materials to
CARICOM’s total exports declined continuously &om 26.3% in 1996 to 22.2% and 20.5% in 1997 and
1998 respectively. For 1999-2001 the percentage contribution of this commodity advanced steadily to
27.9%, 39.7% and 41.7% respectively. The second highest exported commodity throughout the period
was Crude materials, inedible, except fuels with increased percentage contribution from 19.7% in 1996
to 20.4% in 1997 and 20.7% in 1998. In 1999, its percentage contribution declined to 19.0% and
continued to decline with recorded percentage contributions of 16.0% and 15.1% in 2000 and 2001
respectively.
Distribution of CARICOM’s trade, by SITC Sections with Major Trading Partners
Imports for Selected Years
1996
Machiney and Transport Equipment and Mamtfactured Goods were CARICOM’s highest imported
commodities for 1996 and accounted for 27.3% and 16.0% respectively of CARICOM’s total imports.
Analysis of Machineuy and Transport revealed that the USA was the main source with a percentage
‘33
contribution of 485%, the EU was next line with percentage contribution of 22.1% followed by
Selected Asian Countries with percentage contribution of 20.3%. These three trading areas together
represented 90.9% of CARTCOM’s total imports ofMachinery and Transport Equipment. With respect
to Manufactured Goods, CAPJCOM’s major sources were the USA, EU and c’SME with respective
percentage contributions of 43.7%, 15.1% and 9.6% (Tables 1.13.1 (a)—(c)).
1998
In 1998, Machinery and Transpoi-t Eqiiipnient and Manufactured Goods continued to be CARICOM’s
top two commodities imported with percentage contributions of 31.8% and 16.6% respectively. For
CARICOM’s imports of Machinery and Transport Equipinent, the USA continued to dominate with a
percentage contribution of 52.1%. EU followed next but with declined percentage contribution to
19.3% while Selected Asian Countries expanded their contribution marginally to 20.6%. Also in 1998,
CARICOM’s major sources of Manufactured Goods were the USA, EU, LAJA and CSME. These four
trading blocs collectively accounted for 79.5% of CARlCOMs imports of this commodity (Tables
1.13.3 (a)-(c)).
2000
For 2000, CARICOM’s highest imported commodities were Machinety and Transport Equipment and
Mineral fiels, lubricants and related materials with percentage contribution to CARICOM’s total
imports of 27.1% and 21.4% respectively. The USA, Selected Asian Countries and the EU continued
as the major sources of CARlCOMs imports of Machinery and Transport Equprnent in 2000. The
percentage contribution of the USA further expanded to 56.3%, while the percentage contribution of
Selected Asian Countries and EU declined to 19.5% and 15.3% respectively. For Mineral fuels,
lubricants and related materials, L4JA and Andean ‘ommunity were the two major sources for this
commodity. These trading biocs accounted for 56.7% and 49.7% of CARICOM’s total imports of this
commodity (Tables 1.13.5 (a)-(c)).
2001
Tables 1.13.6 (a)
—
(c) revealed that Machinery and Transport Equipment and Mineral freels,
lubricants and related materials continued to top CARICOM’s imports in 2001. The major sources of
Machinery and Transport Equipment continued to be the USA, EU and Selected Asian countries.
However the percentage contribution of the USA declined to 53.6% while the EU expanded its
percentage contribution to 20.6% in this year. The percentage contribution of Selected Asian Countries
9
declined to 17.7% in 2001. LAJA and the Andean Community continued to be the major sources of
CARICOM’s imports of Mineral fuels, lubricants and related materials with percentage contribution
of 47.3% and 34.4% respectively. The combined percentage contribution of these two trading areas
accounted for 81.7% of CARICOM’s imports of Mineraijiiels, lubricants and related materials.
Exports for Selected Years
1996
Mineral Fuels, Lubricants and related materials and Food which accounted for 28.7% and 17.0% of
CARICOM’s total exports in 1996 were the Region’s two highest commodities exported in 1996.
Analysis of Mineral Fuels, Lubricants and related materials revealed that the USA, C’SME and Other
C’arihbean Countries were CARICOM’s main destinations for this commodity. These trading areas
accounted for 46.5%, 22.9% and 17.3% respectively of CARICOM’s total exports of Minerals Fuels,
Lubricants and related materials. For CARICOM’s exports Food, the main destinations were EU
CSME and USA with percentage contributions of 52.2%, 18.0% and 14.4% respectively (Tables 1.13.1
(e)
—
(h)).
1998
In 1998, Mineral Fuels, Lubricants and related materials and Food continued to he the CA.RICOM’s
top two commodities exported. However, the percentage contribution of Mineral Fuels, Lubricants
and related materials declined to 22.1% while the percentage contribution of Food expanded to
19.4%. With regards to MineraTh Fuels, Lubricants and related materials, the USA, c’SME and Other
Caribbean Countries continued to be the main destinations for this commodity. The percentage
contribution of USA to CARICOM’s exports of this commodity declined to 36.5% while the
percentage contributions of C’SME and Other Caribbean Countries advanced to 28.1% and 19.8%
respectively. EU, CSME and USA maintained their positions as the Region’s top destinations for Food
with strengthened percentage contributions of 52.3%, 21.9% and 16.0% respectively (Tables 1.13.3
(e)-(h)).
2000
Analysis of (Tables 1.13.5 (e)-(h)) showed CARICOM’s total exports in 2000 continued to be
dominated by Mineral Fuels, Lubricants and related materiaLs and Food. In this year the percentage
contribution of Mineral Fuels, Lubricants and related materiaLs expanded to 42.1% while the
percentage contribution of Food declined to 13.7%. For exports of Mineral Fuels, Lubricants and
10
35
FIGURE 1.1
BALANCE OF CARICOMS TOTAL TRADE: 1996-2001
30,000
25,000
20,000
15,000
0
o
0
uJ
io,ooo
0
5,000
0
-5,000
-10,000
-15,000
Years
Imports
Exports
17
s- Trade 8alance
FIGURE 1.6
MAJOR SOURCES OF CARICOM’S IMPORTS: 1996
European Union
14%
United Slates
44%
ricsME
I
FIGURE 1.7
European Uron
United States
OJapan
Latin America
0 Rest of the World
MAJOR SOURCES OF CARICOMS IMPORTS: 2001
European Union
14%
Latin America
14%
•CSME
European
Union
• United States
OJapan
27
• Latin America
DResloithe World
j
‘37
FIGURE 1.8
MAJOR DESTINATIONS OF CARICOMS EXPORTS: 1996
CSME
18%
Rest of the World
12%
European Union
18%
)
Other Caribbean
8%
United States
39%
L.
• CSME
Canada
eOther Caribbean
9European Union
United States
DRest of the World
-
FIGURE 1.9
MAJOR DESTINATIONS OF CARICOMS EXPORTS: 2001
Rest of the World
European Union
12%
Other Caribbean
10%
United States
39%
•CSME
Canada
• Other Caribbean
DEuropean Union
29
• United States
DRestof the World
Page 1 of 4
Statement Prepared for the International Monetary and Financial Committee of the Board
I
Dopariment
Canada
ol Finance
.inistèrID cbs Finances
Canada
(
‘...(II (I(iJ
Home > N€.ws > Statement Prenared ¶or the International Monetary and Financial Committee of the Boad of Go’.e rrc’
the internahonal Monetary tind October 2010
-
Washington, DC, October 9, 2010
2010-096
STATEMENT PREPARED FOR TilE INTERNATIONAL MONETARY AND
FINANCIAL COMMITTEE OF THE BOARD OF GOVERNORS OF THE.
INTERNATI ONAL MONET.ARY FUND
The Honourable Jim Flaherty, Minister of Finance for Canada, on behalf of Antigua and Barbuda,
the Bahamas, Barbados, Belize, Canada, Dominica, Grenad4 Ireland, Jamaica, Saint Kitts and
Nevis, Saint Lucia, and Saint Vincent and the Grenadines
We agree that the International Monetary Fund (IMF) played an important role in helping the global economy
through the financial crisis and towards recovery, particularly through fostering international economic co
operation. With a new set of global economic challenges lying ahead, the Fund will have an important role to
play in ensuring a healthy and well-balanced international monetary system. It will do this by promoting
sound economic policy frameworks; providing financial assistance when neled that strikes the right balance
between financing and adjustment; and sustaining co-operation and consultation among its members.
In doing this the IMF must ensure that the proper steps are taken to protect against another severe financial
crisis. The IMF can play a critical role in promoting an open international monetary system that facilitates
timely, orderly exchange rate adjustment. Future IMF reforms, particularly to the Fund’s lending instruments
and resources, can help to prevent future crises, but must also encourage members to adopt sound policy
frameworks.
Canadian Developments
The Canadian economy continues to recover from the deepest global recession since the 1930s. Real gross
domestic product (GDP) in the second quarter of this year increased by 2.0 percent, after posting gains of 5.8
per cent in the first quarter and 4.9 per cent in the fourth quarter of 2009. The economic recovery has been
underpinned by Canada’s Economic Action Plan as well as a strong recovery in private domestic activity. As a
result of this strong performance, Canada has virtually recouped real economic activity lost over the
recession, the only Group of Seven (G-7) country to do so. Canada’s solid economic performance has also
supported a recovery in the labour market, as all of the jobs lost during the recession have been recovered.
The priority of the Government is to complete the implementation of Canada’s Economic Action Plan—a twoyear C$62—billion plan (equivalent to about 2 per cent of GDP on average per year) to support economic
growth and create and maintain jobs.
To maintain and preserve Canada’s strong financial position, the Government is committed to return to
budgetary balance over the medium term, consistent with the G-20 commitment to halve deficits by 2013 and
stabilize or reduce government debt-to-GDP ratios by 2016. In Budget 2010, the Government set out a threepoint plan to bring Canada’s finances back to balance over the medium term. First, it will end the temporary
measures as scheduled in early 2011. Second, targeted measures to restrain the growth of direct program
spending have been put in place. And finally, the Government is undertaking a comprehensive review of its
administrative functions and overhead costs in order to secure further efficiencies and savings.
Irish Developments
Irish Economic Developments
Turning to the Irish situation, following two exceptionally difficult years it now appears that the economy will
record some marginal increase in activity this year. The exporting sector is leading the way, in part a
reflection of the substantial—and necessary—competitiveness adjustments that have occurred over a
relatively short timeframe. An encouraging feature has been the broadening of the export base in recent
quarters, which bodes well for the future.
Domestic demand, however, lags behind. Excess supply continues to weigh on residential investment and will
continue to do so for some time. Household spending remains subdued, on the back of declining real incomes
and weak confidence. Having said that, the latest labour market data point towards stabilization.
httrr//www.fin.gc.caJnlO/1 0-096-eng.asp
11/1/2010
Statement Prepared for the International Monetary and Financial Committee of the Board
...
Page 2 of 4
Apart from supporting the banking sector, the most pressing issue is the need to ensure the public finances
remain on a sustainable path. While revenue and expenditure plans for this year are in line with expectations,
the underlying deficit—that is after excluding one-off issues related to the banking sector—will nevertheless
be of the order of 11.9 per cent of GDP. The Irish Government has recently reiterated its commitment to
reducing the headline deficit to below 3 per cent of GDP by 2014, and will publish a four-year budgetary plan
setting out the annual consolidation measures necessary to achieve this early next month. This is to be
welcomed, as it will underpin confidence and credibility in the sustainability of the public finances in Ireland,
and as such help support economic growth over the short and medium term.
Irish Banking Developments
The Irish Government has recently reiterated its strong commitment to restoring the Irish banking system to
health. This involves a number of actions, some of which have already been undertaken, with more planned
by the Irish Government. A Government guarantee of banks’ liabilities has been extended to ensure the banks
remain able to access the necessary liquidity. The Irish Government has worked to provide certainty on the
final costs of repairing the banking system. The National Asset Management Agency provides a facility to
ensure that the losses of participating institutions are recognized upfront and that the most impaired loans are
removed from their balance sheets. Together with the capitalization of the banks and the resolution and
reorganization of the most impaired institutions, this should allow the banking system to play its essential role
in providing the finance required to underpin economic recovery and fiscal sustainability. In addition, the
Central Bank of Ireland has replaced the previous dual structured Central Bank and Financial Services
Authority of Ireland. The new structure has a unitary board chaired by the Governor with a specific focus on
prudential regulation, protecting consumers and maintaining the financial stability of the financial system.
Caribbean Developments
While the economic outlook has improved for members of my Caribbean constituency, medium-term growth is
expected to be subdued and beiow the Western Hemisphere average. Meaningful strengthening is not
expected until 2011, underpinned by only modest prospects for tourism and foreign direct investment (FDI)
inflows. There are considerable downside risks, mainly associated with lowered expectations for the primary
trading partner, the United States, amid household sector deleveraging and weak employment trends. The
impetus from Europe is also likely to be mild, as households adjust to fiscal austerity measures. The
Caribbean region also expects greater challenges in attracting FDI inflows as global flows normalize at below
pre-crisis levels. Caribbean authorities believe that structural reforms to improve the business environment
can help to improve these prospects, as can effective and well-targeted public sector investment programs.
They acknowledge that reforms must occur within a framework of fiscal consolidation to reduce high debt
burdens and to enhance the economies’ resilience to future shocks. While three Caribbean countries have
taken on IMF programs to guide the adjustment processes, the region’s engagement with the Fund has more
generally intensified through the Fund’s heightened surveillance activities and the increased technical
assistance being provided, particularly through the focused work of the Caribbean Regional Technical
Assistance Centre.
Enhancing financial sector resilience and stability is a top priority for the Caribbean. The authorities are
intensifying their efforts to strengthen and consolidate the supervision of non-bank institutions, and to fortify
bank balance sheets against weakened credit quality and strained liquidity conditions. Co-operation among
supervisors and regulators is also advancing more vigorously, given the increasing regional connectedness of
the financial system—underscored by the need for a speedy resolution to failed insurance sector operations,
which spanned multiple jurisdictions. Many Caribbean authorities are also strengthening their international co
operation mechanisms, having concluded a significant number of Tax Information Exchange Agreements to
improve their standing with the Organisation for Economic Co-operation and Development. They continue to
urge, however, that global initiatives to promote transparency and financial stability do not impinge upon the
ability of legitimate jurisdictions to benefit from the provision of international financial services.
IMF Reform
Since the onset of the crisis, a range of surveillance and lending reforms have been put in place. These
reforms have added to the Fund’s existing tools for safeguarding the stability of the international monetary
system. The challenge now is to utilize these reforms to assess the risks to global financial and economic
stability arising from unsustainable global imbalances and possible financial sector vulnerabilities. Reforms to
IMF surveillance and the scope of IMF lending can help to prevent future crises. In addition, complementary
reforms to the Fund’s governance structure are required to ensure that these tools are used appropriately.
Surveillance
We are encouraged by recent efforts to enhance the quality and substance of Fund surveillance. Last year’s
introduction of the Early Warning Exercise and revamping of the Financial Sector Assessment Program should
help facilitate the identification of vulnerabilities stemming from the financial sector and global imbalances in a
timely fashion.
htto://www.fin.gc.calnl 0/1 0-096-eng.asp
1 1/1/2010
Statement Prepared for the International Monetary and Financial Committee of the Board
...
Page 3 of 4
V-fD
enhancing analysis, particularly
Future reforms to the substance of Fund surveillance should focus on further
global imbalances. Specifically,
from
arising
risks
the
of
clarification
ation
and
examin
ive
extens
more
h
throug
s accumulation, financial
reserve
tionary
precau
of
impacts
the
Fund analysis of cross-country spillover effects,
and multilateral
bilateral
Existing
critical.
will
be
flows
capital
ional
intenat
and
sector vulnerabilities,
The IMF
analysis.
line
stream
to
as
so
possible
surveillance products should be relied upon as much as
for Governors to
vehicle
a
be
and
surveillance
Fund
guide
lar
can
particu
in
Priorities
Statement of Surveillance
set strategic surveillance priorities and promote accountability.
Lending Instruments and Fund Resources
ntially strengthened the
Recent reforms have dramatically altered the Fund’s lending toolkit and substa
ies seeking financial assistance.
countr
for
options
of
provision of global financial safety nets, providing a range
from, and laid bare by, the
resulting
problems
nts
payme
of
balance
ns
and
concer
In addressing the liquidity
introduced new and
es
and
resourc
global economic crisis, the IMF substantially expanded its available
ed to US$500 billion,
increas
was
(NAB)
Borrow
to
ements
Arrang
New
The
ents.
improved lending instrum
the Flexible Credit Line (FCL) was
and
allocation,
Rights
Drawing
l
Special
genera
on
US$250-billi
a
was
there
Precautionary Credit Line.
introduced. More recently, the Fund has reformed the FCL and created a new
changes, we need to
These reforms represent significant change. Before undertaking further significant
and due oversight for
tability
accoun
maintain
to
place
ensure that the proper governance structures are in
incentives to take
reducing
at
aimed
is
G-20
of
the
effort
reform
sector
financial
the
of
IMF programs. Much
level.
country
the
undue risk. We must work to ensure this is also the case at
to realign relative quota shares as
Similarly, a further increase in quota resources will be necessary in order
reflect the need to restore the
e
should
part of the current quota review, but the size of the aggregate increas
spur excessive risk-taking.
to
as
far
so
resources
Fund
overall
ing
adequacy of IMF resources without expand
a scaling back of NAB
by
offset
be
should
quota
IMF
ate
the
aggreg
in
increase
ntial
substa
To this end, a
based institution.
quotaas
a
status
Fund’s
the
resources, in line with the membership’s calls to maintain
Voice and Representation
e the legitimacy of the institution by
One of the main elements of IMF reform centres on efforts to enhanc
review, together with possible reforms
t
quota
curren
nted.
The
represe
ensuring that all members are properly
a more proper alignment of member
towards
ental
instrum
be
will
Board,
Executive
IMF
the
of
re
to the structu
protecting the voting power of the
while
weight,
economic
global
countries’ voice and representation with their
rs.
Fund’s poorest membe
a significant element of
Securing a new quota deal that meets the Pittsburgh commitments will require
members that have not
those
for
priority
a
remain
should
it
step,
first
a
As
atism.
compromise and pragm
ent will increase the voice
this
agreem
n
of
entatio
already done so to ratify the 2008 quota agreement. Implem
e in quota, the increase
increas
the
h
throug
countries
developing
s
and
and representation of emerging market
y
multi-countr
large
for
in basic votes, and the introduction of second alternate Executive Directors
constituencies.
also represent the financial obligation of
Quotas constitute the bulk of overall voting power at the Fund. They
heavy responsibilities, it is essential
such
With
financing.
each member and have a bearing on access to Fund
a manner that promotes
in
incentives
align
and
weight,
economic
global
that quotas properly reflect
able and balanced global
sustain
,
strong
fundamentally sound economic policies that are consistent with
growth.
ape of the IMF Executive Board is another
In addition to quota reform, implementing changes to the landsc
it is clear that the voice and
particular,
In
way of enhancing the Fund’s role in the global economy.
Board needs to increase. We
Executive
the
at
economies
developing
and
market
representation of emerging
nted at the table.
represe
riately
approp
most
must do our best to ensure that the IMF membership is
Corporate Governance Reforms
the effectiveness, credibility and legitimacy of the
A number of other governance reforms can help enhance
in establishing the strategic direction of the
role
primary
a
IMF. First, since Ministers and Governors play
Fund issues will be essential. Second, a
Fund, pursuing options for increasing Ministerial engagement with
the 1MF governance structure should be
in
bodies
various
the
clarification of the roles and responsibilities of
and Fund management.
undertaken to enhance the accountability of the Executive Board
merit-based management selection process
We also reaffirm our desire to see an open, transparent and
regardless of candidate nationality. Done in
selected
is
ement
manag
y
senior
introduced at the Fund whereb
towards effectively enhancing Fund
way
a long
step with quota and Executive Board reform, this will go
legitimacy.
htttv//wwwiin.c.caJn10/10-O96-eng.asp
11/1/2010
Press Release: IMP and World Bank Approve US$12 Billion Debt Relief for Haiti
Page 1 of 4
1’41
Sn’
:L4ts Iniernalional
kR Monetary Fund
IkS
a Francals
IPW and World Bank Approve US$1.2 Billion
Debt Relief for HaIti
Press Release No. 09/243
July 1, 2009
Haiti was granted US$1.2 billion of debt relief by reaching
the completion point under the Enhanced Heavily Indebted
Poor Countries (HIPC) Initiative approved by the Boards of
the International Development Association (IDA) and the
th
International Monetary Fund (IMF). Haiti Is now the 26
country to reach the completion point under the Initiative.
Debt service savings resuit from the HIPC Initiative
(1S$265 million) and the Multilateral Debt Relief Initiative
(MDRI) (US$972.7 million).
To reach the completion point, Haiti can-led out a number
of reforms despite a challenging environment marked by
major natural disasters, a food and fuel crisis, difficult
political conditions, and the Impact of the global economic
downturn. These reforms were aimed at establishing a
more stable macroeconomic environment and at
Implementing its national poverty reduction strategy. Haiti
strengthened public expenditure management by better
focusing poverty reduction spending, producing audited
government accounts, ensuring commitment to an asset
declaration law, and adopting a law on public
procurement.
In addItion, Haiti strengthened tax and customs
administration and Improved debt management and
reporting. In education, Haiti established a financing
mechanism to allow over 50,000 chIldren to attend school,
allocated over 20 percent of recurrent spending to
education, and made progress toward implementing the
teacher training program. In health, Haiti approved an
HIV/AIDS prevention and treatment plan and Improved
immunization rates for measles and DPT3.
“We are very pleased that the Boards of the Bank and the
FUnd have granted Haiti debt relief. This will significantly
reduce Haiti’s debt burden and effectively free resources
for growth and poverty reduction” said Yvonne Tsikata,
the World Bank’s Director for the Caribbean. ‘We
congratuiate the Haitian authorities on this achievement.
Going forward, Haiti must take advantage of this
opportunity by managing future borrowing prudently, and
httyf/wwwimLorg/external/np/sec/prt2009/prO924Thtm
11/1/2010
Press Release: IMP and World Bank Approve US$12 Billion Debt Relief for Haiti
Page 2 of 4
in
continuing Its efforts and progress towards stronger public
expenditure management and public procurement,”
Tslkata added.
Debt relief under the Enhanced HIPC Initiative amounts to
US$140.3 million in end-September 2005 net present
value (NPV) terms& Haiti is expected to receive the
equivalent of US$265 million of debt relief in nominal
terrnsZ under the HIPC Initiative and expected additionai
bilateral relief. Haiti’s public debt as of end-September
2008 amounted to 36 percent of GDP, most of which—
about 28 percent of GDP—is owed to external creditors.
The largest share of Haiti’s external debt Is owed to the
Inter-American Development Bank (41 percent of total
external debt), the World Bank (27 perctnt), and bTh.tcrJ
creditors (24 percent).
By reaching the HIPC completion point, Haiti now is
eligible under the MDRI for further debt relief from IDA
and the Inter-American Development Bank (IADB). MDRI
relief would save Haiti US$972.7 million in debt service of
which US$486.7 million owed to IDA and U5S486 million•
to the IADB. While the IMF is a participant In the MDRI,
HaIti does not have any MDRI-eilgibie debt to the IMF.
“This is a very positive development for Haiti”, said
Finance Minister Daniel Dorsainvil. “The debt relief will
help us Invest In growth and poverty reduction programs.
Haiti has demonstrated over the past four to five ,ears
that It can commit itself to a menu of reforms and respect
this commitment.”
“To reach the completion point under the Enhanced HIPC
Initiative Is a key milestone, and the authoritIes are to be
commended for this important achievement amid severe
external shocks” said Corinne Deléchat, mission chief for
Haiti In the IMF’s Western Hemisphere Department. “Debt
relIef will significantly reduce Haiti’s debt burden and
make it possible to Increase poverty-reducing spend!ng,
allowing further progress toward the MIllennium
Development Goals. In spIte of the debt relIef, Haiti’s
vulnerability to shocks remains high. A major challenge
ahead will be to lock in the ga!ns of debt relief through
prudent fiscal policy, improved quaiity and efficiency of
public spending, strengthened domestic revenue
mobilization, and donor grant financing.”
IMF and Haiti
ANNEX
The IMF approved a first three-year Poverty Reduction and
Growth Facility in November 2006 in the amount of SDR
73.71 million (about US$114.4 million); In June 2008, an
augmentation of SDR 16.38 millIon (about US$25.4
httn://www.imEorg/external/nn/gec/prtlOO9/pr09243.htzn
1 1/1t2010
Press Release: IMP and World Bank Approve US$12 Billion Debt Relief for Haiti
Page 3 of 4
IN-3
million) was approved to help Haiti cope with the impact of
high international food and fuel prices.
A second increase in financial assistance, of SDR
24.57 mIllion (about US$38.1 million), was approved by
the Executive Board in February 2009 to help mitigate the
negative effects caused by a series of hurricanes in 2008
as well as the global downturn.
World Bank and Haiti
Beyond debt relief, the World Bank approved a
disbursement of US$13 million in June 2009 as the second
instaliment of a US$ 23 million Economic Governance
Reform Operation program. The grant, which was
approved on January 30, 2007, supports Haiti’s efforts to
increase transparency and efficiency in the use of public
resources and external assistance.
Since January 2005, the World Bank has provided a total
of US$278 million in grants for Haiti. In addition,
approximately US$20 million have been granted from trust
funds.
The Heavily Indebted Poor Countries Initiative
In 1996, the World Bank and IMP launched the Heavily
Indebted Poor Countries (HIPC) Initiative to create a
framework in which all creditors, including multilateral
creditors, could provide debt relief to the world’s poorest
and most heavily indebted countries, and thereby reduce
the constraints on economic growth and poverty reduction
imposed by the debt-servIce burdens In these countries.
The Initiative was modified in 1999 to provide three key
enhancements:
• Deeper and Broader Relief. External debt thresholds
were lowered from the original framework. As a result,
more countries have become eligible for debt relIef and
some countries have become eligible for greater relief;
• Faster Relief. A number of creditors began to provide
interim debt relief immediately at the decision poInt. Also,
the new framework permitted countries to reach the
completion point faster; and
• Stronger Link between Debt Relief and Poverty
Reduction. Freed resources were to be used to support
poverty reduction strategies developed by national
governments through a broad consultative process.
To date, 35 HIPC countries have reached their decision
points, of which 26 (including Haiti) have reached the
completion poInt.
hnn://www.hnforu/external/nv/sec/vr12009/pr09243.htni
11/1/2010
Press Release: IMP and World Bank Approve US$12 Billion Debt Relief for Haiti
Page 4 of 4
The Muidiateral Debt Relief Initiative
At the July 2005 G8 Summit in Gleneagles, Scotland, G8
leaders pledged to cancel the debt of the world’s most
indebted countries, most of which are located in Africa.
The aim of this Multilateral Debt Relief Intiative was to
reduce further the debt of HIPC5 and provide additional
resource to help them reach the Millennium Development
Goals.
The MDRI is separate from the HIPC Initiative but linked
to It operationally. Under the MDRI, three multilateral
institutions the World Bank’s International Development
Association, the International Monetary Fund, and the
provIde 100 percent debt
Afr!can Development Fund
relief on eligible•debts to countries having reached the
HIPC completion point Unlike the HIPC Initiative, the
MDRI is not comprehensive In its creditor coverage. It
does not Involve participation of official bIlateral or
commercial creditors, or of multilateral institutions other
than the above-mentioned three. The IMP also provided
MDRI debt relief to non-HIPCs whose income per capita is
below US$380 in order to ensure uniformity of treatment
In the use of IMP resources.
—
—
l’et present value of debt is the discounted sum of all
future debt service obligations (Interest and principal).
terms refer to the actual dollar value of debt
servIce forgiven over a period of time.
IMP E)CERNAL RELATIONS DEPARTMENT
Public AftNbs
Media Reladons
Phope: 202423-73CC
Pen: 202-623-7100
Fax:
2024234278
Fix:
2J2623-67fl
lii4+n.Ilnnzniiv hnfnnIevn1Inn/qn’J&2flfl9/mO9243.hbn
I 1/1t2010
N4
Press Release: IMP Opening Resident Representative Offices in the Caribbean
ikhsh4s
Page 1 of 2
Iii Lenia tional
‘.S’ Monetary Fund
IMF Opening Resident Representative
Offices in the Caribbean
Press Release No. 10/174
April 30, 2010
The International Monetary Fund (IMF) is opening two new
ies!dent representative offices, in Jamaica and in Antigua
and Barbuda, the latter to cover IMF member countries in
tre Eastern Caribbean Currency Union. The establishment
of these offices will further deepen the IMP’s dialogue with
the country’s authorities and other Important regional
stakeholders, Including trade unions, the private sector,
academics, and non-governmental organizations. The IMP
already has a Resident Representative office In Haiti.
Mr. Gene Leon has been named to serve as the IMP’s
Senior ResIdent Representative In Jamaica, while Mr.
Wendell Samuel will head the newly-created Regicnai
Representative Office for the Eastern Caribbean, based In
AntIgua and Barbuda.
A presence In the Caribbean will help the IMP to better
understand local circumstances and constraints and foster
the already close and productive dialogue with
policymakers In the region. The resident representatives
will serve as an on-the-ground resource on technical and
policy matters that the authorities can tap as they
implement their economic programs,” said Mr. Nicolas
Eyzagulrre, Director of the IMP’s Western Hemisphere
Department. ai am confident that their presence will help
the IMP to develop closer ties to the people In the region
and help both sides to Improve their understandIng of
each other,” Mr. Eyzagulrre added.
Both new resident representatives have extensive
experience in the Caribbean. Mr. Leon, a national of St.
Lucia, has been In the IMP for more than 13 years, most
recently in the Middle East and Central Asia Department
Key assIgnments have Included developing the first Fund
program for Iraq and leading teams working on the
countries of the Gulf Cooperation Council (Bahrain,
Kuwait, Oman, Qatar, Saudi Arabia, and the UnIted Arab
Emirates). Mr. Leon was the head of research at Central
Bank of Barbados, as well as an associate professor at the
State University of New York. He hoids a PhD In economics
from the University of Southampton, United Kingdom.
httnIIwww.imf.nru/extarnaI/n&secfnr/2O1O/Dr1 01 74.lm
11/1/2010
IL15
Press Re’ease: IMF Opening Resident Representative Offices in the Caribbean
Page 2 of 2
Mr. Samuel, a national of St. Vincent and the Grenadnes,
has been working in the IME’s Western Hemisphere
)epartmert since 2001, where—among others—he led
both the Dominica and Antgua & Barbuda teams. Prior to
joining the IMF, he was the head of the Eastern Caribbean
Central Bank’s Research Department in St. Kitts, and a
ectrer n toe Department or Economics at the Umvarsity
of the West Indies, He holds a PhD in economics from New
York University.
IMF EXTERNAL RELATIONS DEPARTMENT
Pbhc Af
‘[ore:
Fox:
(‘2-623-73C0
202-623-6276
eda R&ations
Phone:
202-627-7100
6ex:
202-623-6772
htto://www.imf.org/external/np/sec/pr/20 10/pr 101 74.htm
11 / 1/2010
IMF AND BARBADOS
Barbados
--
Pagelof2
U.S. Commercial Service Caribbean
BUYUSA.GOV
Caribbean
--
U.S. Commercial Service
BARBADOS
Overview
• Market Overview
• Economic Indicators
• Market Opportunity
Market Overview
Barbados, the easternmost Caribbean island, is an Englishspeaking country, 21 miles long by 14 miles
wide, with approximately 275,000 inhabitants and a labor force of 142,000.
Stable Democratic Government: Barbados enjoys a longstanding democratic
tradition and a strong commitment to the rule of law and political and economic freedom.
Solid Economic Performance: The Barbadian economy grew by approximately 3.5 percent in 2006. At
the end of September 2006, the 12-month moving average rate of inflation was estimated at 7.6 percent,
compared to 5.1 percent at the end of September 2005. The unemployment rate dropped to the lowest
level ever, or 7.6 percent, in the last quarter of 2006. Net International Reserves stood at USD $1.1
billion. Tourism rose by an estimated 2.5 percent, reversing a 2.2 percent decline in 2005. The overall
growth in visitor arrivals was because of greater air travel capacity, which offset the fall-off in cruise
passengers during the same year. The non-traded sectors continued to provide the main impetus for
growth, led by the surge in the construction industry, which increased by 20 percent, mostly due to Cricket
World Cup preparations. The Central Bank of Barbados anticipates a 4-4.5 percent growth in GDP for 2007.
Strong U.S. Market Share: The United States has a trade surplus with Barbados, and 40 percent of
Barbados’ imports come from the United States.
High Level of Development: Barbados’ per capita income is the highest in the Eastern Caribbean region
at USD $17,300, and the country ranks high in the United Nations Development Programs Human
Development Index.
Unemployment has been declining. Poverty, corruption, and crime remain low.
Stable Monetary and Fiscal Policy: The main objective of Barbados’ monetary policy is to preserve the
fixed exchange rate with the U.S. dollar, which has with a debt to GDP ratio of over 70 percent in 2006.
Economic Indicators
Population:
280,000 (2006 estimate)
GDP Per Capita income: 17,300
GDP:
2.976 billion
httn :Ilwww.buvusa. gov/caribbeanlenlbarbados .html
9/29/2010
Barbados --U.S. Commercial Service Caribbean
Exports:
Page 2 of 2
359 million (merchandise)
1.41 billion (commercial services)
Exports to the U.S.:
33.9 million
Imports:
1.6 billion (merchandise)
636 million (commercial services)
Imports from the U.S.:
442.5 million
Exchange Rate:
BDS$2
=
US$1
Market Opportunity
Cricket World Cup 2007: Barbados will host several games, including the final, in the International
Cricket Council (ICC) Cricket World Cup 2007. This event will attract worldwide attention.
Telecom Liberalization: Barbados has recently liberalized its telecom market, with full competition in the
cellular, domestic, customer premises equipment and international sectors. Liberalization has created new
opportunities for U.S. telecom companies, and should continue to bring down the relatively high long
distance rates to the benefit of all international businesses.
CARICOM Single Market: Barbados is a Caribbean Community (CARICOM) leader in implementing the
CARICOM Single Market and Economy (CSME) commitments. Once fully in place, the CSME will reduce or
remove restrictions on the movement of goods, services, labor, and capital throughout the region.
(See www.caricom.org for more information.)
Tax Incentives: International businesses enjoy substantial tax incentives, including a maximum tax rate
of 2.5 percent, and lengthy tax holidays for exporters.
Best Prospects: Barbados imports 70 percent if its food, over a third of which comes from the United
States. Trade opportunities will remain for U.S. Exporters of hotel and restaurant supplies, construction
materials and specialty agriculture and consumer products.
.
1
If you are a Barbadian company wishing to import from the U.S., click here
Links
1. http://www.buyusa.gov/caribbean/en/61.html
Last updated 2008-04-29
© 2001-2010 All rights reserved
httn://www.buvusa. ov/caribbeanJenJbarbados.htm1
9/29/2010
49
Doing Business in the Caribbean Region-- U.S. Commercial Service Caribbean
BUYUSA.GOV
--
Page 1 of 2
U.S. Commercial Service
ribbean
Is’ands of Opportunity
• Five Compelling Reasons to Do Business in the Caribbean Region
• Best Prospects in the Caribbean Region
• Your Connection to the Caribbean Region
• Country Specific Information
Five Compelling Reasons to Do Business in the Caribbean Region
1. Close Proximity: The Caribbean Region is a natural commercial partner of the United States, tied
closely together by geography, history and culture.
2. 3rd Largest Market in Latin America for U.S. Exports: The Caribbean Region as a whole
represents a market of about 235 million people who collectively imported over $18.5 billion of
U.S. goods in 2007! As a result, the Region is the 3nd largest export market for U.S. manufactured
goods in Latin America behind only Mexico and Brazil.
3. Cooperative Trade Relationship: The
Caribbean Basin Initiative
1 (CBI) launched in 1983 and
renewed in 2000 through legislation enacted by Congress established trade programs to facilitate the
economic development and export diversification of the Caribbean Basin economies. U.S. exports to
the CBI countries have more than tripled since the CBI’s creation, from $6.5 billion in 1984 to over
$25 billion in 2000.
4. Free Trade: On August 5, 2004 the United States and the Dominican Republic signed a Free Trade
Agreement (CAFTA-DR)
. The agreement was implemented on March 1, 2007 ensuring that more
2
than 80% of U.S. manufactured goods enter duty free to the DR. In addition to tariff reduction,
CAFTA-DR also provides unprecedented access to government procurement, liberalizes the services
sectors, protects U.S. investments, and strengthens protections for U.S. patents, trademarks, and
trade secrets in the DR.
5. Regional Integration: The Caribbean Community (:. CARICOM
), is an organization of Caribbean
3
nations and dependencies working to promote economic integration and cooperation among its
members. The CARICOM Single Market and Economy (CSM) treaty signed on January 1, 2006 by 12
member countires, establishes deeper regional integration through harmonized tariffs and duty free
trade. Currently, the CARICOM CSM member countries and the Dominican Republic are scheduled to
sign an Economic Partnership Agreement (EPA) in July 2008 establishing free trade between the DR
and the CSM member countries.
Best Prospects in the Caribbean Region
•
•
•
•
•
•
•
•
•
•
•
•
Household Consumer Goods
Building products
Air Conditioning
Telecommunication Equipment & Services
Franchising
Computers and Peripherals
Automotive Parts and Services
Food Processing and Packaging Equip.
Cosmetics and Toiletries
Electrical Power Systems
Hotel & Restaurant Equipment & services
Drugs and Pharmaceuticals
“Your Connection to the Caribbean Region”
Whether your company is trying to enter or expand into the Caribbean Region, we can help you succeed!
httrr//www.buvusa. ov/caribbeanlen1is1ands of oooortunitv .html
11/1/2010
Doing Business in the Caribbean Region
--
U.S. Commercial Service Caribbean
Page 2 of 2
Our Caribbean Regional Office provides counseling on market entry/expansion, identification of potential
business partners, matchmaking appointments, market research, due dilligence reports, promotional events
and other customized services.
.
5
4 for U.S. companies, or Contact Us
Learn more about Our Services
Country Specific Information
•
•
•
•
Dominican Republic
6
7
Jamaica
Trinidad & Tobago
8
9
Other Caribbean Islands
Links
1.
2.
3.
4.
5.
6.
7.
8.
9.
http ://www .ustr. gov/Trade_Development/Preference_Programs/CBI/Section_Index. html
http ://www buyusa gov/caribbean/en/cafta_dr. html
http://www.caricom.org/
http://www.buyusa.gov/caribbean/en/services_for_usexporters.html
http ://www. buyusa gov/ca ri bbean/en/caribbeanstaff. html
http://www.buyusa.gov/caribbean/en/35.html
http://www.buyusa.gov/caribbean/en/36.html
http://www.buyusa.gov/caribbean/en/37.html
http://www.buyusa.gov/caribbean/en/other_caribbean_contacts.html
.
.
© 2001-2010 All rights reserved
hti, //xrx,u,
hii,ii anv/cnrihhpn/n/is1ands
of orrnortunitv.html
11/1/201 0
Public
Information Notice:
IMF
Concludes
2004
Article IV
i:ic
.
Ste
Page
Consultation with Barbados
Man
1
of 5
Site t cc’.
International
Nloneiarv L’und
Public lnlorinauon
Notices
pcl1jc 1 nthnai:ion Notice ‘Pi
No
04o
Jiol Moae.n lund
;‘
700 19th Sueci.
\Vashbvtton. D.C. 20331 USA
.
Ma
14.
‘-
Barbados and the I\4I:
itcaiicn
:teceive emajis
when we cost new
en of nterest
IMF Concludes 2004 Article IV Consultation with
Barbados
the International
rand (tM.f) conoluced the Article i\’ ernsalLaL:oo wiLt
On May 5, 004. the Executive Board
.
.
oi
loauicr\
.
r aces.—
you
cr
Background
eyyo’.r aOtte
TI-c maji sl.av s of the economy arc tourism and financial services. the
pol:uIciion is about 275.000. per capita incorne is about
and the a employment rate is sliubi iv less than Ii maccm. The
[unted Nations Development i>roarams Human De clOfirnout Iflcx
ranked Barbados 27th amona 1 75 countries in 2003.
Barbados economy did well in the I 990s, supported ny r;rudenr
p01 ices and a fhvorable external erni:ronrnenl, During .1993—2000. per
capa real CUP growth averaged 2.5 ercent per year. annual
inflation was 2 percent or less, and unemployment ateelmed shaptis.
The structure of the economy shifted from aericulture to tourism end
financial services. fhisperibrrnaucc was achiex ed in the aontext of
small tiscal deficits (less than 2 pelcera of’ GDP). a coiisec
monetary policy wInch resulted tn a sttbstaattat c;rcuuan ol
external reserves). and a raflge of niarket—orienied relbrms.
1he economy shifted. into a reeesston in 2001 . reflection the ciobal
slowdown., and the impact of the September 11 events on the tourism
sector, Real GOP dropped by a cumulative 4 percent in 2001 —02. To
mjijate the recession. the government launched national emergency
program of public investment proeets aimed at promoting econoni Ic
activIty and ung.radirg the tourjsm and economic infrastructure. 1 iwse
and other measures contributed to an increase in the eciurni
go en ineut de c I trout 2 3 ncr ee ot CUP in Y 20(10 U I ( n March) to 9.5 percent of GOP in bY 2002/03, including extrabudgetary spending of about 4 percent of (tDP, As a result, the
central government debe-to-GDP ratio rose from 63 percent
March 200 [to 76 percent: in March 2003.
a
in
Oei’ the past year, the economy recovered partially from the 2001 -02
recession. as real GDP grew by an estimated 2 percent in 2003. led by
a recovery in the t:ourism sector. Inflation remained low at
1.5 percent, reflectimi the currency peg. The external
current aecaurit
i-itr
IJ’.y,rnrxr m f nvaIvtrn 1 InriIcc/nn/2 004/nn 0456
htm
8/31/2010
• Public Information Notice: IMP Concludes 2004 Article IV Consultation with Barbados
Page 2 of 5
S3
deficit widened in 2003. as merchandise exports declined and imports
recovered from their low recession levels. The central 2ovemr’eiu
deficit narrowd to 6.5 percent of GDP in FY 2O03O4. including
extra-budgetary spending of ck,sc to 4 ptrcent of (Jl)P. T;L\ reentz
increased by 1¼ percent oIGDP. on accouct of higaer -:e:pts fren
’d c.:al cxpct.diture dciiced by a similar
1
the alue-acfded tax. a
Srnt.nL More than half of the goenmcri de1eit was linancat
through pr”tt&aton pcocecds resiliig in a rarginal dceire in the
government debt ratio. to 75 ccent. Notwithstanding S eit of
the eurrnt tccount dcficft. the net international rcs:n :s stood at
l:8S751 million (six months of imports of goods and sen ices) at the
end of the year.
Broud money growth delekratccl in 2003, although it was stiU faste”
than GDP grovu.h, anc banks becainc ne:eadrg llçiid. In an effort
to unwind the excessive buildup of liquk i.y. the cent’ a! bank reduced
the government securities ratio to 16 ptrcer4 in November 2002: in
December 2002, the central bank reduceJ the minimum administered
interest rate on dine and savings deposits, from 3 pcrcent to 2.5
ercr.t, and discontinxicd setting maximum indicutie lending ‘aws
’ins
4
for banks on Felected loans. V!iiJe the banking system rem.
generally sound, the ratio of nonpertbrmng loans to toirL loans has
increased to about 9 pcrccnt, :nd profiwb!hty bdicasc’rs have
weakened some’ hat.
Over the past year, importcnt progress was made in the area of
structural retbrnis, as steps were taken to echance the budget process.
strengthen the nztionai pension system. promote ‘rat -‘ar3ney in the
public sector, improve financial intermediation, and enlici’e the
supply responsivene’s of the economy.
Executive Board Assessment
Executive Directors observed that Barbados’ economy Ss started to
recover from the 2001-02 recession. led by die s’zong puformance of
the tourism sector and supported by the ceuntereyelica fiscal stance
adoptcd in the downturn. However, this fiscal stance gave rise to a
substantial increase in the goernnicnt debt ihieh must now be
nncrsed. Directors were encouraged by the improvement in the
public finances in fiscal er 2003 04 and stressed that. oer the
medium term, debt sustainability would critically depend on the
go annienCs success in fiirthcr reducing its deficit and deepening
reforms to boost growth. They welcomed thc strengtSein of the
international resene position over the last three years. :.bich retlccts
Barbados’ continued access to foreign financing and strong private
capital inflows.
Directors stated that. notvdthstanding the improvement in fiscal year
2003/04. the current level of the government’s deficit implied
continued high government debt ratios and has contributed to large.
albeit declining, external current account delicits. They cautioned that
htt,. linnun,
irnfnrnlavtern.lInnIqpeInnflAA4Innfl4i6 htni
8/31 P2010
Public Information Notice: IMP Concludes 2004 Article IV Consultation with Barbados
Page 3 of 5
sLt.
these factors could pose a risk to the fixed exchange ntc ancl’or. the
central pillar of Rarbados’ policy framework. cipechJ:y in ie event
of a turnaround in private capital flows. A number of l)irectors
therefore recon’mended that the fiscal deficit be reduced to ensure
adequate reserve cover and a dcc lining debt ratio, and that gradual
vth-en;ancitj stricwral
fiscal tightening be combined with
flflOl’flI$. In this regani. Directois also atwecco importance to
anchori’ig the pace of fiscal adjustment on lhrbadcs’ !cr.gxnanding
&amework of social consersui. At the same thm, other l)!cect.’ s.
noting the size of the fiscal imbalance tu:d U’e Sig: deti !vel. trgec
tie authcrities to build dontesic consensu, for a mc’re rapd iiscal
adiusmen.
Directors agrc:d ‘with the governnen.’s focus on expenditure conirol
.cd
1
and siekomed the commitment to wuge rct4raint and the prqj2c
reduction in extra-budgetary spending. mainly transfers to public
enterprises. whkh remains high and has diminished the transparency
of fiscal operations in recent years. But they dlso saw a need to
iatensit’ the revenue effort, both to facilitate deficit reduction and to
protect social spending. Directors encouraged the aurhorities ro
consider, in particular. measures to reduce e\elnptiotsb frtn the V 41’.
as well as iccreascs in the rar.cs ofthe VAT and excises. ‘l’hey
commended the authoritie& proposals to hanmnfre the domes!c and
offshore tax regimes and supportcd the proposed reduction of hwc,e
tax rates. Dfrccors recommended that pthatization pmcxcs. which
have been used to finance extra-budeLar> spending, shoL’ld in the
flaure be allocated mainly to the rct!rement of gocr.i’z’c.’. dec.. ‘l1ie’
urged tne authorities to review the tail tTh of mejor public enterprises.
concurrently ‘with a reduction in government transfers to these
entities.
Directors encouragcd the authorities to move to more nw,rke-hased
mechanisms of monetary control, to enhance control of credit
expansion and xduce distortions in financiul intermedin:!oa
Accordingly, they welcomed the initial stcps by the cetaral bank to
prepare the technical nfrastructure for open market operations, and
recommended phasing out, in due con. the adnth’!sircd raicbnu.ii
interest rate on sa i:igs and time deposits. Regarding broader
financial sector reforms. I)irectors welcomed the actions taken to
implement most ofthe 2002 Financial Sector Assessment Program
recommendations, including improvement in the supenisory and
regulatory frameworks for the banking and insurance sectors.
They encouraged rapid implementation of the remaining
recommendations, including increasing the independence ofthe
central bank, and the strengthening ofeliorts ‘sith regard to Ant:_
Money 1 aundering/Combating the Financing of Temrlsrn stes.
Directors supported the authorities’ sequenced appreach to capital
account liberalization, in line with the ongoing strengtbening ofthe
financial sector and the development of indirect instruments of
monetary control.
httn’llvsww frnfnrulevternsil/nr.IserJrant2004/nn0456.hfrn
8/3 1t2010
Public Information Notice: IMF Concludes 2004 Article IV Consultation with Barbados
Page 4 of 5
Directors shared the :i’ ethics iew on. the conilnued
anproprinieness of tbc Pxed cxc ace rate tnc:imc for da:hado
at though it as also suggested that tac authori es keep the rivat
regime under re\ ic. ‘i’hcy noted that the lo:xg ad ig rep. to he
LS. col te a supitorteu by prudent dscal and monetary pole h. has
acted as a strong anchor of price stability and i xsa.: ecczdt:ee.
Directors emphasizcu. hovc ur. that the [ot2g-terr V1t fIfty of e
regime requited that the public dent d) nnm;.cs be tearcerl tO :1
sustainable position. ender rohast economic policies end relbrnis to
boost growth and cemetitiveness.
I)ireators noted that the decline of aadcul.ture tuid a
c. ha it
recent vents lughlights the aced tO inoad.en the pro,ucn- e ixise. In
this rtuwrd. they welcomed the hoti ties’ recent stalciurni retlria
1 include the roforta of the N tiotef I aserance
achics ements \vhicl.’
Scheme: establishment ola regulator Fa’arevotrk.fbr private v’rsiall
schemes: corno tuzatton of the Port. Aethori ty; r.thr :he.
of rh:’
l\htional
i3arb’tjos
IDak: and the move toward cater ant 1 ha- in
the telecommunications sect-ar. Lookirat ahead, Dh Cta
the a athot ities’ fbeus on refbrrns relati nit to the 121’ cci. tax mt i cv.
O\ enme1:t petistoits. and enhancing the supply rcspraoi\ enn- otlhe
econoin\. Dtrectors coran-eaded the at uctauttes br thete continued
comm tinent to further trade tt[teralizauon in the coat ‘at of the
CARJCO\l, the WiQ, and the envisaged FTA:\, and recent
1 atttai:vcs to enhance labor market flrnathtllt\
Directors noted that, while the statistical informahan provided by
l3arbados is hroad1 adequate ftr surveiIlancL PurPoses. there mmatins
scope for substctriial improvement, particularly w ith retinal 10 the
operaltons of the puN ic enterprises and the capital account of the
balance of payments.
Barbados: Selected Economic Indicators
1999
200()
200.1
2002
2003
10.4
2.4
2.4
5.8
9.4
—3.4
2.8
-6.9
9.9
-0.4
0.2
-1.8
10.3
2.1
1.5
6.7
1 0.7
7.8
—0.4
11.6
-4.2
—4.3
2.1
-8.6
—8.1
-0.3
5.7
12.2
2.4
-2.7
3.6
0.6
(Annual percentage changeNI
Output and prices
Real GDP
Consumer prices (12-month increase)
tourist arrivals
Unemployment (percent ol labor force)
Money and credit 1/
Net domestic assets
Public sector credit (net)
Private sector credit
1.6
0.4
T-itti-v /Iwww imf -raIpvtprnl/rn,/cpr/nnflflfl4Irn,fl4S6 htm
SR 1/201 0
Public Information Notice: IMF Concludes 2004 Article IV Consultation with Barbados
Broad mo nev
of GDP)
Public secEor operations 2/
Nonnranc:ai public sector belnace
In
Page 5 of 5
I L6
70
5.6
10,4
6.5
-1.2
-1.3
1.0
0.0
-3.1
-2.3
1.2
—0.8
-5.2
-10.4
-7.5
-4A)
-9.5
-6.5
1.6
—0.4
1.5
—oA)
1.5
—1 .0
-6.0
18.5
-5.6
22.5
-3.6
28.8
-6.6
27.0
-7.8
26.]
306
184
707
683
751
rrce1t
Central uOvCt’fllnent
Surplus oii\atiostal !nsurance Scheme
Public enterprises
xternoi sector
EXternal cUTOnt account batance
Public external debt 3/
Net international reserves (it millions of
U.S. dollars)
Sources: Barbadian. authorities: and IMF staff estimates.
1/ Changes in percent of begmmng—of —period broad money.
2/ Fiscal years (April-March).
3/ Rcfers to central government and gocrnment guarmuced debt.
1 Under A::: ole IV of the iMFs Articles of Aereement, the IMF holds hi atea discussions ith members.
usually every year. A s:aft’team visits the country. collects economic and hi:anir in tormetior:. arn
cl;scses with offlcials the coun:ry’s economic deveiopmeus and policies. On return to bead ur:rers. the
stall prepares a report, which fbrms the basis for d:seuss:on b\’ the Lxcat:’ e Board. At the cord sma of sac
C
.s s.
of
I
p
( ju
o thc. Be d
I c,s:on th Manam D:rctor
and this summary is transmitted to the counirvs nushonties.
.
IME EXTERNAI_ RELATlOb.S DEPARTMENT
Public Affhirs: 202-623—7300 Fa\: 202-623-6278
Media Relations: 202-623-71.00 Fax: 202-623-6772
—
-
I,++,.s. I/mrnrXT
;mc nrct/cvtvnl I
Innfl Mm
4
,/QpIn,I’)flfl
8/31/2010
LESSON 2- WHAT IS THE TNTERNATTONAL MONETARY FUND AND WHAT DOES IT DO?
ACTIVITY 2.1A
CASE STUDY: BARBADOS AND
THE INTERNATIONAL MONETARY FUND (IMF)
The Country:
Barbados is a Caribbean island country located in the North Atlantic Ocean. It was uninhabited when the British
settled it in 1627. Slaves worked on colonial sugar plantations until slaver was abolished in 1834. Barbados
became independent from Britain in 1966 and has been politically stable since then, Historically, the econom
was dependent on the production of sugar cane, but during the 1990s tourism and light manut’acturing became
more important. Barbados also provides financial services for foreign businesses, which helps to bring in foreign
c urren cv.
The Problem;
The balance of payments (BOP) is a record of’ all the money coming into a country from abroad and all the
money going out of a country to other countries during a specific time period, usually one year. For example.
money comes into Barbados when tourists spend money there and when other countries import sugar from
Barbados. Money goes out when people in Barbados buy foreign goods or make investments in other countries.
In the early 1990s the BOP deficit increased sharply; more money was going out of Barbados than coming in.
This was (lue in part to a drop in tourism and a large increase in the government budget deficit. There weren’t
enough foreign currency reserves to pay for the imports and other assets that people in Barbados wanted to buy
from abroad. Inflation was on the rise, economic growth was stagnant and unemployment was high. Barbados
sought help from the TMF.
The IMF-supported Program:
Barbados requested financial assistance from the TMF, which is normally granted if the government implements
an economic reform program designed to eliminate the underlying problems over time. The TMF-supported pro
gram in Barbados focused on improving the economy through sound fiscal and monetary policies and on helping
to make the country’s businesses more competitive in the world. The government tightened fiscal policy by drasti
cally cutting its spending and improving the efficiency of the tax system. Wages of government workers were cut,
and sonic government workers were laid off and encouraged to find work in the private sector. (This action was
later ruled illegal, and the government had to restore wages when the economy improved.) The central hank used
monetary policy to raise interest rates; this action discouraged excessive spending and reduced inflation. In the
private sector a wage program which kept labor costs down was implemented. This meant that Barbados could
keel) down the prices of its exports and compete better with other countries. Its low prices also attracted tour
ists. All of these measures were designed to curtail inflation and improve long-term economic growth. This would
attract more foreign currency to Barbados by increasing exports, tourism and fbreign investment and would help
to bring an end to the unsustainable BOP deficit.
A.lthough some of’ these measures sound harsh and might be unpopular, there are seldom many options for cor
recting a BOP deficit. One possible alternative wOUld have been for Barbados to devalue its currency, resulting in
lowe)’ prices for tourists in Barbados and those buying Barbados’ exports. however, the government was commit
ted to maintaining the value of the Barbados dollar, which was pegged to the U.S. dollar.
The Outcomes:
Barbados and the IMF achieved the desired goals in a relatively short period of time. The BOP deficit turned into
a surplus, and reserves of international currency increased in 1993-94 due to increased tourism t’roni Europe and
a drop in government spending and the associated imports A program was initiated to revive the sugar indus
try t.o increase exports. Although there were initial declines in GDP (with resulting increases in unemployment)
due to the decrease in the size of the government sector, GDP growth picked up by 1994-95. Inflation fell to a
very manageable rate of one percent. However, there is always a possilnlity that problems will arise again in the
future because the Barbados economy relies heavily on toum-isni. which has its ups and downs.
(3
NVi’IO\\I, (UUNC!l. ON feOXorvile NOUCATJON,
\‘ORK. NY.
WHAT IS THE INTERNATIONAL MONETARY FUND AND WHAT DOES IT DO?
-
LESSON 2
ACTIVITY 2.1B
CASE STUDY: ESTONIA AND
THE INTERNATIONAL MONETARY FUND (IMF)
The Country:
Estonia is an Eastern European country bordered by the Baltic Sea, Latvia and Russia. Estonia was forced into
the Soviet Union in 1940 and remained under communist control until 1991 when the Soviet. Union broke up.
Along with other former Soviet Republics, Estonia is a transition economy; it is in. the process of changing from
a planned economic system to a market economic system. Estonia is considered one of the most economically free
and successful former Soviet Republics, and was admitted to the European Uflion in 2004.
The Problem:
The early years of transition were difficult in Estonia and the other former Soviet Republics. The economy expe
rienced 900 percent inflation in 1.992, a year after the economy switched to a free market system. This means
that on average what. cost 100 Estonian kroons iii 1991 cost 1000 kroons in 1992. Production fell 20 percent,
resulting in declines in income. However, unemployment was not as high as expected due to em:igration to
Western countries. Estonia’s problems were caused in part by the shocks associated with the break in the trade
and financial links that had existed within the Soviet Union and the lag in establishing a functioning market
economy. Although Estonians desperately wanted to have a free market economy. they lacked the skills, experi
ence and institutions necessary for such an economy to function.
The IMF-supported Program:
It has been a challenge for the IMF to help Est.onia and other former communist countries reorient their econo
inies toward market systems and become integrated into the global economy. The IMF provides advice and assis
tance to help liberalize and privatize the economies: to end price controls and replace government ownership with
private ownership. The IMF also provides advice and assistance to help stabilize the economies by controlling
inflation and unemployment and promoting economic growth. The IMF assists in restructuring the economies by
guiding the process of establishing institutions such as banks that are necessary if the new markets are to func
timi.
The first LMF-supported program for Estonia was approved in 1992. and was aimed at macroeconomic stabiliza
tion and the establishment of institutions to ease the transition to a market economic system. The IMF provided
loans, policy advice and technical assistance. Estenia established a currency board to control the money sup
ply and stabilize ts new currency through a fixed link with the Deutschernark, the German currency at that
time. Estonia also avoided having a government budget deficit for a number of years, and introduced a policy to
restrain wage increases. ‘l’his policy kept down business costs and prices of goods for export, which encouraged
other countries to import goods from Estonia.
‘Fhe second phase of the IMF-supported programs for Estonia took place from 1994 through 1998, and was
directed toward increasing economic growth. After 1998 IMF assistance consisted only of advice and techmcal
assistance; Estonia did not need to draw on the loan funds available. From 1999 through 2003, the goals were to
continue to help the Estonian economy develop and quality for admission into the European Union.
The Outcomes:
Estonia is viewed as having successfully made the transition from a planned to a market economy. while bringing
inflation under control and promoting economic growth. Estonia’s rate of inflation fell to 35 percent in 1995 and
as of 2004 was less than 3 percent. rI1.1e success in curtailing inflation is attributed to the successful operations of
the currency board. Compared to other transition economies, real GDP recovered from its initial declines quickly,
and as of 2004 was increasing at rates averaging 6 percent annually. Despite its successes, in 2004 the IMF was
concerned about Estonia’s large current account deficit. This means that Estonia was spending more on imports
than it earned by exporting goods.
ç NATIONAL couNcil. oz IiCONOiUC EDIJCA’IlON. \IW YORK. N.Y.
7
VC(
LESSON 2- WHAT IS THE INTERNATIONAL MONETARY FUND AND WHAT DOES IT DO?
ACTIVITY 2.1C
CASE STUDY: SOUTH KOREA AND
THE INTERNATIONAL MONETARY FUND (IMF)
The Country:
The Republic of iKorea, sometimes called South. Korea, is an East Asian country on the southern half of the
Korean peninsula. It became a country after World War II when it was separated from communist-controlled
North Korea. South Korea (along with rrai.van Singapore and Hong Kong) is one of the four ‘Asian Tigers.’ coun
tries that, experienced very rapid economic growth from the 1970s through 1.997. South Korea’s G.DP per capita is
18 times higher than North Korea’s, and is equal to that of some European Union countries.
The ProbJem:
An Asian financial crisis took place in 1997-98. It began in r1hai1and and rapidly spread to other countries,
including Korea. This crisis exposed many underlying weaknesses in the Korean economy; winch was dominated
by large government-guided conglomerates called chaebois, Tn part because there was little public information on
these conglomerates’ management and their real financial situation, investors lost confidence in Korea and with
drew money from Korean stocks and other assets. The stock marlcet plunged, and the country fell into a severe
recession. The currency; the won, depreciated, and there was a significant risk of inflation. Many of the chaehols
went bankrupt. Korea sought help from the IMF in November 1997 in the form of a three-year stand-by arrange
ment, a loan that the country could borrow from as needed.
The IMF-supported Program:
On December 4, 1997, the 1MF approved Korea’s request for a loan to support economic reforms. The 1MF pro
vided assistance under the Emergency Financing Mechanism, which allowed Korea to receive the money very
quickly because of the crisis. The reforms were designed to help Korea recover from the Asian financial crisis
and to correct some of the underlying problems in its economy, Overall ohjechves of’ the IMF-supportecl program
included restoring the confidence of investors in the economy; restoring GDP growth, containing inflation and
building up reserves of international currencies. Responding to advice from the 1MF, the government pledged to
conduct monetary policy to aim for an inflation rate of’ 5 percent and to stabilize the value of the won, to keep
government spending under control and to encourage freer trade by eliminating subsidies to domestic businesses
that protected them from foreign competition.
To reform the financial and business sectors of the economy, banks, other financial institutions and businesses
that were failing were closed rather than supported by the government. Financial supervision and accounting
practices were raised to international standards. Financial statements were open to audits by internationally icc
ognized firms. Foreign investment was allowed in businesses where it had been prohibited.
The Outcomes:
Korea implemented strong reforms and macroeconomic policies recommended by the IMF. As a result, its eco
nomic growth picked up quickly, and inflation was kept in check. Korea did not borrow all the funds available
under the loan agreement and actually repaid substantial amounts earlier than scheduled.
The Asian financial crisis presented a new situation for the TMF. Many people, including those inside the 1MF.
believe that in the future more should be done to deal with underlying economic weaknesses with the goal of pre
venting crises. Whether this is always j)OSSib]e is a difficult question.
S
©
Nrra)\ I. (‘Ot’NCII.. ON I
CONOMIC EDUIAl ION, N IW YOSK. N
WHAT TS THE INTERNATIONAL MONETARY FUND AND WHAT DOES i.T DO?
-
LESSON 2
ACTIVITY 2.1D
CASE STUDY: TURKEY AND
THE INTERNATIONAL MONETARY FUND (IMF)
The Country;
Turkey is located in both Europe and Asia at the northeast end of the Mediterranean Sea. Modern Turkey was
founded in 1923 from parts of the former Ottoman Empire. There were several military coups in Turkey during
the twentieth century, hut civilian governments were always able to regain political power Turkey’s economy is
a mix of modern industry and traditional agriculture that accounts for 40 percent of Turkish employment. As of
2005, Turkey was striving to undertake the legal and economic reforms necessary to qualify for membership in
the European Union.
The Problem:
High and volatile inflation has been Turkeys main economic problem. Since about 1980 i.t has averaged between
.40 and 100 percent per year with peaks of over 100 percent. An annual inflation rate of 100 percent means
that the average level of prices doubles every year.) This high rate of inflation resulted from loose fiscal policy,
including overly generous social security benefits and large agricultural subsidies. These payments led to very
large government budget deficits. When a government, spends more than it takes in from tax revenues, it has
budget deficits, which need to be financed. In Turkey this has been done through loans from foreigners and by
the central bank printing money, which causes inflation. Tn the l.990s it became evident to economists, private
businesses and the IMF that a reduction in inflation would greatly benefit the Turkish economy. Lower inflation
would lead to increased confidence in the economy, more foreign investment and higher and more stable economic
growth.
The IMF—supported Program:
Since 1980 Turkey has had a series of IMF-supported programs designed to control inflation and strengthen the
economy, An ambitious set of reforms with IMF loans and assistance had good initial results. But by 1989 the
problems of increasing inflation and an increasing government deficit arose again. This failure was due in part
to the Turkish government’s inability to control spending as prescribed in the IMF plan. Between 1994 and 2004,
Turkey and the IMF tried a number of times to agree on a program to control inflation. rfhese programs were not
successful initially because they were not implemented fully, hut since 2001 results have been more positive.
These more successful refbrms have included attempts to reduce government spending by reducing the size of
the government workforce, privatizing businesses formerly owned by the government, restraining government
workers’ pay increases and reforming the social security system. Efforts have also been underway to reform the
tax system to close tax loopholes and improve the efficiency of tax collections. In these ways, the government has
lowered its deficit by decreasing spending and increasing tax revenues, in addition, the central bank has been
granted independence and given price stability as its primary objective and has been freed from the obligation of
printing money to finance the budget deficit. Finally, the IMF granted substantial financial assistance to support
Turkey’s balance of payments.
The TMF-supported programs to improve fiscal policy and lower inflation in Turkey have been criticized because
they have taken a long time to take effect. Outside events such as political turmoil in 1997 have hindered the
efforts, and at times the government has not been fully supportive of the proposed reforms. However, since 2001
the reforms have been more fully implemented and appear to be working.
The Outcomes:
Turkey’s GDP growth averaged a healthy 6-7 percent in 2002-04, and inflation decreased from 70 percent in 2000
to less than 10 percent in 2004. This success is attributed to Turkey’s following the strong macroeconomic stabili
zatiomi policies supported by the IME Concerns over fiscal policy remain, however, because Turkey’s government
debt is still high.
C NATIONAL COUNCIl. ON ECONOUIC EDuCA’rION, New
ross, sr.
9
jtpt
LESSON 2- WHAT IS THE TNTERNATJONAL MONETARY FUND AND WHAT DOES IT DO?
ACTIVITY 2JE
CASE STUDY: UGANDA AND
THE INTERNATIONAL MONETARY FUND (IMF)
The Country:
Uganda is a landlocked country in East Africa with a troubled history. It was a British colony until 1962. From
1970 to 1985, its leaders were known for human rights abuses, causing the death of over a half million of its
people. However, since coming to power in 1986, President Yoweri Museveni has introduced reforms, improved
the country’s human rights record and introduced IJVIF-supported programs that greatly improved the economy.
Despite this progress. Uganda faces many challenges.
The Problem:
In 1996 and 1997 Uganda sought the help of the IMF to reduce the large debts that it owed to fhreign countiies
and banks. When a country has a foreign debt, it has to pay interest on the debt as well as part of the principal
every year. This meant that Uganda could not use this money to pay for clean water, medicine, education and
road maintenance. Uganda’s large debt also meant that foreign private investors were unlikely to want to invest
in the country because of the risk that they would not get their money back.it was important for Uganda to
reduce the amount of its foreign debt so it could use the money to fight poverty. Uganda was one of the poorest
countries in the world, with an estimated 44 percent of its population living in poverty. rIhe problem of poverty in
Uganda is related to problems in education and health. Many children drop out of school due to a lack of money.
There are widespread health problems due to limited access to clean water, doctors, medicine and transportation.
The IMF-supported Program:
1 assistance under the Heavily Indebted Poor
In 1997 Uganda was one of the first countries to qualify for 1M1
Country (HJPC) program. Under this program f reign countries and banis agree to cut the amount a country
owes them by a large amount provided the country effectively implements an antipoverty program. Uganda qual
ified for the IMF HIPC program because it demonstrated that it followed good economic policies during the threeyear period prior to 1907. One of the main goals of this program is to give countries debt relief (meaning they do
not need to pay back some prior loans) so they have more money to spend on reducing poverty and promoting
economic growth.
As a result of the HIPC program, Uganda committed to support economic growth and to make sure that poor peo
ple directly benefited from the improved economy. Economic growth can help reduce poverty because it; results in
more jobs, higher incomes and more goods and services for the population. Uganda’s poverty-reduction programs
included privatizing businesses that had been run by the government, improving communication and transporta
tion networks, helping export industries (coffee is Uganda’s chief export) and providing universal access to health
care and education. Th.e Ugandan government also created a Poverty Action Fund as part of its budget to moni
tor antipoverty programs carried out under the HIPC program. This makes it easy to ensure that Uganda used
the money it savid from the debt reduction on health, education and other poverty-reductmon programs. Because
Uganda met all the commitments under the HIPC program, in 2000 it was one of the first countries to receive a
substantial reduction in its foreign debt under an enhanced HIPC debt-relief program.
The Outcomes:
The outcomes of Uganda’s efforts to reduce poverty within the IMF-supported program and with the support
of foreign countries and banks are encouraging, and Uganda is viewed as a successful model for t.he IMF HLPQ
program. As of 2004, Uganda was experiencing strong economic growth, low inflation and increases in exports.
Statistics show that poverty had been reduced over the past 10 years or so. lurthermnore, support from the IM l
including the HIPC, helped Uganda to gain credibility among other international donors, that are now providing
very significant aid to Uganda. Despite these gains, Uganda is still a poor country facing problems with HIV/
AIDS. rebel forces and government corruption. Much has been accomplished, and much remains to be done.
10
c NVIIO\Ai. ,‘ol :Ncn. ON I•;coNouic
i;uccxaox,
N n’ ross. N
CASE. STUDY: BARBADOS
AND JAMAICA
Why GDP Matters: Compare Jamaica To Barbados : NPR
Page 1 of 5
Why GDP Matters: Compare Jamaica To Barbados
by ALEX BLUMBERG
M9?h 5. 2010
text se
A
A A
When it comes to economic indicators, none may be more abstract than GDP per capita. It is the
measure of all goods and services a country produces, divided by its population. Take two countries
that seem alike in almost every important way
from geography, climate, colonial history and
government structure
but one has a much lower GDP. The differences between Jamaica and
Barbados are striking.
—
—
T\itioe1
f?ad,o1.
‘Oi ;;‘ roo; o’
000co;n’:roo; ue ooly Soo
is
of Use —e othot
J
es poor
;sr:s
STEVE INSKEEP, host:
Now, let’s take a case history of sorts, comparing a country that ran up big debts and a country that did
not. Each country is a Caribbean island Jamaica and Barbados. Alex Blumberg, of our Planet Money
team, visited both. He found the consequences in a change of GDP per capita gross domestic
product. That’s the total amount of goods and services produced in a country divided by the country’s
population. That affected other measures, like reading, writing and arithmetic.
-
-
ALEX BLUMBERG: I went to two elementary schools one in Jamaica and one in Barbados, both in
working class, urban neighborhoods. Jamaica and Barbados are both former British colonies, both
parliamentary democracies. But the Jamaican government made a bunch of decisions after
independence that weighed it down with debt. As a consequence, its economy barely grew, and now its
GDP per capita is a third of what it is in Barbados. And that difference has huge implications in a place
like this.
-
Unidentified Children: (Foreign language spoken)
BLUMBERG: lm in a classroom in Allman Town Elementary School in Kingston, Jamaica, standing nex
to a bunch of boys who high five every time they get a right answer on a multiple-choice health quiz.
The principal, Kandi-Lee Crooks-Smith, is giving me a tour, and my first hint of how GDP affects the
lives of kids.
A low GDP means governments dont have as much tax revenue, which means they can’t spend very
much on their schools. In Ailman Town, Crooks-Smith has to find creative ways to pay for bare
essentials extra toilet paper, cleaning supplies, even the whiteboard at the front of this classroom.
-
Ms. KANDI-LEE CROOKS-SMITH (Principal, Allman Town Elementary School): The whiteboard was
actually provided by the teacher himself because the school cant afford to change the chalkboards.
BLUMBERG: GDP affects the lives of kids here in another way as well. In Jamaica, every sixth grader
takes a test, and the test determines where you go to high school. If you do well in the test, you go to a
decent school, which prepares you for college and a professional job. But if you dont score near the top
htti ://www.npr.org/templates/story/story .php?storyld 124346527
8/31/2010
Page 2 of 5
Why GDP Matters: Compare Jamaica To Barbados : NPR
on this test, you go to something called a non-traditional high school, where there are far fewer
resources.
Ms. CROOKS-SMITH: The odds are more against them.
BLUMBERG: And what does that mean when the odds are what does that mean? They graduate
-
and...
Ms. CROOKS-SMITH: For most of them in the non-traditional high schools, you have a lot of behaviora
problems, and I think most of the students just basically give up.
BLUMBERG: If you graduate from one of these schools, your options are limited to low-paying nonskilled work. You might drop out of the labor force entirely and find work in the informal economy
drugs, gangs, simply selling stuff on the side of the road. I talked to the Jamaican Minister of Education,
who told me the problem is that there simply arent enough high schools in Jamaica.
-
He figures he needs another 150 to meet the demand, which would take about a billion dollars U.S. to
build a billion dollars that Jamaica, with its low GDP per capita, does not have. I asked Kandi-Lee
Crooks-Smith, the principal, if the government did have the money to give her, what would she do with
-
it?
Ms. CROOKS-SMITH: I have hired a reading teacher, not the American history either, but lm thinking if
I could get just one extra person every classroom to focus on the reading alone, I think we would
achieve way more than what were doing right now.
BLUMBERG: Now, lets head to Barbados, specifically the Lawrence T. Gay Primary School in the
largest city in Barbados, Bridgetown. The principal here, Beverly Paris, walks me around from
classroom to classroom. Her school, like the school in Jamaica, has lots of bright colors, lots of shapes
cut from construction paper on the walls. But the Barbados government, because of the higher GDP,
has access to a lot more money, which means more resources and classrooms like the one Beverly
Paris is showing me.
Ms. BEVERLY PARIS (Principal, Lawrence T. Gay Primary School): Television on the wail and so and
so.
BLUMBERG: Television is like a little its like a server closet.
-
Ms. PARIS: Yes. Multimedia projectors, video cameras here, the whole works.
BLUMBERG: And thats funded by the minister
Ms. PARIS: (Unintelligible).
BLUMBERG: So in terms of what you wish you had versus what you actually have, its not that big a
difference, right?
Ms. PARIS: Not really. As I said, in our class (unintelligible) we should accomplish.
BLUMBERG: In Barbados, almost every sixth grader can read. In Jamaica, a quarter can’t. The kids arc
just as bright, the teachers as hardworking. The only difference is one little statistic.
httw I/wixiuj nnr
nr/tmn1ts/stnrv/storv.nhn?storvId 124346527
8/31/2010
Page 3 of 5
Why GDP Matters: Compare Jamaica To Barbados : NPR
For NPR News, rn Alex Blumberg.
Co,;y’ifc
any
,
0e
‘c to..” cc•Ori;r:I Or ‘tTh
[“.OIiC t’c’’.r’c All rQms rescn’sd. [Jo quotes
cript is cm’oecl for rotc:: ct en ‘cx’o
or
‘O•:r. to N’tion,;! Pubic PJio. Ti’.,’ ‘i
“
‘or
5”! ate’ o.’sout
r:’’u.’;e
p’tior :
to c’.’ or”w <:1 i].’
.
2QQ ‘c
‘O’s without
.‘
aie c’ ‘oe
form .t
I... .bn’ au .rc.
frr’t
;,:.‘.‘.;i:
or a ‘u.
mu,
.
0 ctnc”o.’ue
by a co:t:rsctoi :‘:r
“
‘
s
‘...‘..
S’ Oru rc’cc.’’.c7 Eutd
he .‘pcfaiea or rev..rod in the future. Poor’?
to
‘‘i
.
aware thOi the
.
:.n’:.’
r’:uco
on oriy.
or
‘c’
.,‘
.
!‘.‘;‘
“ct he in i’s
.
‘,
‘“
.:‘.
.u2r 0
”o
ruccrc of
j7’.’”:’..
0.
.‘
may
comments
for this story e now
or,,.: roe the Community iAQ for more nforrrtin
Recent First
Sean Leber-Fennessy (stratowhammy) wrote:
QUOTE: “A low GDP means governments dont have as much tax revenue, which means they
can’t spend very much on their schools. In Ailman Town, Crooks-Smith has to find creative
ways to pay for bare essentials even the whiteboard at the front of this classroom’
...
I teach in the United States, which has the highest GDP in the world, and one of the largest
per-capita GDPs in the world. In my classroom paper is rationed, photocopier toner is rationed
and students are not allowed to bring the textbooks home. The room I teach in has not been
updated since 1930 when the building was built, with the exception of the whiteboard that I
had to install myself using shower board. This story is not atypical for inner city schools in the
United States. Yes, there is toilet paper and paper towels, but where it counts students and
teachers do not get what they need. My classroom probably looks more like the classroom
described from Jamaica then the classroom described from Barbados. Looking at a countries
GDP is overly simplistic, although I do applaud an economic analysis of the conditions on the
ground made simple for a general audience. However, unlike the very sophisticated reporting
I am accustomed to on NPR, this story fell flat.
Tuesday, March 09, 2’0 11 4,u8AM
Report abuse
Recommend (5)
Dean Irwin (Sounbwoy) wrote:
How can you justify the generalizations that are so abundant in the story? There are other
schools in Jamaica that are doing VERY well, Oh wait, I guess classrooms have to have TV’s
in order for them to learn. How about going back and spending more time talking to other
schools in both countries?
I’m upset because you have made what I consider to be gross assumptions and over
simplifications, not because I’m Jamaican.
Suecay M’c 07.20109:49:53AM
Report abuse
Recommend (4)
Danielle Evans (DaniJane) wrote:
This story is but a snipett of a 24 minute Planet Money podcast filled with facts and figures
from both primary and secondary sources that are disclosed. You may look them up for
htto ://www.nor.or/temo1ates/story/story .php?storyld= 124346527
8/31/2010
A,nericcin Economic Review: Popers & Proceedings 2009, 99:2, 261-267
http:I/n’ww.ae to org/a rticles.php?doi---10.1257/der.99.2.261
MACROECONOMIC NARRATIVES
FROM AFRICA AND THE DIASPORAt
Institutions versus Policies: A Tale of Two Islands
By
PETER BLAIR HENRY AND CONRAD MILLER*
A long line of work emphasizes the correla
[ion between institutions and economic perfor
mance (Adam Smith 1776; W. Arthur Lewis
1955; Douglass C. North 1990). Rich countries
have laws that provide incentives to engage in
productive economic activity. Investors rely on
secure property rights, facilitating investment in
human and physical capital; government power
is balanced and restricted by art independent
judiciary; contracts are enforced effectively,
supporting private economic transactions.
Recent research moves from correlation to
causation by observing that countries whose
colonizers established strong property rights
hundreds of years ago have, on average, much
higher levels of income today than countries
whose colonizers did not (Daron Acernoglu,
Simon Johnson, and James A. Robinson 2001).
Since a country’s colonial origin—literally
determined centuries ago—can in no meaning
ful way he said to he caused by its present-day
level of income, the nature of countries’ colonial
Discussant: William A. Dark)’, Jr.. Duke University.
Henr: Graduate School of Business, Stanford Uni
5
versity, Stanford, CA 94305—5015, Brookings Institution,
and National l3ureaa of Economic Research (e-mail;
[email protected]); Miller: Department of Economics,
Stanford University, Stanford, CA 94305 (e-mail:
[email protected]). Henry gratefully acknowledges
financial support from the John A. and Cynthia Fry Gunn
Faculty Fellowship, the Stanford Institute for Economic
Policy Research. the Siaofnrd Center for International
Development, and the Freeman Spogli Institute. Miller
gratelully acknowledges financial support from Ihe Mellon
Mays Undergraduate Fellowship. We thank Jonathan
Bendor, Sir Courtney Blackman, Rcnce Bowen, Eleanor
Brown. Cecilia Conrad, William A. Darity Jr., Kevin Davis,
Chad Jones. John Rapley. Tracy Robinson, Paul Romer,
members of the Caribbean Policy Research Institute, and
seminar participants at Brookings, MIT, and Stanford for
very helpful comments and discussions.
origins enables researchers to estimate the causal
impact of property rights on long—run economic
outcomes. Differences in the legal tradition that
countries inherited fromn their colonial masters
also have a long-run impact on economic out
comes. Countries with English common law ori
gins provide investors with stronger protection
and are less prone to government ownership and
regulation than countries with civil law brigins
(Rafael La Porta, Florencio Lopez-de-Silanes.
and Andrei Shleifer 2008). In turn, common law
countries have greater linancial development,
less corruption, smaller informal economics,
and lower unemployment.
Case studies seem to suggest that institutions
also exert a causal influence on economic out
comes over periods of time somewhat shorter
than the centuries-long span emphasized by
the colonial and legal origins literature. For
instance, following the Armistice of 1953, Korea
broke into two separate nations with similar lev
els of income, almost identical ethnic and cul
tural makeup, but starkly different institutional
arrangements of the economy. North Korea
resorted to central planning while South Korea
relied on pl’operty’ rights and markets (with a
healthy dose of state intervention). More than 50
years later South Korea’s income per capita is
more than ten times as large as North Korea’s.
The divergence of the East and West German
economies following the partition of Germany
after World War II ostensibly provides another
piece of evidence in favor of the view that insti
tutions play the dominant role.
While institutions undoubtedly affect eco
nomic outcomes, the macroeconomic policies
that governments choose- to implement may
exert just as much influence on the Lrajectory
of their economies as the broader institutional
framework within which those policy decisions
take place. As a matter of arithmetic, long-run
261
Economic Association.
copyright © 1998, 1999,2000, 2001, 2002, 2003, 2004,2005, 2006, 2007,2008, 2009, 2010 by the American
262
AEA PAPERS AND PROCEEDINGS
WA 12009
1.2
CD
a
CD
C)
C
0
(.
CD
C)
—
0.6
BErbados
Jamaica
x
CD
-D
. 0.4
0
0)
a
-
0.2
CD
0
.N .fo
‘-i>
j’
%CJ
qo
c’
cii’
c
5 c0 c c
c
’
1
ri’) ri)
\°J
Year
MOURN
I.
STANDARDS OF LIviNG IN BARRAD0s AND JAMAICA DI’ERGE AFTER INDEPENDENCE
income levels are the sum of a series of shortand medium-run growth rates that are heavily
influenced hy fiscal, monetary, and exchange
rate policy (to name a few). This article demon
strates the relevance of the point by examining
a very clilTerent kind of policy experiment from
the ones in the existing literature on institutions
and growth.
In contrast to the examples of North and South
Korea and East and West Germany, we examine
a pair of countries—Barhados and Jamaica—
whose income levels diverge over a 40-year
stretch in spite of no obvious differences in the
institutional arrangements of their economies at
the beginning of the observation period.
1. Standards of Living in Barbados and Jamaica
Barbados and Jamaica are both former British
colonies, small island economies, and predomi
nantly inhabited by the descendants of Africans
who were brought to the Caribbean to cultivate
sugar. As former British colonies, Barbados and
Jamaica inherited almost identical p01 itical,
economic, and legal institutions: Westminster
Parliamentary democracy, constitutional protec
tion of property rights, and legal systems rooted
in English common law. Yet, as Figure 1 demon
strates, the standard of living in the two countries
diverged in the roughly 40-year period following
their independence from Great Britain.
Figure I plots the natural logarithm of an
index of real GDP per capita (measured in US
dollars) in Barbados and Jamaica from 1960
through 2002. By construction, the value of the
index is one in 1960 so that the natural log of
the index is zero in 1960. While Barbados has
not exactly experienced a growth miracle, its
economy performed reasonably well over the
42-year period and substantially better than
Jamaica’s. To he exact, by 2002, the natural log
of the index is 0.917 for Barbados and 0.356 for
Jamaica, so that the average growth rate of real
GDP per capita for Barbados over the entire
sample is 2.2 percent per year (0.917 divided
by 42) versus 0.8 percent per year for Jamaica
(0.356 divided by 42).
One particularly striking feature of Figure 1
is the sharp decline in Jamaica’s standard of liv
ing that sets in after 1972. Of course, the first oil
price shock in 1973 precipitated a general slow
down in world economic growth, but the central
point (laid out in more detail later in the paper)
is that growth in Jamaica slowed moie dramati
cally than it did in Barbados. While Jamaica’s
economy contracted at a rate of 2.3 percent per
year from 1972 to 1987. Barbados, whose econ
omy has a similar structure (see Table I) and was
subject to the same external shocks, grew by 1.2
percent per year. In oiher words, for a 15-year
period income per head in Barbados grew by 3.5
percentage points faster than it did in Jamaica.
((4
VOL. 99 NO. 2
INSTITUTIONS VERSUS POLICIES. A TALE OF TWO iSLANDS
263
TABLE l—B,\ISBAE,os AND JAMAICA HAVE SIMILAR ECONOMIES
Barbados
Jamaica
Exports as percent GDP
58.4
50.0
Trnports as percent GDP
68.6
60.7
Agriculture as percent GDP
Tndustry
as
percent GDP
Services as percent GDP
Population
Area (square miles)
Turning from growth rates to levels gives a
tangible sense of the impact of these growth-rate
differentials on long—run standards of living. In
1960 real GDP per capita was $3,395 in Barbados
and $2,208 in Jamaica. in 2002 Barbados’s
GDP per capita was $8,434 while Jamaica’s
was $3,165. The $1,187 income gap that existed
between Barbados and Jamaica around the time
of independence now stands at $5,269 dollars.
Put another way, the income gal) between the
two countries now exceeds Jamaica’s level of
GDP per capita.
Since their initial conditions were similar at
the time of independence, it stretches credulity
to argue that Barbados and Jamaica diverged
because of differences in colonial origins, legal
origins, geography. or some other exogenous
feature of their economies. We argue below
that the explanation for the divergence lies not
with differences in institutions but differences
in macroeconomic policy.
3.7
5.7
18.0
33.1
78.3
61.2
300,000
2.700,000
166
4,244
85 percent of the populations of Barbados and
Jamaica. Slavery was abolished in the British
West Indies in 1834. and following World War
I the region began a process of “constitutional
decolonization” that led the islands down a grad
ual, if difficult, path toward greater se1fgovernment (Trevor Muisroe 1972). Reporting on his
visit to the region in 1922, Major H. F. L. Wood,
Britain’s Under Secreta:ry of State for Colonies
wrote:
II. Institutions
“The whole history of the African popula
tion of the West Indies inevitably drives
them towards representational institu
tions fashioned after the British Model.
Transplanted by the slave trade or other
circumstances to foreign soil, losing in the
pmcess their social system, language and
traditions... Small wonder if they look for
political growth to be the only course and
pattern that they know, and aspire to share
in what has been the particularly British
gift of representational institutions”
(Wood 1921).
Jamaica won its independence from Britain in
1962. Barbados in 1.966. At the lime they became
sovereign nations, both countries possessed the
two institutional characteristics that the litera
ture identifies as critical to long-run prosperity:
strong constitutional protection of private prop
erty and English common law. A brief review of
the islands’ colonial histories verifies the state
ment in the preceding sentence.
The English settled Barbados in 1627 and
wrested Jamaica from the Spanish in 1655.
Both islands entered the modern era as planta
tion economies that produced sugar and other
agricultural commodities using slave labor (Eric
Williams 1970). By the end of the eighteenth
century, African slaves comprised more than
Three subsequent empirical observations
demonstrate the accuracy of Wood’s predic
tion that the British West Indies (Barbados and
Jamaica in particular) were destined to establish
institutions that mirrored the mother country.
First, as sovereign nations, both Barbados
and Jamaica organized their governments as
parliamentary democracies in the WestminsterWhitehall tradition (Anthony Payne 1993).
Since independence, Barbados and Jamaica
have maintained two-party political systems
and consistently held free and fair elections with
no unconstitutional transfers of power. While
sporadic violence often accompanies elections
in Jamaica, neither Barbados nor Jamaica has
(9C1
MAY 2009
4EA PA PERS AND PROCEEDINGS
264
suffered a coup or civil war, and both countries
have a free and vocal press. Four postjndcpen—
dence elections in Jamaica iesultecl in the ruling
party peacefully turning over power to the
opposition. Three such transitions occurred in
Barbados.
Second, the constitutions of Barbados and
Jamaica explicitly protect private property. The
joint parliamentary committee that drafted
Jamaica’s constitution was chaired by Norman
Manley—a lawyer. Rhodes Scholar, and father
of the nation’s future prime minister. Discussing
the constitution in front of Jamaica’s House of
Parliament on 23 January 1962. Manley says:
“We have put into this constitution a clause
which provides that property may not be,
in effect, arbitrarily acquired. Property
is protected in that it can only be taken
under a law which has been passed. And
when so taken, it must be taken in accor
dance with the terms of that law. What the
law provides for compensation, you must
get. .{J.Jt is of the highest importance for a
country like Jamaica to let the world know
that., people can come here to invest...
fuHy protected by the laws of the land...”
(Manley 1962, 306).
.
Barbados. which attained full independence
four years after Jamaica, adopted a constitu
tion with an effectively identical coverage of
private property. Both constitutions assert that
property cannot he compulsorily acquired
except under written law that describes a pro
cedure for determining and providing compen
sation and grants claimants the right of appeal
to a court (Chapter 3, Section 16. of Barbadian
Constitution: Chapter 3, Section 18, of Jamaican
Constitution). The constitutions also delineate
similar sets of exceptions to this clause, such as
cases where property is acquired in satisfaction
of a tax, property is in a condition dangerous to
the health of others, or property is acquired to
pay debt of the insolvent.
Third, Barbados and Jamaica adopted legal
systems based on English common law (RoseMarie Antoine 1999). Describing the essence of
this adoption to the Philadelphia Bar Association
in 1967, Manley says: “As to the law, we took over
the English common law holus holus. But what
was more important we took over the structure
and machinery which England built up for the
administration of justice” (Manley 1967, 340).
For most of their histories, both countries shared
the Judicial Committee of the Privy Council in
England as their highest court of appeals.
Because Barbados and Jamaica possess simi
lar economic institutions and legal systems, nei
ther the property-rights nor legal-origins theory
of long-run income determination can explain
their postindependence divergence Although
the institutional structures of Barbados and
Jamaica are very close, the same cannot be said
of their approaches to macroeconomic policy.
III. Macroeconomic Policies
When Jamaica gained independence in 1962
the Jamaican Labor Party (JLP) held a parlia
mentary majority. For the next ten years the JLP
remained in power and GDP per capita grew at a
rate of 5.4 percent per year, with the lion’s share
of growth stemming from two principal sources:
strong US growth in the 1960s created a robust
export market for Jamaican bauxite; and rising
incomes in North America boosted growth in
Jamaica’s tourism industry.
But all was not well. In classic Dutch Disease
fashion, growth in the bauxite sector drove up
the relative price of nontradeables, reducing
the competitiveness of Jamaica’s agricultural
sector and precipitating an exodus of workers
from the countryside to the cities (Carl Stone
and Stanislaw Wellisz 1993). Because of strong
unions, wages in other sectors did not adjust
downward to absorb the excess labor released
from agriculture (Caribbean Policy Research
Institute 20(5). Consequently, during its first
decade of independence Jamaica experienced
the odd combination of strong growth coupled
with an unemployment i-ate that rose from 13
percent in 1962 to 23.2 percent in 1972.
Rising unemployment, income inequality,
and the attendant societal tensions proved 100
much for the JLP at the ballot box. In 1972 the
People’s National Party (PNP) rose to power
under the leadership of Prime Minister Michael
Manley (son of Norman) and the promise of
“democratic socialism: The two cornerstones of
democratic socialism and the PNP’s economic
policies were “self-reliance” and “social jus
tice.” Self-reliance translated as extensive state
intervention in the economy. The PNP nation
alized companies, erected import barriers, and
imposed strict exchange controls (R. DeLisle
Worrell 1987). Social justice meant income
70
INSTITUTIONS VERSUS POLICIES: .4 TALE OF TWO iSLANDS
VOL. 99 NO. 2
265
TAmE 2—EcoNosmic: Pot.tcv AND PErmt’OtmMANCE IN BARBADos AND JSMAI(’A Divr.sc;tt AfTER
1973
.larnaica
Barbados
1966—1972
1973—1980
962—1972
1973—1980
Growth rate of GDP per capita
Fiscal deficit, percentage of GDP
6.0
2.7
4.2
—4.3
2.7
5.3
2.3
15.5
inflation
6.0
14,8
4.4
23.0
redistribu ion through job creatIon programs,
housing development schemes, and subsidies on
basic food items.
Whatever merits the PNP’s economic program
may have had, it was expensive. Government
spending rose from 23 percent of GDP in 1972
to 45 percent in 1978. Revenue did not keep pace
with the rise in expenditure. From 1962 through
1972 Jamaica’s averaee fiscal deficit was 2.3
percent of GDP (see Table 2). in contrast, from
1973 to 1980 the average fiscal deficit was 15.5
percent of GDP! The PNP tinanced much of
the deticit by borrowing directly from the Bank
of Jamaica. Predictably, inflation rose. From
1962 to 1972 inflation averaged 4.4 percent per
year. By 1980 inflation was 27 percent per year,
investment had collapsed (to 14 percent of GDP
down from 26 percent in 1972), and the PNP
was voted out of power.
Because Jamaica’s reversal of fortune coin
cided with the oil price shock of 1973 and the
onset of worldwide stagflation, it is tempting
to blame the country’s downward spiral on
external events. While many have done so (see
Manley 1987), even a cursory comparison with
Barbados makes it difficult for an obiective
observer to embrace that conclusion.
The inflation rate in Barbados also spiked
in the early 1970s, hitting a peak of 39 percent
in 1975, but Barbados’s policy response to the
external shocks that precipitated the spike could
not have been more different from Jamaica’s.
First of all, Barbados avoided nationalization,
kept state ownership to a minimum, and adopted
an outward-looking growth strategy (Courtney
Blackman 2006, 390). Second, instead of tak
ing an accommodative stance that delayed the
inevitable retrenchment needed to adjust to
higher energy prices, policymakers in Barbados
kept government spending under control. While
the fiscal deficit in Barbados did climb to 7.7
percent of GDP in 1973. by 1978 that number
was down to 2.9 percent. Since much of defi
cit financing comes from ihc central bank, by
extension, Barbados also ran a tighter monetary
ship than Jamaica. Table 2 summarizes the
net result of the difference in macroeconomic
policy in Barbados antI Jamaica over the two
periods.
IV. Exchange Rate Policies
In 1975 Barbados pegged its currency to the
US dollar at a parity of l3$2: US$1. The parity
came under threat when Barbados suffered a
deep recession in the early 1990s and real GDP
per capita contracted by 5.1 percent per year
from 1989 to 1992. In the midst of the crisis
in 1991, Barbados entered formal negotiations
with the International Monetary Fund (IIVIF)
to redluest. financial assistance. Among other
things, the IMF recommended devaluation to
stimulate production and return the economy to
full employment. Deeply attached to the stabil
ity of thei:r currency, the Barhadians resisted the
recommendation. instead of devaluing, the gov
ernment began a set of negotiations with employ
ers, unions, and workers that culminated with a
tripartite protocol on wages and prices in 1993.
Under the 1993 Wage antI Price Protocol.
workers and utmions assented to a one-time cut in
real wages of about 9 percent and agreed to keep
their demands for future pay raises in line with
increases in productivity. Firms promised to
moderate their price increases, the government
maintained the parity of the currency, and all
parties agreed to the creation of a national pro
ductivity hoard to provide better data on which
to base future negotiations.
To be sure, the protocol involved costly
bargaining. When negotiations began. public
demonstrations broke out and the government’s
wage-cut proposal was challenged in court, all
the way up to the Privy Council (Alvin Wint
266
A EA PA PERS AN!) PROCEEDINGS
2004, ch. 3). Nevertheless, the center held.
The fall in real wages helped restore exter
nal competitiveness and profitability, thereby
achieving the same result as a devaluation but
without the risk of triggering an inflationary
spiral. The economy recovered quickly. From
1993 to 2000 GDP per capita grew by 2.7 per
cent per year.
Linlike Barbados, Jamaica devalued its cur
rency several times between 1975 and 2002.
From this fact, many observers draw the spe
cious conclusion that the difference in exchange
rate policy accounts for Barbados’s superior
economic perfornianc&. But Barbados’s fixed
exchange rate did not cause its economy to
outperform Jamaica’s. Rather, the proximate
source of Barbados’ superior performance was
a set of growth-facilitating policies—monetary
restraint, fiscal discipline, openness to trade.
and ultimately wage cuts to restore competi
tive unit labor costs—that had the side effect
of enabling the monetary authority to maintain
the exchange-rate parity without losing external
competitiveness. in contrast. Jamaica’s policies
were never consistent with maintaining commt
ment to any parity the government might have
wanted to adopt.
The differences in exchange rate policy do,
however, raise an important issue. Faced with a
scenario like that of Barbados in 1991. would
Jamaica he able to achieve the social consen
sus needed to adopt the measures required to
avoid a competitive devaluation? As stated in
the previous paragraph. we think the Jamaican
record speaks for itself. Answering the deeper
question—why do some democratic societies
(of which Barbados is just one example) manage
to reach constructive policy compromises while
others (such as Jamaica) do not?—remains an
important research challenge.
2
V. Conclusion
It may he tempting for readers to regard this
paper as a quaint tale of two exotic islands
better known for their beaches, music, and
Olympic sprinters than their significance
Hon. Edward Seaga, “The Caribbean Single Market:
Beneficial Path or Wayward Journey.” Jamaica Observer,
February 10, 2006.
See Donald Robothani (1998) for clues about answers
to this question for Barbados and Jamaica.
MAY 2009
in the global economy. On the contrary, we
think that important general lessons lie at the
heart of this Caribbean parable. Recent work
focuses on the very long-run effects of insti
tutions to the point of exclusion of almost all
other factors. But the macroeconomic deci
sions of governments can exert just as much
influence on the trajectory of the economy
as the. institutional framework within which
those decisions take place. Countries have no
control over their geographic location, colo
nial heritage, or legal origin, hut they do have
agency over the policies that they implement.
Of particular importance for small open econ
omies (i.e., most countries in the world) is the
response of policy to macroeconomic shocks
such as a fall in the terms of trade. Pedestrian
as it may seem, changes in policy, even those
that do not have a permanent effect on growth
rates of GDP per capita, can have a significant
impact on a country’s standard of living within
a single generation.
REFERENCES
Acemoglu, Daron, Simon Johnson, and Tames
A. Robinson. 2001. “The Colonial Origins
of Comparative Development: An Empirical
Investigation.” American Econoin ic Review,
9l(5): 1369—1401.
Antoine, Rose-Marie. 1999. Commonwealth
(.uribbea,i Law and Legal Systems. London:
Cavendish Publishers.
Blackman, Courtney. 2006. The Practice of Eco
nonzic Management. A Caribbean Perspec
tive. Kingston: Ian Randle Publishers.
Caribbean Policy Research Institute. 2005. Thking
Re.cponsibilits: The .!amnaican Economy Since
Independence. http:llwww.takingresponsibil
ity.org/.
La Porta, Rafael. Florencio Lopez-de-Silanes, and
Amlrei Shleifer. 2008. “The Economic Conse
quences of Legal Origins.” Journal of Ecu
nommc Literature, 46(2): 285—332.
Lewis, W. Arthur. 1955. The Theory of Econonuc
Growth. 1-fomewood, Illinois: Unwyn Hyman.
Manley, Michael. 1987. lip the Down Escalator:
Del’elopmentandthelnternationalEcononm)c A
./amaican C’aseStud’. London: AndreDeutsch.
Manley, Norman Washington. 1962. “The mdc
penclence Constitution.” In Norman Washington
Manle’ and the New Jamaica: Selected
VOL. 99 NO. 2
INSTITUTIONS VERSUS POLICIES: .4 TALE OF TWO ISLANDS
Speeches and Writings /938—68, ed. Rex Net
ileford, 1971. London: Longnian Caribbean.
Munroc, Trevor. 1972. The Politics of Decoloni
zation: Jamaica, 1944—1962. Jamaica: Univer
sity of the West Indies Institute of Social and
Economic Research.
North, Douglass C. 1990. institutions, Institu
tional Change, and Economic PerJirinance.
Cambridge: Cambridge University Press.
Payne, Anthony. 1993. “Westminster Adapted:
The Political Order of the Commonwealth
Caribbean.” In Democracy in the Caribbean:
Political Economic, and Social Perspectives,
ed. Jorge I. Dominguez, Robert A. Pastor, and
R. DeLisle Worrell. Baltimore: Johns Hopkins
University Press.
Robotham, Donald. 1998. “Transnationalisrn in
the Caribbean: Formal and Informal.” Ameri
can Ethnologist, 25(2): 307—21.
Smith, Adam. 1776. An inquiry into the Nature
and Causes of the Wealth of 1”Jations. In
Mortimer Adler red.), 2005, Great Books of
267
the Western World, Encyclopedia Britianica.
Stone, Carl, and Stanislaw Wellisz. 1993.
“Jamaica.” In The Political Economy of Pot’
errv, Equity, and Growth: Five Sinai! Open
Economies, ed. Ronald Findlay and Stanislaw
Wellisz, 140—218. New York: Oxford Univer
sit)’ Press.
Williams, Eric. 1970. From Columbus io Cos
ta,’: The History of the Caribbean 1492—1969.
New York: Random House.
Wint, Alvin. 2003. C’omnpetitii’eness in Small
Developing Economies: Insights from the
Caribbean. Kingston: University of the West
Indies Press.
Wood, Hon. E. F. L., M.P. 1921. Report of a Visit
to Certain West Indian Colonies and to Brit
ish Guiana, as cited in Anthony Payne (op. cit.)
1993. 58—59.
Worrell, R. DeLisle. 1987. Sinai! Island Econo
mnies: Structure and Perfbrmunce in the Eng
lish Speaking Caribbean Since 1970. New
York: Praeger.
Doing Business in the Caribbean Region
--
U.S. Commercial Service Caribbean
Page 1 of 2
\13
BUYUSA.GOV
Caribbean
--
U.S. Commercial Service
Islands of Opportunity
•
•
•
•
Five Compelling Reasons to Do Business in the Caribbean Region
Best Prospects in the Caribbean Region
‘Your Connection to the Caribbean Region”
Country Specific Information
Five Compelling Reasons to Do Business in the Caribbean Region
1. Close Proximity: The Caribbean Region is a natural commercial partner of the United States, tied
closely together by geography, history and culture.
2. 3rd Largest Market in Latin America for U.S. Exports: The Caribbean Region as a whole
represents a market of about 23.5 million people who collectively imported over $18.5 billion of
U.S. goods in 2007! As a result, the Region is the 3nd largest export market for U.S. manufactured
goods in Latin America behind only Mexico and Brazil.
3. Cooperative Trade Relationship: The rf’ Caribbean Basin Initiative
1 (CBI) launched in 1983 and
renewed in 2000 through legislation enacted by Congress established trade programs to facilitate the
economic development and export diversification of the Caribbean Basin economies. U.S. exports to
the CBI countries have more than tripled since the CBI’s creation, from $6.5 billion in 1984 to over
$25 billion in 2000.
4. Free Trade: On August 5, 2004 the United States and the Dominican Republic signed a Free Trade
AQreement (CAETA-DR)
. The agreement was implemented on March 1, 2007 ensuring that more
2
than 80% of U.S. manufactured goods enter duty free to the DR. In addition to tariff reduction,
CAFTA-DR also provides unprecedented access to government procurement, liberalizes the services
sectors, protects U.S. investments, and strengthens protections for U.S. patents, trademarks, and
trade secrets in the DR.
5. Regional Integration: The Caribbean Community (‘ CARICOM
), is an organization of Caribbean
3
nations and dependencies working to promote economic integration and cooperation among its
members. The CARICOM Single Market and Economy (CSM) treaty signed on January 1, 2006 by 12
member countires, establishes deeper regional integration through harmonized tariffs and duty free
trade. Currently, the CARICOM CSM member countries and the Dominican Republic are scheduled to
sign an Economic Partnership Agreement (EPA) in July 2008 establishing free trade between the DR
and the CSM member countries.
Best Prospects in the Caribbean Region
•
•
•
•
•
•
•
•
•
•
•
•
Household Consumer Goods
Building products
Air Conditioning
Telecommunication Equipment & Services
Franchising
Computers and Peripherals
Automotive Parts and Services
Food Processing and Packaging Equip.
Cosmetics and Toiletries
Electrical Power Systems
Hotel & Restaurant Equipment & services
Drugs and Pharmaceuticals
“Your Connection to the Caribbean Region”
Whether your company is trying to enter or expand into the Caribbean Region, we can help you succeed!
http ://www.buyusa.gov/caribbeanlen!islands of opportunity .html
11/1/2010
Subsidies on trial in Caribbean rum rumble Washington Examiner
Page 1 of 5
i7if
Washington Examiner
P
••
home deflvery
classifieds
autos
I jobs real estate
home listings
Making this Right.
Restore Gidf communities
View todays E-Dition
wash ingtonexa miner corn
—
E efunQr1I
Home
Nation
advertise
-
—
Freeemail alerts!
“
tu Wixammcr
Nows Politics Lcca Opinion Economy Spor LiftyN
World
Beltway Confidential
Yeas & Nays
Opinion Zone
Capital Land
CI
Mobile Site
POLITICS
[Print] [Email]
•
C
‘::
6
relweet
Subsidies on trial in Caribbean rum rumble
By: TIMOTHY P. CARNEY
Senior Examiner Columnist
November 18, 2009
If you drink Captain Morgan rum, you probably don’t care where it came from.
But to the governments of Puerto Rico and the Virgin Islands
and to the topshelf K Street lobbyists they have hired in recent months
where to distill
Captain Morgan is a billion-dollar question.
--
--
Diageo is a multinational liquor giant that hires a Puerto Rican distillery to make
Captain Morgan rum. Puerto Rico’s next-door neighbor, the U.S. Virgin Islands,
however, is trying to lure the Captain away with a raft of subsidies. The special
arrangement these two territories have with the U.S. government ropes
Washington into their cutthroat competition for more booze business
which
means more K Street lobbyists.
--
This column obtained a copy of a June 2008 agreement between Diageo and the
government of the Virgin Islands. In the contract, the Virgin Islands promises
Diageo a handful of generous tax credits and direct subsidy payments if the
company builds a new Captain Morgan distillery in St. Croix, the main island,
thus cutting ties with the Puerto Rican distillery. The agreement specifically
states, “Absent such financing, tax, production and marketing incentives, Diageo
would not locate the Project in the Virgin Islands.”
httn//wwuj wchiricrtnnpyminpr
9/29/201 0
Subsidies on trial in Caribbean rum rumble I Washington Examiner
Page 2 of 5
incentives” in the contract is
Even if you don’t like rum, reading through the T
enough to make your mouth water. They start with special help in clearing
bureaucratic hurdles: “The Government shall do all things and take such actions
reasonably necessary, to the fullest extent permitted by law, to assist Diageo” in
obtaining all necessary permits.
Then come the tax credits. The Virgin Islands offered Diageo a 90 percent tax
credit on all its income derived from the Captain Morgan project. Also, “Diageo
shall be completely exempted” from property taxes, gross receipts taxes or
excise taxes on raw materials imported, and the customs fees would also be
lowered. Lower taxes and less red tape are great, but no smaller competitor
could ever get permission to pay only a dime on every dollar in taxes it owes.
The agreement grants other special tax cuts just for Diageo, including breaks on
interest payments and estimated tax payments. When the tax breaks are
targeted at one company, they function more as corporate welfare than as
limited government.
The direct subsidy payments are much more blatant. First, Diageo would pocket
“Marketing Support Payments” for the public service of marketing Captain
Morgan to U.S. drinkers. Then come the “Molasses Subsidy Payments,” in which
taxpayers would guarantee that Diageo never pays more than 16 cents per
gallon of molasses. The Virgin Islands also would give Diageo a “Production
Incentive Payment.” So the Captain would get subsidized materials, subsidies for
production and then subsidies to sell the rum.
All this subsidy money will come from the Virgin Islands’ “cover-over,” an annual
payment the U.S. government makes to the Virgin Islands and Puerto Rico out of
federal excise taxes. In short, when a Virgin Islands-made bottle of rum is sold in
the U.S., the federal excise tax on that bottle is sent back to the Virgin Islands’
government. The same is true for Puerto Rico.
The Virgin Islands courtship of Captain Morgan has angered Puerto Rican
officials, who have started to push back. The territory’s congressional
representative, Pedro Pierluisi, introduced a bill in April prohibiting territories
from using more than 10 percent of their cover-over for subsidies (a consultant
for Puerto Rico tells me it turns about 6 percent of the cover-over into liquor
subsidies).
On Nov. 1, the Senate of Puerto Rico hired Quinn Gillespie and longtime
Republican aide David Hoppe to lobby on the issue. The Conservation Trust of
l,-..
//rrri1i
atcnpymjnpr nnm/nnl itics/Suhsjdies-on-triaj-in-Caribbean-rum-rumble...
9/29/2010
Page 3 of 5
Subsidies on trial in Caribbean rum rumble Washington Examiner
Puerto Rico has hired Democratic activist and former Clinton White House aide
Joe Velasquez for the fight.
The Virgin Islands government has hired the firm Winston and Strawn, including
partner James F. Miller, whose online biography paints a portrait of a corporatewelfare specialist. Miller takes credit for creating “tax incentives for coal,” and
boasts of working with “the Export Import Bank, the Overseas Private
Investment Corporation [and] the Inter-American Development Bank,” which are
leading subsidy agencies.
Puerto Rico’s play here is something like bilateral disarmament: We won’t bribe
companies with hyper-subsidies if the Virgin Islands doesn’t. But the predicament
points out a hole in a standard free-market argument. It turns out that
municipalities competing for business aren’t in a race to roll back regulations and
lower taxes, but in a race to provide more taxpayer subsidies.
Timothy P. Carney, The Examiner’s lobbying editor;, can be reached at
[email protected]. He writes an op-ed column that appears
Friday.
More from Timothy P. Carney
• GE backed regulations that killed GE
jobs in U.S.
• ‘Obama is anti-business’ is really a cry
for more corporate welfare
• DISCLOSE Act empowers lobbyists
• Naked regulatory robbery: Big Pharma
vs. Big Tobacco
• Strickland profits from ‘green’
patronage in Ohio
Topics
Washington Examiner, Captain Morgan,
Puerto Rico Virgin Islands, K Street,
Diageo, St. Croix, Pedro Pierluisi, David
Hoppe, Joe Velasquez, Winston and
Strawn ,James F. Miller, Export Import
Bank, Overseas Private Investment
Corporation, Inter-American Development
B
,
Reader Comments
All comments on this page are subject to our Terms of Use and do not necessarily reflect the
views of the Examiner or its staff. comment box is limited to 200 words. comments that
advocate violence, racism, or libel as well as comments written in ALL CAPS are not permitted.
EL:..:
Optional: Login below.
Corrents for tHs pEçe
closed.
htto://www.washingtonexarniner. corn/politics/Subsidies-on-trial-in-Caribbean-rum-rumble... 9/29/2010
News Release Ex-Im Bank Approves $250 Million in Export Financing for 211,000 For...
Page 1 of 1
r1r]
News from the Export-Import Bank of the United States
August 5, 2010
Contact: Phil Cogan, (202) 565-3200
EX-IM BANK APPROVES $250 MILLION IN EXPORT. FINANCING
FOR 211,000 FORD MOTOR COMPANY VEHICLES
Ford, Small Business Suppliers and Workers in 41 States to Benefit
WASHINGTON, DC The Export-Import Bank of the United States (Ex-Im) has approved a $250 million
working capital loan guarantee for Ford Motor Company in Dearborn, Michigan. The loan facility will finance
$3.1 billion of export sales for over 200,000 vehicles being sold to buyers in Canada and Mexico. These exports
represent 15 percent of Ford’s 2009 production and the vehicles will be manufactured in plants located in
Chicago, Illinois.; Dearborn and Wayne Michigan; Kansas City, Missouri; Louisville, Kentucky; and Avon Lake,
Ohio. The Private Export Funding Corporation (PEFCO) will provide the funding for the revolving $250 million
loan backed by Ex-Im’s guarantee. The loan, fees and interest will be paid off in one year.
-
“Ex-Im’s working capital loan guarantee enables both Ford and hundreds of its small business suppliers to
maintain their competitiveness in the global marketplace,” said Fred P. Hochberg, chairman and president of
Ex-Im Bank. “This transaction alone will support thousands of high paying export-related American jobs by
exporting superior goods and services to international buyers.”
“Ford is committed to using our U.S. manufacturing plants as a growing source of exports to regions all over the
world,” said Mark Fields, Ford Motor Company president of the Americas. “Our partnership with Ex lm Bank
highlights a public-private relationship that supports American jobs and the economy.’
Models to be exported using the Ex-Im loan guarantee facility include the F-150 pickup, Explorer SUV, Focus,
Escape, Expedition, E-Series Van, Taurus, and Lincoln MKS and Navigator. Of particular note is that the loan
facility will support the export of the new, highly fuel-efficient crossover Ford Explorer SUV. It is scheduled to go
into production at the Chicago assembly plant later this year. Ford’s investment in the Chicago assembly plant
is adding 1,200 new jobs there.
Ford reports that key suppliers to the Explorer alone are investing in new facilities and hiring for more than 600
jobs in Michigan, Indiana and Illinois. According to Tony Brown, group vice president, Ford Global Purchasing,
more than 650 companies in 41 states produce parts and components for the vehicles being exported. At the
same time thousands of other indirect suppliers provide other services to Ford.
This is an innovative transaction and the first of its kind at Ex-Im Bank. The loan is formula-based and secured
by vehicles in transit to Canada and Mexico. The flexibility of the formula-based loan facility will facilitate the
continued growth of Ford’s exports.
Ex-Im Bank is an independent, self-funding federal-government agency that operates entirely on the proceeds
of the fees and interest that it charges. Ex-lm fill gaps in export financing, strengthens U.S. export
competitiveness, and helps creates and maintain U.S. jobs. The Bank provides a variety of financing
mechanisms, including working capital loan guarantees to help U.S. businesses acquire the capital needed to
produce goods and services for export, export-credit insurance to protect against nonpayment by foreign
buyers, and loan guarantees and direct loans to assist foreign buyers of U.S. goods and services.
In fiscal 2009, overall Ex-Im Bank financing totaled $21 billion. In the first nine months of fiscal 2010 (through
June 2010), Ex-Im Bank authorized $17.4 billion in loans, guarantees and insurance more than the total
authorizations for all of fiscal 2008. For more information, see Ex-Im Bank’s Web site at www.exim.gov.
-
Original URL: http:Ilwww.exim.govlpressrelease.cfm42BEO2AO-DFB9-2BCO-36C4F6788D7222301
Export-Import Bank of the United States
811 Vermont Avenue, N.W.
Washington, DC 20571
Tel: 1 (202) 565-3946 (EXIM) or 1 (800) 565-3946 (E)(IM)
http://www.exim.gov/pressreleaseprint.cfmI428E02A0-DFB9-2BC0-3 6C4F678 8D 7222 BO
11 / 1/2010
Overseas Private Investment Corporation
Page 1 of 1
Close Window I Print this pase
Overview
C is an independent U.S. government agency whose mission is to mobilize
and facilitate the participation of U. S. private capital and skills in the economic and social development of less developed countries and areas, and
countries in transition from nonmarket to market economies.
OPIC assists U.S. companies by providing financing (from large structured finance to small business loans), political risk insurance, and
investment funds. OPIC complements the private sector in managing risks associated with foreign direct investment and supports U.S. foreign
policy.
OPIC was established as an agency of the U.S. government in 1971 and currently does business in over 150 countries. For more information about
OPIC, click on Our Work.
To determine if your company can work with OPIC, please read the Investor Screener.
OPIC does have certain policy requirements in the areas of environment, worker and human rights, and economic impact.
Copyright 2010 Oversea Private Investment Corporation. All rights reserved. Terms & Conditions.
htto:!/www.ooic.ov/sites/a11/themes/zenJooic/Drint.nho
11/1/2010
Page 1 of 4
Overseas Private Investment Corporation
Close Window Print this once
CurrentOPlCProj ects
the project originated.
Below is a list of current OPIC projects as of the end of the last fiscal year. The fiscal year listed in the database represents the year during which
Fiscal Year:
<Any>
<Any>
Dollar Amount:
<Any>
-____
-
<Any>
-
<Any>
Iy]
Showing records I through 30 of 741
.1
•2
.3
.4
.5
•6
.7
.8
.9
next,
last
Fiscal
RegionlCountry
Year
Latin America and the Caribbean,
1984
Panama
1993 Africa arid the Middle East Israel
1-tr• //xrjsrsr
Project
Name: DESARROLLO DE RIO PACORA SA
US Sponsor: Herbert R. Lee
Type: Finance
Description: Coffee farm expansion
Name: ISRAEL GROWTh FUND
US Sponsor: Apax Partners & Co Israel
Type: Finance
Description: Venture capital fund for Israel (growth fund)
Name: RUSSIA PARTNERS COMPANY, L.P.
nnir any/citpe/i11/t1wmc/zen/nnic/nrintnhn
Amount
$167,000
$D0 000 000
11/1/2010
Overseas Private Investment Corporation
US Sponsor: Siguler Guff& Company
Type: Investment Funds
Description: A newly organized, privately owned
investment company
Name: RUSSIA PARTNERS COMPANY, L.P.
US Sponsor: Siguler Guff& Company
Europe and Eurasia, Europe and
1994
Type: Investment Funds
Eurasia Regional
Description: DIRECT EQUiTY INVESTMENT FUND
Name: COMPANIA GENERAL DE COMERCIO E
INDUSTRIA SA
Latin America and the Caribbean,
US Sponsor: Marriott International Capital Corporation
1994
Argentina
Type: Finance
Description: Refurbishment and operation of Plaza Hotel
Name: Compania General de Comercio e Industria S.A.
Latin America and the Caribbean, US Sponsor: MARRIOTI’ INTERNATIONAL INC
1994’
Type: Insurance
Argentina
Description: hotel
Name: Grenada Electricity Services Limited
Latin America and the Caribbean, US Sponsor: W R B ENTERPRISES iNC
1994
Type: Insurance
Grenada
Description: electric services
Name: Coca-Cola Nigeria Limited
US Sponsor: COCA COLA CO
1995 Africa and the Middle East, Nigeria Type: Insurance
Description: soft drink concentrate & beverage base
Name: DRAPER INTERNATIONAL INDIA FUND
US Sponsor: DRAPER INTERNATIONAL
1995 Asia and the Pacific, India
Type: Investment Funds
Description: DIRECT EQUITY INVESTMENT FUND
Name: INDIA PRIVATE EQUITY FUND
US Sponsor: CIBC World Markets
1995 Asia and the Pacific, India
Type: Investment Funds
Description: DIRECT iNVESTMENT FUND
Name: PAJTON ENERGY COMPANY
US Sponsor: Edison Mission Company
1995 Asia and the Pacific, Indonesia
Type: Finance
Description: Coal fired electric power station and facilities
Name: AGRIBUSINESS PARTNERS INTERNATIONAL
US Sponsor: AMERICA FIRST COMPANIES
Europe and Eurasia, Europe and
Type: Investment Funds
1995
Eurasia Regional
Description: PRIVATE EQUITY INVESTMENT FUND
FOR RUSSIA AND THE NIS
Name: AGRIBUSINESS PARTNERS INTL (BALTICS)
US Sponsor: AMERICA FIRST COMPANIES
Europe and Eurasia, Europe and
1995
Type: Investment Funds
Eurasia Regional
Description: PRIVATE EQUITY INVESTMENT FUND
Na me: BANCROFT EASTERN EUROPE FUND LP
US Sponsor: BANCROFT ADVISORS LLC
Europe and Eurasia, Europe and
1995
Type: Investment Funds
Eurasia Regional
Description: PRIVATE EQUITY INVESTMENT FUND
Name: NEW CENTURY CAPITAL PARTNERS, L.P.
US Sponsor: NCH Advisors
Europe and Eurasia, Europe and
1995
Type: Investment Funds
Eurasia Regional
Description: Direct Equity Investment Fund
Name: NEW CENTURY CAPITAL PARTNERS, L.P.
US Sponsor: NCH Advisors
Europe and Eurasia, Europe and
1995
Type: Investment Funds
Eurasia Regional
Description: Direct Equity Investment Fund
Name: KATEL Joint Venture
US Sponsor: T K TEL LTD
Europe and Eurasia, Europe and
1993
Eurasia Regional
httn://www.onic. ov/sites/a11/themes/zenIooic/orint.nht,
Page 2 of 4
$75,000,000
$37500000
$4,000,000
$34,306,400
$7,500,000
$48,600,000
$97,985,823
$2oOOooooo
$67,500,000
$7,500,000
$70,000,000
$46,875,000
$140,625,000
11 / 1/2010
Overseas Private Investment Corporation
1995 Europe and Eurasia, Kyrgyzstan
1996
Africa and the Middle East,
Morocco
1996 Africa and the Middle East, Kuwait
1996 All OPIC Countries, All Countries
1996 All OPIC Countries, All Countries
1996
Asia and the Pacific, Asia and the
Pacific Regional
1996 Asia and the Pacific, Philippines
1996 Europe and Eurasia, Turkey
1996
Latin America and the Caribbean,
Brazil
1996
Latin America and the Caribbean,
Colombia
1996
Latin America and the Caribbean,
Costa Rica
1996
Latin America and the Caribbean,
Costa Rica
1997
Africa and the Middle East,
Rwanda
1997
Latin America and the Caribbean,
Venezuela
//wwwnni c
Type: Insurance
Description: Cellular Telephone System with international
gateway
Name: JORF LASFAR ENERGY COMPANY
US Sponsor: CMS Generation Company
Type: Finance
Description: PrivatizationlExpansion of 1320 MW power
plant in Morocco
Name: EQUATE Petrochemical Company K.S.C. (Closed)
US Sponsor: UNION CARBIDE CORP
Type: Insurance
Description: petrochemical production
Name: AQUA PARTNERS LP
US Sponsor: Tarrant Partners
Type: Investment Funds
Description: Direct Equity Fund
Name: GLOBAL ENVIRONMENT EMERGING
MARKETS FUND, II
US Sponsor: GEF Management Corporation
Type: Investment Funds
Description: Direct Equity Investment Fund
Name: ASIA DEVELOPMENT PARTNERS, L.P.
US Sponsor: South Asia Capital Ltd. C/O Olympus Capital
Holdings
Type: Investment Funds
Description: Direct Equity Investment Fund
Name: CE Casecnan Water and Energy Company, Inc.
US Sponsor: MIDAMERICAN ENERGY HOLDINGS CO
Type: Insurance
Description: Irrigation and hydroelectric power generation
Name: DOGA ENERJI
US Sponsor: Edison Mission Company
Type: Finance
Description: electric energy and thermal energy power plant
Name: Morgan Stanley do Brasil Ltda.
US Sponsor: MORGAN STANLEY GROUP INC
Type: Insurance
Description: bank
Name: Termovalle S.C.A. E.S.P.
US Sponsor: TERMOVALLE INVESTMENT CO L L C
Type: Insurance
Description: electric services
Name: P.H. Don Pedro, S.A.
US Sponsor: GENERAL ELECTRIC CAPITAL CORP
Type: Insurance
Description: 14 MW hydroelectric power plant
Name: P.H. Rio Volcan, S.A.
US Sponsor: GENERAL ELECTRIC CAPITAL CORP
Type: Insurance
Description: electric services
Name: SORWATHE S.A.R.L.
US Sponsor: TEA IMPORTERS INC
Type: Insurance
Description: tea plantation
Name: WILPRO ENERGY SERVICES (EL FIJRRIAL)
LIMITED
US Sponsor: The Williams Companies, Inc.
Type: Finance
Description: natural gas compression services
ov/sites/al1/themes/zenJoDjc/rint.flhp
Page 3 of 4
$24,500,000
$200,000,000
$200000000
$200,000,000
$80,000,000
$100,000,000
$125,000,000
$95,000,000
$50,000,000
$200,000,000
$40,032,940
$47,346,000
$1,259,257
$165,000,000
11/1/2010
Federal B...
Investment Policy and Statutory Requirements OPIC-10-R-0021 (Archived)
-
-
Page 1 of 4
Investment Policy and Statutory Requirements
Solicitation Number: OPIC-1O-R-0021
Agency: Overseas Private Investment Corporation
Office: Contracts and Administrative Services
Location: Contracts and Administrative Services
V
Notice Type:
Combined Synopsis/Solicitation
Original Posted Date:
August 4, 2010
Posted Date:
September 2, 2010
Response Date:
Sep 27, 2010 4:00 pm Eastern
Original Response Date:
Sep 27, 2010 4:00 pm Eastern
V
Archiving Policy:
Automatic, 15 days after response date
Archive Date:
October 12, 2010
Original Set Aside:
N/A
Set Aside:
N/A
Classification Code:
R Professional, administrative, and management support services
--
NAICS Code:
926 Administration of Economic Programs/9261 50
Commercial Sectors
--
--
Regulation, Licensing, and Inspection of Miscellaneous
Synopsis:
Added: Aug 04, 2010 4:55 pm
as an agency of the U.S. government in
The Overseas Private Investment Corporation (“OPIC”) was established
ic development in new and emerging
1971. OPIC helps U.S. businesses invest overseas, fosters econom
ted with foreign direct investment, and
markets, complements the private sector in managing risks associa
ents, including extractive industries,
supports U.S. foreign policy. OPIC supports a wide range of investm
law (Title IV of the Foreign Assistance Act
agriculture, manufacturing and infrastructure. OPIC is required by U.S.
httns ://www.fbo.gov/index?s=opportunity&mode=form&id=3 520b5445a0f23 3 600b2b
7a5...
11/1/2010
Investment Policy and Statutory Requirements OPIC-l0-R-0021 (Archived) Federal B...
-
-
Page 2 of 4
of 1961) to evaluate certain policy issues for every project it supports. OPIC’s Office of Investment Policy is
responsible for insuring that OPIC projects are implemented in a manner consistent with OPIC’s statutory
requirements related to social and environmental matters which include:
Statutory Reguirements
• Environmental, health, and safety impacts.
• Impacts on project affected people.
• Labor and working conditions.
• Human Rights.
The Office of Investment Policy performs in-depth analyses on all projects proposed for OPIC support and
ensures that any OPIC-supported project meets statutory requirements in environmental, health, safety, social,
labor, and human rights policy areas. The office also monitors project performance to ensure that a project
complies with all statutory and contractual requirements in environmental, health, safety, social, labor, and human
rights policy areas.
The role of the Independent Consultant (IC) is to provide support to OPIC’s Office of Investment Policy in meeting
its Statutory Requirements. ICs should identify the Statutory Requirements for which they would like to be
considered. IC support should also identify which of the following Tasks for which they would like to be
considered:
Task Categories
• Independent technical project reviews.
• Independent industry-specific technical reviews to support policy decisions or policy revisions.
• Independent reviews of project working conditions, including associated management systems.
• Assist in independent auditing or monitoring of OPIC-supported projects.
• Preparation of draft reports to OPIC management or OPIC’s outside stakeholders.
• Support for policy and procedure revisions.
https://www. fbo. gov/index?s=oppormnity&mode=form&id=3 520b5445a0f23 3 600b2b7a5...
11/1/2010
About the Inter-American Development Bank Inter-American Development Bank
-
1DB
JOB Home
>
Page 1 of I
Inter-American Development Bank
Share
About Us
Comment
MO
About the Inter-American Development Bank
IDE Presidency
We SI jtt efforts by Latin America and the Caribbean countries to reduce poverty and
inequality. We aim to bring about development in a sustainable, climate-friendly way.
Basic Facts
Development Effectiveness
Established in 1959, we are the largest source of development financing for Latin America
and the Caribbean, with a strong commitment to achieve measurable results, increased
agenda that seeks
integrity, transparency and accountability. We have an evolving
to increase our
inenJt in the region.
Ninth Capital Increase
Public Information Services
Five things you need to
know about the 1DB
While we are a regular bank in many ways, we are also unique in some key respects.
Besides loans, we also provide grants, technical assistance and do research. Our
shareholders are 48 member countries, including 26 Latin American and Caribbean
borrowing members, who have a majority ownership of the 1DB.
Policies
Strategies
Our Fund for Secjl Operations (FSO) provides concessional financing to our most
vulnerable member countries.
Given our shareholder base and prudent management, we have a strono financial poSition.
As a result, the 1DB is able to borrow in international markets at competitive rates and
transfer that benefit to our clients.
© 2010 Inter-American Development Bank
-
All Rights Reserved.
http://w-ww.iadb.org/enlabout-us/about-the-inter-american-development-bank,5995 html
11 / 1/2010
Projects Inter-American Development Bank
Page 1 of 1
-
31DB
toe Home
>
25
Inter-American Development Bank
Projects
Project Cycle
Share
Projects
The 1DB partners with countries to provide financial resources and knowledge to achieve
results. Since 1959, the 1DB has approved $183 billion for projects, mobilizing more than
$402 billion in investments. The Bank’s activities cover the entire spectrum of economic
and social development in Latin America and the Caribbean, with an emphasis on programs
that benefit the most vulnerable and the poorest populations.
Types of Financing
The 1DB Group uses loaDs.
ousranteen and
investments to fund
development programs.
Development Effecliveness
How does the 1DB improve
development effectiveness?
Comment
Search our Projects
The Bank supports clients in the design of projects, and provides finencino, technical
cooperation and knov:ledoe services to support development interventions. Projecte
identify the reasons for the proposed intervention, the actions the Bank will support and
the expected results. The 1DB focuses on empirical evidence for making decisions and
measuring the impact of its projects.
The Bank has adopted specific criteria and methodolooies to ensure it is able to:
Keywords:
Advasred Sen’th
search Pruiert Documents
Spotllghl
Procurement Opportunities
environmental Impact
Monthly Operational
Summary
• measure the achievement of a specific intervention;
Public Information Services
• monitor project progress, with focus on actions implemented and their impact; and
• produce evidence of what works and why in development interventions.
Integrity at the 1DB
Independent Consultation
The 1DB Group is a key partner for micro, small, medium and large-size companies and
banks. The Bank offers financing opportunities for comoanies end finencial institutions,
access to grants and consulting and procurement contracts.
© 2010 Inter-American Development Bank
http://wwwiadb.org/enlprojects/projects, 1 229thtm1
-
and Investigation
Mechanism
Want to do business with
the JOB?
All Rights Reserved.
11/1/2010
FREE TRADE AGREEMENT
IMPLICATIONS FOR ECONOMIC
DEVELOPMENT
Page 1 of 2
The Trade Stimulus Fact Sheet October 27, 2008
-
Advanced Search
Search trade.gov
u.s. businesses by
Download printer friendly version
Promoting Trade and
October 27 2008
Investment
Strengthening Industry The Trade Stimulus
Competitiveness
Approval of the
Trade is an engine of economic growth
Colombia, Panama, and South Korea Free Trade Agreements
Ensuring Fair Trade
Helping
--
Browse by organization
U.S. Commercial
Service
Manufacturing and
(FTAs) would help stimulate further growth.
U.S.-Colombia FTA
Services
1.
Market Access and
Compliance
Import Administration
2.
u.s. exports are expected to increase by $1.1 billion under the
FTA.
10,000 U.S. companies export to colombia; 8,500 of these are
small- and medium-sized firms (SMEs).
U.S. GDP is expected to increase by approximately $2.5 billion,
according to the usrrc.
3.
U.S.-Panama FTA
The Panama canal expansion, valued at $5.25 billion, is an
historic opportunity for U.S companies. The FTA will level the
playing field for U.S. firms eager to compete for canal projects.
6,400 U.S. companies export to Panama, of which 5,200 are
SMEs.
American SIIEs would directly benefit from the FTA as 39
percent of total U.S. merchandise exports to Panama are
Shipped by SME5.
1.
2.
3.
IJ.S.-Korea FTA
U.S. exports are expected to increase by $10.3 billion.
Korea is a $1 trillion economy. Within the first 3 years of the
FTA, 95 percent of U.S exports of consumer and industrial
goods will enter this huge market duty-free.
U.S. GDP is expected to increase as much as $20 billion,
according to studies.
i.
2.
3.
Free Trade Works Trade Stimulates the
American Economy
—
•
From January to August 2008, U.S. exports totaled $850.5
billion
1
a huge economic stimulus that kept America
growing despite the effects of the domestic housing market.
--
•
Net exports contributed 2.9 percentage points to total GDP
growth in the 2nd quarter of 2008, and are the MAIN reason
that America’s economy had positive growth in the first half
of the year.
•
Exports of goods and services grew by 18 percent to $1.3
trillion in the first eight months of 2008.
•
706 days have passed since the U.S-Colombia FTA was
signed. In that time, U.S. exports to colombia have faced
tariffs over $1.3 billion, which the FTA would eliminate. U.S.
exporters face more unnecessary tariffs as they wait for
approval of the Panama and South Korea FTA5.
• The United States has a $10.3 billion trade SURPLUS with
2 ETA5 work.
itsl4 FfA partners.
• The U.S. manufactured goocs trade balance improved 158
percent with our 14 FA partners, but only 7 percent with
non-FTA partners in the first eight months of 2008.
3 is due to
• About 59 percent of the U.S. trade deficit
petroleum imports.
http://trade.gov/press/press releases/2008/fta-factsheet 102708 .asp
11 / 1/2010
The Trade Stimulus Fact Sheet October 27, 2008
-
Page 2 of 2
1 Exports of non-petroleum goods
2 For manufactured goods only
Trade deficit of goods and services
httix/Itrade. gov/press/press releases/2008/fta-factsheet 102708 .asp
11/1/2010
Page 1 of3
Free Trade Agreements
Advanced Search
Search trade.gov
Helping U.S. businesses by
Promoting Trade and
Investment
Strengthening Industry
Competitiveness
Ensuring Fair Trade
Browse by organization
U.S. Commercial
Service
Manufacturing and
Services
Market Access and
Compliance
Import Administration
Free Trade Agreements
Free trade agreements (FTAs) have proved to be one of the best
ways to open up foreign markets to U.S. exporters. Today, the
United States has FTA5 with 14 countries. In 2006, six new ETA5
were implemented: with Bahrain, El Salvador, Guatemala,
Honduras, Morocco, and Nicaragua. Last year, trade with countries
that the United States has FTAs was significantly greater than their
relative share of the global economy. Although comprising 7.5
percent of global GDP (not including the United States), those ETA
countries accounted for over 42 percent of U.S. exports.
U.S. Free Trade Agreement Partners in the Global Economy
Percent of World GDt 2006
Percent of U.S. Exports
1 2006
ErA
Countries:
7.5%
Non-FT
To
FTA
Countries:
42.6%
—
Countries:
2S%
EtA = free trade agreement
GDP = gross domestic product
Note: World GDP excludes the United States. GDP percentage
shares are based on GDP figures on a purchasing power parity
basis. Export figures are for total U.S. Exports.
Free trade agreement countries include all countries with free trade
agreements with the United States (Australia, Bahrain, canada,
chile, Dominican Republic, El Salvador, Guatemala, Honduras,
Israel, Jordan, Mexico, Morocco, Nicaragua, and Singapore).
Sources: International Monetary Fund, World Economic Outlook
Database (April 2007); U.S. Department of Commerce,
International Trade Administrations, and Bureau of the Census
Pending Free Trade Agreements
Colombia
NEW! U.S-Colombia TPA Fact Sheet
A Partnership to Prosperity
Why a Colombia Trade Promotion Agreement?
case for Colombia: Giving American Products a Fair Shake
State by State Impact Reports
Industry Sectoral Reports
United States Trade Representative (USTR) Information
Korea
Why a Korea Trade Promotion Agreement?
State by State Impact Reports
Industry Sectoral Reports
USTR Information
Panama
Why a Panama Trade Promotion Agreement?
State by State Impact Reports
USTR Information
http://trade .gov/ftalindex.asp
11/1/2010
Page 2 of 3
Free Trade Agreements
Free Trade Agreement Partners
and the US.Trade Balance,2006
vakie of trade n bionsofdollars
SL
S12
—-
—-
-
-
-
-
-
—
-
-
--
-
-
-
-.
-
-
-
-
Es’part5
Imports
-
0
-I
EtA Contnes
Sewte US.
Non-flA Countries
irtmimtofCurne*tce.
Existing Free Trade Agreements
Australia
State by State Impact Reports
Industry Sectoral Reports
Opportunity Report
Textiles Information
Additional Australia ETA Information for Exporters
USTR Information
Bahrain
State by State Impact Report
Industry Sectoral Reports
Textiles Information
Additional Bahrain ETA Information for Exporters
USTR Information
CAFTA-DR
State by State Impact Reports
Additional Reports and Statistics
Textiles Information
Additional CAFTA-DR ETA Information for Exporters
USTR Information
Chile
Opportunity Report
Additional Reports and Statistics
Textiles Information
Additional Chile ETA Information for Exporters
USTR Information
Israel
Additional Reports and Statistics
Additional Israel ETA Information for Exporters
Textiles Information
USTR Information
Jordan
Additional Reports and Statistics
httix//trade.gov/ftalindex.asp
11/1/2010
zo
UJZ
WcJZ
UJWLU
uJ’n-J
zw
w
-J
U