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Trade and economic growth in the Caribbean

University of Florida Institutional Repository

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TRADE AND ECONOMIC GROWTH IN THE CARIBBEAN By BRIAN M. FRANCIS A DISSERTATION PRESENTED TO THE GRADUATE SCHOOL OF THE UNIVERSITY OF FLORIDA IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY UNIVERSITY OF FLORIDA 2003

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Copyright 2003 by Brian Michael Francis

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This dissertation is dedicated to my sumptuous wife, Angela Francis.

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ACKNOWLEDGMENTS Firstly, I wish to give thanks and praise to God Almighty because without him none of this research would have been possible. God has been with me every step of the way, providing guidance and blessings. At times when problems seemed insurmountable, he was there to help me resolve them and gave me the strength and determination to persevere. The combined and timely efforts of many individuals made the completion of this research exercise possible. I am thankful for the opportunity to have worked with my entire supervisory committeeDrs. Timothy Taylor; Andrew Schmitz; Ronald Ward; James Seale, Jr.; and Terry McCoy. My experience working with them was extremely revealing. I came away armed with knowledge of what research in general and graduate training at the University of Florida in particular should and should not involve. The interactions with my supervisory committee brought to the fore several very important and interesting lessonslessons that can benefit every graduate student. Dr. Timothy Taylor, my supervisory committee chair, has been a source of major ideas. He worked conscientiously to shape the final outlook of the research. Throughout my stay at the University, he acted as an academic mentor. The degree of flexibility with which he operated is amazing and enviable. His indefatigable desire to achieve perfection and his fervent aspiration for excellence were the ingredients that challenged, stimulated, and kept me alert. I am very appreciative of the opportunity to have worked iv

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with him. Most importantly, Dr. Taylor opened my eyes to some of the major pitfalls gradate students should avoid. Dr. Ronald Ward deserves special recognition for his unselfish attitude, thoroughness, and guidance (especially in the development, specification, and estimation of the empirical model used in the research). He gave freely of his time and advice. I am enormously grateful for and impressed by his positive approach and willingness to provide assistance whenever called upon to do so. The other members of my supervisory committeeDrs. Andrew Schmitz; James Seale, Jr.; and Terry McCoyprovided useful criticisms and suggestions that shaped and overpoweringly influenced the final outcome of the research. Ms. Anne Taylor of the Editorial Office, and Ms. Joyce Dolbier of the Institute of Food and Agricultural Sciences, have contributed significantly to the quality of the dissertation through their thorough editing of the manuscript. I wish to record my thanks and appreciation to them for their very kind assistance. Drs. Tom Spreen, Chairperson; Jeff Burkhardt, Graduate Coordinator; Chris Andrew, former Graduate Coordinator; and Carlton Davis, Distinguished Professor; Department of Food and Resource Economics, respectively, deserve special mention for their roles in gaining my acceptance by the University of Florida. They paved the way by granting to me a graduate research assistantship. Their continuous support, encouragement, and insightfulness were invaluable to me. To the professors who taught me, the students with whom I studied, and the other faculty and staff with whom I interacted, I say well done. They brought to the fore v

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many qualities and attributes I never knew I had; and as a result they made me a better person altogether. My sojourn at the University of Florida was indeed a very interesting one, especially during the last 6 months. It was quite an experience, eye opening in many ways. With strong support and commitment from my wife, family, friends, and supervisory committee, I triumphed. In this regard, I wish also to recognize tremendous support and inspiration. I offer sincere appreciation to my entire family and to all of my friends. Special expressions of gratitude are extended to my brothers Allan, Alvin, Carlton, Christopher, Desmond, and John; to my sisters Suzette, Thessa, and Veronica; to Abigail, Alisha, Jumal, and Marlon; to my mother-in-law, Ms. Clarence Murray; and other in-laws; and to Mr. Rodney Jerome, Mrs. Maria Ollivierre, and their children. Mr. Wilfred Hercules, Mr. Victor Ashby, Mr. William Samuel, Mr. Richard Duncan, and Professor Frank Alleyne, merit distinctive acclaim. Their teachings, unwavering expressions of confidence in my abilities, and moral support, have inspired me to achieve success at the highest level of my discipline. My mother, Ms. Mavis Francis, has contributed significantly to my upbringing. Her excellent moral teachings and values laid the foundations and prepared me to face the challenges of life in general and graduate education in particular. I wish to thank her most sincerely. Finally, to my lovely wife, Angela, to whom this dissertation is dedicated, I wish to express my deepest love and gratitude. Without her drive, love, perceptiveness, support, and commitment, this dissertation would not have been possible. vi

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TABLE OF CONTENTS Page ACKNOWLEDGMENTS.................................................................................................iv LIST OF TABLES.............................................................................................................xi LIST OF FIGURES.........................................................................................................xiii ABSTRACT.......................................................................................................................xv CHAPTER 1 INTRODUCTION........................................................................................................1 Economic Characteristics of Caribbean Countries.......................................................5 Problematic Situation....................................................................................................7 Problem Statement......................................................................................................10 Research Objectives....................................................................................................12 Scope of the Research.................................................................................................12 2 LITERATURE REVIEW...........................................................................................15 Trade and Economic Growth: Theoretical Considerations........................................15 Sources of Ambiguity..........................................................................................17 Theories of Absolute and Comparative Advantage.............................................18 Bhagwatis Immismerizing Growth....................................................................20 Endogenous Theories..........................................................................................21 Kaldors Export-led Model..................................................................................22 Taylors Open Structuralist Model......................................................................23 Trade and Economic Growth: Empirical Evidence....................................................24 Growth Theory and Empirics.....................................................................................27 Growth Theory....................................................................................................28 Neoclassical theory......................................................................................29 Endogenous growth theory...........................................................................29 Theoretical Review..............................................................................................31 Neoclassical theory......................................................................................31 Endogenous growth theory...........................................................................32 Growth Empirics.................................................................................................33 Simulation exercises.....................................................................................36 Growth accounting.......................................................................................36 Time series regression..................................................................................37 vii

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Cross-sectional studies.................................................................................38 Panel data regression....................................................................................41 Problems faced in empirical analysis...........................................................43 Previous Caribbean Studies.................................................................................44 Agricultural Diversification: Theoretical Considerations..........................................46 Meaning and Purpose of Agricultural Diversification........................................46 Agricultural Diversification within the Context of Trade...................................50 3 OVERVIEW OF COUNTRIES.................................................................................56 Background on Countries...........................................................................................56 Belize...................................................................................................................56 Dominica.............................................................................................................57 Jamaica................................................................................................................58 Trinidad and Tobago...........................................................................................58 Economic Performance...............................................................................................59 Belize...................................................................................................................60 Dominica.............................................................................................................60 Jamaica................................................................................................................62 Trinidad and Tobago...........................................................................................63 Gross National Income........................................................................................65 Economic Structure....................................................................................................65 Sectoral Contribution...........................................................................................65 Belize............................................................................................................66 Dominica......................................................................................................67 Jamaica.........................................................................................................69 Trinidad and Tobago....................................................................................69 Trade Dependency...............................................................................................70 Belize............................................................................................................71 Dominica......................................................................................................71 Jamaica.........................................................................................................72 Trinidad and Tobago....................................................................................73 Economic Development Policies................................................................................74 Belize...................................................................................................................77 Dominica.............................................................................................................80 Jamaica................................................................................................................82 Trinidad and Tobago...........................................................................................87 4 AGRICULTURAL EXPORT DIVERSIFICATION.................................................95 Introduction.................................................................................................................95 Measuring Agricultural Export Diversification..........................................................97 Extent of Agricultural Export Diversification in the Caribbean...............................101 Belize.................................................................................................................101 Dominica...........................................................................................................104 Jamaica..............................................................................................................106 Trinidad and Tobago.........................................................................................108 viii

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Summary of Findings........................................................................................110 5 MODEL DEVELOPMENT, SPECIFICATION, ESTIMATION, AND EMPIRICAL ANALYSIS...............................................................................................................126 Model Development.................................................................................................126 Empirical Specification............................................................................................129 Estimation Technique...............................................................................................134 Cooley-Prescott Procedure................................................................................136 Confidence Intervals..........................................................................................139 Data and Empirical Findings....................................................................................140 Belize.................................................................................................................141 Dominica...........................................................................................................144 Jamaica..............................................................................................................146 Trinidad and Tobago.........................................................................................150 Summary of Findings........................................................................................154 6 SUMMARY, CONCLUSIONS, AND CONSIDERATIONS FOR FURTHER RESEARCH.............................................................................................................175 Summary...................................................................................................................175 Conclusions...............................................................................................................176 Considerations for Further Research........................................................................179 APPENDIX A DEFINITION OF VARIABLES FROM WORLD BANK DATA..........................183 Per-Capita GNI, Atlas Method (Current US$).........................................................183 Gross Domestic Product (Constant 1995 US$)........................................................183 Gross Domestic Product (Current US$)...................................................................184 Agriculture, Value Added (% of GDP)....................................................................184 Industry, Value Added (% of GDP).........................................................................184 Services, Value Added (% of GDP).........................................................................185 Labor Force (Total)...................................................................................................185 Population (Total).....................................................................................................186 Gross Capital Formation (Current US$)...................................................................186 Foreign Direct Investment, Net Inflows (BoP, Current US$)..................................186 Merchandise Exports (Current US$)........................................................................187 Exports of Goods and Services (Current US$).........................................................187 Merchandise Imports (Current US$)........................................................................187 Imports of Goods and Services (Current US$).........................................................187 Illiteracy Rate, Adult Total (% of People Ages 15 and Above)...............................188 ix

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B DEFINITION OF VARIABLE FROM BULMER-THOMAS AND NICHOLLS..189 LIST OF REFERENCES.................................................................................................190 BIOGRAPHICAL SKETCH...........................................................................................208 x

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LIST OF TABLES Table page 3-1 Gross National Income (GNI) per-capita in current US$ based on the Atlas Method for selected years, 1980-2001...................................................................................92 3-2 Annual average growth rate of real GDP, 1970s-1990s, and 2001............................93 3-3 Annual average growth rate of current GNI per capita, 1970s-1990s, and 2001........93 3-4 Sectoral contributions to GDP in selected countries, 1980-2001................................93 3-5 Total exports and imports as percentages (%) of GDP for selected years, 1980-2001.................................................................................................................94 4-1 Commodity group aggregates for the classification of agricultural exports.............111 4-2 Entropy indexes for Belize, 1970-2001.....................................................................112 4-3 Entropy indexes for Dominica, 1970-2001...............................................................113 4-4 Entropy indexes for Jamaica, 1970-2001..................................................................114 4-5 Entropy indexes for Trinidad and Tobago, 1970-2001.............................................115 4-6 Major agricultural exports from Belize for selected years by value ($1000)............116 4-7 Shares of major agricultural exports from Belize for selected years (%)..................117 4-8 Major agricultural exports from Dominica for selected years by value ($1000).....118 4-9 Shares of major agricultural exports from Dominica for selected years (%)............119 4-10 Major agricultural exports from Jamaica for selected years by value ($1000).......120 4-11 Shares of major agricultural exports from Jamaica for selected years (%).............121 4-12 Major agricultural exports from Trinidad and Tobago for selected years by value ($1000)...................................................................................................................122 4-13 Shares of major agricultural exports from Trinidad and Tobago for selected years (%)..........................................................................................................................123 xi

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5-1 Estimated time varying coefficients for Belize, 2001...............................................156 5-2 Estimated time varying coefficients for Dominica, 1998..........................................156 5-3 Estimated time varying coefficients for Jamaica, 2001.............................................157 5-4 Estimated time varying coefficients for Trinidad and Tobago, 2001........................157 5-5 Estimated time varying intercepts and coefficients of diversification for Belize, 1990-2001...............................................................................................................158 5-6 Estimated time varying coefficients of the growth in total exports and imports for Belize, 1990-2001..................................................................................................159 5-7 Estimated time varying intercepts and coefficients of diversification for Dominica, 1987-1998...............................................................................................................160 5-8 Estimated time varying coefficients of the growth in total exports and imports for Dominica, 1987-1998.............................................................................................161 5-9 Estimated time varying intercepts and coefficients of diversification for Jamaica, 1981-2001...............................................................................................................162 5-10 Estimated time varying coefficients of the growth in total exports and imports for Jamaica, 1981-2001................................................................................................163 5-11 Estimated time varying intercepts and coefficients of diversification for Trinidad and Tobago, 1980-2001..........................................................................................164 5-12 Estimated time varying coefficients of the growth in total exports and imports for Trinidad and Tobago, 1980-2001...........................................................................165 5-13 Estimated time varying coefficients of trade and diversification for the first and last periods for each country..................................................................................166 xii

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LIST OF FIGURES Figure page 4-1 Estimated entropy indexes for Belize, 1970-2001.....................................................124 4-2 Estimated entropy indexes for Dominica, 1970-2001...............................................124 4-3 Estimated entropy indexes for Jamaica, 1970-2001..................................................125 4-4 Estimated entropy indexes for Trinidad and Tobago, 1970-2001.............................125 5-1 Dynamic path of the intercept for Belize, 1990-2001...............................................167 5-2 Dynamic path of adjustment in the coefficients of the growth in exports for Belize, 1990-2001...............................................................................................................167 5-3 Dynamic path of adjustment in the coefficients of the growth in imports for Belize, 1990-2001...............................................................................................................168 5-4 Dynamic path of adjustment in the coefficients of diversification for Belize, 1990-2001........................................................................................................................168 5-5 Dynamic path of the intercept for Dominica, 1987-1998..........................................169 5-6 Dynamic path of adjustment in the coefficients of the growth in exports for Dominica, 1987-1998.............................................................................................169 5-7 Dynamic path of adjustment in the coefficients of the growth in imports for Dominica, 1987-1998.............................................................................................170 5-8 Dynamic path of adjustment in the coefficients of diversification for Dominica, 1987-1998...............................................................................................................170 5-9 Dynamic path of the intercept for Jamaica, 1981-2001.............................................171 5-10 Dynamic path of adjustment in the coefficients of the growth in exports for Jamaica, 1981-2001................................................................................................171 5-11 Dynamic path of adjustment in the coefficients of the growth in imports for Jamaica, 1981-2001................................................................................................172 xiii

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5-12 Dynamic path of adjustment in the coefficients of diversification for Jamaica, 1981-2001...............................................................................................................172 5-13 Dynamic path of the intercept for Trinidad and Tobago, 1980-2001......................173 5-14 Dynamic path of adjustment in the Coefficients of the growth in exports for Trinidad and Tobago, 1980-2001...........................................................................173 5-15 Dynamic path of adjustment in the coefficients of the growth in imports for Trinidad and Tobago, 1980-2001...........................................................................174 5-16 Dynamic path of adjustment in the coefficients of diversification for Trinidad and Tobago, 1980-2001................................................................................................174 xiv

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Abstract of Dissertation Presented to the Graduate School of the University of Florida in Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy TRADE AND ECONOMIC GROWTH IN THE CARIBBEAN By Brian M. Francis December 2003 Chair: Timothy G. Taylor Major Department: Food and Resource Economics During the 1970s, the primary development paradigm in the Caribbean was predicated on import substitution industrialization (ISI) and protected domestic markets, which were arguably biased against agricultural exports. A shift began in the mid-1980s from ISI to outward orientation, which favored export-led growth and openness to international markets. At center stage were agricultural exports and export diversification. Our study examines the relationship between trade and economic growth in Belize, Dominica, Jamaica, and Trinidad and Tobago across the past 30 years, incorporating the effect of agricultural export diversification. The measurements for diversification used entropy indexes for total, and within and across commodity groups. The estimation was carried out using the Cooley-Prescott procedure for handling time varying coefficients. Analyses of the entropy indexes revealed some evidence of diversification in all four countries. The data suggested that most of the diversification occurred across commodity groups. xv

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Trade played a significant role in economic growth in the Caribbean. In Belize, Dominica, and Jamaica exports impacted economic growth positively. The importance of exports remained unchanged in Dominica although it declined in Belize and Jamaica. The impact of exports on economic growth changed from positive to negative after 1985 in Trinidad and Tobago. The negative effect increased. Imports had a positive effect on economic growth in Belize, and Trinidad and Tobago. The importance of imports increased in Belize but declined in Trinidad and Tobago. In Dominica and Jamaica, imports impacted economic growth negatively. However, the negative effects of imports on economic growth in Jamaica declined but remained unchanged in Dominica. Diversification helped economic growth in all four countries. In terms of policy implications, the econometric results revealed that the relationship among trade, agricultural export diversification, and economic growth varied from country to country. These results suggest that policies aimed at stimulating both economic growth and agricultural export diversification should be on a country-to-country basis, rather than one size fits all. xvi

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CHAPTER 1 INTRODUCTION The current economic landscape in the Caribbean1 is to a large extent a reflection of the historical relationship between these countries individually and also collectively with Europe and North America. This relationship has shaped the economic structure of Caribbean countries and ultimately dictated the pattern of production and trade. In the opinion of Demas (1992), every country has evolved with several characteristics which include Relatively narrow economic bases, specializing in the production and export of a small range of agricultural staples (for example, bananas, bauxite, petroleum, and sugar)2 Small or virtually non-existent manufacturing sectors that produce mostly for domestic consumption Heavy dependence on imported items such as food and manufactured goods No well-developed local or regional capital markets Absence of diversified economies Extensive trading relationships with Europe and North America. The colonial and historical relationship between the Caribbean and Europe meant that the economic performance of the countries was inextricably linked to the 1Caribbean refers to the following CARICOM countries: Antigua and Barbuda, the Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, and Trinidad and Tobago. 2See Nelson (1992a) for information on trading arrangements involving bananas and sugar. 1

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2 preservation of this relationship.3 Furthermore, the benefits to be derived from these relationships depended on a number of factors (such as stability in the prices of exports to Europe, favorable terms of trade, and continued access to preferential arrangements). Notwithstanding the benefits expected from existing relationships with Europe, Caribbean countries were nonetheless interested in pursuing development strategies that involved some degree of industrialization. In this respect, two distinct periods in Caribbean economic development can be identified: the 1960s and 1970s; and the 1980s to present. Lewis (1950, 1954) represented the first attempt at constructing an economic model or theory specific to the problems of the Caribbean. Given the period in which he wrote, it is no surprise that Lewis ideas paralleled classical thinking. To a large extent, his views reflected some degree of dissatisfaction with the vast deterioration in the economic and social conditions of Caribbean countries and the manner in which the colonial authorities handled the developments. To arrest these declining fortunes and begin the process of economic transformation of Caribbean economies, Lewis advocated a strategy of industrialization, mainly in light manufacturing, to transform Caribbean countries economically. This strategy, Lewis argued, was the only way that these economies could solve their main problems of overpopulation and poverty. His strategy called for the insertion of foreign enterprise and capital or investment into Caribbean economies to take advantage of cheap labor in the traditional agricultural sector and to manufacture for metropolitan markets. In terms of policy, Lewis prescribed Export-based industrialization for the regional Caribbean economy 3Blackman (1991) discussed issues relevant to this relationship.

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3 Inviting foreign capitalists to invest in the domestic economies Offering tax and other incentives to encourage overseas investment in the countries. As brilliant as Lewis ideas were, they received severe criticism, mostly from the Plantation School.4 Plantation economies of the Caribbean were said to have sufficiently special and unique historical, structural and institutional features so as to require a new analysis that make these features central to the model. The central hypothesis of the plantation economy model is that the plantation legacy deprived the region of internal dynamics and the legacy involved patterns of income distribution that discriminated against economic transformation. Clearly, unlike Lewis model of industrialization through attracting foreign direct investment and promoting exports, the plantation model is one of internally propelled growth and development. In terms of policy prescriptions, the plantation economy model proposes that production be reorganized around the domestic economy, with the local sectors becoming the target for investment and long-term capital accumulation. A policy of import substitution industrialization (ISI) was favored. This paradigm dominated development policy in Caribbean countries from the 1960s to the early 1980s. Import substitution industrialization involved the domestic production of goods that substituted for imports. Domestic industries were therefore afforded quota or tariff protection to shield them from import competition. Import substitution industrialization was predicated on the idea that developing countries (the South) must protect themselves from imports from industrialized countries (the North) and place emphasis on developing manufacturing activities that would foster structural economic change. Import 4For some of the criticisms levied against Lewis and an in-depth exposition on the plantation school, see Beckford (1972), Best (1968), and Thomas (1968).

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4 substitution industrialization achieved only partial success in the Caribbean. A major factor that may have limited the success of ISI in the Caribbean is the small size of the domestic markets (McCoy 1993). Faced with macroeconomic problems in the 1980s5 and spurred on by the International Monetary Fund (IMF) and the World Bank, many Caribbean countries abandoned their inward-looking strategy of industrialization in favor of an outward-oriented policy that intended to promote growth through export expansion. This strategy promoted exportation of processed products, semi-manufacturers, light manufacturing, and nontraditional agricultural commodities (rather than continue to focus on the export of a few major unprocessed primary products). In essence, import substitution industrialization was replaced by an outward-oriented development strategy (Thorpe 1997, Weeks 1995). Export promotion (including agricultural exports) formed an integral part of the outward-oriented development strategy. Many organizations and writers alluded to the significance of agriculture to developing countries. The Inter-American Development Bank (IADB), for example, highlighted the importance of agriculture and agricultural exports to economic growth and rural development in Caribbean countries. Deere and Melendez (1992) noted that promoting nontraditional exports (an integral component of the Caribbean Basin Initiative) did not adequately compensate for 5Some of the economic problems of the 1980s included reductions in gross per-capita investment, deterioration in physical and human capital, rising levels of malnutrition, rising levels of debt, sharp contraction in private capital inflows, an increase in net outflows of capital, weak economic structures, and inappropriate economic policies (Wilson 1992). The 1970s oil crises significantly aggravated these economic problems. For a detailed discussion of the oil crises see Lee et al. (1990), Fleay (2000) and Odell (2001).

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5 the declines in traditional exports such as sugar and petroleum.6 The effects of export growth and diversification on economic growth reflected The fact that the fastest growing exports were assembly operations in free trade zones, which had limited linkages to the domestic economies of the Caribbean The overall decline in the value of agricultural exports from the Caribbean associated with the reduction in sugar exports The overlapping of the CBIs coverage with various existing programs that granted duty-free treatment to Caribbean exports-programs such as the Generalized System of Preferences (GSP), and sections 806.3 and 807 of the U.S. tariff code. Notwithstanding these effects, the extent to which agricultural export diversification is related to economic growth in Caribbean countries is unknown empirically. Given mounting pressures for the elimination of trade preferences for Caribbean exports to the European Union, important actions will be to diversify agriculture and determine the impact of agricultural exports diversification on economic growth in the Caribbean within the context of the trade-growth nexus. Economic Characteristics of Caribbean Countries Though different in physical dimensions, population sizes, and endowment of natural resources, the economies of the Caribbean are similar in many respects. The Economic Commission for Latin America and the Caribbean (ECLAC, 1986) and Jesson and Rodrguez (1999) presented a vivid picture of the structure of Caribbean economies. Caribbean countries are characterized by Relatively small economies, land mass, and population. In 2001, Caribbean countries had a combined nominal gross domestic product (GDP) of US $33 6In the early 1980s, sugar and petroleum were the major Caribbean Basin exports to the U.S. The sugar import quota for Caribbean Basin countries was reduced from an annual average of 1.6 million tons in 1979-1981 to 268,000 tons in December 1987. Consequently, Caribbean Basin producers lost an estimated $1.8 billion between 1982 and 1989 (Deere and Melendez 1992, p. 62-63).

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6 billion, a combined land area of 462,834 square km, and total population of 14.6 million7 High degree of trade dependency Price taking in international markets Narrow export base, mainly agricultural products such as bananas, rice, rum and sugar; tourism and offshore financial services; oil and natural gas; and bauxite Heavy dependence on taxes on international trade and transactions Acute reliance on trade preferences Favorable, yet challenging locations. Caribbean countries are near the U.S. and feature tropical conditions. However, they suffer from high per-unit transportation cost.8 Interestingly, the World Bank classifies the Bahamas as a high-income country. Antigua and Barbuda, Barbados, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and Trinidad and Tobago are classified as upper-middle-income countries; and Belize, Guyana, Jamaica, St. Vincent and the Grenadines, and Suriname as lower-middle-income countries. Haiti, one of the poorest countries in the Western Hemisphere, is classified as a low-income country.9 7The figure for land mass was obtained from the Central Intelligence Agency (CIA 2002), The World Factbook 2002. The data on nominal GDP and total population came from the World Bank, World Development Data group. 8These clearly distinguishing features of Caribbean countries pose unique challenges for their quest toward achieving sustained levels of economic growth. 9World Bank (2003), World Development Report 2003, p. 243. Classifications are as of June 30, 2003 and are based on 2001 Gross National Income (GNI) per capita, calculated using the World Banks Atlas method. A country with a GNI per capita of US $745 or less is considered low-income; US $746-2,975 as lower-middle-income; US $2,976-9,206 as upper-middle-income; and US $9,206 and above as high-income. Although Bardados GNI per capita in 2001 exceeded US $9,206, the country was classified as upper-middle-income. These classifications should be weighed against some of the risks facing small islands developing states like those in the Caribbean. For some discussions on these risks, see Blackman (1991).

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7 Problematic Situation By the 1970s, evidence on the results of ISI policies in the Caribbean as well as other developing countries began to accumulate and suggested that the anticipated results had not been realized. According to Bruton (1998), important lessons learned from two decades of pursuing ISI policies included The global post-war economic boom tended to undermine the argument that developing countries could not export Physical (central) planning could not avert economic bottlenecks and misallocations Imports rose faster than expected and economic independence declined rather than increased. Beginning in the 1980s, the continued poor economic performance of developing countries (and the evolution of development thought in concert with contemporary economic events) increasingly questioned the wisdom of the ISI paradigm. The new consensus that emerged argued that an outward-oriented approach that focused on trade in general, and exports in particular, should be pursued. The basic argument supporting this view was that openness to foreign competition, foreign capital, and elimination of export biases would engender structural change in accordance with the dictates of comparative advantage. In this regard, Krueger (1995) recognized that an outer-oriented trade strategy would not succeed without adequate infrastructure (such as ports, roads, railroads, electric power, and communications), increasing educational attainment, and several other policies conducive to growth. As the outward-oriented paradigm gained favor with the United States Agency for International Development (USAID) and the World Bank, access to development funds became increasingly dependent on adopting polices consistent with this approach.

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8 During the period 1978-1988, the Organization for Economic Cooperation and Development (OECD 1992) documented the huge amount of resources in the form of official/overseas development assistance (ODA) to the Caribbean from various bilateral and multilateral donors including the U.S.,10 Canada, the United Nations Development Program (UNDP), and the Inter-American Development Bank (IADB). Net ODA disbursements to the Caribbean from all sources (at 1987 prices and exchange rates) totaled $572 million in 1978, and $509 million in 1988 (OECD 1992, p. 98-99). Agriculture benefited tremendously. Thus, the Caribbean, like many other developing countries, had little choice but to move in the direction of outward-oriented policies, despite continued skepticism regarding the efficacy of those policies. This state of affairs led to the outward-oriented paradigm being identified as the Washington Consensus.11 The Washington Consensus seemed opposed to all forms of import protection. Over time, and as attempts to adopt policies consistent with the Washington Consensus intensified, the outward-oriented paradigm came under increasing scrutiny and criticisms in a number of areas. For instance, while the benefits of nontraditional exports continued to be acknowledged, understanding the complex interactions among exports, technology transfer, and domestic learning remained elusive. Despite seeking independence from Britain, thereby ending many years of colonization, many Caribbean countries continue to rely heavily on preferential access to 10The U.S. efforts towards boosting agricultural export expansion from the Caribbean was strongly supported by the passage of the Caribbean Basin Economic Recovery Act (CBERA) in 1983 and its successors, the Caribbean Basin Trade Partnership Act (CBTPA). The CBTPA expanded duty-free access to the U.S. market granted under the original CBERA and provided near NAFTA parity to eligible beneficiaries. 11John Williamson is credited with the creation of the concept know as the Washington Consensus.

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9 the European markets for their traditional agricultural commodities such as bananas, minerals and sugarcommodities whose comparative advantages are clearly declining (ECLAC 1986). According to ECLAC (1986), banana exports suffered from a lack of price competitiveness and inferior quality control relative to producers in Africa and Central America. The loss in comparative advantage for sugar resulted from the production of other sources of sugar, such as corn syrup and beet sugar, and the changing nature of preferences.12 These factors plus mounting macroeconomic difficulties forced many Caribbean countries to pursue stabilization and structural adjustment programs under the auspices of the IMF and the World Bank.13 The main objective of the IMF and World Bank was to transform Caribbean countries into more open, market-oriented economies, and to promote economic efficiency and growth. The IMF and the World Bank advocated major policies such as trade liberalization, export promotion, privatization, deregulation, fiscal reform, and exchange-rate adjustments. Despite the shift in paradigm from ISI to outward orientation during the mid-1980s, many Caribbean countries are failing to achieve continuously the high and positive economic growth rates expected. The debate over the choice between closed or open economic policies continues unabated with no clear answers in sight. Indeed, Jesson and Rodrguez (1999) observed that despite important policy changes, export diversification 12ECLAC (1986) observed although there are mounting pressures for the elimination of preferences, Caribbean countries still benefit from the Cotonou partnership, the trade and aid agreement between the EU and the African, Caribbean and Pacific (ACP) countries; the CBI; the US-Caribbean Basin Trade Partnership Act; and Caribcan, a preferential trade program maintained by Canada for the Caribbean. 13For a discussion of some of the issues and policy lessons regarding the stabilization efforts of Barbados, Guyana, Jamaica, and Trinidad and Tobago in the 1980s and 1990s see Hilaire (2000). See also King (2001) for further details on Jamaicas experience with stabilization and structural adjustment programs.

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10 has been limited, and insufficient for generating satisfactory rates of economic growth in CARICOM. They also noted that the regions overall export performance has been unsatisfactory, despite advantageous market access situations. Further, Jesson and Rodrguez (1999) noted that those conditions are becoming less favorable; and foreign aid, a major contributor to development in past decades, is also diminishing. Based on these factors, Jesson and Rodrguez (1999) concluded that CARICOM is in fact clearly at a crossroads. Problem Statement The shift from import substitution industrialization to an outward-oriented development strategy in the mid-1980s raised concerns about the efficacy of either paradigm for stimulating economic growth and development in Caribbean countries. Bruton (1998) noted that there is increasing doubt that growth is as simple as it appears in the export-oriented arguments, and that renewed focus is given to more basic characteristics of an economy, especially entrepreneurship, institutions, and knowledge accumulation. Under the ISI strategy, the substitution of domestic production with imports was deemed necessary for enhanced economic growth and development. The outward-oriented development paradigm places tremendous emphasis on the role of both exports and imports in stimulating economic activity. Most empirical studies on the trade-growth relationship were conducted within the context of an export-led growth strategy (which, unfortunately, was misconstrued as an outward-oriented development paradigm). The link between exports and economic growth has received widespread attention, especially in relation to the success of the East Asian economies. Balassa (1985), Feder (1983), Kavoussi (1984), Ram (1985), and Tyler (1981), have all examined the

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11 relationship between exports and economic growth14 in a cross-section of countries. Frankel and Romer (1999) also explored the relationship between exports and economic growth by examining the direction of causation. Generally, exports impacted economic growth positively. Unfortunately, the role of imports in the economic growth process received little attention in the literature relative to exports. The inclusion of both imports and exports as separate arguments in the neoclassical type of production function typically used to model economic growth is justified in the literature (Esfahani 1991). Esfahani (1991) found that exports had a positive impact on economic growth through the provision of foreign exchange and positive externalities arising from increased competition. Further, he justified the inclusion of imports as an additional explanatory variable in the growth model because imports tend to be correlated with exports. If imports are excluded from the model, Esfahani (1991) argued that the impact of exports would be overestimated. The purpose of our study is to examine the relationship between trade (imports and exports) and economic growth in the Caribbean over the past 30 years. The influence of agricultural export diversification on the trade-growth nexus is also incorporated. Diversification in agriculture became a major focus of export promotion because of the threat of removal of preferential access to the European market for traditional agricultural exports under the trade agreement between the European Union and the African-Caribbean-Pacific countries (EU-ACP Trade Agreement). The pursuit of agricultural 14One of the most influential arguments that link growth and openness has been the NBER multi-country project on trade regimes and economic development. In that study, Krueger (1978), and Bhagwati (1978), coordinated studies of ten countries that had undergone major liberalizations. These studies gain credibility from the degree and kind of institutional knowledge that they reveal. Their ultimate appeal, however, probably comes from the readers feeling that these observations come about as close to a controlled experiment as we are likely to get. Another study in the same genre is Edwards and Edwards (1987) which deals informatively with the Chilean liberalization from 1973 to 1983. (Leamer 1995, p. 94)

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12 diversification is also linked to the fact that Caribbean countries have narrow export bases. Our study addresses 3 key questions: Has agricultural export diversification occurred and when? To determine whether export agriculture has in fact diversified and when, the entropy index of total diversification is estimated and analyzed over the period 1970-2001 What was the extent and nature of agricultural export diversification? To establish these issues, entropy indexes for across and within commodity groups are estimated and analyzed. The agricultural export structure of each country in our study is analyzed with particular focus on the changing composition of major commodities exported since 1970 What has been the link between trade and economic growth in the Caribbean taking into account the influence of agricultural export diversification on this relationship? To achieve this goal, an empirical economic growth model is developed and estimated with time varying coefficients using the Cooley-Prescott procedure. Research Objectives The broad objectives of our study are To measure the extent to which export agriculture has diversified, and examine the nature of its evolution To examine the role of trade in the economic growth experience of Caribbean countries over the past 30 years, incorporating the influence of agricultural export diversification on the trade-growth relationship. The specific objectives of our study are To measure and analyze the extent to which agricultural exports have diversified using entropy indexes (total, and within and across commodity groups) To explore the relationship between trade and economic growth during the past three decades, with special focus on the influence of agricultural export diversification on the trade-growth nexus. Scope of the Research To accomplish these objectives, our study focuses on four Caribbean countries: Belize, Dominica, Jamaica, and Trinidad and Tobago. These countries were chosen for two reasons:

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13 They allow for a more in-depth analysis of the issues germane to trade, agricultural diversification, and economic growth They encompass the major characteristics of Caribbean economies relating to size, resource endowment, and economic diversity. Chapter 2 reviews literature on the relationship between trade and economic growth; literature on agricultural diversification, within the context of trade; and literature on economic growth theory and empirical analysis. Chapter 3 presents a brief overview of the structure and performance of the economies of Belize, Dominica, Jamaica, and Trinidad and Tobago, and some of the economic policies implemented to promote economic growth and development. Chapter 3 also gives some country-specific background information. Chapter 4 examines the extent and nature of agricultural export diversification since 1970. Entropy indexes are estimated and analyzed for each of the four countries. Previous empirical studies that used the entropy index were mostly concerned with the measurement of corporate diversification and its effect on firm growth.15 Chapter 5 focuses on development, specification, and estimation of economic growth models that allow exploration of the relationship between trade and economic growth (capturing, in the process, the impact of agricultural export diversification). Chapter 5 also discusses empirical findings. The main objective of Chapter 5 is to evaluate relationships among trade, agricultural export diversification, and economic growth over the past three decades. Whether diversification is taxing or helping the economy will also be examined. Chapter 6 summarizes the main findings of our study 15These studies include Baldwin and Caves (2001), Gollop and Monahan (1991), and Jacquemin and Berry (1979).

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14 and presents some conclusions based on these findings. Chapter 6 also considers areas for further research.

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CHAPTER 2 LITERATURE REVIEW Given the multidimensional focus of our study, the literature review concentrates on three broad issues: the relationship between trade and economic growth; economic growth theories and empirical analysis; and theoretical aspects of agricultural diversification, with specific reference to trade. Trade and Economic Growth: Theoretical Considerations The relationship between trade and economic growth occupies a vast literature, covering both traditional and modern models. Trade theories date back to Adam Smith, who linked development with the role of trade as a vent for surplus (Myint 1958). Hicks (1953) illustrious Inaugural Lecture at Oxford paved the way for the development of postwar theoretical literature, which focused mainly on the comparative static effects of economic expansion on the terms of trade and balance of payments. Analysis of the determinants of terms of trade between rich and poor countries (the so-called North-South models, otherwise called center-periphery models), with differential demand structure, labor market conditions, and patterns of growth, forms part of this literature. More recent developments include endogenous trade theories dealing with, among other things, the spillover effects of research and development (Grosman and Helpman 1990, 1991). These theories emerged in the 1960s and for much of the next two decades dominated the literature. These brands of models focused heavily on the effect of trade policy on the rate of economic growth. Based on empirical evidence, these models 15

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16 generate ambiguous results on the relationship between trade and economic growth (Harrison and Revenga 1995). Several excellent publications have dealt with trade in general and the relationship between trade and economic growth in particular. These include Baldwin (2003), Bhagwati (1964), Chipman (1965a,b; 1966), Copeland and Taylor (2003), Davis (2000), Grossman and Helpman (1990, 1991), Harrison and Revenga (1995), Hicks (1953), Jayme (2001), Myint (1958), and Young (1991). Chipman (1965a,b; 1966) grouped trade models into three categories: classical, neoclassical, and modern. These categories merely reflected differences in emphasis (Chipman 1965a). In Chipmans (1965a,b; 1966) categorization, classical trade theories refer to the works of Mill, Ricardo, and Torrens, all of which brought out the nature of the issue of international specialization in production. The neoclassical school includes the works of early Leontief, Edgeworth, Haberler, Lerner, Marshall, Meade, and Viner. These theories addressed issues on both the consumption and production sides, as reflected in the notions of opportunity cost and community indifference. The modern theories, which began with the work of Heckscher and Ohlin and were extended by Lerner and Samuelson, focused on the role of factor endowment. Endogenous growth models form a significant component of modern theories. Logically, to exhaustively survey this huge body of literature in any single undertaking is virtually impossible. In fact, such an exercise is far beyond the scope of our study. Indeed, according to Chipman (1965a): . the field of international trade is particularly well provided with surveys, especially (although not exclusively) of a non-mathematical kind, and it would be pointless to try to cover ground that others have covered so well. (Chipman 1965a, p. 478)

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17 Against this backdrop, the presentation in this section of our study follows closely Baldwin (2003) and Jayme (2001). The discussions focus on the more popular theories, which provide a rationale for the nature of the relationship between trade and economic growth. For each theory, only the main points are highlighted. Underlying assumptions and detailed workings of the models can be found in the studies cited earlier. Sources of Ambiguity Baldwin (2003) acknowledged the continued disagreement among economists concerning the nature of the relationship between trade and economic growth, despite the existence of several multi-country case studies using comparable analytical frameworks, various econometric publications with large cross-country data sets, and important developments in growth theory. Baldwin (2003) offered three explanations for this situation Differences among researchers in the definition of the issues being studied. Some writers address the causal relationship between increases in trade and increases in growth rates (or between increases in growth and increases in trade), irrespective of why these economic variables change. Others are interested in the effects of differences in government policies on economic growth The impact of policies affecting the openness of a country to trade or its inward-orientation or outward-orientation is the concern of many studies. The findings of such studies are sensitive to how the various terms are defined. For example, openness may be defined in narrow terms to include only import and export taxes or subsidies. It could also be defined to include explicit non-tariff distortions of trade. Alternatively, it could be defined broadly to capture issues such as exchange-rate policies, domestic taxes and subsidies, competition and other regulatory policies, education policies, the nature of the legal system, the form of government, and the general nature of institutions and culture Differences in quality and detail of the data being analyzed, specifically in relation to developing countries. Many studies have been affected by a lack of good data on basic factors (for example, the levels of import protection). Given these problems, some economists and policy makers have become skeptical of the true nature of the relationship between trade and economic growth. They are also

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18 hesitant to draw broad generalizations from empirical findings because of their specificity and the bias that the personal viewpoints of the researchers may have introduced into the analyses (Baldwin 2003). Despite these shortcomings, interest in the trade-growth nexus remains and continues to receive a significant amount of attention in both the theoretical and empirical literature on trade and economic growth. Theories of Absolute and Comparative Advantage The relationship between trade and economic growth was first explored in the context of the theories of absolute and comparative advantage by Ricardo and within the context of the Hecksher-Ohlin (H-O) model and their cohorts (Jayme 2001). Baldwin (2003) noted that under the traditional comparative-statics framework (including or excluding economic distortions), a change in trade policy would generate a one-time change in the level of production (although in the real world of economic frictions one might observe a shift to a new equilibrium over several years). Similarly, in the standard neoclassical model of exogenous growth, an adjustment in trade policy creates a change in the pattern of product specialization, but not in the steady-state rate of growth. Jayme (2001) suggested that the theory of comparative advantage is the starting point for a discussion of trade and its relationship with economic growth. Within the context of the theory of comparative advantage trade creates a more efficient use of an economys resources by enabling imports of goods and services that could otherwise only be produced at home, at higher resource costs (for instance, developing countries often import capital and intermediate goods that are crucial to long-run economic growth; it would be costly to produce these goods domestically). According to the theory, countries that engage in trade can be assured the benefits of welfare gains in a static model. The Ricardian model, according to Jayme (2001),

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19 explains the welfare gains if a country specializes in producing goods in which it has a comparative advantage. The Hecksher-Ohlin-Samuelson (H-O-S) model, on the other hand, shows welfare gains in the two-country case, with both countries specializing in the production of goods based on their factor endowments. The essential argument in these theories is that trade is the way to achieve static productivity efficiency and international competitiveness, leading, in turn, to economic growth. Jayme (2001) cautioned that it is not clear, under the Ricardian or the H-O-S model, if and how trade impacts economic growth in the long run. Jayme (2001) noted that the Ricardian static model and the Viner (1937) version of it suggest an improvement in income and welfare when countries engage in international trade. However, Findlay (1984) presented a dynamic Ricardian model in which trade reduces the rate of economic growth in comparison to autarky in any country that exports agricultural goods and imports industrial commodities, because the rise in rents is absorbed by luxury consumption while the fall in the rate of profit reduces accumulation. North-south models of trade, according to Jayme (2001), adopt this dynamic version of the Ricardian model, in which free trade hurts growth in underdeveloped, agricultural economies. A corollary of the H-O model is the factor price equalization theorem, which argues that prices equalize across countries under international immobility of factors (Jayme 2001). Under given assumptions, countries that engage in international trade in the fashion of the H-O model improve welfare and income, and also realize changes in income distribution, due to a better allocation of factors in comparison to autarky.16 16Jayme (2001) noted there is an extensive discussion in the international trade literature about the validity of the H-O model. The most known limitation of this model is the Leontief Paradox. Leontief (1953) found

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20 The Hecksher-Ohlin-Samuelson (H-O-S) model analyzes the implications of international trade on employment and income distribution, and the consequent impact on economic growth (Jayme 2001). Within the context of this theory, international trade generates a higher Pareto-efficient equilibrium by reallocating resources between sectors. Changes in relative prices create inter-sectoral factor reward differentials that encourage businessmen to move the factors of production until these differentials in factor reward are eliminated. If a countrys importable-sector is capital-intensive and its exportable-sector is labor-intensive, a shift from an import substitution strategy to an exported-oriented strategy reduces the domestic relative prices of imports. If the economy is on a production possibility frontier, output will increase in the exportable sector and will decrease in the importable one. Since the exportable segment is less capital-intensive than the importable sector, a change in the composition of output increases the aggregate demand for labor and reduces that for capital. The result will be a new equilibrium where real wages increase and capital rental falls, changing the income distribution of the economy. Thus, according to the H-O-S model, trade liberalization is an important policy for countries to increase their rates of economic growth. Bhagwatis Immismerizing Growth Bhagwatis (1958) immismerizing growth is a neoclassical model that explores the relationship between trade and economic growth in which national welfare declines as a result of economic growth pushed by technological progress (Jayme 2001). The implication of the model is based on the deterioration of the terms of trade after growth. The fundamental argument is that after technological progress, national welfare can that the United States exported labor-intensive commodities and imported capital-intensive ones, a practice that clearly contradicts the predictions of the H-O model.

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21 decline as a result of economic growth. This may result from a deterioration of the terms of trade that exceeds the favorable effect on welfare due to economic growth at constant relative product prices. Therefore, if a country opens to trade in the presence of distortions, the effects on growth can be immismerizing, in turn, decreasing the welfare of the economy. Endogenous Theories By the late 1980s and early 1990s, according to Baldwin (2003), endogenous growth theory emerged, spearheaded by Romer (1986), Lucas (1988), and Grossman and Helpman (1991). The relationship between international trade and economic growth formed a major area of focus of endogenous models. Grossman and Helpman (1991), for example, addressed the question of how trade policy can affect growth rates, in a two small country casesmall in the sense of facing fixed world prices for the two final goods produced. There are two factors of production, human capital (skilled labor) and unskilled labor whose supplies are fixed. One of the final goods is produced with human capital and a fixed amount of differentiated, non-traded intermediate inputs, while the other is produced with unskilled labor and the same bundle of intermediate inputs. Baldwin (2003) noted that in Grossman and Helpmans (1991) formulation, if a country is importing the good that only uses human capital as a direct input and exporting the good intensively using unskilled labor, the import duty would raise the relative domestic price of the human capital-intensive good and, via the Stolper-Samuelson theorem, raise the relative wages of skilled labor. This increase in the price of human capital will lower the level of research and development activity by raising its costs and thus lead to a lower equilibrium growth rate. In contrast, if the country imports the unskilled labor-intensive goods, import protection will lower the relative wages of skilled

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22 labor and accelerate the growth rate. Thus, in this model there is no definite answer to whether protection increases or decreases the growth rate. It depends on the pattern of imports and exports. Besides using the concept of increasing returns as the driving force for endogenous growth, Grossman and Helpman (1991) and other growth theorists, according to Baldwin (2003), have introduced such concepts as knowledge spillovers resulting from trade in goods as well as the ability to imitate the products of foreign producers as engines of endogenous growth. Import protection generally reduces growth rates under these formulations. Kaldors Export-led Model According to Jayme (2001), Kaldor (1970) developed an export-led growth model built on the notion of cumulative causation, taking into consideration the fact that exports are the main component of demand. The model highlighted the role played by the rate of growth of foreign demand in stimulating higher levels of output in the domestic economy. In this model, it is the rate of growth of autonomous demand that determines the rate of growth of output. Expansionary demand policies have cumulative effects, since the higher the rate of growth of output, the faster the rate of growth of productivity; whereas the faster the rate of growth of productivity the lower the rate of increase in unit costs and, hence, the faster the rate of growth of exports. This feature contributes to the explanation of income disparities between developed and underdeveloped countries, since cumulative causation can operate in opposite ways. This is especially so in countries facing balance of payments constraints and high-income elasticity of demand vis--vis their income elasticity of exports. Such is the case of underdeveloped countries, in which balance of payments constraints lead to impediments to economic growth. Indeed, the lower the rate of growth of output, the lower the growth rate of productivity,

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23 and the lower the rate of growth of productivity the higher the increase in unit costs, lowering the rate of growth of exports (Jayme 2001).17 Some economists extended Kaldors model by incorporating the balance-of-payments constraints (Jayme 2001). Thirlwall (1979), for example, applied the balance-of-payments constrained economic growth model to look at industrialized economies. He later extended the model to capture the effects of capital flows, an important issue for developing countries. The basic idea behind the model is that differences among countries long-run growth rates can be explained by difference in demand. Taylors Open Structuralist Model Taylor (1993) developed a stylized model that sought to explain the relationship between trade, financial openness, and economic growth (Jayme 2001). Based on an analysis of trade policy and economic growth in a sample of countries, Taylor (1993), according to Jayme (2001), found no clear evidence linking trade to the performance of the economies. Fast-growing countries, more or less open, had diverse patterns of specialization, but their success was not led by growth in exports, industrial or otherwise. Trade policy did not appear to be promoting economic growth. In fact, there was no evidence, empirically or theoretically, that trade and liberalized trade policies stimulated economic growth in the countries included in our study.18 Jayme (2001) concluded Taylors (1993) stylized model revealed that trade does not necessarily affect growth by way of liberalization of current and capital accounts. 17For a detailed mathematical treatment of the model, see Jayme (2001). 18See Jayme (2001) for a detailed mathematical development and workings of Taylors (1993) model.

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24 This finding simply contributes to the ambiguous nature of the relationship between trade and economic growth that is so predominant in the literature. Trade and Economic Growth: Empirical Evidence The relationship between trade and economic growth has been explored empirically by several writers including Dollar (1992), Edwards (1998), Harrison (1996), Sachs et al. (1995), Srinivasan and Bhagwati (1999), and Vamvakidis (1999). Harrison (1996) observed that the strength of the relationship depended on whether the analysis was conducted based on cross-section or panel data (a combination of cross-section and time series). In many studies the rate of growth of Gross National Product (GNP) or Gross Domestic Product (GDP) is regressed on various macroeconomic variables including the growth in labor and capital and the degree of openness (as measured by the ratio of exports to GDP or GNP). The models are derived from a basic neoclassical type of production function in which output is expressed as a function of several variables including labor, capital, openness (or exports) and technology. They are usually specified as log linear functions19 and have been criticized for their use of the degree of openness rather than the growth in exports as an explanatory variable (Leamer 1995). The choice of the degree of openness or the growth in exports depends on the dynamics of the trade-growth relationship. These dynamics take on tremendous importance within the context of orthodox comparative advantage theory that permits a one-off effect of trade liberalization on the rate of growth, not a continuing effect. 19Other approaches to modeling economic growth include the multi-product Heckscher-Ohlin (H-O) Model with constant returns to scale at the level of the industry and the Constant Elasticity of Substitution (CES) Production Function.

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25 Leamer (1995) noted that models which link the rate of growth with the degree of openness draw their dynamics from assumptions regarding economies of scale or the nature of technological change. Nonetheless, he doubted trade theory would decisively answer this modeling question. He also suspected that information embodied in aggregate data sets is unlikely to be decisive about the growth-openness dynamics. Leamer (1995) also hinted that the level of exports seems not to be a very good indicator of openness since much of the cross-country variation in the ratio of exports to GNP or GDP reflects differences in comparative advantage as opposed to government intervention in international transactions. The problem, he indicated, is much greater than a measurement-error because The comparative advantage components of the variation in export growth are unlikely to be exogenous to the process that determines GDP or GNP Exports may be high because of export promotion, rather than non-interference. Edwards (1989, 1991) tackled this problem by experimenting with many other measures of openness, including some from Leamer (1988) that attempted to control for differences in comparative advantage. The existence of these various measures of openness will always generate a huge amount of debate in relation to inferences based on them. Frankel and Romer (1999) and Irwin (2001) examined the effects of the component of openness that is independent of economic growth (that is, the part of bilateral trade flows that are explained by populations, land areas, borders, and distances). According to the OECD (2001), this component explained a significant proportion of the differences in income levels and growth performance between countries. From this argument, we might

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26 infer a general relationship running from increased trade to increased growth. The effect is not perfectly defined numerically but is quite significant economically. Another approach to exploring the relationship between exports (as measured by the degree of openness) and economic growth involves testing for the direction of causation between the growth in exports and economic growth (Jung and Marshall 1985, and Sharma et al. 1991). The three most popular causality tests are Grangers test, Whites test, and Sims test. Some of the procedures used included stationary data and statistical techniques to determine the best possible lag length for the variables involved in the tests. According to Ghartey (1973), other studies employed nonstationary data and followed procedures developed by Granger (1969) and Sims (1972). In Gharteys (1993) view, studies based on these tests of causation suffered various limitations (such as the arbitrary choice of lag length, arbitrary choice of pre-filters, non-stationary variables, and omission of relevant variables that could allow for the occurrence of a causal feedback relationship). Leamer (1995) criticized tests of causation, arguing that these studies are not identifying causal directions between exports and economic growth but are only inquiring whether movements in one variable precede or follow movements in the other. He further questioned whether these studies relate at all to the growth-openness debate by citing criticisms offered by Lal and Rajapatirana (1987), who argued that if a small country is developing efficiently in line with its comparative advantage, it will specialize and be compelled to turn to overseas markets to which to export goods that use the most abundant factor of production most intensively. If this situation arises, GNP may appear to Granger cause exports. However, with a closed economy the internal growth spurt

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27 would have been choked off due to lack of export markets. Hence, in Leamers (1995) opinion, causation is just a version of the weather and weatherman story. Rodrguez and Rodrik (2001) critically examined the most prominent and recent empirical studies on the relationship between trade and economic growth, and identified weaknesses endemic to those studies.20 Rodrguez and Rodrik (2001) concluded that primarily the strong results in those studies arose either from obvious misspecification or from the use of measures of openness that are proxies for other policy or institutional variables that have independent detrimental effects on economic growth. Further, they suggested that the estimated coefficients on the openness indicators were fragile due to particular sensitivity to controls for those other policy and institutional variables. Regardless of the criticisms from Rodrguez and Rodrik (2001), the OECD (2001) concluded that (despite econometrics difficulties) openness primarily enhanced economic growth. The weight of the evidence quite clearly suggested that inference. Furthermore, there was no coherent body of evidence that indicated openness was bad for economic growth (OECD 2001). Growth Theory and Empirics The achievement of sustained levels of economic growth is an important objective of many countries throughout the world. At the macroeconomic level, economic growth is seen, among other things, as a means to eliminate poverty, raise the quality of life, and influence the level and distribution of wealth within a country. Economic performances differ from one country to another. Hence, the impact of economic growth on poverty alleviation, the standard of living, and the distribution of wealth show some disparity. 20Weaknesses included flawed measures of openness and weak econometrics.

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28 At the microeconomic level, studies on economic growth have concerned themselves with issues such as why some countries have grown at more rapid rates than others; what some of the critical factors are that impact economic growth within an economy; and whether countries converge to steady state paths and at what rate, or diverge. In search of answers to these questions, various empirical methodologies have been proposed. Consequently, the economic growth literature is extensive and spans many decades. Growth Theory Various theories have been advanced to provide a theoretical foundation for the empirical analysis of economic growth. The neoclassical theory and endogenous growth models (often called new growth theories) have received the most attention in the literature.21 Other strands of theories include The evolutionary models of growth, based largely on case studies of innovation (for a benign review of this class of models, see Nelson 1995) Technology gap models, described as appreciative theory (Fagerberg 1994). Fagerberg (1994) credited the development of this class of models to historians and historically oriented economists The GNP function approach, which originated with the work of Burgess (1974) and Kohli (1978). While it is feasible to undertake a thorough evaluation of the economic growth literature, no single assessment could be completely exhaustive. The objective therefore is to review comprehensively the literature on the theoretical analysis of economic 21As Rogers (2003) pointed out, there is a long history of ideas on economic growth prior to the neoclassical and endogenous growth theories. Eltis (2001) contained a classic account of the theories of growth and distribution of Karl Marx, Franois Quesnay, Robert Malthus, David Ricardo, and Adam Smith. Recent books presenting excellent reviews of economic growth include McCombie and Thirlwall (1994), Rostow (1990), and Ruttan (2001). McCombie and Thirlwall (1994) is particularly interesting. They discussed several theories of economic growth (old and new) that are both demand and supply oriented as well as balance-of-payments-constrained growth models.

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29 growth. The discussions focus on the neoclassical and endogenous growth theories because they provide the theoretical foundations to most of the empirical models found in the growth literature. Neoclassical theory The neoclassical approach to economic growth usually starts with an examination of Solow (1956, 1957) and Swan (1956), to such an extent that the model is often referred to as the Solow-Swan growth model.22 An important aspect of Solows (1956) work was the incorporation of factor substitutability to generate a stable equilibrium growth path. From 1956 to the mid 1980s, a huge volume of literature developed, representing various adaptations to the basic neoclassical framework (Edwards 1989, Renelt 1991, Rogers 2003, Temple 1999). The basis of the neoclassical approach is a simple aggregate production function of the form ),(LKAfY (2-1) where f is a functional notation which relates national income or output (Y) to technical change (A) and two basic factors of production (physical capital, K; and labor, L). In Solows (1956) conceptualization, technical change is any development that shifts the production function (for example, an improvement in education of the labor force). The production function is assumed to display constant returns to scale. Endogenous growth theory This approach linked permanent changes in certain policy variables to permanent changes in economic growth rates. Endogenous growth models may be classified into 22McCallan (1996) noted that the development of the neoclassical growth model is often attributed to Brock and Mirman (1972), Cass (1965), Koopmans (1965), and Ramsey (1928) in the context of social planning.

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30 two groups. The first or early set of models, generally referred to in the literature as AK-models, were based on the writings of Lucas (1988), Rebelo (1991), and Romer (1986, 1987). The second strand of endogenous growth models, which focused more explicitly on endogenous technological change, included Aghion and Howitt (1992); Grossman and Helpman (1990, 1991); and Romer (1990a). These models emphasized the role of research and development in technological change and promotion of economic growth. In essence (unlike the neoclassical model), endogenous growth theory treated technical change as endogenous, not as exogenous. Romer (1986) was the pioneering work in endogenous growth theory. Following Arrows (1962) learning-by-doing framework, Romer (1986) argued that the generation of knowledge is positively linked to the scale of economic activity, which is assumed to be proportional to capital accumulation. For sustained growth, constant returns to the reproducible factors are required. Romer (1986) recognized the possibility of knowledge spillovers (positive externalities), which may cause a single firm to experience diminishing returns to capital, but overall, there would be increasing returns to scale. Following in this tradition, Lucas (1988) adopted an aggregate production function approach that allowed for an externality to human capital. Aghion and Howitt (1992) advanced a Schumpeterian model of growth through creative destruction, allowing for learning-by-doing and the fact that new innovations may make old ones obsolete. A thorough discussion of some of the microeconomic and macroeconomic issues pertaining to education and economic growth can be found in Krueger and Lindahl (2001).

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31 Theoretical Review Broadly speaking, the theoretical approaches have examined two issues: Convergence and divergence The sources of economic growth. While the foundations of the theoretical approaches themselves have been heavily criticized, the theoretical review presented here is mainly concerned with problems related to empirical research. Neoclassical theory Despite the popularity of neoclassical growth theory up until the mid 1980s, the literature points to a number of weaknesses associated with this approach. A major problem ascribed to the neoclassical theory was the huge amount of focus on achieving some degree of consistency with one or more of the stylized facts rather than developing models that would allow for empirical estimation and evaluation. Easterly and Levine (2001) listed five stylized facts pertaining to total factor productivity (TFP) and its determinants: Factor accumulation does not account for the bulk of cross-country differences in the level or growth rate of GDP per capita; TFP does There are huge and growing differences in GDP per capita; divergencenot conditional convergenceis the big story Growth is not persistent over time, but capital accumulation is All factors of production flow to the same places, suggesting important externalities National policies influence long run growth. To address this criticism, Mankiw et al. (1992), derived a growth equation or model based on the neoclassical theory that allowed for econometrics estimation. Though

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32 Mankiw et al. (1992) is widely cited, their approach is not without problems. To estimate their model, the rate of depreciation, for example, has to be approximated. According to Temple (1999), Benhabib and Spiegel (1994) suggested an alternative approach. Renelt (1991) undertook an extensive review of the theoretical and empirical literature on economic growth. One reason for the success of the standard neoclassical growth model, Renelt suggested, is that it provided a convenient tool for organizing data on the sources of economic growth. However, he continued, the model left much of the growth unexplained. An implication of the model is that countries with similar technologies and preferences will converge to the same steady state output levels. While this is true for some countries, there is little evidence of convergence, particularly in developing countries (De Long 1988; Easterly 1993; Quah 1989; Romer 1990a, b). Some empirical findings have shown that GNP does display long-term persistence to shocks (Campbell and Mankiw 1987, 1989; Kormendi and Meguire 1990; Nelson and Plosser 1982). McCallan (1986) suggested that the main problem with the neoclassical theory was its failure to explain many basic facts of economic growth behavior. Given the fundamental premise upon which neoclassical theory was built, this theory tended to suggest either equal or different growth rates for all countries, which the model itself cannot explain. These results were inconsistent with reality because different economies have in fact recorded different growth rates in the long run. Endogenous growth theory Like the neoclassical model, the endogenous growth theory suffered form certain limitations. Firstly, problems were associated with the treatment of human capital. The difficulty with measuring human capital has led to the use of many different proxies for

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33 the variable, including primary and secondary enrollment ratios, literacy rates, and expenditure on education. Though the theory was itself unclear on the correct measurement of human capital in relation to growth, there is some doubt about whether any of the proxies used is consistent with the theoretical meaning of human capital. Furthermore, the lag structure is vitally important.23 Secondly, lack of clarity in defining human capital has led to huge variations and disparities in the definition and measurement of the various proxies used over time and across countries. Moreover, McCallan (1986) pointed to the possibility of knowledge externalities and the allocation of resources to the production of human capital as attractive characteristics of endogenous growth models. However, he cited two logical difficulties associated with these models. Firstly, the achievement of never-ending growth, as he referred to it, requires never-ending increases in human capital; but never-ending growth requires increases in knowledge, not human capital.24 Secondly, the assumption of constant returns to scale in the production function (if satisfied) may suggest that these models would not generate steady, continuous growth without exogenous technical progress. Growth Empirics Growth theories provide no definitive answer as to which exogenous variables should be included in the empirical model. There are several growth theories and competing models; some emphasize the domestic resource base; others underscore the 23Easterlin (1981) discussed this issue. 24McCallan (1986) distinguished between human capital and knowledge. He defined human capital as the productive skills of an individual worker that is not passed on to other generations. Knowledge, on the other hand, represents the aggregate of human capital in the society, which is passed on from one generation to the next.

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34 openness of markets and the extent of international trade; others stress the importance of factors such as human capital, infrastructure of the economy, the quality of government (for example, the extent of corruption), domestic and foreign investment, and the level of international debt. While trade (exports and imports) as well as diversification may play a role in the economic growth process in the Caribbean, the omission of some of these additional considerations from the empirical growth model could lead to serious bias in the results. Regarding the plethora of research on economic growth, Rogers (2003) observed Most empirical models are not based on a specific theoretical model; instead the empirical specifications are somewhat ad hoc, with motivation for the variables included being taken from a wide range of sources. This is less than ideal, but the complexity of economic growth and the lack of an encompassing model make it a necessity. (Rogers 2003, p. 122) Further, growth theories are silent regarding functional form. In the absence of any theoretical structure requiring that specific properties be met, any functional form that makes intuitive sense in the context of the problem under investigation could be used. The literature should be a good guide in determining the type of functional form applied. Linear, semi-log, and quadratic are all simple functional forms that have been applied in previous studies. The appropriateness of a functional form can be determined using Ramseys RESET test or a Box-Cox transformation of the model (which determines whether one functional form or specification is appropriate in contrast to another). In terms of empirical methodology, Svedberg (2002) identified five approaches to studying economic growth: simulations of growth models, growth accounting, time series regression, cross-country studies, and panel data regressions. Simulations and growth accounting are essentially analytical tools based on simple computational procedures. These methods will be discussed only briefly. Hence, the discussions focus mostly on

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35 times series regression, cross-sectional studies, and panel data regression since all three methods involve the use of econometrics analysis and techniques. Durlauf and Quah (1998) noted that the critical empirical implications of the neoclassical theory rested exclusively on the nature of the production function and preferences. Although some writers endogenized the technical change variable in the production function, Durlauf and Quah (1998) questioned such parameterization on the basis that while that approach might have been useful for fitting the regression, results became difficult to interpret in relation to the underlying economic analysis. Despite the emergence of the endogenous growth models, there is little evidence in the empirical literature that pointed to a conclusive rejection of the neoclassical Solow-type models25. Easterly (2001) advanced two main explanations for the inability of growth regressions to explain what he called the cross-decade slowdown. Firstly, the models were misspecified because they regressed stationary growth rates on nonstationary variables. Jones (1995) argued similarly. Secondly, many models failed to incorporate into the analysis the impact of external factors such as the industrial slowdown and the world interest rate. Indeed, the lack of consensus on the sources of economic growth left many economists to wonder whether economic growth is the result of good economic policies or good fortune (Easterly et al. 1993).26 25For a more detailed technical discussion of economic growth empirics, see Brock and Durlauf (2001), Easterly and Levine (2001), Klenow (2001), Pritchett (2001), Romer (2001), Sala-i-Martin (2001), Solow (2001). 26Easterly et al. (1993) tested the good-luck hypothesis by incorporating into the growth regression luck factors such as terms of trade shock and external transfers.

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36 Simulation exercises This empirical methodology involves an assessment of the economic growth process under different scenarios. The approach seeks to determine the impact on economic growth and other related factors of changing circumstances. For example, this methodology may be applied to ascertain the effect on economic growth of differences in production techniques, differences in the underlying technologies, or differences in the quality of human capital. Furthermore, the approach allows for an evaluation of the robustness of various model specifications by investigating the performance of each model using different combinations of independent variables and different assumptions about the evolution of the growth process. Anderson and Strutt (1999) was a good example of the usefulness of this kind of approach for analyzing economic growth. Growth accounting Growth accounting provides a framework within which data can be organized and analyzed in order to describe the economic growth process.27 The goal is to measure the contribution of the various factors of production to economic growth. The growth accounting exercises usually work with time-series data for a single country. The flexibility of this approach allows for the incorporation of the effects of increasing returns and externalities on economic growth. According to Chen (1977), growth accounting is associated with writers such as Denison, Kendrick, and Solow. 27Some studies along the line of growth accounting included Baily and Schultze (1990); Elias (1978); Jorgenson, Gollop, and Fraumeni (1987); Maddison (1987).

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37 A prominent feature of studies based on growth accounting is the high share of total factor productivity (TFP) that is unexplained in the models.28 Barro (1998) discussed growth accounting in details. Time series regression Time series regression is particularly useful to gain insights into the economic growth process in an individual country over a given number of years. The approach is mostly applied to determine the sources of growth and to model the causal relationship between economic growth and numerous variables such as exports and imports. According to Temple (1999), some time-series econometricians argued that because cross-sectional regressions ignore pertinent information, while panel data analysis unjustifiably assumes parameter homogeneity,29 growth models should be estimated for individual countries using time series regressions. The major problem using this approach is spurious regression. The main argument here is that the regression results (as indicated by, for example, a high R2) may be reflecting common trends in the time series but not a significant relationship between the dependent and independent variables. This problem can be resolved by eliminating the trend component of the time series. If the trend is removed, the de-trended series may become stationary. A stationary series will satisfy all of the required properties of regression analysis: constancy of the mean, constancy of the variance, and constancy of the auto-covariance.30 28For a discussion of some of the findings across countries, see Chenery (1986). 29This observation is not necessarily so. The literature contains panel data studies that incorporate parameter heterogeneity. 30Gujarati (1995) discussed time-series analysis succinctly. The use of growth rates for the variables in the estimation of the empirical growth models negates the problem of nonstationarity.

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38 Temple (1999) alluded to three major problems associated with time series regression The lack of quality data, particularly for developing countries and insufficiently long data sets Long lags of the regressors are required in order to prevent short run business cycle effects driving apparent long run correlations, leading inevitably to degrees of freedom problems Time series data do not provide sufficient basis for examining the determinants of long run growth with any degree of confidence.31 Another problem associated with time series models is the use of linear specifications, especially in relation to the analysis of shocks. Potter (1995), for example, argued that in the case of post-1945 US GNP, a nonlinear model predicted that output would return to trend quickly if hit by a negative shock, while linear models show no evidence of increased stability. Hence, a linear model would wrongly predict that output remain below trend for many years. He concluded that linear models could fail to highlight interesting economic structure. Cross-sectional studies The use of cross-sectional regressions is linked in part to the absence of sufficiently long time series data for many variables over a wide range of countries. In fact, in some instances, data may only be available for a single year. Cross-sectional regression techniques are rooted in the neoclassical growth theory. At the most rudimentary level of analysis, the growth rate is regressed on a number of explanatory variables. The list of explanatory variables depends on the issue being examined. Temple (1999) noted that cross-sectional studies dealt with several issues such as 31Of these problems, the major drawback in our study relates to insufficiently long data series.

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39 The evolution of world income, that is, whether or not poor countries have been catching up with rich economies Whether countries converge to steady state paths and at what rate The rate at which returns to various inputs such as human and physical capital diminish Whether countries are poor because of a lack of inputs or major differences in technology Differences in growth rates over long periods Economic growth performance in the long run. Within the context of the neoclassical framework, convergence and divergence in economic growth and performance have received a tremendous amount of attention.32 The economic literature identifies two broad concepts of convergence. Absolute convergence implies that poor countries will grow faster than rich countries, thus catching up over time. Generally, cross-country studies have not supported this hypothesis. Most findings suggest that there is instead divergence. The second concept is that of conditional convergence, which suggests that for two countries with the same steady state, the one further away from the steady state will grow faster than the one closer to the steady state; that is, growth is conditional on factors such as savings rates, population growth, education, and technology; and poor economies will grow faster initially than rich ones. In the Solow (1956) type model, diminishing returns will imply conditional convergence. 32Endogenous models have also been used to study convergence. For a discussion of some of these models and results, see Barro and Sala-i-Martin (1999). Other studies based on cross-sectional regressions included Balassa (1985); Barro (1991); Cardoso and Fishlow (1989); De Long (1988); De Long and Summers (1991); Diamond (1989); Dollar (1992); Easterly and Wetzel (1989); Edwards (1989); Feder (1983); Gupta and Islam (1983); Hwa (1988); Khan and Reinhart (1990); Kormendi and Meguire (1985); Mankiw et al. (1992); Moschos (1989); Romer (1989a, 1990c).

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40 Empirically, a negative partial correlation between initial income and subsequent economic growth may be interpreted as conditional convergence. In such cases, one may conclude that cross-country income levels are converging. A positive partial correlation between initial income and ensuing economic growth would indicate that cross-country income levels are diverging. Indeed, there was evidence of a negative partial correlation between initial income and economic growth after controlling for factors that were likely to affect steady-state output per effective labor (Barro 1991, Barro and Sala-i-Martin 1992, Cho 1996, Durlauf and Quah 1998, Mankiw et al. 1992). Whether all economies converged to the same level of per-capita income is a reflection of interactions across countries and the nature of the production function assumed (Durlauf and Quah 1998). A major limitation of cross-section studies (highlighted in the growth literature) is the notion that many studies fail to address the simultaneous equation problems that are often inherent in the analysis. Simultaneity bias arises because the basic model treats the independent variables as exogenous. However, many explanatory variables in growth equations may very well be endogenously determined. This potential creates bias in OLS estimates. Another criticism is that in many applications of this approach, heterogeneous countries are treated as if they were homogeneous.33 This allows for the use of a single model specification across all countries in the analysis. Some writers have argued that the results from cross-section studies may be improved significantly if mechanisms are developed to allow for differences among the countries in the group. 33This problem is not limited to cross-sectional regressions alone. Panel data analysis suffers a similar drawback.

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41 Further, because most cross-sectional studies within the neoclassical tradition simply regress economic growth on a number of independent variables, the results usually appear reasonable, but the analyses ignore the potential problems of reverse causality and spurious correlation.34 Scholing and Timmermann (1988) included 118 independent variables in their study and found most of the socio-economic variables to significantly impact growth either directly or indirectly. Finally, linearity in the specified regressions presents yet another methodological problem when using the cross-sectional approach. The literature does raise the possibility of non-linear relationships between independent variables and growth35 and the existence of threshold effects and low-level traps. Panel data regression Panel data regression involves the analysis of economic data that are pooled over time and across countries. In essence, therefore, this empirical approach combines both time series and cross-sectional data. Panel data analysis reduces degrees of freedom problems in cases where time series data on individual countries are limited to only a few years. It is sometimes considered more appropriate for the analysis of growth dynamics (Durlauf and Quah 1998). According to Temple (1999), panel data analysis presents other advantages. Firstly, it allows the researcher to control for omitted variables that are persistent over time. Secondly, the use of several lags of the explanatory variables as instruments to 34Simple Granger causality tests were performed to ensure that the direction of causality runs from the exogenous variables included in the model to economic growth and not the reverse. The tests were carried out using Econometrics View (Eviews, version 4.1). The results are not reported because they are not central to the objectives of our study. 35This problem is not unique to cross-sectional studies. It is also possible to have non-linear relationships in time-series analysis. This was not considered a problem in our study.

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42 overcome the problems of measurement error and endogeneity biases is feasible due to additional degrees of freedom. Despite potential reasons to be skeptical about their results, Temple (1999) cited the approach of Caselli, Esquivel, and Lefort (1996), who applied the General Method of Moments to estimate a dynamic panel data model that illustrated severe biasedness in certain cross-sectional estimates of convergence rates, as encouraging. Thirdly, panel data analysis can be used to study the determinants of total factor productivity growth, while avoiding the complexities of dynamic models. In terms of problems associated with the use of panel data, Temple (1999), alluded to The use of fixed effects models to analyze the impact of variables that are fairly constant over time, or that will affect growth only with a long lag The presence of cyclical effects raises doubts over the use of annual data covering a long period as opposed to splitting the data set into various intervals over which the analysis should be conducted. Given the possibility of heterogeneity, the modeling of the short-run dynamics may be extremely important. In practice, researchers can carry out tests for parameter heterogeneity. Dummy variables are usually added to the model in order to capture or control for country-specific effects. Often, the dummies turned out to be statistically significant. Ciccone (1996), for example, attributed the significance of the dummies to neighborhood effects (that is, a countrys growth rate is affected by the economic performance of neighboring countries). That result was similar to Manski's (1993) social effects. Indeed, the stronger the estimated neighborhood effects are, the greater the chance is that some important variables have been omitted from the growth regressions. Easterly and Levine (1997) demonstrated this issue.

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43 Problems faced in empirical analysis Temple (1999) noted that growth empirics present several problems for applied econometricians including The issue of omitted variables Inappropriate functional form Parameter heterogeneity, which arises due to differences in social, political, and institutional features across countries The issue of endogeneity, that is, many variables that enter growth regressions as exogenous may in fact be endogenous, creating a simultaneity problem Measurement errors in the data Correlations among the disturbances, creating problems for the interpretation of the results Uncertainty related to model specification, which highlights a lack of robustness in various specifications. Hence, variables that tend to be significant in one specification may very well turn out to be insignificant in another.36 Indeed, Levine and Renelt (1992), and Sala-i-Martin (1997) found a general lack of robustness among growth equations. Moreover, Durlauf and Quah (1998) observed that the problem with both Levine and Renelts (1992), and Sala-i-Martins (1997) approaches is that they attempted to use mechanical statistical criteria in identifying factors whose interest and plausibility are motivated by economic (or social science) theory. Durlauf and Quah (1998) suggested that the dimensions along which we want estimates to be robust should be determined by the goals of the researcher, which cannot be reduced to algorithms of the kinds employed by Levine and Renelt (1992), and Sala-i-Martin (1997). 36See Temple (1999) for more detailed discussions of these problems and proposed solutions. Temple (2000) also presented further considerations vis--vis model uncertainty, parameter heterogeneity and outliers.

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44 Further, Bleaney and Nishiyama (2002) presented a benchmark model that encapsulated three existing models in the literature. They found the model that best fits the data reflected elements of all three existing models. Hence, they concluded that many of the independent variables included in recent growth models were indeed significant determinants of economic growth. Despite the many challenges associated with the empirical analysis of economic growth, a tremendous amount of progress has been made in dealing with some of the problems identified. At a technical level, the inability of growth theory to suggest appropriate independent variables for inclusion in growth regressions and a specific functional form leave these issues open to interpretation. In the absence of a generally accepted specification for a growth model, empirical research will continue to be conducted using new models and estimation techniques consistent with the objective of the research. The final outcome will reflect the experience of the researcher and the available data. The best approach is to design models that are simple, consistent with theory, and are capable of providing answers to the questions of interest to the researcher. These criteria are applied in Chapter 5. Previous Caribbean Studies In terms of previous empirical work on the Caribbean, a few studies have been reported on the sources of economic growth (for example, Lewis and Craigwell 1998; Nicholls 2001a, b; Nicholls 2001c). However, none of these studies addressed specifically the relationship between trade and economic growth. Lewis and Craigwell (1998) used cointegration to investigate the determinants of economic growth in Barbados during the period 1960-1991. Their results supported an important role for government policy in the growth process. They found an inverse

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45 relationship between government investment and growth. No significant relationship between human capital and economic growth existed, although the writers cautioned that their findings should not be interpreted as indicative of the unimportance of human capital accumulation in stimulating economic growth in Barbados. According to Lewis and Craigwell (1998), the insignificance of human capital may be due to the collinearity of enrollment indices with physical capital accumulation, arguments put forward by Romer (1989), and De Gregorio (1992). Lewis and Craigwell (1998) also suggested that enrollment rates do not accurately capture investment in human capital and do not allow for differences in quality. According to Lewis and Craigwell (1998), Benhabib and Spiegel (1994) noted that at best, enrollment ratios represent investment levels in human capital. Nicholls (2001a,b) applied a growth accounting framework to assess the sources of economic growth in Antigua and Barbuda and St. Vincent and the Grenadines, respectively. The analysis for Antigua and Barbuda focused on the period 1900-1998. The findings revealed three patterns of economic growth: Economic growth during the period 1900-1950 was driven largely by the export of sugar and sea-island cotton, based on private sector activity During the period 1950-1977, economic growth was driven by private foreign investment in hotels and other tourist infrastructure, with minimal assistance from government A huge build up of public sector debt accounted for most of the economic growth observed during the third period, 1977-1998. For St. Vincent and the Grenadines, Nicholls (2001b) analyzed the sources of economic growth during the period 1978-1996. Capital accumulation, whose importance grew over time, accounted for the majority of economic growth. Growth in total factor productivity proved to be the second most important determinant of economic growth.

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46 Nicholls (2001c) reviewed the main determinants of economic growth in 28 Caribbean countries over the period 1960-1998, using a data set developed by Bulmer-Thomas and Nicholls (2001). The study evaluated the impact on economic growth, measured as growth in per capita gross domestic production, of human capital formation (measured by public expenditure on education), trade (measured by the growth in per capita exports), the stability of institutions (measured by the exchange-rate), and the management of the environment. The empirical analysis employed both pooled regression and fixed effects panel data modeling techniques. The main result of the research suggested the rate of growth of per capita exports as the single most important determinant of economic growth in the Caribbean. Agricultural Diversification: Theoretical Considerations The concept of agricultural diversification and the theoretical nexus between diversification and international trade have been addressed in several interesting papers including Delgado (1995), Foster (1975), Foster et al. (1990), Hayami (1996), Kerr (1989), Klein and Chase-Wilde (1989), McCalla and Valds (1995), Pingali and Rosegrant (1995), Quiroz and Valds (1995), Schmitz (1989b), Schmitz and Noeth (1999), and Taylor (2003a). McCalla and Valds (1995), and Taylor (2003a) provided the most detailed treatment of the theoretical underpinnings of agricultural diversification. The discussions reflect this assertion. Meaning and Purpose of Agricultural Diversification Agricultural diversification has no unique meaning (Schmitz 1989a). Schmitz (1989a) offered two alternative definitions of agricultural diversification found in the literature. Agricultural diversification is a process whereby more and more activities are added either to a single farm enterprise or to a region. For example, through irrigation,

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47 diversification could take place if a wider set of production activities is added to the resource base over time. For example, if the production of livestock adds to grain activities as a result of irrigation, then, irrigation would have generated agricultural diversification. An alternative view considers agricultural diversification as a process that creates greater income stability to producers than they would otherwise have realized. Hence, if a country engages in, for example, five activities, all of which are correlated in the same manner, then, the country is not diversified since increases in prices will result in higher profitability for all industries. A reduction in prices will make all of the industries unprofitable at the same time. Therefore, a country that engages in several agricultural activities is not necessarily diversified. Real diversification requires some of the activities to be negatively correlated. In this scenario, growth in one industry should generate opposite characteristic in other industries. Agricultural diversification is often conceptualized as an enviable outcome of the dynamics of economic development or the result of intentional policy option (McCalla and Valds 1999). Agricultural diversification is a typical response to instability at the farm level. With regards to exports, agricultural diversification is a potentially efficient mechanism for diminishing the impact of risk on producers welfare (McCalla and Valds 1999). The inclusion of new products to the mix of commodities exported, the movement from primary to processed commodities and increasing the market share of existing products should all redound to a reduction in the variance of the value of production at both the farm and industry levels. The extent of the reduction depends on the correlation between different prices. According to McCalla and Valds (1999), if the correlation is -1.0, the variance of the portfolio will be lowered to zero (0); if it is +1.0,

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48 the variance of the portfolio is unaffected. Newbery and Stiglitz (1981), according to McCalla and Valds (1999), argued that for all scenarios in between, some reduction in the variance will be obtained. McCalla and Valds (1999) suggested that agricultural diversification provides two advantages: It expands the production possibility set, thereby generating more opportunities for income generation and employment creation It lowers the risk of having all of ones eggs in a single basket containing a small number of commodities with potentially high covariance risk. Langham and Davis (1998), and McCalla and Valds (1999) suggested that agricultural diversification could be pursued with two broad objectives in mind: To expand the production and distribution of commodities to satisfy a higher proportion of domestic food consumption. In this scenario, agricultural diversification is seen as a means of generating domestic food security, or as an import substitution policy To increase the mix of agricultural commodities targeted for the export market in order to stabilize foreign exchange earnings. In this context, agricultural diversification forms part of an export promotion strategy within the context of international trade. Moreover, McCalla and Valds (1999) noted agricultural diversification is less of a policy issue in developed economies due to the presence of institutions that enable economic agents to manage risk to stabilize their consumption over time. Caribbean countries lack these risk markets. Hence, producers of agricultural commodities absorb the full extent of price and production risks. If they are risk averse, they will increase diversification, trading off income for lower risks. Simultaneously, some producers will accept increased risks if they are associated with higher income, purchasing insurance to grant them some degree of protection.

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49 For Caribbean countries, agricultural export diversification is an important component of export promotion, structural adjustment, and employment generation (particularly in rural communities due to the dominance of agriculture). According to McCalla and Valds (1999), Delgado (1995) provided three justifications for agricultural export diversification (all of which applies to the Caribbean) Some countries depend heavily on income from traditional agricultural exports, many of which suffer from falling world prices Many countries are characterized by the existence of a relatively large non-tradable sector due to high transactions costs (transport and others), which would remain largely underdeveloped even if price distortions are eliminated Externalities and market failures, which give governments tremendous flexibility to influence the factor intensity of long run growth. Such options favor an active pro-diversification policy as an avenue for improving competitiveness. On the basis of Delgados (1995) rationale, an agricultural diversification strategy should be directed towards The encouragement of agricultural exports to reduce the risk of food insecurity The implementation of trade-creating policies between low and high potential zones The promotion of non-traditional agricultural exports, both primary and processed commodities.37 The extent of governments participation in the promotion of agricultural export diversification remains a moot issue because of a lack of agreement in the literature. McCalla and Valds (1999) supported the case for a proactive role of government in promoting agricultural export diversification. Governments intervention should be limited to partial funding of the cost of searching for new export markets, through a 37This third element of this strategy is probably the most important from a Caribbean perspective and has in fact received tremendous attention, particularly since 1984.

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50 subsidy and/or direct assistance from export promotion agencies for the search of new markets. The rationale for governments participation is that unlike industrial products, private producers of agricultural commodities will more than likely under-invest in searching for new markets for their commodities. The cost associated with searching for additional foreign markets is often high and could lead to the free rider problem among producers since any new markets penetrated will also become accessible to other producers and exporters. These arguments are theoretically appealing, but Caribbean governments may have to take an even greater explicit role in the promotion of agricultural export diversification given anticipated changes in the EU-ACP trading agreement, and the limited resources available to producers of agricultural commodities.38 Agricultural Diversification within the Context of Trade Trade liberalization and structural adjustment usually involve initiatives such as a reduction in trade barriers on imports and exports, an alignment of macroeconomic policies, and the deregulation of internal factor and product markets in general. Agricultural diversification emerges as a strategic response to these measures with the overall objective being an acceleration in the development of new production possibilities; that is, greater levels of diversification (McCalla and Valds 1999). At both the producer and sectoral levels, the scope for agricultural diversification (as a risk management strategy in response to trade liberalization) is restricted by the co-movements of the prices of agricultural commodities on the international market (McCalla and Valds 1999). In support of this view, McCalla and Valds (1999) pointed 38Caribbean governments also have the constraint of limited resources. They have to allocate more resources to agriculture if the sector is as important to the economies as have been argued.

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51 to Quiroz and Valds (1995) who found (for the period 1970-1991) that 22 of 28 correlations in world prices were positive. Commodity combinations like wheat-maize, rice-wheat, cotton-maize and cocoa-coffee, among others, exhibited substantial positive correlations in world prices. Within this range of products, one should not be overly optimistic regarding the returns in terms of export price risk reduction by diversification. Negative correlations were small and limited to bananas and rice.39 The diagnosis pertaining to horticultural products was less clear, requiring further analysis. McCalla and Valds (1999) added that it is reasonable to expect that over time these correlations should increase in response to changing conditions on both the demand and supply sides and to improvements in transport and communications. Demand conditions include income growth and factors associated with it (urbanization, increase in the value of time, technological developments which increase the shelf-time duration of products), and food consumption patterns that are increasingly becoming more flexible and diversified. For example, countries which traditionally had a diet concentrated on rice or legumes, have witnessed an expansion in wheat and livestock consumption. Trade liberalization reinforces this trend by lowering the price of substitutes for these traditional staples. Hence, over time, substitution possibilities will likely increase, in turn, inducing a higher correlation on world prices. In terms of supply factors, new technologies and new investments in infrastructure (such as irrigation, roads, and storage facilities) will increase the possibility of higher output levels from diversification. Freer trade fortifies this trend towards substitution 39These arguments imply that Caribbean countries should not produce bananas and rice. Practically (especially for bananas), the countries will continue to produce these commodities since they represent important sources of farmers income (weekly income in the case of bananas).

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52 possibilities in production and, by extension, diversification of production and trade. As more and more countries worldwide eliminate taxes on agricultural exports, adopt a more flexible diet, and create a more diversified mix of commodities, the more positive should be the correlation between prices. In addition to the higher substitution possibilities in consumption and production over time and improvements in transport and communications, the prices of agricultural and non-agricultural commodities on the world market are also positively correlated because they react in a similar fashion to macroeconomic conditions such as movements in interest rates. Therefore, one would expect an increase in correlations in world prices between the prices of imports and exports of developing countries. In reality, these correlations tend to provide tremendous price insurance for developing countries (McCalla and Valds 1999). Orthodox trade theories argue that trade should be driven by comparative advantage. McCalla and Valds (1999) noted countries opening to trade should specialize in commodities for which they are good at producing (exportables) and limit or cease production of commodities for which they do not have a comparative advantage (importables). Further, if the agricultural sector suffers from a lack of significant comparative advantage in a wide array of commodities, trade could lead to reduced diversity of production. Additionally, by opening the economy through the removal of border controls such as quantitative restrictions and/or export taxes, the domestic economy could suffer from high levels of variability in prices on the international market, generating, in the process, increased domestic price variability and income uncertainty. Under such scenarios, trade is antithetical to agricultural diversification.

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53 On the contrary, the impacts of new technology, and new investment in irrigation, roads, and storage facilities, make a greater diversified agricultural output more possible (McCalla and Valds 1999). Trade liberalization buttresses this argument and stimulates higher substitution possibilities in production and thus diversification of production and trade (exports and imports). In this setting, trade and agricultural diversification are complements. Taylor (2003a) discussed the issues of specialization and diversification in a rather succinct manner, drawing on technology gaps models of economic growth. Taylor (2003a) noted technology gaps models are less formal and are based on what Fagerberg (1994) called empirically based appreciative investigations. Abramovitz (1956), according to Taylor (2003a), captured a critical aspect of technology gaps models, arguing that the potential of countries to close technology gaps is dependent on two major factors: technological congruence and social capability. Technological congruence refers to the ability of countries (for example, those in the Caribbean) to adopt technological innovations arising in developed countries that are the clear leaders in technological innovation. This directly impacts the extent to which technology transfers take place. Social capability addresses the array of factors including levels of human capital, economic infrastructure, and institutional capacities that influence a countrys capacity to embrace available technology. Social capability also promotes economic efficiency. Taylor (2003a) noted that these ideas suggest two important sets of factors that could impact the ability of Caribbean countries to innovate and, in effect, catch-up with developed countries

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54 The basic characteristics of technology available for transfer (for example, by foreign direct investment) or imitation. If technological developments by developed countries are biased toward large scales of operation or are extremely complex, then, Caribbean countries may not be able to adopt or imitate The internal ability of Caribbean countries to realize technological innovations or adopt. This ability is closely connected with human resource factors such as education and managerial acumen as well as economic, political and physical infrastructure characteristics that define the commercial environment in the Caribbean. These factors will influence the realized technological innovation, which, subsequently, impacts the production structure and, hence, the export structure of the countries, by changing the competitive position of various industries in both Caribbean and foreign markets. Given that many of the factors noted, especially those relating to social capability, are generally reluctant to change, the export structure of those countries is likely to be characterized by some degree of stability. Put differently, it is possible that export diversification initiatives may inherently be faced with significant social and economic barriers that are difficult to overcome. This belief plus the existence of preferences may create strong economic and institutional disincentives to export diversification in general and agricultural export diversification in particular. Furthermore, Taylor (2003a) observed that many countries pursuing export diversification strategies place a significant amount of emphasis on picking winners and identifying suitable technologies. Unless the winners picked are technologically congruent and factors affecting social capabilities are appropriately addressed, only small changes in export structures are likely to emerge. Under such circumstances, export agriculture may display a high degree of specialization. For Caribbean countries, agricultural export diversification is a strategic and deliberate policy choice as a response to the reduction in, and potential loss of,

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55 preferential access of major traditional commodities, particularly to the European market. Agricultural export diversification is also intended to address the issue of instability in export earnings, which is often associated with lower income to producers and suppliers of inputs, and reduced government revenue, both occurring directly from taxes and indirectly from consumption expenditures. As appealing as these theoretical arguments for and against agricultural diversification within the context of international trade are, McCalla and Valds (1999) concluded that there is no general rationale for an active policy of diversification, with the exception of the case of export promotion. They opined that in both the static and dynamic cases, the two traditional arguments for diversification (risk reduction, and contributing to growth) are not strong arguments that warrant a proactive government policy of diversification. Further, McCalla and Valds (1999) argued that there is no evidence that opening the economy to trade will have a significant impact on increasing risk for agriculture. Indeed, diversification is a natural process of growth, and the opening of the agricultural economy will probably contribute to accelerating the diversification of production and trade. Therefore, trade and diversification are complementary; they are not conflicting (McCalla and Valds 1999). Moreover, McCalla and Valds (1999) noted that since initial conditions vary from one country to another there would be some degree of variation in the outcome of economic policies geared towards diversification. Essentially, some countries will realize more specialization, while other will experience diversification.

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CHAPTER 3 OVERVIEW OF COUNTRIES Background on Countries Belize Belize (formerly British Honduras) is a small Caribbean country with a total area of 22,966 square km and a total population of approximately 263,000 people. Belize is the most sparsely populated nation in Central America; it is larger than El Salvador and compares in size to the state of Massachusetts. Slightly more than one half of the people live in rural areas. About one-fourth live in Belize City, the principal port, commercial center, and former capital. The population is diverse, consisting of various ethnic groups: mestizo (48.7%), Creole (24.9%), Maya (10.6%), Garifuna (6.1%), and other (9.7%). English is the official Language in Belize, but Spanish, Mayan, Garifuna (Carib), and Creole are also widely used. The country borders the Caribbean Sea, between Guatemala and Mexico and is 600 sea miles from Jamaica, its closest Caribbean neighbor (McCoy, 1993). Belize gained its independence from the United Kingdom (UK) in 1981 and has since followed the Parliamentary Democracy model of government based on the Westminster system. The country maintains strong ties to both the United Kingdom and the United States. The country has a tropical climate; very hot and humid. In terms of terrain, the country is flat and has a swampy coastal plain, and low mountains in the south. Natural resources include arable land potential, timber, fish, and hydropower. Because of its location, Belize is susceptible to natural hazards such as coastal flooding especially in the south, and hurricanes. Belize follows a fixed exchange-rate regime, with 56

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57 the Belizean Dollar (BZD) pegged to the U.S. Dollar (USD) at 1.00 USD = 2.0000 BZD. Agriculture and Tourism are the mainstays of the economy. Dominica The Commonwealth of Dominica, an island located between the Caribbean Sea and the North Atlantic Ocean, about one half of the way from Puerto Rico to Trinidad and Tobago, has a total area of 754 square km and a population of 70,158 people. The population is mostly black but includes other ethnic groups such as mixed black and European, Europeans, Syrian, and Carib Amerindian. Indians still living on Dominica are the only pre-Columbian population remaining in the eastern Caribbean. English is the official Language in Dominica, but French patois is extremely common. Since gaining its independence from Britain in 1978, Dominica has maintained a Republic form of Parliamentary Democracy based on the Westminster system. Dominica features a tropical climate, moderated by northeast trade winds, heavy rainfall, and rugged mountains of volcanic origin. Natural resources include timber, hydropower, and arable land. Like other Caribbean countries, Dominica is vulnerable to natural disasters such as flash floods and hurricanes. Its spectacular, lush, and varied flora and fauna, which are protected by an extensive natural park system; its many mountains, the most mountainous country of the Lesser Antilles; and its volcanic peaks, which feature cones of lava craters and include a boiling lake, the second-largest, thermally active lake in the world, have earned Dominica the common title: The Nature Island of the Caribbean. As a member of the Eastern Caribbean Central Bank, Dominicas official currency is the East Caribbean Dollar (XCD). Since 1976, the currency has been pegged to the U.S. Dollar at 1.00 USD = 2.7000 XCD. Agriculture is the most important sector in Dominica.

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58 Jamaica Jamaica, located in the Caribbean Sea, south of Cuba, is 10,991 square km in total area and has a population of 2,680,029 people. The population divides among Black (90.9%), East Indian (1.3%), White (0.2%), Chinese (0.2%), Mixed (7.3%), and Other (0.1%). The main Languages used in Jamaica are English and patois English. Jamaica gained full independence within the British Commonwealth in 1962. The form of government practiced in Jamaica is Constitutional Parliamentary Democracy based on the Westminster system. Jamaica is characterized by a tropical climate, with hot and humid interior temperatures. The countrys terrain is mostly mountains and has a very narrow, discontinuous coastal plain. The terrain includes the popular Blue Mountain Peak at 2,256 m, the highest peak on the island. Natural resources include bauxite, gypsum, and limestone. Jamaica is susceptible to destruction mainly from hurricanes. Jamaica follows a flexible exchange-rate regime. The rate of exchange between the Jamaican and U.S. Dollars is 1.00 USD = 59.0000 JMD.40 Tourism is the key economic sector in Jamaica.41 Trinidad and Tobago The Republic of Trinidad and Tobago is a twin-island small open economy, located between the Caribbean Sea and the North Atlantic Ocean, northeast of Venezuela. Tobago enjoys some degree of regional autonomy. Since gaining its independence from Britain in 1962, Trinidad and Tobago has practiced the Parliamentary Democracy form of 40The exchange-rates for Jamaica and Trinidad and Tobago came from the Universal Currency Converter (2003). The figures were the exchange-rates reported on October 10, 2003. 41See Stone (1991) for a good discussion of some of the socio-economic implications of the development of tourism in Jamaica.

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59 government based on the Westminster system. In 1976, the country adopted a republican constitution, replacing Queen Elizabeth with a president elected by parliament. The country has a total land area of 5,128 square km and a population of about 1,163,724 people, about 95% of which reside in the larger island of Trinidad (4,820 square km in land mass). The population is ethnically diverse with about 39.6% African origin, 40.3% East Indian, 14% Mixed, 1% White, 1% Chinese and 1% Other. English is the official Language, but Hindi, French, Spanish, and Chinese are used. The country features a tropical climate and in terms of terrain is characterized by mostly plains with some hills and low mountains. Its natural resources include petroleum and natural gas. Trinidad and Tobago is one of the most prosperous Caribbean countries largely because of its petroleum and natural gas production and processing. Trinidad and Tobago uses a flexible exchange-rate regime. The exchange-rate between the Trinidad and Tobago Dollar (TTD) and the U.S. Dollar is 1.00 USD = 6.1500 TTD. Tourism is the most vibrant sector in Tobago. Economic Performance 42 The economic performances of Belize, Dominica, Jamaica, and Trinidad and Tobago are illustrated in Tables 3-1 and 3-2. As reflected in Table 3-1, Gross National Income (GNI) per capita ranged from US $2,940 in Belize to US $5,960 in Trinidad and Tobago in 2001. Trinidad and Tobago is the only country with per capita income in excess of US $5,000. Per capita income in Belize, Dominica and Jamaica never exceeded US $3,500. 42Most of the information presented on both economic performance and economic structure came from the World Bank (2003), Countries Briefs and Countries Assistance Strategy and the International Monetary Fund (2001,2002), Public Information Notices for the various countries.

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60 Table 3-2 presents the annual average growth of real Gross Domestic Product (GDP) for the past three decades from, the 1970s-1990s, and for 2000-2001. Belize Belize is the only country to have realized a continuous increase in per capita income from 1980 to 2001 due partly to continuous positive average economic growth rates. In 2001, the country witnessed a small increase in per capita income. Belize experienced positive real growth rates across all three decades. Average real growth rates fluctuated from one decade to the next, decreasing in magnitude from the 1970s to the 1990s (although the 1980s and 1990s recorded similar average growth rates). Compared to the average growth rates recorded during the 1970s to 1990s, the economy improved tremendously in 2001, growing by approximately 5.1%. According to the World Bank (2002), the recent economic policies pursued by Belize focused on restoring high growth rates. High growth rates have been achieved through a program of fiscal expansion based on low taxes and high investment. Also, the government has provided credit to the private sector through the Development Finance Corporation (DFC) and the Social Security Board on very concessional terms. As a result, growth increased from 1.5% per year in the 1990s to over 10% and 5% in 2000 and 2001, respectively. The IMF (2002) attributed the lower rate of growth in 2001 to negative impacts of hurricanes, the terrorist attacks in the United States, and a shrimp-virus epidemic. Dominica Dominica experienced fluctuating per capita incomes over the 20-year period covering the 1980s and 1990s. In 2001, per capita income in Dominica declined to US $3,200 (from US $3,250 in 2000).

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61 Average real growth rates fluctuated from one decade to the next, decreasing in magnitude from the 1980s to the 1990s. During the 1990s, Dominicas economy continued to grow, though at a slower annual average rate compared to the 1980s. In the 1990s, annual growth averaged about 1.3%; it averaged approximately 1.5% in the 1980s. Stronger growth in the 1980s was mainly due to a favorable external environment, when preferential market access and strong prices resulted in a twofold increase in banana export earnings. Large flows of concessional aid financed investments in infrastructure. The external environment worsened in the 1990s as concessional aid flows declined rapidly and preferential access to external markets began to be eroded. The World Bank (2002) concluded that the WTO ruling against the preferential treatment of Caribbean bananas accelerated this trend. Further, over the past years, output and employment growth have been on the decline. These developments reflect the ongoing retrenchment of the key banana industry (due to weak export prices and the problems pertaining to preferential access to the European Union market), and the weak growth of non-banana agriculture and stay-over tourism (IMF 2002). Consequently, Dominicas real GDP stagnated in 2000 and contracted by 4.3% in 2001 because Banana production fell by 35% (mostly due to adverse weather conditions) Other key sectors of the economy declined (reflecting the slowdown abroad) The events of September 11, 2001 occurred An increasingly difficult fiscal situation emerged. The downturn in the economy appeared to have further increased unemployment and poverty. These effects were mostly evident in the rural areas affected by the continued displacement of banana farmers (IMF 2002).

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62 Jamaica Jamaica displayed no clear growth pattern over the past 30 years. Average real growth rates varied across all three decades. Economic performance during the 1970s was relatively weak, with the economy contracting by 1.2% on average per year. According to the World Bank (2002), Jamaica has made measurable progress in stabilizing the economy since the mid-1990s and, despite severe domestic and external shocks in 2001, has returned to positive growth after four years of contraction.43 Jamaica, like the rest of the Caribbean, is also vulnerable to natural disasters, particularly hurricanes and flooding, and faces many domestic and external risks. Firstly, despite the governments policies to improve incentives for private investment, recovery in the domestic economy could be held back by a slower-than-expected decline in domestic interest rates, a weak private sector supply response, and austerity-driven labor action or social unrest. Secondly, policy risk factors such as delays or setbacks in the implementation of the governments program would arise, for example, as a result of domestic consensus-building difficulties or shortcomings in implementation capacity. Thirdly, the possibility of adverse commodity price movements (such as a decline in the price of alumina and/or further oil price increases) would increase the current account deficit. Fourthly, an increase in the current account deficit combined with a decline in foreign direct investment (a significant source of financing), could affect recovery. 43The World Bank maintained that the weak performance of the Jamaican economy in the latter part of the 1990s resulted in part from a financial sector crisis that developed around 1996, when several domestic financial institutions and insurance companies ran into severe liquidity and solvency problems. The Government undertook wide-ranging intervention, which succeeded in averting a run on and collapse of the financial system but led to rapid accumulation of high-cost domestic debt. The intervention has imposed severe costs on the economy, such as high interest rates, crowding out of investment, reduction in competitiveness, and a vitiation of financial sector intermediation, which in turn have resulted in a lack of growth over the last four years.

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63 In 2001, real growth in Jamaica was approximately 1.7%. Throughout the three decades, Jamaicas average growth rate (in absolute terms) never exceeded 2%. The World Bank (2002) claimed that long-term growth in Jamaica has been hampered by consistently high real interest rates, a high level of crime and violence, a decline in competitiveness, and structural rigidities. Trinidad and Tobago Trinidad and Tobago experienced an increase in per capita incomes since the 1970s, except for a significant reduction to US $3,700 in 1990 (from US $5,090 in 1980). This development reflected the reduction in economic activity in the country associated with the macroeconomic problems that began in the late 1980s. In 2001, the country witnessed an increase (relative to 1990) in per capita income to US $5,960 as economic recovery intensified. Like Jamaica, Trinidad and Tobago experienced no clear growth pattern over the past decades. Unlike the other countries, Trinidad and Tobagos economy contracted during the 1980s by approximately 1% on average per year. The 1990s represented a period of recovery for Trinidad and Tobago (average growth rate being 1.4%). The World Bank (2002) noted a marked improvement in Trinidad and Tobagos economic performance towards the end of the 1990s owing to sound policies and significant new energy-related investments. The non-energy sector has also been buoyant, reflecting a pickup in exports of manufactured goods, and strong demand in construction and services. In late 1999 (to signal their commitment to sound policies) Trinidad and Tobago requested that the IMF monitor their economic program covering the fiscal year beginning in October. The program aimed at achieving adequate rates of economic growth and job creation, and maintaining macroeconomic stability through a

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64 strengthening of fiscal policy, credit restraint, and structural reforms (particularly privatization). Performance under the program, in the World Banks (2002) opinion, was in line with the governments objectives: strong growth (just under 5% in 2000 and 5% in 2001), relatively low inflation (about 3%), an improvement in the balance of payments, and a reduction in unemployment to 12% at mid-2000. The World Bank (2002) continued, under the 1988 to 1994 reform program, and Trinidad and Tobagos economy successfully stabilized; structural reforms were initiated. Since 1994, the country recorded real GDP growth of over 3% per year and low inflation. It also achieved small budget surpluses and balance in external accounts. The current economic recovery is fueled by stronger than expected performance in the non-oil sectors, primarily in services related to construction, distribution, tourism, financial, and telecommunication sectors. While petroleum is supplemented by natural gas production, the economic base remains narrow. Indeed, economic performance in Trinidad and Tobago is a reflection of the positive and negative features of the country. The World Bank (2002) identified as the countrys strengths The abundance of natural resources such as oil and gas in Trinidad, and bio-diversity in Tobago A vibrant domestic private sector Proximity to the markets in North America A vibrant manufacturing and business center, providing financial and commercial services A niche market in hydrocarbons such as liquefied natural gas, compressed gas, ammonia and methanol An established market for sugar exports and for agricultural products such as fruit juices and concentrates

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65 A potential to broaden its economic base in tourism, and financial and information services, construction and entertainment services. The disadvantages are mainly due to The small size of the country High unit costs in provision of public services Limited economic diversification Volatility in oil prices, which continues to exacerbate income fluctuations. Gross National Income Table 3-3 reflects the performance of Belize, Dominica, Jamaica and Trinidad and Tobago in terms of current per capita GNI from the 1970s to 2001. Belize recorded positive growth rates from one decade to the next. The other countries had mixed performances. In 2001, the economies of Dominica and Jamaica contracted. Belize and Trinidad and Tobago expanded, with Trinidad and Tobago growing by approximately 13.5%. Economic Structure The discussion of the economic structure focuses on two key issues: the sectoral contribution of the agricultural, industrial, and services sectors to GDP; and trade dependency. Sectoral Contribution Table 3-4 captures the evolution of the economic structure of Belize, Dominica, Jamaica, and Trinidad and Tobago since 1980 with respect to the contributions of the major sectors of the economy to GDP. Historically, agriculture44 has played an important role in the economic development of Belize and Dominica. The sector has been less 44The definition of Agriculture corresponds to that used by the World Bank (2001). Agriculture includes forestry, hunting, and fishing, as well as cultivation of crops and livestock production.

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66 important to Jamaica, and Trinidad and Tobago. Though the sectors role has diminished over the years in all four countries, it remains a significant earner of foreign exchange and an important source of income for many rural households in Belize and Dominica. A significant amount of economic activity in these countries takes place within the industrial sector,45 dominated by manufacturing and mining. During the period 1980-2001, the industrial sectors contribution to GDP in Dominica increased from 20.9% in 1980 to 22.8% in 2001. The importance of the sector declined in Belize, Jamaica, and Trinidad and Tobago. The services sector46 is the largest and most significant in all four economies (except Trinidad and Tobago in 1980 when industry dominated). Generally, the services sector accounts for more than one half of total GDP. Its importance increased in all four countries from 1980 to 2001. Tourism is the largest activity in the services sector and the most significant foreign-exchange earner in the Caribbean. In all of the countries, a large amount of effort is directed at attracting stay-over visitors and cruise passengers particularly from the USA and Europe. Belize Despite declining fortunes, agriculture remains a significant sector in Belize. The economy of Belize depends primarily on agriculture (in particular bananas, sugar, and citrus), which accounted for 23.0% and 22.7% of GDP in 2000 and 2001, respectively; 45The definition of the industrial sector follows that used by the World Bank. Industry comprises value added in mining, manufacturing, construction, electricity, water, and gas. 46The definition employed here is that used by the World Bank (2001). Services include wholesale and retail trade (including hotels and restaurants); transport; government, financial, professional, and personal services such as education, health care, and real estate services. Also included are imputed bank service charges, import duties, and any statistical discrepancies noted by national compilers as well as discrepancies arising from rescaling.

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67 and 68.0% of exports in 2000 (World Bank 2002). More recently, the economy has been diversified towards tourism and other service industries. The services sector, which accounted for 41.7% of GDP in 1980, contributed 52.3% to GDP in 2001. Tourism is not a major activity in Belize. However, like many Caribbean countries, Belize encouraged the development of the offshore financial sector, informatics, and betting and gaming as part of its integration into the global economic environment. Belize did not only diversify towards services, but also away from industry and agriculture. The greatest declines (relatively) occurred in the industrial sector. In 1980, the industrial sector contributed 30.9% to GDP. In 2001, the sectors contribution fell to 25% of GDP. Light manufacturing and construction dominate industrial activities in Belize. The contribution of agriculture to the economy fell from 27.4% in 1980 to 22.7% in 2001. Dominica In Dominica, agriculture remains a major source of economic activity for many rural households and an important contributor to GDP, despite the reduction in the sectors contribution to GDP from 30.7% in 1980 to 17.2% in 2001. Banana is the major export crop produced in Dominica. The World Bank (2002) noted that Dominica has continued to shift from agriculture to services, mainly through tourism, but also offshore financial services and, more recently, telecom-related services. The island continues to enjoy important comparative and competitive advantages that sustain its prospects for further growth and diversification. In the World Banks (2002) opinion, Dominica being Anglophone and having a highly educated citizenry has been advantageous to the country, given its relative proximity to the markets of North America and Europe. These factors, combined with attractive natural resources, increase the potential of Dominica for

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68 developing its eco-tourism sector and diversifying its economy. One of the main challenges is to maintain the requisite macroeconomic environment and continue investments in human, physical and institutional capital that would enable the country to fully exploit its potential in the global economy. In 1980, the industrial sector contributed 20.9% to GDP in Dominica. In 2001, the sectors contribution rose to 22.8%. Light manufacturing and construction are the most important industrial activities in Dominica. The main manufacturing industry in Dominica is soap, which is produced from local coconuts. The services sector has grown in importance in Dominica since 1980, with its contribution to the economy increasing from 48.4% to 60.0% in 2001. The increased contribution of services reflect the development of an offshore financial sector, informatics, and betting and gaming as alternative sources of foreign exchange.47 Activities include the sale of passports to overseas investors, company registrations, banking and Internet gambling. These initiatives were direct responses to the problems plaguing traditional agriculture and pressing needs to diversify their economic bases. The importance of tourism (though growing) is relatively small. However, given the nature of Dominica, the potential for eco-tourism is great. Indeed, Dominica is actively seeking to exploit its competitive advantage in attractions such as rainforests, volcanic scenery and scuba diving. 47Reliance on the offshore financial sector as a means of earning foreign exchange is rather risky since, like other nations, the offshore sector in the Caribbean is under tremendous scrutiny by the Financial Action Task Force (FATF) of the OECD and the Financial Stability Forum. For example, all members of the OECS, the Bahamas, Barbados and Belize, were listed in June 2000 by the OECD as tax havens. The Bahamas, St Vincent, Dominica and St Kitts-Nevis were listed as non-co-operative jurisdictions. Later, some of the countries, following extensive reforms, were removed from the FATF list.

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69 Jamaica The importance of agriculture to the Jamaican economy is small. Agriculture contributed 8.2% to GDP in 1980. The sectors contribution has since fallen, reaching 6.4% in 2001. Agricultural activities in Jamaica are concentrated in bananas and sugar. The industrial sectors contribution to GDP declined from 38.3% in 1980 to 30.8% in 2001. Manufacturing is strong (relative to Belize, and Dominica) in Jamaica. Unlike Trinidad and Tobago, Jamaicas manufacturing sector suffers from high energy and labor costs. Jamaica also benefits extensively from bauxite and alumina. Services remain the strongest area of economic activity in Jamaica. The contribution of the services sector to GDP increased from 53.5% in 1980 to 62.8% in 2001. Tourism is a major earner of foreign exchange and generator of employment in Jamaica and holds some prospects for continued growth. Jamaica has also encouraged the development of the offshore financial sector, informatics, and betting and gaming as alternative sources of foreign exchange. Trinidad and Tobago In Trinidad and Tobago, agriculture contributed 2.3% and 1.6% to GDP in 1980 and 2001, respectively. Alcoholic beverages, rice, and sugar provide the impetus to agricultural activity in Trinidad and Tobago. Not surprisingly, the industrial sector in Trinidad and Tobago contributed generally in excess of 43% to GDP. The sector is driven largely by oil and natural gas, making the country the strongest in terms of manufacturing. The importance of industry to the economy of Trinidad and Tobago declined from 62.5% in 1980 to 43.8% in 2001. Indeed, services have emerged as the leading sector in the economy of Trinidad and Tobago. In 1980, the services sector accounted for 35.2% of GDP (second to industry).

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70 In 2001, services accounted for 54.6% of GDP (exceeding industry and becoming the major source of economic activity in Trinidad and Tobago). Tourism (the main economic activity in Tobago) contributed to this development. The importance of tourism in Trinidad and Tobago is small relative to Jamaicas. Trade Dependency Table 3-5 illustrates the relatively high degree of trade dependency of Belize, Dominica, Jamaica, and Trinidad and Tobago for selected years during the period 1980-2001. Dominica and Trinidad and Tobago experienced increases in their shares of total exports in GDP. The share of total exports in GDP fell in Jamaica but remained almost constant in Belize. In 1980, the ratios ranged from 22.0% in Dominica to 55.4% in Belize. By 2001, the range had narrowed from 41.5% in Jamaica to 55.1% in Belize. The contribution of total exports to GDP shows some degree of variation over the twenty-year period. Total imports continue to play an important role in economic activity in all of the countries. The relative importance of imports to the economies fluctuated somewhat. Except for Dominica (with a downward trend), no clear pattern is identifiable over the range of countries from one decade to the next. However (since 1980) Belize, Jamaica, and Trinidad and Tobago experienced increases in their shares of total imports in GDP. In 1980, the ratios ranged from 39.0% in Trinidad and Tobago to 92.6% in Dominica. By 2001, the range narrowed from 43.0% in Trinidad and Tobago to 74.1% in Belize. For all of the countries, the ratio of total imports to GDP is much higher than those of total exports, suggesting current account deficits. Given the relatively small economic bases of these countries, domestic production is highly concentrated on a select small number of commodities. Consequently, local consumption and production needs have to

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71 be satisfied by imports. Indeed, high levels of imports and exports are central features of small countries (Demas 1992). The importation of intermediate and some consumer goods is vitally important to Caribbean economies. Every Caribbean country should increase its exports, focusing on a wider range of high-quality and technology-intensive commodities.48 Belize The contribution of total exports to GDP shows some degree of variation over the twenty-year period. Belize experienced a marginal decline in the share of total exports in GDP across the decades. The ratio moved from 55.4% in 1980 to 55.1% in 2001. The reduction in exports is attributed partly to various exogenous shocks. Total imports continue to play an important role in economic activity in Belize, though its relative importance fluctuated somewhat. No clear pattern is identifiable over the twenty-year period. In 1980, imports accounted for 68.6% of GDP. By 2001, the share of imports in GDP expanded to 74.1%. This development reflects the rapid increase in imports resulting from public investment (World Bank 2002). The combination of Belizes export and import performances in 2001 led to an increase in the current account deficit to 20% of GDP, increasing the risk of severe balance of payments difficulties (World Bank 2002). Dominica In Dominica, the shares of total exports and imports in GDP fluctuated across the decades, although there is evidence of a clear downward trend for imports. The ratio of 48In 2001, the share of total exports in GDP declined in Belize. The country recorded the strongest real economic growth rate in 2001. The decline in the share of total exports in GDP resulted from a reduction in earnings from agricultural exports.

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72 exports to GDP increased from 22% in 1980 to 51.2% in 2001. In 1980, total imports accounted for 92.6% of GDP. By 2001, the share of imports in GDP declined significantly to 63.8%. According to the IMF (2002), the external current account deficit widened to about 18% of GDP in 2000, on account of a sharp decline in banana exports, stagnant receipts on services (including tourism), and higher interest payments, following the substantial buildup of public sector external debt of previous years. The external current account deficit narrowed to about 16.5% of GDP in 2001, due to lower imports. Jamaica Trade plays a very important role in economic activity in Jamaica. During the period 1980-2001, Jamaica witnessed a reduction in the contribution of total exports to GDP from 51.1% to 41.5%. The share of total imports in GDP increased from 51.0% in 1980 to 55.8% in 2001. According to the World Bank (2002), Jamaica has been successful in maintaining single digit inflation since 1997, largely through tight monetary policy and by preventing a rapid nominal depreciation of the exchange rate. However, real appreciation of the exchange rate prior to 1999/2000 and again in 2001/2002 has resulted in some loss of competitiveness. Consequently, Jamaicas exports have contracted every year for the past five years, reflecting weak performances in both the traditional and non-traditional export sectors (World Bank 2002). Rising imports (mainly food and capital goods) since 1998/1999, combined with a slowdown in tourism receipts and increased investment income outflows, resulted in a widening of the external current account deficit from 3% of GDP in 1998/1999 to about 8.6% of GDP in 2001/2002 (World Bank 2002).

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73 Trinidad and Tobago In terms of the share of total exports in GDP, the ratio increased from 50.4% in 1980 to 54.8% in 2001. Exports play a significant role in Trinidad and Tobago, particularly the exports of oil and natural gas. According to the World Bank (2002), until recently Trinidad and Tobagos economic fortunes have closely followed the fluctuations in world oil prices. During the 1970s, when oil prices were high, the oil revenue windfalls were used for economic and social infrastructure, including infrastructure for gas production. The collapse of oil prices in the 1980s generated a prolonged period of economic contraction. Except for positive growth during 1990 and 1991, during the remaining years of 1983-1993, Trinidad and Tobago recorded negative growth. During this period, poverty and net emigration of skilled workers increased, thereby worsening the countrys economic performance. Imports also play an important role in economic activity in Trinidad and Tobago. In 1980, total imports contributed 39.0% to GDP. By 2001, the share of imports in GDP had increased to 43.0%. In the World Banks (2002) estimation, the performances of exports and imports have raised Trinidad and Tobagos external current account surplus to 5% of GDP in 2000, owing to higher export volumes and prices of petroleum and natural gases that exceed and offset a surge in imports related mainly to public sector projects.

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74 Economic Development Policies Although most of the policies adopted by Caribbean countries resulted from ideological factors and the influence of institutions such as the IMF and World Bank,49 it is imperative that one notes the role of socialism in the Caribbean: it did not transform the economies by reordering the political equation in favor of the majority class (Stone 1989). Further, the outcome of economic management under socialism was not significantly worse than conventional capitalist approaches. Stone (1989) suggested that neither ideological solution has provided any easy path towards economic recovery or transformation in the Caribbean. In his opinion, politics and ideology cannot provide solutions to problems that are essentially rooted in the structure of Caribbean economies. Blackman (1991) linked the policy prescriptions of the IMF and World Bank to the prevailing economic fad in industrialized countries. He expressed the view that a common facet of this advice is failure to take into account the characteristics of small countries. Best (1991) lamented the importance of every country to undertake programs and design development policies that are unique to its realities, independent of the influences of bilateral and multilateral institutions. Best (1991) cautioned that Caribbean countries need to be precise about the particular ways in which ideology and technology (on a world scale) impact upon them. He saw this issue as the challenge of that era. Hence, the Caribbean should always exercise prudence in its relationships with countries and 49Grenada, Guyana and Jamaica have all experimented with Socialism/Marxism during the 1970s. Aided by the IMF and World Bank, in particular, all three countries have embraced neo-liberal policy reforms leading to more outward oriented economies.

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75 institutions that seek to transfer enlightenment to them (whether through the integration of capital, the transfer of technology, or the sheltering of markets). Furthermore, evidence pertaining to analogous Adjustment Programs and economic reform initiatives by many other countries suggests some degree of ambiguity in terms of impact on macroeconomic performances (Khan 1990). While many criticisms continue to be levied against the IMF and World Bank, Demas (1992) acknowledged many difficulties associated with achieving economic changes Administrative problems, which refer generally to difficulties entrenched in the public sector, requiring extensive reforms Cultural factors, which are reflected in issues such as poor work ethics, incapacity for improved training to develop and broaden skills, and disregard for savings, preferring instead to increase spending on consumer goods and services Institutional difficulties, related to the role of organizations such as trade unions, and other matters, for example, inadequate reforms in major social sectors including education and health Political considerations, which generally speak to a lack of appreciation of the need for effective government. Despite these difficulties, Demas (1992) remained confident that Caribbean countries could survive and prosper if adequate attention is given to economic policy reform and due consideration taken of the exigencies of the global economic environment. Demas (1992) explained . as sensible West Indiansby increasing our expertise in management, marketing and technology and becoming sufficiently resourceful and entrepreneurial to be able to switch from product to product in accordance with shifts in external demand, we can create economies that are resilient and less fragile. In this way we can also diversify our production and exports (in terms of both the range of products and of countries with which we trade) and so achieve

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76 self-reliant and self-sustaining development on the basis of competitiveness in world trade in goods and services. (Demas 1992, p. 9)50 Additionally, Wilson (1992) observed that the low level of development of many Caribbean countries presented a major barrier vis--vis the exploitation of the opportunities arising from the implementation of more liberalized policies. Coupled with the presence of significant levels of poverty and under-development, both of which generate social and political problems, these factors represented major obstacles to rational economic management in the Caribbean. Indeed, Wilson (1992) suggested that contrary to the popular view, structural adjustment is required in bad times and also in apparently good times. Indeed, if the adjustment is made as the situation changes (particularly when those changes result from exogenous factors), then the need for severe adjustments will be significantly minimized. Furthermore, no one in the Caribbean is capable of criticizing the IMF and what it represents in the broader context of capitalism on a global scale (Watson 1993). He argued that to criticize the IMF one must understand the logic of capital and capitalism as a system. Watson (1993) also suggested that in pursuit of stabilization, a country should seek to Restore equilibrium in the external account through increased foreign exchange earnings Acquire productive capital and technology to increase skills, boost productivity and generate higher levels of export competitiveness. 50For a discussion of Caribbean competitiveness in the market place and strategies for gaining international competitiveness, see Charles (1992).

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77 Belize Britain granted adult suffrage to Belize in 1954, which marked a new beginning for the country. Belizeans seized the opportunity, which marked the demise of colonial status and created an avenue for the people to determine the nature and subsequent evolution of their own political economy (Palacio 1996). By 1964, Belize introduced internal self-governance, placing the burden of economic development on the shoulders of democratically elected political leaders. Development initiatives immediately followed. Between 1960 and 1980, the governments development agenda included central planning, building a platform to encourage private sector investment, and initiating social and community development projects and programs (Palacio 1996). These initiatives accounted for the evolution of the economy during the 1960s up to the 1980s. The U.S. State Department (2003) observed that forestry was the only economic activity of any consequence in Belize until well into the 20th century when the supply of accessible timber began to dwindle. Cane sugar then became the principal export and recently has been augmented by expanded production of citrus, bananas, seafood, and apparel. The country has about 809,000 hectares of arable land, only a small fraction of which is under cultivation. Domestic industry is limited, constrained by relatively high-cost labor and energy and a small domestic market. Tourism attracts the most foreign direct investment, although significant U.S. investment also is found in the energy, telecommunications, and agriculture sectors. A combination of natural factors (such as climate, the longest barrier reef in the Western Hemisphere, numerous islands, excellent fishing, safe waters for boating, jungle wildlife, and Mayan ruins) supports the thriving tourist industry. Development costs are high, but the government of Belize has designated

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78 tourism as its second development priority after agriculture. In 2000, tourist arrivals totaled 180,760 with more than 110,000 coming from the United States. Tourist receipts amounted to $113.3 million. Belizes investment policy is codified in the Belize Investment Guide, which sets out the development priorities for the country.51 According to the IMF (2002), Belize is strengthening regulatory frameworks in critical sectors intended for private sector participation (e.g., power, solid waste management, and water and sanitation) to help relieve infrastructure constraints. The government is also assisting in the promotion of private sector participation in the provision of services and maintenance of infrastructure (including through concession arrangements and contracting services out). Improving the investment climate will also require easing a number of other constraints including high domestic lending rates, foreign exchange shortages, cumbersome investment approval process involving ministerial discretion for duty exemptions, and weakness in land tenure and land titling arrangements. In the IMFs (2002) view, Belize has true growth potential and should be able to further broaden its economic base. Belizes relative strengths are its abundance of land, forest, and water resources, and its location in proximity to the large markets of Mexico and the United States. Other advantages include a niche market for a multifaceted tourism sector, and agribusiness. The government, therefore, needs to integrate Belize further into the world economy and expand the countrys trade and investment opportunities through new agreements. Belize, according to the IMF (2002), continues to expand its trading horizons by negotiating bilateral trade agreements with several countries such as Mexico, 51For further details, see Country Commercial Guide for Belize, available from the U.S. Department of Commerce's (2002) Web site.

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79 Spain, Cuba, Costa Rica, Guatemala, Nicaragua, El Salvador, and Honduras. It is also seeking membership in the Free Trade Agreement of the Americas (FTAA), which is, at the moment, targeted for conclusion by the year 2005. Furthermore, within the EU context, and in collaboration with other African, Caribbean and Pacific (ACP) countries, CARICOM is negotiating a new Lom Convention and a free-trade agreement with the Andean countries. Belize has also concluded investment promotion treaties, such as double taxation treaties, with the UK and CARICOM countries in recent years. Foreign direct investment has been overwhelmingly concentrated in banking, resort tourism, and land development. Additionally, the IMF (2002) noted that Belize is subject to several external risks arising from the uncertainty in preferential trade arrangements for its major exports to the EU and the USA. Since the late-1980s, real prices for banana and sugar exports to the preferential markets have declined sharply. Notwithstanding this problem, Belize has been able to satisfactorily improve land productivity in traditional agriculture and diversify its economic base. Moreover, the IMF (2002) suggested that Belize must improve competitiveness in traditional exports and diversify into new exports. Belize faces competitive pressures for all its exports. The prices for bananas, citrus, and sugar could continue to decline during this decade. If this occurs, real GDP could decline by about 1-2% per year, foreign exchange earnings could drop by as much as 6% per year, and an additional 500 people each year (0.5% increase in head count each year) could fall into poverty, unless Belize is able to quickly restructure its agricultural operations, reduce its unit costs, and accelerate the pace of economic diversification (IMF 2002).

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80 Regarding trade policy, the IMF (2002) welcomed the removal of the ministerial discretion to grant import duty exemptions, but noted that Belize still maintains extensive tax and duty exemptions, and twenty nine (29) groups of goods under protectionist quantitative non-tariff barriers. The IMF (2002) believed that these import restrictions should be converted into tariffs to improve resource allocation, increase revenue, and reduce administrative costs. Dominica The World Bank (2002) suggested that Dominica faces special development challenges because of its small size and vulnerability to natural disasters and other external shocks. With a small population, institutional capacity is limited and per capita costs of basic social and infrastructure services are very high. Historically, Dominica has promoted monocropping in agriculture, relying on preferential trade arrangements, which now face certain, albeit phased, dismantling as a result of World Trade Organization rulings. The World Bank (2002) also noted that Dominica has been engaged in the development of an Eastern Caribbean Development Strategy, which includes key elements such as Enhancing economic cooperation and macroeconomic stability through concerted action on trade and sound fiscal and monetary policies, focusing in the short-to-medium-term on improving fiscal discipline and public savings (paragraphs 8-10) Increasing private sector-led economic growth and diversification, including through direct support to the private sector (paragraph 16) Indirect support for growth through improved financial services, infrastructure and maintenance of the environmental heritage (paragraphs 18 and 20-22) Developing human capital through continued investments in better quality health and education, especially improved access to secondary and tertiary education (paragraphs 24-25)

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81 Building greater organizational capacity, through public sector reform, sub-regional integration, better aid coordination (paragraphs 29-33) and private sector training (paragraph 16). According to the IMF (2002), Dominicas prospects for achieving an improved balance of payments position and sustaining output growth in the medium term will depend largely on strengthening competitiveness in the export and tourism sectors. Given the fixed exchange rate regime the country follows, fisca1 discip1ine, wage moderation, and structural po1icies aimed at increasing factor productivity must be encouraged. These must include the ongoing restructuring in the banana sector, reduction of telecommunication costs, continued tax and trade reforms, and improvements in the efficiency of public investment. With respect to trade policies, Dominica lowered its maximum CET rate to 25% in January 1999, two years behind the scheduled implementation date for Phase III of the 1992 CARICOM agreement. The authorities implemented the final reduction (to 20%) under Phase IV (scheduled for January 1998) in July 2001 in the context of the 2001/02 Budget (IMF). In the IMFs (2002) opinion, Dominica needs to intensify its trade libera1ization policy to narrow the dispersion of tariff rates, phase out import licensing, reduce the existing customs service charge to the approximate cost of processing import transactions in line with World Trade Organization (WTO) guidelines, and eliminate all remaining price controls (except those on fuels and cement which could be removed at a later stage). Other important policy initiatives deserving of serious considerations include reforming the telecommunication system, strengthening the oversight of the financial system, continued restructuring of the banana industry, privatizing selected state-owned enterprises such as banks, divesting government shares in the telephone company, abolishing the monopoly of the Dominica Export Import Agency (DEXIA) on the

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82 importation of sugar and bulk rice, and transforming the National Development Corporation (NDC) into a self-financing agency. Jamaica During the 1960s, foreign multinational firms, mainly American, British and Canadians, dominated most commercial activities in Jamaica, ranging from agriculture to public utilities such as power, water, and transportation. According to the U.S. State Department (2003), the discovery of bauxite in the 1940s and the subsequent establishment of the bauxite-alumina industry shifted Jamaicas economy away from sugar and bananas. By the 1970s, Jamaica had emerged as a world leader in export of these minerals as foreign investment increased. The 1970s marked an interesting period in the economic development of Jamaica. This relates to Michael Manleys assumption of power in 1972. Stone (1989) noted Manley's complete alienation of both the middle and capitalists classes. Moves in the name of democratic socialism (such as acquiring control of primary production and provision of infrastructure, taxing agricultural lands not in full production, extending secondary education opportunities to the poor, instituting the National Youth Service, and making an international cartel of bauxite)52 may have been attempts to give Jamaicans a heroic self-image. Manleys reforms encountered tremendous opposition among local and foreign elites. Besides his frequent attacks on international capitalism, Manley shaped his agenda based on his belief that Jamaica was characterized by four traits: nationalism, adverse terms of trade, capital-dependency, and vulnerability in bargaining with industrialized 52Despite Manleys nationalization initiatives, some multinationals remained in Jamaica, but many of them engaged mostly in joint ventures in activities owned or controlled by the Government.

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83 countries (Langley 1989). Hence, his strategy for the development of Jamaica was two-fold: Firstly, the formation of regional groupings that would give Jamaica and other Third World countries greater power to negotiate with industrialized countries Secondly, the formulation of a common strategy vis--vis their relationship with developed countries. Faced with an increasing trade deficit during the 1970s,53 Manley promoted a strategy of import substitution industrialization. This strategy granted protection to firms to increase domestic production of goods and services that substituted for imports. It was supported by the imposition of various forms of restrictions on trade, particularly imports. The government also instituted price controls on several consumer goods. In 1989, Manley returned to power with great reluctance to embark again on a nationalist, non-capitalist path. In fact, he committed himself to promoting economic reforms aimed at fostering the continued development of an outward oriented economy (Langley 1989, Garrity 1996). The 1980s heralded massive economic reforms in Jamaica, aimed at restructuring the countrys productive sectors, promoting exports, increasing productive employment, reducing fiscal deficits, lowering inflation, and satisfying certain social imperatives.54 Aided principally by the IMF, World Bank, Inter-American Development Bank (IADB), and the United States Agency for International Development (USAID), Jamaica began 53The Bank of Jamaica estimated that during 1960-1971 the external accounts showed an accumulated surplus of US $95 million. These fortunes reversed, with the balance of payments recording an accumulated deficit of US $ 679.2 million during the period 1972-1980 (Jamaica, Bank of Jamaica 1985). 54For a detailed discussion of the performance of various macroeconomic variables in Jamaica during the 1970s and 1980s, see Boyd (1988), Sharpley (1984), and Thomas (1999). The economic reforms resulted from a combination of problems including social unrest, rising fiscal deficits, severe balance of payments problems, rising inflation, and acute foreign exchange shortages.

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84 moving away from its Socialist path and implemented policies aimed at creating a more market-oriented and outward-looking economy.55 Trade liberalization and the attraction of foreign investment became important pillars of the countrys reform efforts. Major strategies included The privatization of many state-owned enterprises. This included the sale of the power company and the privatization of one airport.56 The government also invited private participation in the provision of infrastructure Tax reforms Deregulation of various industries Restructuring of the financial sector. Jamaicas economic reforms had far reaching implications for every sector of the economy. Girvan (1992) noted some of the negative implications of adjustment programs on Jamaicas social sector overshadowed the positive impacts. Girvan (1992) cited the following as evidence of the adverse effects of adjustment programs on the social sector in Jamaica: A huge reduction in living standards of a vast majority of Jamaican workers A marked decline in the share of wages and salaries in National Income Various crises in both the public health and education systems. 55Jamaicas experience with the IMF started in December 1976 with the negotiation of a Stand-by-Agreement that included a wage freeze, fiscal restraint and a devaluation of the Jamaican dollar by 20 to 40%. In January 1977, Jamaica implemented a home grown Adjustment program, as a rejection of the IMFs package, that included policies such as a reversal of the wage freeze, imposition of import and exchange controls, suspension of foreign debts for a year and a half, and sourcing bilateral funding from sympathetic governments. Furthermore, to attract foreign investment, Jamaica entered into other Agreements with the IMF in August 1977, and June 1979 (Boyd 1988). Under these programs, Jamaica experienced mixed economic performances, forcing many cancellations and resumptions of cooperation with the IMF. 56Stone (1992a) discussed Jamaicas experience with privatization in 1981.

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85 The U.S. State Department noted Jamaicas economic policies encourage foreign investment in areas that earn or save foreign exchange, generate employment, and use local raw materials. The government provides a wide range of incentives to investors, including remittance facilities to assist them in repatriating funds to the country of origin; tax holidays which defer taxes for a period of years; and duty-free access for machinery and raw materials imported for approved enterprises. Free trade zones have stimulated investment in garment assembly, light manufacturing, and data entry by foreign firms. However, over the last 5 years, the garment industry has suffered from reduced export earnings, continued factory closures, and rising unemployment. This can be attributed to intense international and regional competition, exacerbated by the high costs of operations in Jamaica, including security costs to deter drug contamination. To lay foundations for faster economic growth, Jamaica, according to the World Bank, is committed to maintaining macroeconomic stability, taking anti-crime measures to improve the business environment, maintaining social order, improving infrastructure, strengthening the competitiveness of the economy by adopting sector-specific growth-oriented policies, continuing efforts to reduce labor market rigidities, and adopting further public sector reforms. These initiatives are essential in order to maintain economic stability and avoid some of the many pitfalls from the pastpitfalls clearly reflected by Nelson (1992b) who concluded that Jamaicas economic experiences can be described as a pathology of change over time from euphoria to gloom, from hope to despair, from success to failure and from progress to crisis.

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86 In July 2000, Jamaica requested a Staff-Monitored Program (SMP) with the IMF covering the two Jamaican fiscal years April 2000-March 2002. The economic situation, while still demanding close monitoring, has improved in comparison with 2-3 years ago. Moreover, on-track implementation of the SMP would help to reverse the adverse public debt dynamics and contribute to restoration of growth. The World Bank (2002) acknowledged that despite such positive developments, Jamaica faces considerable challenges ahead. The immediate challenge is to recover its growth trend, which will assist in lowering the extent of poverty. Thus, the priority task is to lay the foundations for a restoration of growth. In terms of social dimensions, Jamaica needs to address major concerns relating to the vulnerability of its youth as well as to crime and violence, which have a negative impact on investment and tourism, and affect the poor disproportionately. Furthermore, the World Bank (2002) noted that Jamaica advanced a development strategy that rests on four pillars: Restoring economic growth Ensuring that growth is inclusive and that the poor are adequately protected Improving governance, efficiency and effectiveness in the public sector Ensuring sustainable development. The countrys approach to economic development has attracted financial support from the World Bank in excess of US $220 million in new lending for fiscal year 2001/2002, consisting of, among other things, US $75 million to support financial sector restructuring, and to help in reducing the public debt burden, thereby paving the way for restoration of growth and employment opportunities for the poor. The Inter-American Development Bank also approved a similar US $150 million project. There was also a US $25 million project approved by the Caribbean Development Bank.

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87 Trinidad and Tobago Prior to the 1980s, Trinidad and Tobago enjoyed a stable currency and a healthy economy with high living standards and sound social services due largely to massive inflows of revenue from the export of oil and natural gas. The government placed little effort on prudent economic policies and management. Little or no evidence of exchange controls existed. Foreign currency moved freely into and out of the economy. Prior to the first oil crisis, oil and natural gas dominated the economy, accounting for 20% of GDP (Wilson 1992). The governments economic development strategy followed along the lines of ISI. Major policies instituted include the granting of huge amounts of protection to manufacturing, production and consumption subsidies. The protection afforded manufacturing created a relatively uncompetitive sector, while the subsidization of production and consumption stimulated domestic demand and buttressed inefficient production activities in non-oil industries. Further, the ISI policies raised the economys dependence on oil and noticeably decreased the potential for economic diversification. Not surprisingly, therefore, despite benefiting tremendously from the 1970s oil crises, Trinidad and Tobagos economy took a severe downward spiral in the early 1980s. Wilson (1992) linked the economic problems that emerged to the vast amount of revenues earned from oil and natural gas. He noted that in response to a deliberate policy of spending and distributing what appeared to be, at the time, continuing and long lasting gains, almost one half of the windfall went into consumption, which, encouraged by subsidies, grew at a faster rate than GDP throughout the decade. Clearly, the heavy emphases on consumption and subsidization played central roles in the demise of the economy. Structural adjustment became inevitable. Trinidad and

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88 Tobagos experience with structural adjustment is detailed in Harewood (1993), Ramkisson (1988), and Wilson (1992). Trinidad and Tobago reacted almost instantly to the economic problems that emerged in the early 1980s, but its adjustment measures were inadequate, becoming more protectionist (Wilson 1992). In 1983, the government introduced exchange controls and sought to restrict imports through licensing. These measures generated reduced levels of imports of vitally important inputs and raw materials needed to boost production, sealed off the economy from foreign imports, and further protected domestic production from foreign competition. Hence, imports fell, but the balance of payments recorded a deficit due to poor export performance. The government also increased spending to stimulate aggregate demand and maintain the countrys standard of living. Wilson (1992) noted that the fall in oil prices and the huge decline in revenues posed a major challenge to the government to adjust to the new realities. According to Wilson (1992), the governments response included Spending the pre-1973 surpluses of TT $3,108 million in the period 1983 to 1986 Increasing external borrowings to TT $4,640 million, while TT $792 million was borrowed on the local market Resorting to Central Bank borrowings in the last 5 months of 1986 in the sum of TT $943 million. Accordingly, the government was able to maintain expenditure levels that exceeded current revenue. That approach was inappropriate since it failed to address the inherent weaknesses in the economy (Wilson 1992). In Wilsons (1992) opinion, policies should have been instituted aimed at addressing the countrys competitiveness and promoting the production of non-oil commodities for exports. They were not. Hence, according to

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89 Wilson (1992), by 1986 (following the reduction in oil prices) Trinidad and Tobago witnessed severe macroeconomic problems, including An increase in unemployment from 10% in 1982 to 18% in 1996 A massive reduction in government savings, which moved from a surplus equivalent to 20% of GDP in 1981 to a deficit equivalent of 1% in 1987 A massive compression of imports A reduction in the competitiveness of the manufacturing, agricultural, and tourism sectors (competitiveness of these sectors was partially restored with the December 1985 devaluation of the Trinidad and Tobago dollar). Plagued with economic distress, the government of Trinidad and Tobago sought the assistance of the IMF under the Compensatory Financing Facility and subsequently entered into two standby arrangements with the Fund in August 1988. The World Bank provided the country with a structural adjustment loan and conditional assistance was received from other multilateral institutions. Central to the program of reform aimed at making the economy more market oriented were reductions in public spending, which included cuts in public sector wages and the suspension of some payments;57 revision of the tax regime {including the introduction of a value added tax (VAT)}; movement to a market-based exchange-rate regime; elimination of exchange controls; deepening of trade liberalization; removal of price controls on consumer items; divestment of about 50% of the assets of the state-owned enterprises; and initiation of retrenchment of staff in statutory agencies. The local currency was devalued by 15.3% from TTD 3.60 = USD 1.00 to TTD 4.25 = USD 1.00. Also in 1988, substantial amendments were made to the EC Zero 57See Ramkhelewan (1991) for a detailed exposition of Trinidad and Tobagos proposal for the settlement of outstanding payments to public officers and employees of Caroni (1975) Ltd.

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90 system, followed by its abolition in 1991. The restrictions on invisible trade were also relaxed in the following year. It is against this background that the government, in April 1993, took the decision to abolish exchange controls on current as well as capital transactions and to float the TT dollar. Prior to the adjustment program, Trinidad and Tobago had a fixed exchange-rate system. The TT dollar was pegged to the US dollar at TTD 4.25 = USD 1.00. Adjustment was sustained and broadened during the 1990s. On April 13 1993, Trinidad and Tobago introduced a market-determined system of exchange rates. More recently, Trinidad and Tobago initiated reforms in several sectors. The private sector is increasingly becoming an engine of growth (U.S. State Department 2003). Reductions in subsidies to state enterprises have contributed to fiscal soundness and lent credibility to the governments ongoing divestment program (U.S. State Department 2003). Companies all or partially divested since 1994 include the National Fisheries Company, BWIA International Airways, National Flour Mills (NFM), the Trinidad and Tobago Electricity Commission (T&TEC), TT Methanol Company, Trinidad Cement, TT Iron and Steel Company, and the Water and Sewerage Authority (WASA). In May 1997, the government sold its remaining 69% interest in the Trinidad and Tobago Methanol Company to a consortium consisting of the local firm CL Financial and Germanys Ferrostaal and Helm consortium. NFM was divested by an additional 14% in 1997, bringing the governments holding down to 51%. The government is currently considering creating a holding company to bring its remaining shares in several formerly wholly government-owned enterprises to market.

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91 Trinidad and Tobagos economic strategy is based on fiscal and monetary discipline, private sector investment, and export-led growth (U.S. State Department 2003). The strength of Trinidad and Tobagos economy resides in the performance of the energy sector. Therefore, economic policies should facilitate the flow of additional resources to this sector. However, the country cannot become over-dependent on the energy sector. Economic diversification must be pursued specifically in relation to manufacturing and services. According to the World Bank (2002), to sustain the recent economic recovery and employment growth, the government needs to deepen the structural reforms.58 In particular, strengthening the financial system; streamlining the investment approval process; reforming the sugar sector and land tenure system; removing impediments in the labor market; improving the regulatory frameworks in critical sectors such as oil and gas, power, water, and telecommunications; and improving the efficiency in public sector including strengthening the implementation capacity of project units, education, health, social protection, and environmental management, are crucial. A major challenge for the government is to rebalance the roles of the public and private sectors in most of the above sectors. In Demas (1991) opinion, the keys to economic development in Trinidad and Tobago are two-fold: Firstly, the need to address various internal issues that would lead to the inculcation of the right values and attitudes towards various economic issues ranging from consumption to risk-sharing. The critical factors in this regard include: a reduction 58The economy recovery occurred with severe social and political consequences. See Wilson (1992) for a discourse on some of the social and political difficulties that faced Trinidad and Tobago during its years of structural adjustment. See also Cain and Birju (1992) for a discussion of the impact of structural adjustment on crime and crime control measures in Trinidad and Tobago.

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92 in consumption, higher domestic savings, grater domestic capital investment, increased education and training, more production and higher productivity, higher levels of exports, and a broadly agreed role for the government Secondly, taking advantage of the external environment, which, in his view, is not excessively unfavorable to Trinidad and Tobago. Indeed, Basdeo (1991) suggested that Trinidad and Tobago must seek to create an economy that is outward oriented in order to take advantage of the opportunities arising from globalization. As part of its development thrust, the country must diversify and transform its industrial sector to become less dominated by oil and natural gas. Other pillars of the countrys economic strategy must include tourism development, increased manufacturing activities, greater levels of international competitiveness, expansion of exports, encouragement of entrepreneurship, promotion of the development of small and medium-sized businesses, and greater utilization of the countrys human resources. Furthermore, Harewood (1993) suggested the expansion of production for exports to both regional and international markets is the critical determinant of economic growth in Trinidad and Tobago on a sustained basis. This requires economic adjustments to boost productivity and the countrys competitiveness given that the economy has been stabilized as a result of fiscal and monetary policy reforms.59 Table 3-1 Gross National Income (GNI) per-capita in current US$ basedon the Atlas Method for selected years, 1980-2001 Country 1980 1990 2000 2001 Belize 1410 2190 2880 2940 Dominica 800 2260 3250 3200 Jamaica 1220 1820 2820 2800 Trinidad and Tobago 5090 3700 5250 5960 Source: World Banks Development Data Group 59The strategies outlined by Basdeo (1991), Demas (1991), and Harewood (1993) are applicable to Trinidad and Tobago today. Hence, these strategies cannot be discounted.

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93 Table 3-2 Annual average growth rate of real GDP, 1970s-1990s, and 2001 Country 1970s 1980s 1990s 2001 Belize 1.59 1.51 1.50 5.08 Dominica 1.52 1.34 -4.28 Jamaica -1.23 1.40 1.13 1.73 Trinidad and Tobago 1.56 -0.90 1.44 5.00 Source: Calculatedfrom World Banks Development Data Group data Table 3-3 Annual average growth rate of current GNI per capita, 1970s-1990s, and 2001 Country 1970s 1980s 1990s 2001 Belize 1.72 1.49 1.41 2.08 Dominica 1.68 1.46 -1.5 Jamaica 1.53 1.48 1.49 -0.7 Trinidad and Tobago 1.87 -1.39 1.45 13.5 Source: Calculated from World Banks Development Data Group data Table 3-4 Sectoral contributions to GDP in selected countries, 1980-2001 Country Sector 1980 1990 2000 2001 Belize Agriculture 27.4 20.7 23 22.7 Industry 30.9 25.4 29 25 Services 41.7 53.8 48 52.3 Dominica Agriculture 30.7 25 17.4 17.2 Industry 20.9 18.6 23.5 22.8 Services 48.4 56.4 59.1 60 Jamaica Agriculture 8.2 6.5 6.3 6.4 Industry 38.3 43.2 30.5 30.8 Services 53.5 50.4 63.2 62.8 Trinidad and Tobago Agriculture 2.3 2.5 1.6 1.6 Industry 62.5 46.2 43.2 43.8 Services 35.2 51.2 55.2 54.6 Source: World Banks Development Data Group All the sectoral contributions are value added as a % of GDP

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94 Table 3-5 Total exports and imports as percentages (%) of GDP for selected years, 1980-2001 Total exports Country 1980 1990 2000 2001 Belize 55.4 63.8 58 55.1 Dominica 22.0 54.5 54.6 51.2 Jamaica 51.1 48.1 44.4 41.5 Trinidad and Tobago 50.4 45.4 60.1 54.8 Total imports Country 1980 1990 2000 2001 Belize 68.6 61.6 78.1 74.1 Dominica 92.6 80.5 67.8 63.8 Jamaica 51.0 51.9 56.1 55.8 Trinidad and Tobago 39.0 28.6 46.2 43.0 Source: Calculated from World Banks Development Data Group data

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CHAPTER 4 AGRICULTURAL EXPORT DIVERSIFICATION Introduction Historically, agriculture in the Caribbean has been dominated by the production and export of traditional primary commodities (for example, bananas, and sugar in Belize). In recent times, various countries witnessed a marked reduction in the contribution of agriculture to GDP, attributed to factors such as contracting output as a result of natural disasters and other causes; increasing competition from imports and substitute goods; and unfavorable international market conditions, for example, low prices and obscured demand (CARICOM 1990). One of the major driving forces behind agricultural export diversification initiatives in the Caribbean has been the threat to eliminate preferential access to the European market for various traditional commodities such as bananas and sugar. Opponents of the Lom Convention have argued that preferential treatment to ACP agricultural commodity exports may have promoted over-specialization in a small range of primary products, thereby discouraging the diversification of the countries agricultural exports. As important as preferences may be, an even greater challenge facing Caribbean countries as they seek to diversify their export agriculture relates to phytosanitary and sanitary restrictions imposed by importing countries. Usually, these measures result in the 95

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96 creation of a list of agricultural commodities that are permitted entry into the U.S. market.60 Furthermore, the United States Congress has directed that the principal negotiating objectives with respect to agriculture should be to achieve more open and fair trading conditions for agricultural commodities by developing and strengthening trade rules while clarifying those that distort imports and exports; and creating a freer and more open global trading structure for agricultural commodities, among others (Lewis 1991). Perhaps, it is within this context that diversification takes on greatest significance for Caribbean countries and has prompted the implementation of various initiatives aimed at boosting the diversification of export agriculture. Agricultural diversification in the Caribbean should be viewed as a strategy for achieving more broadly based, efficient and competitive production structures (Demas 1987). Success in this regard depends on three main elements: The need to increase productivity of traditional commodities and add value through processing The desire to widen production of nontraditional commodities for consumption in the domestic economy and other Caribbean countries The ability to expand production of nontraditional commodities for export to international markets. Undoubtedly, diversification, if successful, should redound to the benefit of the economies through increased food security; higher levels of foreign exchange earnings and savings; employment generation, particularly in the rural communities; the realization of improved production linkages between agriculture, tourism, manufacturing 60Lewis (1991) contained a list of admissible fruits and vegetables from Trinidad and Tobago to the U.S. market.

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97 and other sectors of the economies; and fostering greater utilization of otherwise underutilized scarce resources (Demas 1987). The success of any agricultural diversification initiative in the Caribbean is conditional upon several factors, some of which have been advocated by Demas (1987).61 A major consideration is that of cost. Demas (1987) hinted of the potentially huge costs associated with promoting agricultural diversification in the Caribbean. He identified the possibility of large overhead costs related to activities such as the creation of new infrastructure, research, marketing and irrigation. In his opinion, these costs could be shared among various countries through regional projects and programs. Given the continuing pattern of uncertainty in the terms of trade experienced by Caribbean countries vis--vis agricultural exports, particularly primary commodities, many governments have recognized the urgency to diversify their agricultural sectors. Several projects have been identified as important mechanisms for fostering diversification of export agriculture at both the country-specific and Caribbean-wide levels.62 Measuring Agricultural Export Diversification Various indexes have been advanced in the literature as measures of diversification. Many of the indexes have been applied to measuring corporate diversification (Baldwin et al. 2001, Hoopes 1999, Hoskisson et al. 1993, and Ramanujam and Varadarajan 1989). Amin Gutirrez de Pieres and Ferrantino (1997), and Stanley and Bunnag (2001), were studies based on the analysis of export diversification. 61Davis (1988) discussed some issues pertaining to what he called the product-product dimension of an agricultural diversification strategy for the Caribbean. 62CARICOM (1990) identified several potential projects and programs deemed necessary for fostering agricultural diversification in Caribbean countries. Evidence of actual implementation is lacking.

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98 According to Jacquemin and Berry (1979) most diversification indexes take the general form niiiwSI1 (4-1) where I is the diversification index, Si is the share of the ith commodity, wi is an assigned weight, and n is the total number of commodities. Assigning different weights in Equation 4-1 produces a variety of diversification indexes. If wi is defined as the share of the ith commodity, Si, we obtain the Herfindahl index,63 defined as niiSH12 (4-2) If wi equals ln(1/Si), the Entropy index64 is obtained: )/1ln(1niiiSSE (4-3) Gollop and Monahan (1991) maintained the assertion that there is no formal production theory that suggests a unique measure of diversification. Furthermore, Gollop and Monahan (1991) noted that none of the traditional indexes satisfy all of the desired properties that might be ascribed to a perfect measure of diversification. Gollop and Monahan (1991) suggested that a measure of diversification should: Vary directly with the number of commodities Vary inversely with the increasingly unequal distribution of commodities across the products mix 63The Herfindahl index originated with Hirschman (1945). See Hirschman (1964) for a note of the origin of the index. Adelman (1969) contains a derivation of the index and its interpretation as a numbers-equivalent. The Herfindahl index was also used in the estimation of the empirical growth models. Both indexes generated similar results. Hence, the results from the Herfindahl index were not reported. 64According to Langham and Davis (1998), the Entropy Index was developed in information theory by Shannon (1948). Others have linked the origin of the index to the work of Theil (1967).

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99 Vary directly with the degree of dissimilarity among the commodities Apply equally well in alternative scenarios (for example, to firms, industries, or even countries) Lie, if possible, between zero and one.65 Hence, the use of a particular index rests ultimately on the properties of a given measure in relation to the objective of the analysis and data availability. Our study uses the entropy index.66 The Entropy index analyzes diversification in terms of the relative significance of each commodity in total exports. The larger the value of the index the more diversified are the exports. The entropy index has been widely used in the analysis of diversification that examined related and unrelated corporate diversification within a unified framework (Palepu 1985). The data used in calculating the entropy index were obtained from the FAOSTAT online database and composed of observations on 555 agricultural commodities categories (primary and processed crops and livestock) defined at the four-digit level. These commodity categories have been grouped into 23 broad product aggregates (Table 4-1). Information on the product classifications and their concordance with other commodity categorization systems are available online.67 Thus, the analysis can assess The degree of total agricultural export diversification The degree to which diversification has occurred within broad product aggregates (related diversification) 65The entropy index satisfies all but the last condition. The upper limit of the index is the natural logarithm of the number of commodities (that is, LN (555)*100 = 631.90 in our case). 66Other measures of diversification include the revealed competitive advantage index (Balassa 1965), the Ogive Statistic (Conroy 1989), the Gini Concentration index (Stanley and Bunnag 2001), and the coefficient of variation and log-variance of product group shares (Imbs and Wacziarg 2002). 67http://www.fao.org/WAICENT/faoinfo/economic/faodef /FAODEFE.HTM#COMG.

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100 The degree to which diversification has occurred across these aggregates (unrelated diversification). To accomplish this assessment, let k denote the number of product aggregates (in the current analysis k = 23) and define kiikSS (4-4) as the share of total exports in aggregate group k. The measure of export diversification within this group is then given by ikkikiwkSSSSEln (4-5) The measure of exports diversification across the group aggregates is given by KkkkASSE1)/1ln( (4-6) The entropy measure for total agricultural export diversification (equivalent to Equation 4-3) is niiiTSSE1)/1ln( (4-7) Jacquemin and Berry (1979) showed that a significant advantage of the entropy index is that the measure for total export diversification may be decomposed into expressions involving Equations 4-5 and 4-6. To see this, the entropy measure for total agricultural export diversification may be rewritten as )/1ln(1ikKkkiikTSSE (4-8) which, after some algebraic manipulation (Jacqueman and Berry 1979, p. 361-362), gives AwkKkkTEESE1 (4-9)

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101 Equation 4-9 says that the entropy measure of total agricultural export diversification can be decomposed into two distinct components: Within broad product group (related) diversification, as measured by the weighted average of the within group entropy measures (Ewk) Across broad aggregate group (unrelated) measure of diversification (EA). Extent of Agricultural Export Diversification in the Caribbean This section discusses the extent of agricultural export diversification in Belize, Dominica, Jamaica, and Trinidad and Tobago over the period 1970-2001.68 All data were measured in terms of nominal values expressed in U.S. dollars. Agricultural export diversification is sometimes conceived as the progression from traditional commodities to non-traditional commodity exports (Amin Gutirrez de Pieres and Ferrantino 1997). Within the context of the Caribbean, agricultural export diversification may be envisioned (in part) as the movement away from the export of primary products and toward processed commodities. This is borne out in the ensuing discussions. Belize Table 4-2 shows the estimated entropy indexes for total diversification, and the within and across commodity group decompositions for Belize over the period 1970-2001. These data are also plotted in Figure 4-1. The diversification measures for Belize exhibit a great amount of variability. From 1970 to the late-1980s, the index of total diversification showed no clear trend, increasing from 202.78 in 1970 to only 209.86 in 1989 (a 3.5% increase). Most of the diversification of export agriculture in Belize (as reflected in the changes in the index) took place after 1990. The index increased by 68The discussions throughout this section follow closely Taylor and Francis (2003).

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102 17.2% from 192.53 in 1990 to 225.55 in 2001 (the sharpest increase being from 188.56 in 2000 to 225.55 in 2001). This result suggests some degree of agricultural export diversification in Belize. Up to 1998, most of the diversification occurred across commodity groups, which accounted for 65.1% of the total diversification on average over the period of analysis. Most of this diversification took place across 5 product groups: Sugar, Sweeteners and Derived Products; Vegetables and Derived Products; Fruits and Derived Products; Water, Ice, and Beverages; and Cattle and Products. The index for across group diversification increased up to 1990, but declined thereafter. The within group measure of diversification, which accounted for 34.9% of total diversification on average, remained fairly constant up to 1990, increasing from 58.61 in 1970 to 59.96 in 1990. The index more than doubled between 1991-2001, increasing from 57.17 in 1991 to 144.21 in 2001. During the period 1999-2001, the within group measure of diversification contributed more to total diversification than the across group index. Most of the diversification occurred within 2 product groups: Fruits and Derived Products; and Sugar, Sweeteners and Derived Products. The evolution of agricultural exports in terms of values (Table 4-6) and shares (Table 4-7) by commodities over the period of analysis demonstrates the extent and major driving forces behind agricultural export diversification in Belize. The changes that have taken place in the structure of agricultural exports from Belize over the past four decades are rather interesting. In 1970, the top two export commodities (sugar and concentrated orange juice) accounted for 61.0% of Belizes total agricultural exports (sugar accounted for 52.7% and concentrated orange juice accounted for 8.3% of total

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103 exports). These same commodities accounted for 72.1%, 62.1%, and 53.5% of total agricultural exports in 1980, 1990, and 2000, respectively. In 1980, the share of concentrated orange juice declined to just 5.5%, but rose in 1990 to about 17.5% of the total. By 2000, the top export shifted from a primary product (sugar) to a processed commodity (concentrated orange juice, with a share of 28.9%). Indeed, the data reveal a dramatic decline in the relative significance of sugar exports so much so that by 2000, the contribution of sugar to agricultural exports fell to 24.6% and sugar was overtaken by concentrated orange juice as the major agricultural export from Belize (Table 4-7). Another interesting observation is that the number of agricultural products with shares of at least 1.0% declined from 13 in 1970 to 9 in 1980, increased to 10 in 1990, and fell again to 8 in 2000. The composition of agricultural exports became more concentrated. In 1970, the top five exports accounted for 77.6% of total exports, with sugar alone accounting for 52.7%. By 2000, the top five exports accounted for 88.7% of the total, with concentrated orange juice, the leading export, accounting for 28.9%; sugar, the second leading export, for 24.6%; bananas, the third leading export, for 22.7%; orange juice (single-strength), the fourth leading export, for 7.7%; and papayas, the fifth leading export, for 4.8% (Table 4-7). Moreover, since 1980, coconuts, which had a ranking of 12 in 1970, with a share of 1.0%, no longer appeared in the top twenty-five agricultural exports from Belize. Also, cucumbers and gherkins, and cheese have exhibited the most dramatic increases in export performance. None of these products were ranked in the top exports in 1970. In 1990, however, they were ranked numbers 4 and 6, accounting for 5.8% and 4.7% of total

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104 agricultural exports, respectively. By 2000, they were ranked numbers 11 and 12; however, their contribution in terms of value dropped tremendously. The evolution of the diversification indexes suggests that Belize experienced some degree of diversification of its export agriculture. However, the analysis of the share of the top five exports suggests that the composition of agricultural exports became more concentrated, apparently contradicting the evidence of diversification. However, the data reveal some diversification from sugar to citrus and bananas. The changes in the contribution of orange juice and sugar have already been discussed. In 1970 and 1980, bananas accounted for only 0.9% and 4.9%, respectively of total agricultural exports. In 1990 and 2000, bananas exports represented 10.3% and 22.7%, respectively of total agricultural exports. Clearly, with the reduction in the share of sugar, particularly since 1990, the shares of concentrated orange juice and bananas have increased. Dominica Table 4-3 shows the estimated entropy indexes for total diversification, and the within and across commodity group decompositions for Dominica over the period 1970-2001. These data are also plotted in Figure 4-2. There is substantial variation in the changes in the diversification indexes for Dominica during the period 1970-2001. Three distinct phases in the Dominicas diversification can be identified from Figure 4-2: 1970-1975, 1976-1988, and 1989-2001. During the period 1970-1975, the index of total diversification increased by 47.1% from 94.84 in 1970 to 139.54 in 1975 (Table 4-3). Most of the diversification occurred within commodity groups (which accounted for 56.7% of the total diversification on average). Indeed, the within group measure of diversification increased by 40.3% from 53.78 in 1970 to 75.46 in 1975. All of the diversification happened within the Fruits and

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105 Derived Products group. In terms of commodities, most of the diversification during the period 1970-1975 resulted from changes in the structure of agricultural exports attributed mainly to bananas, coconuts, grapefruit and pomelo, lemon juice, and oil of coconuts. In 1970, these 5 commodities accounted for 96.0% of Dominicas exports (bananas, 77.6%; coconuts, 3.2%; grapefruit and pomelo, 3.0%; lemon juice, 7.0%; and oil of coconuts, 5.2%). In 1975, these same commodities represented 90.5% of Dominicas total agricultural exports (bananas, 63.1%; coconuts, 3.2%; grapefruit and pomelo, 7.9%; lemon juice, 7.9%; and oil of coconuts, 8.4%). Dominicas export agriculture became less diversified (more specialized) during the period 1976-1988. The index of total diversification decreased by 61.9% from 129.89 in 1976 to 49.44 in 1988 (Table 4-3). Most of the changes in the index of total diversification were attributed to the across group measure of diversification (which accounted for 55.2% of the total diversification on average). The index of across-group diversification declined by 65.3% from 72.56 in 1976 to 25.20 in 1988. Most of the changes took place across 5 commodity groups: Beverage Crops and Spices, Fruits and Derived Products, Oil-Bearing Crops and Derived Products, Roots and Tubers, and Vegetables and Derived Products. With respect to specific commodities, most of the changes in the structure of agricultural exports were attributed mainly to bananas and oil of coconuts. In 1976, bananas accounted for 68.1% of Dominicas total agricultural exports. In 1988, bananas share increased to 92.0%. In contrast, the share of oil of coconuts declined from 10.5% in 1976 to 1.2% in 1988. Since 1989, Dominicas export agriculture witnessed increased degrees of diversification as evident from Table 4-3. The index of total diversification more than

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106 doubled from 80.92 in 1989 to 174.13 in 2001. Most of the diversification occurred across commodity groups (which accounted for 55.6% of the total diversification on average). Indeed, the across group measure of diversification also more than doubled from 47.77 in 1989 to 103.22 in 2001. Most of the changes in the across group measure of diversification occurred across 3 product groups: Fruits and Derived Products, Oil-Bearing Crops and Derived Products, and Roots and Tubers. In terms of commodities, most of the diversification during the period 1989-2001 resulted from changes in the structure of agricultural exports attributed mainly to bananas. Bananas share of total agricultural exports from Dominica declined from 85.4% in 1989 to approximately 62.8% in 2000. Jamaica Table 4-4 shows the estimated entropy indexes for total diversification, and the within and across commodity group decompositions for Jamaica over the period 1970-2001. Figure 4-3 illustrates the evolution of each of the three indexes for Jamaica since 1970. There is a lot of variability in the indexes. Like Dominica, three distinct phases in Jamaicas diversification can be identified from Figure 4-3: 1970-1975, 1976-1985, and 1986-2001. In all three periods, over 70.0% on average of the changes in diversification occurred across commodity groups. During the period 1970-1975, the index of total diversification decreased by 33.0% from 209.97 in 1970 to 140.68 in 1975 (Table 4-4). This suggests that Jamaicas export agriculture became less diversified (more specialized). Most of the changes in the structure of the countrys exports took place across 4 commodity groups: Beverage Crops and Spices; Fruits and Derived Products; Sugar, Sweeteners and Derived Products; and Vegetables and Derived Products. In terms of individual products, most of the changes in

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107 the degree of diversification were attributed mainly to bananas and sugar. In 1970, sugar accounted for 45.8% of Jamaicas total agricultural exports, while bananas represented 18.4% (Table 4-11). By 1975, sugars share increased to 70.0%, while bananas share declined to 7.4%. Jamaica experienced some degree of diversification in its export agriculture during the period 1976-1985. The index of total diversification increased by 23.6% from 219.91 in 1976 to 271.73 in 1985 (Table 4-4). Most of the diversification occurred across 3 commodity groups: Cereals and Derived Products, Roots and Tubers, and Vegetables and Derived Products. With respect to specific commodities, most of the changes in the structure of agricultural exports (which occurred across commodity groups) resulted from alcoholic beverages, bananas, cigars and cheroots, green coffee, sugar, and yams. The most significant changes took place with bananas, sugar, and yams. The share of bananas declined from 10.0% in 1976 to 3.2% in 1985. The share of sugar declined from 47.0% in 1976 to 35.6% in 1985. The share of yams increased from 0.5% in 1976 to 3.2% in 1985. During the period 1986-2001, Jamaicas export agriculture became somewhat less diversified (more specialized). The index of total diversification fell from 264.62 in 1986 to 251.56 in 2001, a 4.9% reduction. Most of the changes in export structure occurred across 3 commodity groups: Cereals and Derived Products, Other Animal Products, and Roots and Tubers. In terms of commodities, most of the adjustments in Jamaicas export structure during the period 1986-2001 resulted from changes in alcoholic beverages, bananas, cigars and cheroots, cocoa beans, green coffee, and sugar. The most significant changes took place with cocoa beans, and green coffee. The share of cocoa beans

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108 decreased from 3.4% in 1986 to 0.3% in 2000. The share of green coffee increased from 4.2% in 1986 to 9.7% in 2000. Trinidad and Tobago Table 4-5 shows the estimated entropy indexes for total diversification, and the within and across commodity group decompositions for Trinidad and Tobago over the period 1970-2001. Figure 4-4 illustrates the evolution of each of the three indexes for Trinidad and Tobago since 1970. The index of total diversification increased by 46.6% from 213.42 in 1970 to 312.85 in 2001 with noticeable increases in the implied levels of agricultural export diversification after 1984. Diversification of Trinidad and Tobagos export agriculture occurred mostly across commodity groups (which accounted for 68.8% of the total diversification on average over the period of analysis). The index of across-group diversification increased by 36.7% from 151.22 in 1970 to 206.77 in 2001. Most of the diversification took place across 6 product groups: Beverage Crops and Spices; Cereals and Derived Products; Fruits and Derived Products; Oil-Bearing Crops and Derived Products; Vegetable Fibers; and Water, Ice and Beverages. The evolution of Trinidad and Tobagos agricultural exports in terms of values (Table 4-12) and shares (Table 4-13) by products during the period 1970-2000 reveals the extent and major driving forces behind the countrys diversification. The increase in measured diversification was apparently due to a combination of a decline in sugar exports and an increase in the export of a range of processed agricultural products. In 1970, sugar exports were dominant, accounting for about 52.1% of total value of agricultural food exports. The share of cocoa beans (the second leading export) was 11.8% (Table 4-13).

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109 While sugar remained the dominant agricultural export from Trinidad and Tobago in 1980, its share of the total value declined to just 34.8%. Cocoa beans remained the second leading export, accounting for about 9.2% of the total. By 2000, the share of sugar in total exports declined to 15.5% (Table 4-13). Nonalcoholic beverages became the leading agricultural export from Trinidad and Tobago. Based on the data in Table 4-13, cocoa beans (a major export throughout the four decades) declined to a rank of 15 in 2000, accounting for just about 1.1% of the value of total agricultural exports. Additionally, the number of agricultural products ranked in the top exports with shares of at least 1.0% increased from 13 in 1970 to 18 in 1980, fell back to 13 in 1990, and rose to 17 in 2000 (Table 4-13). Indeed, the composition of agricultural exports from Trinidad and Tobago became less concentrated. In 1970 the top five exports accounted for 76.9% of total exports (with sugar alone accounting for 52.1%; cocoa beans, the second leading export, for 11.8%; food preparedness, the third leading export, for 5.6%; molasses, the fourth leading export, for 4.0%; and green coffee, the fifth leading export, for 3.4%). By 2000, the top five exports accounted for only 56.5% of the total (with the leading export, nonalcoholic beverage accounting for only 18.0%; sugar, the second leading export, for 15.5%; alcoholic beverages, the third leading export, for 10.6%; pastry, the fourth leading export, for 6.7%; and breakfast cereals, the fifth leading export, for 5.7%). Also, since 1990, green coffee, which was the fifth leading export in 1970, and the seventh in 1980, was no longer listed among the top agricultural exports from Trinidad and Tobago in 2000.

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110 Summary of Findings All four countries experienced varying degrees of agricultural export diversification since 1970. Most of the diversification of export agriculture took place after 1990 for Belize. This country also experienced a decline in the sugar industry, but an expansion in the citrus and banana industries. However, diversification occurred during the periods 1970-1975 for Dominica (mostly within commodity groups), and after 1989 (when most of the diversification occurred across commodity groups). This countrys agricultural export of bananas dominated across the decades. Furthermore, some degree of diversification in export agriculture occurred during the period 1976-1985 for Jamaica. For Jamaica, most of this diversification occurred across commodity groups. This countrys most striking development in export agriculture was the significant decline of sugar. Alcoholic beverages, and cigars and cheroots have increased their shares of total exports. A fair amount of diversification since 1970 occurred for Trinidad and Tobago, with noticeable increases in the implied levels of agricultural export diversification after 1984. Most of the diversification in Trinidad and Tobago took place across commodity groups. Like Jamaica, Trinidad and Tobago witnessed a reduction in the dominance of sugar; but by 2000, sugar was replaced by alcoholic beverages as the leading agricultural export for Trinidad and Tobago. Both Jamaica and Trinidad and Tobago demonstrated higher levels of agricultural export diversification than Belize and Dominica. This is at least partially related to the larger and more diverse nature of the economies of Jamaica and Trinidad and Tobago. Both Belize and Dominica have large primary agricultural commodities that dominate the countries agricultural export structure. In Jamaica and Trinidad and Tobago, agricultural exports are boosted by processed commodities, which generate greater value added.

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111 The extent of diversification in the four countries suggests that size matters. Relative to Jamaica and Trinidad and Tobago, Dominica is a small country; thus, there may exist significant resource constraints to the diversification of agricultural exports beyond that observed since 1970. However, the absence of agricultural export diversification may also be related to the disincentives to diversification implicit in the significant commodity preferences for sugar and bananas received by Dominica from the European Union. Jamaica and Trinidad and Tobago are less dependent on similar preferential treatment. While Belize may not be considered small in relation to Jamaica and Trinidad and Tobago geographically, its agricultural exports demonstrated much lower extent of diversification. Belize has also become increasingly concentrated in commodity exports, which receive preferential access to European and North American markets. Table 4-1 Commodity group aggregates for the classification of agricultural exports Cereals and Derived Products Cattle & Products Roots and Tubers Buffaloes & Products Sugar, Sweeteners & Derived Products Sheep & Products Pulses & Derived Products Goats & Products Nuts and Derived Products Pigs & Products Oil-Bearing Crops & Derived Products Poultry & Products Vegetables & Derived Products Horses etc. and Products Fruits and Derived Products Camels & Products Water, Ice & Beverages Rabbits & Products Beverage Crops and Spices Other Animals & Products Vegetable Fibres Other Animal Products Feedstuffs Source: Adopted from Food and Agriculture Organization. Definition and Classification of Commodities. http://www. Fao.org/WAICENT/faoinfo/ economic/faodef/FAODEFE.HTM#COMG (10/15/03). 2003b.

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112 Table 4-2 Entropy indexes for Belize, 1970-2001 Within Across Total Within Across (% o f (% o f Year Index Index Index total) total) 1970 202.78 58.61 144.18 28.90 71.10 1971 189.21 60.67 128.55 32.06 67.94 1972 187.02 56.57 130.44 30.25 69.75 1973 184.04 56.86 127.18 30.90 69.10 1974 160.21 57.42 102.78 35.84 64.16 1975 113.65 46.15 67.50 40.61 59.39 1976 193.38 58.57 134.82 30.28 69.72 1977 176.12 49.77 126.35 28.26 71.74 1978 177.54 55.79 121.75 31.42 68.58 1979 173.29 46.05 127.24 26.58 73.42 1980 149.44 44.62 104.81 29.86 70.14 1981 147.36 37.14 110.22 25.20 74.80 1982 162.33 42.78 119.55 26.35 73.65 1983 121.32 32.15 89.16 26.50 73.50 1984 157.26 40.51 116.75 25.76 74.24 1985 211.44 70.41 141.03 33.30 66.70 1986 178.47 50.19 128.28 28.12 71.88 1987 194.35 56.89 137.46 29.27 70.73 1988 198.56 56.24 142.33 28.32 71.68 1989 209.86 58.61 151.25 27.93 72.07 1990 192.53 59.96 132.57 31.14 68.86 1991 179.80 57.17 122.62 31.80 68.20 1992 204.60 69.82 134.77 34.13 65.87 1993 194.63 67.90 126.73 34.89 65.11 1994 187.81 73.00 114.81 38.87 61.13 1995 178.01 71.99 106.02 40.44 59.56 1996 185.99 83.57 102.42 44.93 55.07 1997 190.80 80.97 109.82 42.44 57.56 1998 186.11 90.01 96.10 48.37 51.63 1999 188.24 99.98 88.26 53.11 46.89 2000 188.56 105.37 83.19 55.88 44.12 2001 225.55 144.21 81.34 63.94 36.06 Source: calculated from FAOSTAT Online Agriculture Database

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113 Table 4-3 Entropy indexes for Dominica, 1970-2001 Within Across Total Within Across (% o f (% o f Year Index Index Index total) total) 1970 94.84 53.78 41.06 56.71 43.29 1971 93.43 52.31 41.12 55.99 44.01 1972 119.83 70.54 49.29 58.87 41.13 1973 103.42 57.52 45.90 55.62 44.38 1974 114.51 67.22 47.28 58.71 41.29 1975 139.54 75.46 64.08 54.08 45.92 1976 129.89 57.33 72.56 44.14 55.86 1977 126.54 60.28 66.26 47.64 52.36 1978 116.19 53.95 62.24 46.43 53.57 1979 130.46 57.87 72.59 44.36 55.64 1980 114.82 47.60 67.22 41.45 58.55 1981 65.60 34.20 31.40 52.13 47.87 1982 102.09 43.70 58.39 42.81 57.19 1983 120.94 53.39 67.55 44.14 55.86 1984 125.66 50.11 75.56 39.87 60.13 1985 103.61 45.85 57.76 44.25 55.75 1986 84.27 37.69 46.58 44.72 55.28 1987 56.93 23.86 33.07 41.91 58.09 1988 49.44 24.24 25.20 49.03 50.97 1989 80.92 33.15 47.77 40.96 59.04 1990 86.79 40.10 46.69 46.21 53.79 1991 88.49 37.94 50.55 42.88 57.12 1992 97.51 43.57 53.95 44.68 55.32 1993 110.51 56.03 54.48 50.70 49.30 1994 113.99 49.81 64.18 43.69 56.31 1995 151.36 66.66 84.70 44.04 55.96 1996 156.57 72.53 84.04 46.32 53.68 1997 167.46 77.77 89.69 46.44 53.56 1998 178.23 83.59 94.64 46.90 53.10 1999 164.69 70.71 93.98 42.93 57.07 2000 171.93 69.78 102.15 40.59 59.41 2001 174.13 70.91 103.22 40.72 59.28 Source: calculated from FAOSTAT Online Agriculture Database

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114 Table 4-4 Entropy indexes for Jamaica, 1970-2001 Within Across Total Within Across (% o f (% o f Year Index Index Index total) total) 1970 209.97 71.23 138.74 33.92 66.08 1971 212.07 66.97 145.10 31.58 68.42 1972 214.40 65.32 149.08 30.47 69.53 1973 229.30 68.49 160.80 29.87 70.13 1974 184.72 48.54 136.18 26.28 73.72 1975 140.68 30.50 110.18 21.68 78.32 1976 219.91 61.26 158.65 27.86 72.14 1977 215.01 53.00 162.01 24.65 75.35 1978 214.23 53.31 160.92 24.88 75.12 1979 235.14 62.57 172.57 26.61 73.39 1980 235.20 60.76 174.44 25.83 74.17 1981 252.92 64.00 188.91 25.31 74.69 1982 256.98 69.00 187.98 26.85 73.15 1983 271.64 73.32 198.32 26.99 73.01 1984 239.58 64.94 174.65 27.10 72.90 1985 271.73 78.84 192.89 29.01 70.99 1986 264.62 73.96 190.66 27.95 72.05 1987 253.69 66.53 187.16 26.23 73.77 1988 247.90 68.94 178.95 27.81 72.19 1989 252.02 60.99 191.04 24.20 75.80 1990 245.55 63.80 181.75 25.98 74.02 1991 242.12 61.78 180.34 25.52 74.48 1992 254.37 71.67 182.70 28.17 71.83 1993 255.58 65.39 190.19 25.58 74.42 1994 262.75 68.08 194.67 25.91 74.09 1995 258.97 66.35 192.62 25.62 74.38 1996 248.37 60.92 187.45 24.53 75.47 1997 254.43 62.28 192.15 24.48 75.52 1998 249.53 59.17 190.36 23.71 76.29 1999 253.02 59.89 193.12 23.67 76.33 2000 247.00 54.11 192.89 21.91 78.09 2001 251.56 56.35 195.21 22.40 77.60 Source: calculated from FAOSTAT Online Agriculture Database

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115 Table 4-5 Entropy indexes for Trinidad and Tobago, 1970-2001 Within Across Total Within Across (% o f (% o f Year Index Index Index total) total) 1970 213.42 62.20 151.22 29.14 70.86 1971 214.50 60.71 153.79 28.30 71.70 1972 194.60 49.35 145.25 25.36 74.64 1973 227.26 65.19 162.07 28.68 71.32 1974 180.75 49.76 130.99 27.53 72.47 1975 165.84 43.18 122.66 26.04 73.96 1976 213.41 65.36 148.05 30.63 69.37 1977 235.40 69.09 166.31 29.35 70.65 1978 249.29 78.98 170.30 31.68 68.32 1979 232.99 75.09 157.89 32.23 67.77 1980 264.25 90.76 173.48 34.35 65.65 1981 255.70 84.95 170.75 33.22 66.78 1982 258.54 85.84 172.69 33.20 66.80 1983 229.22 69.78 159.44 30.44 69.56 1984 202.15 54.41 147.74 26.92 73.08 1985 209.95 61.01 148.94 29.06 70.94 1986 225.60 70.38 155.22 31.20 68.80 1987 264.20 88.87 175.34 33.64 66.36 1988 269.40 81.69 187.71 30.32 69.68 1989 272.00 81.76 190.24 30.06 69.94 1990 282.24 85.96 196.28 30.46 69.54 1991 289.26 92.47 196.79 31.97 68.03 1992 285.74 89.60 196.14 31.36 68.64 1993 302.86 98.43 204.43 32.50 67.50 1994 304.39 103.43 200.96 33.98 66.02 1995 293.74 94.53 199.21 32.18 67.82 1996 306.54 103.87 202.66 33.89 66.11 1997 310.24 110.42 199.82 35.59 64.41 1998 298.67 103.83 194.84 34.76 65.24 1999 310.74 100.85 209.89 32.46 67.54 2000 309.67 102.60 207.08 33.13 66.87 2001 312.85 106.08 206.77 33.91 66.09 Source: calculated from FAOSTAT Online Agriculture Database

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116 Table 4-6 Major agricultural exports from Belize for selected years by value ($1000) Commodity 1970 Commodity 1980 Commodity 1990 Commodity 2000 Sugar (Centrifugal, Raw) 6,685 Sugar (Centrifugal, Raw) 47,702 Sugar (Centrifugal, Raw) 42,765 Orange juice Concentrated 35,200 Orange juice Concentrated 1,048 Orange juice Concentrated 3,961 Orange juice Concentrated 16,771 Sugar (Centrifugal, Raw) 30,000 Orange juice Single-Strength 927 Cucumbers And Gherkins 3,849 Bananas 9,869 Bananas 27,700 Natural Gums 720 Bananas 3,495 Cucumbers And Gherkins 5,525 Orange juice Single-Strength 9,400 Grapefruit juice Concentrate 456 Grapefruit juice Concentrate 2,408 Grapefruit juice Concentrate 4,813 Papayas 5,800 Fruit Prepared Nes 443 Cheese (Whole Cow Milk) 2,274 Cheese (Whole Cow Milk) 4,479 Grapefruit juice Sing-Strength 4,400 Crude Organic Materials 29 389 Molasses 2,189 Molasses 3,268 Beverages Dist Alcoholic 2,965 Flour Of Wheat 209 Dry Skim Cow Milk 1,091 Beverages Dist Alcoholic 1,750 Molasses 1,700 Grapefruit And Pomelo 195 Beverages Dist Alcoholic 683 Beans, Dry 1,616 Oranges 1,000 Hide Nes 151 Fruit Prepared Nes 618 Beef Preparations 1,039 Beans, Dry 850 Molasses 148 Butter Of Cow Milk 420 Dry Skim Cow Milk 645 Cucumbers And Gherkins 422 Coconuts 124 Oil Of Vegetable Origin Nes 374 Butter Of Cow Milk 364 Cheese (Whole Cow Milk) 400 Beef Preparations 123 Beef And Veal 362 Pastry 330 Peas, Dry 260 Bananas 120 Pastry 273 Chocolate Products Nes 300 Grapefruit And Pomelo 250 Oranges 109 Honey 263 Food Prepared Nes 261 Grapefruit juice Concentrate 250 Wheat 99 Beef Preparations 252 Beverages Non-Alcoholic 249 Cocoa Beans 210 Bran Of Wheat 92 Natural Gums 228 Cocoa Beans 246 Meat Preparations Pigs 175 Macaroni 80 Hide Nes 153 Fruit Fresh Nes 235 Cotton Lint 163 Germ Of Wheat 76 Chocolate Products Nes 143 Natural Gums 202 Lemons And Limes 70 Bread 64 Mangoes 141 Tea 131 NaturalGums 70 Bulgur, Whole meal 59 Fruit Dried Nes 88 Infant Food 101 Essential Oils Nes 61 Pastry 58 Crude Organic Materials 29 84 Sugar Confectionery 97 Fruit Juice Nes 54 Rice, Paddy 32 Food Prepared Nes 80 Fruit Dried Nes 95 Fruit Prepared Nes 50 Rice, Husked 28 Wine 77 Beer Of Barley 94 Beef Preparations 50 Source: FAOSTAT Online Agriculture Database

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117 Table 4-7 Shares of major agricultural exports from Belize for selected years (%) Commodity 1970 Commodity 1980 Commodity 1990 Commodity 2000 Sugar (Centrifugal, Raw) 52.7 Sugar (Centrifugal, Raw) 66.6 Sugar (Centrifugal, Raw) 44.6 Orange juice Concentrated 28.9 Orange juice Concentrated 8.3 Orange juice Concentrated 5.5 Orange juice Concentrated 17.5 Sugar (Centrifugal, Raw) 24.6 Orange juice Single-Strength 7.3 Cucumbers And Gherkins 5.4 Bananas 10.3 Bananas 22.7 Natural Gums 5.7 Bananas 4.9 Cucumbers And Gherkins 5.8 Orange juice Single-Strength 7.7 Grapefruit juice Concentrate 3.6 Grapefruit juice Concentrate 3.4 Grapefruit juice Concentrate 5.0 Papayas 4.8 Fruit Prepared Nes 3.5 Cheese (Whole Cow Milk) 3.2 Cheese (Whole Cow Milk) 4.7 Grapefruit juice Sing-Strength 3.6 Crude Organic Materials 29 3.1 Molasses 3.1 Molasses 3.4 Beverages Dist Alcoholic 2.4 Flour Of Wheat 1.6 Dry Skim Cow Milk 1.5 Beverages Dist Alcoholic 1.8 Molasses 1.4 Grapefruit And Pomelo 1.5 Beverages Dist Alcoholic 1.0 Beans, Dry 1.7 Oranges 0.8 Hide Nes 1.2 Fruit Prepared Nes 0.9 Beef Preparations 1.1 Beans, Dry 0.7 Molasses 1.2 Butter Of Cow Milk 0.6 Dry Skim Cow Milk 0.7 Cucumbers And Gherkins 0.3 Coconuts 1.0 Oil Of Vegetable Origin Nes 0.5 Butter Of Cow Milk 0.4 Cheese (Whole Cow Milk) 0.3 Beef Preparations 1.0 Beef And Veal 0.5 Pastry 0.3 Peas, Dry 0.2 Bananas 0.9 Pastry 0.4 Chocolate Products Nes 0.3 Grapefruit And Pomelo 0.2 Oranges 0.9 Honey 0.4 Food Prepared Nes 0.3 Grapefruit juice Concentrate 0.2 Wheat 0.8 Beef Preparations 0.4 Beverages Non-Alcoholic 0.3 Cocoa Beans 0.2 Bran Of Wheat 0.7 Natural Gums 0.3 Cocoa Beans 0.3 Meat Preparations Pigs 0.1 Macaroni 0.6 Hide Nes 0.2 Fruit Fresh Nes 0.2 Cotton Lint 0.1 Germ Of Wheat 0.6 Chocolate Products Nes 0.2 Natural Gums 0.2 Lemons And Limes 0.1 Bread 0.5 Mangoes 0.2 Tea 0.1 NaturalGums 0.1 Bulgur, Whole meal 0.5 Fruit Dried Nes 0.1 Infant Food 0.1 Essential Oils Nes 0.1 Pastry 0.5 Crude Organic Materials 29 0.1 Sugar Confectionery 0.1 Fruit Juice Nes 0.0 Rice, Paddy 0.3 Food Prepared Nes 0.1 Fruit Dried Nes 0.1 Fruit Prepared Nes 0.0 Rice, Husked 0.2 Wine 0.1 Beer Of Barley 0.1 Beef Preparations 0.0 Source: Calculated from FAOSTAT Online Agriculture Database

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118 Table 4-8 Major agricultural exports from Dominica for selected years by value ($1000) Commodity 1970 Commodity 1980 Commodity 1990 Commodity 2000 Bananas 3,879 Bananas 3,030 Bananas 31,499 Bananas 13,530 Lemonjuice Single-Streng 350 Oil Of Coconuts 387 Plantains 751 Oil Of Coconuts 1,000 Oil Of Coconuts 261 Grapefruit And Pomelo 382 Essential Oils Nes 715 Food Prepared Nes 950 Coconuts 160 Food Prepared Nes 121 Grapefruit And Pomelo 590 Roots And Tubers Dried 938 Grapefruit And Pomelo 150 Taro (Coco Yam) 110 Crude Organic Materls 29 506 Plantains 830 Cocoa Beans 70 Lemons And Limes 47 Food Prepared Nes 490 Oranges 680 Taro (Coco Yam) 37 Vegetables Fresh Nes 46 Taro (Coco Yam) 435 Yams 639 Oranges 25 Oranges 32 Grapefruitjuice Concentr 397 Essential Oils Nes 450 Lemons And Limes 21 Cake Of Coconuts 21 Waters,Ice Etc 299 Vegetables Fresh Nes 341 Avocados 16 Coconuts 20 Oranges 283 Avocados 270 Mangoes 14 Lemonjuice Single-Streng 16 Oil Of Coconuts 260 Pepper,White/Long/Black 254 Copra 13 SugarRefined 14 Yautia (Cocoyam) 175 Coconuts 240 Wheat 0 Mangoes 12 Avocados 160 Cigarettes 210 Flour Of Wheat 0 Crude Organic Materls 29 11 Yams 124 Grapefruit And Pomelo 170 Bran Of Wheat 0 Cocoa Beans 7 Lemons And Limes 105 Fruit Juice Nes 135 Macaroni 0 Avocados 2 Sugar And Syrups Nes 87 Vanilla 121 Germ Of Wheat 0 Beverages Non-Alcoholic 2 Pumpkins, Squash, Gourds 70 Lemons And Limes 120 Bread 0 Wheat 0 Coconuts 61 BerriesNes 89 Bulgur, Wholemeal 0 Flour Of Wheat 0 Ginger 49 Macaroni 70 Pastry 0 Bran Of Wheat 0 Mangoes 46 Mangoes 60 Rice, Paddy 0 Macaroni 0 Vegetables Fresh Nes 39 Cinnamon (Canella) 57 Rice, Husked 0 Germ Of Wheat 0 Lemonjuice Single-Streng 36 Lemonjuice Single-Streng 50 Milled/Husked Rice 0 Bread 0 Beverages Dist Alcoholic 33 Beverages Non-Alcoholic 45 Milled Paddy Rice 0 Bulgur, Wholemeal 0 Macaroni 30 Crude Organic Materls 29 44 Source: FAOSTAT Online Agriculture Database

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119 Table 4-9 Shares of major agricultural exports from Dominica for selected years (%) Commodity 1970 Commodity 1980 Commodity 1990 Commodity 2000 Bananas 77.6 Bananas 71.1 Bananas 84.4 Bananas 62.8 Lemonjuice Single-Streng 7.0 Oil Of Coconuts 9.1 Plantains 2.0 Oil Of Coconuts 4.6 Oil Of Coconuts 5.2 Grapefruit And Pomelo 9.0 Essential Oils Nes 1.9 Food Prepared Nes 4.4 Coconuts 3.2 Food Prepared Nes 2.8 Grapefruit And Pomelo 1.6 Roots And Tubers Dried 4.4 Grapefruit And Pomelo 3.0 Taro (Coco Yam) 2.6 Crude Organic Materls 29 1.4 Plantains 3.9 Cocoa Beans 1.4 Lemons And Limes 1.1 Food Prepared Nes 1.3 Oranges 3.2 Taro (Coco Yam) 0.7 Vegetables Fresh Nes 1.1 Taro (Coco Yam) 1.2 Yams 3.0 Oranges 0.5 Oranges 0.8 Grapefruitjuice Concentr 1.1 Essential Oils Nes 2.1 Lemons And Limes 0.4 Cake Of Coconuts 0.5 Waters,Ice Etc 0.8 Vegetables Fresh Nes 1.6 Avocados 0.3 Coconuts 0.5 Oranges 0.8 Avocados 1.3 Mangoes 0.3 Lemonjuice Single-Streng 0.4 Oil Of Coconuts 0.7 Pepper,White/Long/Black 1.2 Copra 0.3 Sugar Refined 0.3 Yautia (Cocoyam) 0.5 Coconuts 1.1 Wheat 0.0 Mangoes 0.3 Avocados 0.4 Cigarettes 1.0 Flour Of Wheat 0.0 Crude Organic Materls 29 0.3 Yams 0.3 Grapefruit And Pomelo 0.8 Bran Of Wheat 0.0 Cocoa Beans 0.2 Lemons And Limes 0.3 Fruit Juice Nes 0.6 Macaroni 0.0 Avocados 0.0 Sugar And Syrups Nes 0.2 Vanilla 0.6 Germ Of Wheat 0.0 Beverages Non-Alcoholic 0.0 Pumpkins, Squash, Gourds 0.2 Lemons And Limes 0.6 Bread 0.0 Wheat 0.0 Coconuts 0.2 BerriesNes 0.4 Bulgur, Wholemeal 0.0 Flour Of Wheat 0.0 Ginger 0.1 Macaroni 0.3 Pastry 0.0 Bran Of Wheat 0.0 Mangoes 0.1 Mangoes 0.3 Rice, Paddy 0.0 Macaroni 0.0 Vegetables Fresh Nes 0.1 Cinnamon (Canella) 0.3 Rice, Husked 0.0 Germ Of Wheat 0.0 Lemonjuice Single-Streng 0.1 Lemonjuice Single-Streng 0.2 Milled/Husked Rice 0.0 Bread 0.0 Beverages Dist Alcoholic 0.1 Beverages Non-Alcoholic 0.2 Milled Paddy Rice 0.0 Bulgur, Wholemeal 0.0 Macaroni 0.1 Crude Organic Materls 29 0.2 Source: Calculated from FAOSTAT Online Agriculture Database

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120 Table 4-10 Major agricultural exports from Jamaica for selected years by value ($1000) Commodity 1970 Commodity 1980 Commodity 1990 Commodity 2000 Sugar (Centrifugal, Raw) 36,026 Sugar (Centrifugal, Raw) 54,668 Sugar (Centrifugal, Raw) 82,851 Sugar (Centrifugal, Raw) 95,790 Bananas 14,448 Beverages Dist Alcoholic 18,103 Bananas 38,263 Beverages Dist Alcoholic 37,100 Beverages Dist Alcoholic 4,583 Bananas 10,501 Beverages Dist Alcoholic 22,125 Coffee, Green 26,600 Pimento, Allspice 3,941 Cigars Cheroots 9,318 Coffee, Green 9,192 Bananas 21,200 Fruit Prepared Nes 3,553 Coffee, Green 4,765 Yams 8,083 Cigars Cheroots 17,000 Molasses 2,629 Cocoa Beans 4,496 Food Prepared Nes 6,980 Beer Of Barley 11,900 Cigars Cheroots 1,973 Pimento, Allspice 3,887 Beer Of Barley 5,913 Food Prepared Nes 11,000 Pumpkins, Squash, Gourds 1,195 Crude Organic Materials 29 2,303 Cigars Cheroots 5,871 Yams 9,000 Coffee, Green 1,080 Food Prepared Nes 2,150 Pimento, Allspice 5,595 Pimento, Allspice 5,600 Cocoa Beans 994 Yams 1,907 Fruit Prepared Nes 3,986 Pastry 4,600 Essential Oils Nes 722 Tang, Mand., Clement, Satsma 1,616 Crude Organic Materls 29 3,463 Fruit Prepared Nes 4,200 Ginger 690 Fruit Juice Nes 1,615 Cocoa Beans 3,337 Papayas 3,300 Vegetables Fresh Nes 517 Roots And Tubers Nes 1,576 Food Prep.Flour,Malt Ext 2,993 Sweet Potatoes 2,100 Orange juice Single-Strength 400 Chocolate Products Nes 1,542 Oranges 2,780 Oranges 1,900 Orange juice Concentrated 398 Fruit Prepared Nes 1,518 Chocolate Products Nes 2,037 Crude Organic Materials 29 1,850 Food Prepared Nes 398 Infant Food 1,429 Orange juice Concentrated 1,995 Vegetables Prepared Nes 1,600 Cocoa Powder And Cake 394 Beer Of Barley 736 Cheese (Whole Cow Milk) 1,933 Beverages Non-Alcoholic 1,600 Sugar Confectionery 390 Molasses 727 Roots And Tubers Nes 1,880 Coffee Roasted 1,600 Grapefruit juice Concentrated 353 Grapefruit juice Concentrated 697 Pastry 1,569 Food Prep.Flour,Malt Ext 1,400 Grapefruit And Pomelo 328 Cigarettes 656 Tang.Mand.Clement.Satsma 1,544 Roots And Tubers Nes 1,300 Oranges 284 Orange juice Concentrated 611 Essential Oils Nes 1,118 Cheese (Whole Cow Milk) 1,300 Crude Organic Materials 29 271 Orange juice Single-Strength 583 Grapefruit juice Concentrated 932 Essential Oils Nes 910 Spices Nes 268 Coffee Roasted 575 Wine 780 Tang.Mand.Clement.Satsma 880 Lemon juice Single-Strength 266 Essential Oils Nes 570 Cocoa Powder And Cake 767 Spices Nes 870 Source: FAOSTAT Online Agriculture Database

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121 Table 4-11 Shares of major agricultural exports from Jamaica for selected years (%) Commodity 1970 Commodity 1980 Commodity 1990 Commodity 2000 Sugar (Centrifugal, Raw) 45.8 Sugar (Centrifugal, Raw) 41.4 Sugar (Centrifugal, Raw) 36.7 Sugar (Centrifugal, Raw) 34.8 Bananas 18.4 Beverages Dist Alcoholic 13.7 Bananas 16.9 Beverages Dist Alcoholic 13.5 Beverages Dist Alcoholic 5.8 Bananas 7.9 Beverages Dist Alcoholic 9.8 Coffee, Green 9.7 Pimento, Allspice 5.0 Cigars Cheroots 7.1 Coffee, Green 4.1 Bananas 7.7 Fruit Prepared Nes 4.5 Coffee, Green 3.6 Yams 3.6 Cigars Cheroots 6.2 Molasses 3.3 Cocoa Beans 3.4 Food Prepared Nes 3.1 Beer Of Barley 4.3 Cigars Cheroots 2.5 Pimento, Allspice 2.9 Beer Of Barley 2.6 Food Prepared Nes 4.0 Pumpkins, Squash, Gourds 1.5 Crude Organic Materials 29 1.7 Cigars Cheroots 2.6 Yams 3.3 Coffee, Green 1.4 Food Prepared Nes 1.6 Pimento, Allspice 2.5 Pimento, Allspice 2.0 Cocoa Beans 1.3 Yams 1.4 Fruit Prepared Nes 1.8 Pastry 1.7 Essential Oils Nes 0.9 Tang, Mand., Clement, Satsma 1.2 Crude Organic Materls 29 1.5 Fruit Prepared Nes 1.5 Ginger 0.9 Fruit Juice Nes 1.2 Cocoa Beans 1.5 Papayas 1.2 Vegetables Fresh Nes 0.7 Roots And Tubers Nes 1.2 Food Prep.Flour,Malt Ext 1.3 Sweet Potatoes 0.8 Orange juice Single-Strength 0.5 Chocolate Products Nes 1.2 Oranges 1.2 Oranges 0.7 Orange juice Concentrated 0.5 Fruit Prepared Nes 1.1 Chocolate Products Nes 0.9 Crude Organic Materials 29 0.7 Food Prepared Nes 0.5 Infant Food 1.1 Orange juice Concentrated 0.9 Vegetables Prepared Nes 0.6 Cocoa Powder And Cake 0.5 Beer Of Barley 0.6 Cheese (Whole Cow Milk) 0.9 Beverages Non-Alcoholic 0.6 Sugar Confectionery 0.5 Molasses 0.6 Roots And Tubers Nes 0.8 Coffee Roasted 0.6 Grapefruit juice Concentrated 0.4 Grapefruit juice Concentrated 0.5 Pastry 0.7 Food Prep.Flour,Malt Ext 0.5 Grapefruit And Pomelo 0.4 Cigarettes 0.5 Tang.Mand.Clement.Satsma 0.7 Roots And Tubers Nes 0.5 Oranges 0.4 Orange juice Concentrated 0.5 Essential Oils Nes 0.5 Cheese (Whole Cow Milk) 0.5 Crude Organic Materials 29 0.3 Orange juice Single-Strength 0.4 Grapefruit juice Concentrated 0.4 Essential Oils Nes 0.3 Spices Nes 0.3 Coffee Roasted 0.4 Wine 0.3 Tang.Mand.Clement.Satsma 0.3 Lemon juice Single-Strength 0.3 Essential Oils Nes 0.4 Cocoa Powder And Cake 0.3 Spices Nes 0.3 Source: Calculated from FAOSTAT Online Agriculture Database

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122 Table 4-12 Major agricultural exports from Trinidad and Tobago for selected years by value ($1000) Commodity 1970 Commodity 1980 Commodity 1990 Commodity 2000 Sugar (Centrifugal, Raw) 21,005 Sugar (Centrifugal, Raw) 27,966 Sugar (Centrifugal, Raw) 30,402 Beverages Non-Alcoholic 41,973 Cocoa Beans 4,775 Cocoa Beans 7,371 Cake Of Soya Beans 10,648 Sugar (Centrifugal, Raw) 36,113 Food Prepared Nes 2,251 Beverages Dist Alcoholic 7,035 Beverages Dist Alcoholic 9,860 Beverages Dist Alcoholic 24,765 Molasses 1,621 Flour Of Wheat 4,526 Beverages Non-Alcoholic 9,735 Pastry 15,530 Coffee, Green 1,355 Coffee Extracts 3,862 Pastry 8,335 Breakfast Cereals 13,346 Beverages Dist Alcoholic 1,268 Food Prepared Nes 2,865 Cocoa Beans 5,563 Food Prepared Nes 10,085 Orange juice Single-Strength 712 Coffee, Green 2,839 Food Prepared Nes 4,864 Cigarettes 9,215 Grapefruit juice Single-Strength 629 Pastry 2,542 Beer Of Barley 4,369 Beer Of Barley 8,342 Compound Feed, Oth or Nes 579 Bread 2,450 Breakfast Cereals 3,284 Cake Of Soya Beans 7,458 Fruit Prepared Nes 528 Beer Of Barley 2,196 Chocolate Products Nes 2,905 Sugar Confectionery 6,745 Oil Of Coconuts 479 Sugar Confectionery 2,148 Oil Of Soya Beans 2,794 Chocolate Products Nes 4,454 Cheese (Whole Cow Milk) 453 Chocolate Products Nes 2,033 Sugar Confectionery 1,847 Margarine + Shortening 3,710 Margarine + Shortening 412 Molasses 1,643 Prepared Groundnuts 1,429 Prepared Groundnuts 3,656 Sugar Refined 314 Fruit Prepared Nes 1,489 Margarine + Shortening 1,015 Orange juice Single-Strength 3,338 Coffee Extracts 285 Whole Milk, Evaporated 1,326 Coffee Roasted 988 Cocoa Beans 2,663 Bread 282 Orange juice Single-Strength 1,131 Meat Prepared Nes 978 Oil Of Soya Beans 2,247 Vegetables Prepared Nes 266 Vegetables Prepared Nes 954 Orange juice Single-Strength 970 Flour Of Wheat 2,235 Butter Of Cow Milk 219 Infant Food 899 Oil Of Coconuts 942 Whole Milk, Condensed 1,966 Pastry 197 Oil Of Veget Origin Nes 538 Vegetables Prepared Nes 759 Crude Organic Materials 29 1,913 Dry Skim Cow Milk 173 Orange juice Concentrated 412 Macaroni 698578 Vegetables Prepared Nes 1,850 Vegetables Fresh Nes 169 Margarine + Shortening Groundnuts) 275272 Cigarettes Macaroni 1,765 Pulses Nes 139 136 Grapefruit juice Single-Strength Coffee Extracts 490 Sausages Beef And Veal 1,720 Sugar Confectionery Beverages Non-Alcoholic 269 Fruit Juice Nes 459 Pumpkins, Squash, Gourds Prepared Nuts (Excluding 1,674 Oranges 132 Pepper, White/Long/Black 241 Chicken Meat 416 1,656 Source: FAOSTAT Online Agriculture Database

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123Table 4-13 Shares of major agricultural exports from Trinidad and Tobago for selected years (%) 1980 Commodity 1970 Commodity Commodity 1990 Commodity 2000 Sugar (Centrifugal, Raw) 52.1 Sugar (Centrifugal, Raw) 34.8 Sugar (Centrifugal, Raw) 27.2 Beverages Non-Alcoholic 18.0 Cocoa Beans 11.8 Cocoa Beans 9.2 Cake Of Soya Beans Beverages Dist Alcoholic 9.5 Sugar (Centrifugal, Raw) 15.5 Food Prepared Nes 5.6 Beverages Dist Alcoholic Flour Of Wheat 8.8 8.8 Beverages Dist Alcoholic 10.6 Molasses Coffee, Green 4.0 5.6 Beverages Non-Alcoholic 8.7 Pastry 6.7 5.7 3.4 Coffee Extracts 4.8 Pastry 7.55.0 Breakfast Cereals Beverages Dist Alcoholic 3.1 Food Prepared Nes 3.63.5 Cocoa Beans Food Prepared Nes 4.3 Orange juice Single-Strength 1.8 1.6 Coffee, Green Food Prepared Nes 4.4 Cigarettes 4.0 Grapefruit juice Single-Strength Pastry 3.2 Beer Of Barley 3.9 Beer Of Barley Cake Of Soya 3.6 Compound Feed, Oth or Nes 1.4 Bread 3.0 Breakfast Cereals Chocolate Products Nes 2.9 Beans Oil Of Soya Beans Chocolate Products Nes Margarine + Shortening 1.6 3.2 Fruit Prepared Nes 1.3 Beer Of Barley Sugar Confectionery 2.7 2.62.5 Sugar Confectionery Chocolate Products Nes 2.9 1.9 Oil Of Coconuts Cheese (Whole Cow Milk) 1.2 1.1 2.72.5 Sugar Confectionery Prepared Groundnuts 1.7 Margarine + Shortening 1.0 Molasses Fruit Prepared Nes 2.0 1.3 Prepared Groundnuts 1.6 Sugar Refined Coffee Extracts 0.8 1.9 Margarine + Shortening 0.9 Orange juice Single-Strength 1.4 1.1 0.7 Whole Milk, Evaporated 1.6 Coffee Roasted 0.90.9 Cocoa Beans Bread 0.7 Orange juice Single-Strength 1.41.2 Meat Prepared Nes Oil Of Soya Beans 1.0 Vegetables Prepared Nes 0.7 0.5 Vegetables Prepared Nes Orange juice Single-Strength 0.9 Flour Of Wheat 1.0 Butter Of Cow Milk Infant Food 1.1 Oil Of Coconuts 0.8 Whole Milk, Condensed Crude Organic Materials 29 0.8 Pastry 0.5 Oil Of Veget Origin Nes 0.7 Vegetables Prepared Nes Macaroni 0.7 0.8 Dry Skim Cow Milk 0.4 Orange juice Concentrated Margarine + Shortening 0.5 0.6 Vegetables Prepared Nes 0.8 Vegetables Fresh Nes Pulses Nes 0.4 0.3 Cigarettes 0.5 Macaroni 0.8 0.7 0.3 Grapefruit juice Single-Strength 0.3 Coffee Extracts 0.40.4 Sausages Beef And Veal Sugar Confectionery 0.3 Beverages Non-Alcoholic 0.30.3 Fruit Juice Nes Pumpkins, Squash, Gourds 0.7 Oranges 0.3 Pepper, White/Long/Black ChickenMeat 0.4 Prepared Nuts (Excluding Groundnuts) 0.7 Source: Calculated from FAOSTAT Online Agriculture Database

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124 0 40 80 120 160 200 240 1970 1975 1980 1985 1990 1995 2000 Across Total Within Figure 4-1 Estimated entropy indexes for Belize, 1970-2001 0 40 80 120 160 200 1970 1975 1980 1985 1990 1995 2000 Across Total Within Figure 4-2 Estimated entropy indexes for Dominica, 1970-2001

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125 0 50 100 150 200 250 300 1970 1975 1980 1985 1990 1995 2000 Across Total Within Figure 4-3 Estimated entropy indexes for Jamaica, 1970-2001 40 80 120 160 200 240 280 320 1970 1975 1980 1985 1990 1995 2000 Across Total Within Figure 4-4 Estimated entropy indexes for Trinidad and Tobago, 1970-2001

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CHAPTER 5 MODEL DEVELOPMENT, SPECIFICATION, ESTIMATION, AND EMPIRICAL ANALYSIS Model Development The primary objective of our study is to explore the link between trade and economic growth in the Caribbean, taking into consideration the impact of agricultural export diversification on this relationship. The development of the empirical model must be based on standard trade and growth theories (discussed in Chapter 2) and incorporate exogenous variables other than the growth in total exports, the growth in total imports, and the entropy index of total agricultural export diversification to avoid potential misspecification errors due to omitted variables, and to control for the influence of other variables on economic growth.69 The model development starts with a production function of the form (5-1) where Y represents Gross Domestic Product (GDP), K is Gross Domestic Investment, L is labor, F represents total factor productivity (TFP), A is a constant, e is the base for the natural logarithm, and the is (i = 0,,3) are the coefficients of the exogenous variables. The variable t captures technological changes through time. Taking natural logarithms of both sides of Equation 5-1 gives 3210FLAKeYt FLKAtYlnlnlnlnln3210 (5-2) 69The development of the empirical model follows along similar lines to Melendezs (1996). 126

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127 Totally differentiating Equation 5-2 with respect to time and factoring all of the coefficients, we get dtFddtLddtKddtYdlnlnlnln3210 (5-3) Assuming that TFP depends on the rate of growth of total exports (X); total imports (M); and other principal variables (I), which includes human capital (H); mathematically we have F = f(X, M, I). (5-4) This approach is analogous to specifying a production function with these additional variables as extra arguments. Indeed, Fosu (1996) rationalized the inclusion of exports on the basis that exports are capable of generating increased efficiency arising from the enhancement of competition and the relaxation of foreign exchange constraints (which allows for the adoption of more efficient methods of production). Imports have the potential to increase efficiency through competition. From a firm level perspective, Lucas (1988) justified the impact of human capital on total factor productivity by suggesting that the efficiency of capital and labor, the availability of useful knowledge to select these factors and combine them, and their productivity, may depend on the level of education or capacity of the population. Totally differentiating Equation 5-4 with respect to time, gives dtdIIfdtdMMfdtdXXfdtdF*** (5-5) By multiplying each term on the right hand side of Equation 5-5 by Z/Z (Z representing the individual variables in the equation), substituting for logarithmic differentiation,

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128 multiplying both sides of the equation by 1/F, and denoting F,j the elasticity for the jth factor, we get dtIddtMddtXddtFdIFMFXFlnlnlnln,,, (5-6) Substitution of Equation 5-6 into Equation 5-3 gives .lnlnlnlnlnln,,,3210dtIddtMddtXddtLddtKddtYdIFMFXF (5-7) For any variable, Q, define70 11lnlnlnlnttttQQQQDQdtQd (5-8) Hence, Equation 5-7 may be expressed as ttIFtMFtXFtttDIDMDXDLDKDY ,,3,210 (5-9) Equation 5-9 relates economic growth to the growth in physical capital (DK), the growth in labor (DL), the growth in total exports (DX), the growth in total imports (DM), and the growth in other variables (DI).71 This approach has two advantages: it generally avoids serial correlation problems in the model due to first differencing of the time series (Gujarati 1995, p. 461), and it avoids the spurious regression problem often associated with time series variables that could be trended. The disadvantage is that it does not allow for a direct estimation of the various elasticities (although the elasticities could be derived indirectly).72 70This is a non-trivial step since the transformation is not that straightforward. 71An alternative approach is to estimate Y directly by substituting Equation 5-4 into Equation 5-1. In that case, a distributed lag model, for example, could be specified and estimated. 72The values and meaning of the elasticities are beyond the objective of our study.

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129 Empirical Specification Four important aspects of our study must be incorporated into the empirical supported by empirical evidence; it was simply a theoretical position. However, a study by Akbar and Naqvi (2000) for Pakistan revealed growth causes export diversification. analysis. Firstly, how agricultural export diversification is likely to influence the relationship between trade and economic growth needs to be explored. Amin Gutirrez de Pieres and Ferrantino (1997), and Stanley and Bunnagi (2001), suggested that the primary motive behind export diversification efforts has been the desire to foster economic growth and enhance export earnings stability. The process by which this effect occurs begins with technological innovation, resulting in improvements in efficiencies in production. These efficiencies will impact the competitive structure of production and, by corollary, the competitive advantage of various industries. By pursuing policies of openness, market forces provide incentives for efficiency and enable technology transfers and export opportunities. In turn, market driven structural changes evolve, export structures develop, and economic growth is impacted. The theoretical underpinning of these ideas is in the literature on economic growth and convergence, particularly the new growth theories and technology gap models. In this setting, causality runs from diversification to economic growth. Indeed, Al-Marhubi (2000) found export diversification promotes economic growth.73 The link between agricultural export diversification and economic growth can also be explained using the product cycle literature (Dollar 1986, Grossman and Helpman 1991, Krugman 1979, Matsuyama 2000, Segerstrom et al. 1990, Stokey 1991, Vernon 1966). The main argument here is that innovative activity by the North generates 73Interestingly, McCalla and Valds (1999) inferred that diversification is an inherent and desirable outcome of economic growth; it is not a strategy to promote growth. Based on this view, the direction of causation runs from economic growth to diversification. It should be noted that their view was not

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130 increasing product diversification, while imitative activity by the South translates into greater diversity of products being produced and exported from low-wage locations Caribbean. Ht thus replaces It in the empirical growth model (Amin Gutirrez de Pieres and Ferrantino 1997). Hence, economic growth and export diversification are linked. Learning and knowledge spillovers play important roles in this process (Amin Gutirrez de Pieres and Ferrantino 1997). Secondly, the impact of human capital on economic growth is well documented in the literature (Rogers 2003). Hence, the influence of human capital must therefore be reflected in the empirical growth model. Thirdly, capital should be decomposed into its domestic and foreign components, in order to separate the effect of each category on economic growth. This is particularly important in the context of Caribbean countries given their relatively small domestic economic bases and limited resources. Fourthly, the relationship between trade and economic growth is being examined during a period characterized by a shift in development paradigm from import substitution industrialization to an outward-oriented strategya shift that resulted in various macroeconomic policy changes (documented in Chapter 3) at several periods since the 1970s. As a result, it is likely that the coefficients of the model may have changed during the various estimation periods. Such potential changes in the coefficients must be explored and accounted for. With these adjustments, Equation 5-9 is operationalized as follows: The entropy index of total diversification (DVI) is included in the model as an additional explanatory variable to determine how agricultural export diversification influences the relationship between trade and economic growth Human capital (Ht) is used as the key additional source of economic growth in the

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131 Capital is disaggregated into domestic capital (DKD) and foreign capital (DKF). Foreign capital probably plays a more central role in the economic growth process in small open economies like those of the Caribbean than does domestic capital due to, among other things, the absence of well-developed capital markets. Hence, the basic model estimated for each of the four countries is ttttttDMDXDLDKFDKDDY543210 tttDVIDH 76 (5-10) It is important to note that changes in the coefficients (s) in Equation 5-10 may occur for two reasons: changes in the productivity of each of the factors, and changes in the underlying technologies (s). In terms of the coefficients signs, Rogers (2003) noted no agreement in the literature on the nature of the relationship between domestic physical capital (or domestic investment) and economic growth. He presented contrasting evidence from De Long and Summers (1991), who found a positive relationship between domestic investment and growth, and Podrecca and Carmeci (2001), whose research revealed no evidence that a higher level of domestic investment generates increased economic growth. Further, they found increasing the investment to GDP ratio led to a fall in growth in subsequent periods. Indeed, physical investment should be considered a proximate cause of economic growth, not an ultimate cause (Rogers 2003). Other more fundamental factors (for example, the nature of the financial system) underlie effective rates of domestic investment. Based on empirical evidence in the literature, Rogers (2003) observed foreign physical capital (or foreign investment) is generally considered as conducive to economic growth, although foreign direct investment can generate enclave economies that detract from further economic development of the domestic country.

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132 Labor is considered one of the fundamental factors of production and invariably enters most growth equations as an exogenous variable. Several empirical findings in the literature found a positive relationship between labor and economic growth. As countries open to freer trade, the economic growth process is likely to change. Exactly how the nature of economic growth would change remains a controversial issue (Rogers 2003). In general, trade changes the patterns of consumption, production, and factor prices, thus impacting economic growth inevitably. The literature is replete with as many theories and empirical evidence in support of a positive trade-growth relationship as it is with a negative trade-growth relationship (Renelt 1991, Temple 1999, Rogers 2003). Hence, whether growth in exports and imports promote or retard economic growth continues to be debated and investigated empirically. According to Rogers (2003), human capital could influence economic growth in two ways. First, workers with higher levels of education or skills should be more productive, everything held constant. Implicit in this belief is the assumption that highly educated and skilled individuals would be more inventive and innovative. In this way, human capital acts as a factor of production and is expected to have a positive effect on economic growth. Second, the level of human capital could positively affect the rate of accumulation of other factors of production, thus indirectly contributing to higher levels of economic growth. There is little controversy in the literature over the positive role of human capital in promoting economic growth. The problem with empirically testing and

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133 establishing this positive relationship between human capital and economic growth lies in the measurement of human capital (Rogers 2003).74 measures have already been mentioned in our study) used in empirical research and the problems associated with them. Akbar and Naqvi (2000) examined the relationship between export diversification and economic growth in Pakistan from 1972/1973-1997/1998 and found a significant positive relationship between export diversification and economic growth. However, the direction of causation ran from economic growth to export diversification. Al-Marhubi (2000) analyzed the relationship between export diversification and economic growth in a cross-section of 91 countries for the period 1961-1988 and found export diversification promoted economic growth. The results were robust to different measures of export diversification. Al-Marhubi (2000) justified the results using two theoretical arguments: Sustained economic growth requires a shift from dependence on primary exports towards diversified manufactured exports, consistent with the so-called Prebisch-Singer thesis on the deterioration of the terms-of-trade for primary commodities Export instability is potentially associated with substantial costs resulting from macroeconomic uncertainty in many commodity-exporting developing countries. Export instability could generate unsteadiness in domestic demand and make investment more risky, thus discouraging investment, in turn, reducing economic growth. Export diversification stabilizes export earnings, leading to higher economic growth. On the basis of the preceding thoughts and taking into account the structure of the economies of Belize, Dominica, Jamaica, and Trinidad and Tobago, the coefficients from Equation 5-10 for the growth in domestic physical capital, DKD (1); growth in labor, DL (3); growth in total exports, DX (4); and growth in human capital, DH (6) are expected to be positive. The coefficients for the growth in foreign physical capital, DKF (2); growth in total imports, DM (5); and diversification, DVI (7), could be positive or 74See Temple (1999), and Rogers (2003) for some details on various measures of human capital (these

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134 negative, depending on the nature of the dynamics of those variables and economic growth. models, recursive estimation models, standard Kalman filtering with transition matrix, trend variables with interaction terms, and diagonalized and non-diagonalized estimates. Estimation Technique Given the shift from ISI to outward orientation in the mid-1980s, changes in the coefficients of Equation 5-10 may have occurred over the estimation periods. If the policy changes had a significant impact on the evolution of economic growth in the Caribbean, then, expectedly, the coefficients in Equation 5-10 may no longer be considered non-stochastic since an error term may be associated with them. Hence, an interesting question is: Are any changes in the coefficients permanent or simply stochastic? If the macroeconomic policies changes that occurred in the countries over the past decades were profound, then, the resulting impact on the relationship between economic growth and the factors influencing it, if significant, should be permanent. Hence, Equation 5-10 is estimated for each individual country using a time varying coefficients model approach. The Cooley-Prescott procedure is utilized.75 Much of the early work on time varying coefficients has been attributed to Rosenberg (1973), and Cooley and Prescott (1973a, b). Cooley and Prescott (1973a) observed that an econometric equation (representing a complex behavioral or technical relationship) is by definition an approximation of reality. Hence, it is susceptible to specification errors and structural change over time. These changes may be associated with changes in technology, institutional arrangements, tastes, and managerial techniques. Furthermore, Cooley and Prescott (1973a) suggested that when statistical 75Other techniques for dealing with time varying coefficients include stockastically convergent parameters

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135 tests are applied to econometric relationships, the hypothesis of structural stability is often rejected. In subsequent years, several articles have emerged in the literature dealing with time varying coefficients (Engel and Watson 1987, Harvey et al. 1986, Nichols and Pagan 1983, Ward (1982), Ward and Myers 1979, Ward and Stevens 2000). All of these studies explored issues pertaining to time varying coefficients in a comprehensive yet succinct manner. Therefore, the discussions in this section draws heavily from these articles. Two approaches to estimation have been followed in the literature for dealing with the issue of structural change. The first relates to the time varying coefficients model, which captures the changes in the coefficients from one year to the next in a simple manner. The second approach involves more complex techniques and uses, for example, state-space framework and the Kalman filter. The sources of coefficient variation in an econometrics model can be grouped into three broad categories: Structural changes in the economic phenomenon being studied, which could result from technological and institutional changes Aggregation of data Model misspecification. Ward (1982) listed several factors that could generate empirical and misspecification errors. A major concern relates to the omission of important information from the model, wrong functional form, and use of proxy variables. If such data are uncorrelated with the included information then no serious estimation problem exists.

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136 Furthermore, if the more influential independent variables are excluded, the resulting estimates of the coefficients of the variables included will be biased. The extent and the direction of their bias depend on the strength and direction of correlation between the included and excluded variables. If the strength varies over time, the estimated coefficients of the included variables will not be stable over alternative observation periods. One solution to the problem of unstable coefficients over the estimation period is to re-specify Equation 5-10 as a time varying coefficients model of the form ttttttttttttDMDXDLDKFDKDDY543210 tttttDVIDH 76 (5-11) Stochastic and stationary coefficient variation models (random coefficient models) have been used increasingly. With these models, the coefficient vectors are assumed to be random drawings from a common multi-variable distribution with mean vector and covariance matrix If the intercept alone is assumed to vary, the model reduces to an analysis of covariance with random effects (Ward and Myers 1979). The random coefficient models have been analyzed with a single sample of cross-section data. Time-series and pooled data have also been used. Cooley-Prescott Procedure Among the techniques for dealing with varying coefficients, the Cooley-Prescott approach provides the most direct method of estimating the coefficients while, simultaneously, accounting for the permanent versus transitory components in the coefficients (Cooley and Prescott 1973a, b).76 The Cooley-Prescott approach has been 76No attempt is made in our study to measure or present the permanent and transitory components associated with any of the coefficients because the extent of the permanent or transitory components does not unduly influence the results based on the objectives of our study. Fomby et al. (1984) measured the permanent and transitory components associated with the coefficients in their model.

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137 widely used. Nonetheless, it is worthwhile to present the fundamental aspects of this estimation technique from a mathematical perspective in order to appreciate the essence of the model and how it works. Cooley and Prescott (1973a, b) used adaptive regression models to address the problem of structural change. Adaptive regression models facilitate intercept adjustments where the intercept is specified to follow a Markovian process. One method of dealing with time varying coefficients is to apply an extension of the adaptive regression model where adjustments in the slope parameters may occur over time. It is assumed that the coefficients of Equation 5-11 consist of two components: a permanent component that evolves over time, and an error term it associated with the stochastic nature of the coefficients. Hence (5-12) To apply the Cooley-Prescott procedure, Equation 5-10 may be expressed as Yt = Xtt, where t represents time (t = 1,2,..,n), X is a 1 x 8 vector and is an 8 x 1 vector. The Cooley-Prescott model assumes that the s are adaptive and subjected to both permanent and transitory changes. The transitory changes are temporary shocks whose effects do not persist over time. Permanent changes, as they reflect changes in behavioral, technological, and institutional aspects of the economic phenomenon being studied, are more likely to persist over time and be generated in a systematic pattern. Structural changes in the system should generate changes in the permanent components over time. An important feature is that the model picks up structural drifts as opposed to uniformly constrained shifts. The coefficient vector t is assumed subject to both transitory and permanent changes. Pit itPitit

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138 The transitory changes can be defined according to the adaptive regression format, that is tPtt (5-13) The permanent component can be defined according to the adaptive regression format, that is (5-14) where t and vt are identically and independently distributed multivariate normal vector variables with zero mean vectors and covariance matrices and v. A particular covariance structure used by Cooley and Prescott (1973a,b) is and tPtPtv)1( 2)1()(tCov vtvCov2)( (5-15) where and v are assumed known up to scale factors. Let first elements be one (11 = 11v = 1) when the intercept is subjected to the above pattern of variation. Again, Cooley and Prescotts pattern is sufficiently general to accommodate a wide variety of causes. The proportions of the total coefficients variation, and (1), can be attributed to permanent and transitory changes, respectively. The parameter represents the speed of coefficient adaptation to structural changes in the phenomenon being studied. The larger (smaller) value of implies that the sources of coefficient variation are more (less) of a permanent nature. Changing elements of and v imply varying rates of changes for the coefficients and different degrees of permanency of changes. Coefficients are estimated using maximum likelihood procedures. Given n observations and t < n, the estimation procedure is based on calculating the coefficients for period n+1 and then estimating for each period using the initial pt

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139 estimates. If there is a propensity for the coefficients to shift over time, such shifts will become apparent with the time varying coefficients (TVC) model.77 Confidence Intervals Confidence intervals are estimated along with the coefficients to generate intervals around the point estimates. The confidence intervals are important because they illustrate the statistical significance or insignificance of the estimated coefficients with a given level of confidence (95% confidence in our study). The confidence intervals are derived using the technique of bootstrapping. The Bootstrapping approach involves the following procedures: The use of recursive estimation to generate preliminary coefficients from the model (Equation 5-10) The difference (d) between successive values of the jth coefficient (j) over the entire estimation period (n) is computed, where 1jijijd (j = 0,1,2,.7; i = 2,3,..,n) (5-16) The squared differences are summed and the summation divided by the total number of observations in the sample (less one) times the overall variance, S2. Dividing by the overall variance removes scale effects arising from differences in the magnitudes of the coefficients. This gives the estimated variances of the coefficients, defined as 22212)1()(~Snnijijij (5-17) Assuming zero covariance between pairs of coefficients,78 that is, 0 ~ 2kj (5-18) 77Ward (1982) presented a detailed mathematical exposition of the TVC Procedure. 78This assumption is one of practical convenience. Without the assumption, the procedure would be much more tedious and the results far from realistic.

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140 an approximation of the bootstrapped variance of the coefficients changing through time (VQ matrix) may be expressed as 2270~0.0..0..0.00.0 ~ VQ (5-19) Running the common filter over the entire data set using the VQ matrix. This procedure generates the coefficients over the remaining periods since the first k+1 years (k being the number of coefficients in Equation 5-10) are used as seed values The VQ matrix is then used to re-estimate the model recursively (using the estimated coefficients and standard errors from previous periods) to obtain the variances and hence standard errors for each of the coefficients for each year Computation of the square roots of the variance of each coefficient generates the estimated standard errors that are used to construct 95% confidence intervals for each estimated coefficient. Mathematically, the standard errors are calculated as 2)(jtjtse (t = k+2,..,n). (5-20) Data and Empirical Findings The econometric analyses include data on economic growth, agricultural export diversification, total exports, total imports, and other key variables. All the data used in our study are principally from 3 sources: the FAOSTAT Online Agriculture Database, the World Bank Development Database, and Bulmer-Thomas and Nicholls (2000). Because of limitations, data for Belize include the period 1981 to 2001; and data for Dominica include the period 1978 to 1998. Data for Jamaica, and for Trinidad and Tobago include the period 1971 to 2001. Agricultural export data are cited from the FAOSTAT Online Agriculture Database. For Belize, Jamaica, and Trinidad and Tobago, human capital is proxied by the literacy rate. For Dominica, human capital is proxied by public expenditure on education per head, data obtained from Bulmer-Thomas and Nicholls (2000). Bulmer-Thomas (2001) and Nicholls (2001a,b) have all used these data. Also,

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141 labor force data are not available for Dominica. The growth in the total population is used as a proxy for the growth in labor, following Islam (1992). Other macroeconomic 79 79For definitions of the variables used in the empirical analysis, see Appendices A, B. data for all four countries were obtained from the World Bank Development Database. Time varying coefficients and 95% confidence intervals for the intercept, the growth in total exports, the growth in total imports, and diversification are presented in Tables 5-5 to 5-12, for all four countries. While the signs and magnitudes of the coefficients are statistically significant, it is probably more interesting to observe the process leading up to the final values in 2001. This is important since it will suggest possible periods of structural changes. To see this, the coefficients and confidence intervals are plotted in Figures 5-1 to 5-16. Belize Equation 5-10 was estimated for Belize over the period 1981-2001 using the Cooley-Prescott procedure. Estimated time varying coefficients and supporting statistics for 2001 are reported in Table 5-1. Based on the diagnostic statistics, the model seemed to have performed relatively well. All explanatory variables were significant at the 5% level. Signs for the growth in foreign investment, total exports, total imports, and diversification were positive. The magnitude of the impact of these variables on economic growth ranged from 0.015-0.018, 0.131-0.176, 0.169-0.220, and 0.211-0.258, respectively. Domestic investment, labor, and human capital impacted economic growth negatively. The negative economic effect of these variables on economic growth ranged from 0.106-0.123, 8.384-10.641, and 1.466-2.231, respectively.

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142 The negative impact of domestic physical capital on economic growth in Belize may be reflective of the fact that most domestic investment involved refurbishment and rehabilitation of existing capital stock and not the expansion of the countrys capital stock. Hence, while resources were expended to maintain existing infrastructure, the countrys capital stock did not increase. Thus, the negative coefficient may be suggesting that domestic expenditure in a given year was taxing growth in that same period. In terms of labor, the migration of skilled workers from Belize is probably a major area of concern. As more and more highly skilled individuals migrated, the labor force may have consisted of an increasing number of less skilled workers. Probably, that is one of the implications of migration that was captured in the negative labor-growth relationship. Given Belizes location, it could be the case that many individuals migrated to the USA and other neighboring countries in search of greater economic opportunities. The negative impact of human capital on economic growth is not at all surprising. Human capital is extremely difficult to capture using a proxy variable. The proxy used in the analysisliteracy rate does not fully capture the extent of human capital since it excludes important factors such as the experience of the labor force and on-the-job training. Given data limitations, no other proxy was available. Time varying coefficients and 95% confidence intervals for the intercept, the growth in total exports, the growth in total imports, and diversification are presented in Tables 5-5 and 5-6, covering the period 1990-2001. All of these variables impacted economic growth positively throughout the estimation period. There was no change in the signs of the estimated coefficients. The intercept, and the coefficients of export and

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143 diversification declined over the estimation period (Figures 5-1, 5-2, and 5-4, respectively). This suggests that the intercept, exports, and diversification were having less impact on the rate of economic growth in the latter years. The impact of the intercept on economic growth declined from 186.447 in 1990 to 129.527 in 2001, a 30.5% reduction (Table 5-5). The intercept captures the impact of nonincluded factors in Equation 5-10 that influenced economic growth in Belize. Clearly, the combined influence of these variables on economic growth deteriorated. The importance of exports in stimulating economic growth fell from 0.176 in 1990 to 0.131 in 2001, a reduction of 25.6% (Table 5-6). In 1990, a 1% increase in exports generated a 0.176% increase in economic growth. In 2001, a 1% increase in exports would have caused a 0.131% increase in economic growth. These effects may be reflecting Belizes continued reliance on traditional agricultural exports such as bananas and sugar. Most of the agricultural export diversification in Belize took place after 1990. Belize witnessed only a small degree of agricultural export diversification (Chapter 4). Hence, while diversification helped economic growth, its impact declined by 18.2% from 0.258 in 1990 to 0.211 in 2001 (Table 5-5). Consequently, the impact of a 1% increase in the implied level of diversification on economic growth fell from 0.258% in 1990 to 0.211% in 2001. The pattern of evolution of the coefficient of the growth in imports is different from that of exports, as evident from Figure 5-3. The coefficient of imports increased from 0.169 in 1990 to 0.220 in 2001, an increase of 30.2% (Table 5-6). In 1990, a 1% expansion in imports created a 0.169% increase in economic growth. In 2001, a 1% rise

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144 in imports caused a 0.220% increase in economic growth. These effects are not surprising for a small open economy like that of Belize. Given the evolution of the various coefficients, there is no evidence of structural changes taking place in Belize during the period 1990-2001. Indeed, in those years, Belize pursued an outward-oriented development strategy that emphasized the importance of both exports and imports in stimulating economic growth. Furthermore, despite the statistical significance of the growth in total exports, total imports, and diversification, their economic impacts were relatively small. The preceding analysis indicates that foreign investment, exports, imports, and diversification encouraged economic growth in Belize. Domestic investment, labor, and human capital hurt economic growth. Imports had a greater effect than exports, on economic growth. Agricultural export diversification had a larger effect than either exports or imports, on economic growth in Belize. Dominica In the case of Dominica, the model was estimated using data from 1978-1998. Table 5-2 shows the estimated time varying coefficients for 1998 as well as related statistics. Based on the diagnostic statistics, the model performed relatively well. All explanatory variables except the intercept were statistically significant at the 1% level. The intercept was statistically insignificant in 1998. Signs for the growth in domestic investment, foreign investment, labor, exports, and diversification were positive. These variables had fixed effects on economic growth throughout the period 1987-1998. The magnitudes of the coefficients were 0.108 for domestic investment, 0.015 for foreign investment, 1.342 for labor, 0.105 for exports, and 0.021 for diversification. Imports, and human capital impacted economic growth negatively. The coefficients for these variables

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145 also remained constant throughout the period 1987-1998. The negative impacts of these variables on economic growth were 0.034, and 0.791, respectively. Until recently, Dominica maintained a very restrictive import regime. Even within the context of CARICOM, Dominica was somewhat reluctant to reduce the rates on the Common External Tariff (CET), consistent with the regional trading agreement. Hence, the country locked itself out of the potential benefits associated with imports. It has been argued in the literature that imports serve to increase domestic productivity due to increased competition, ultimately leading to greater production efficiencies. If the gain in productivity exceeds the cost associated with foreign reserves losses, the net benefit to growth in the domestic economy will be positive. In the case of Dominica, the cost associated with foreign reserves losses from imports may have been greater than the gain in productivity. Hence, imports impacted economic growth negatively. Human capital development remains a major area of concern for Dominica. Though the country made some strides in boosting its human resource capabilities, the level of human capital is still relatively low. This factor, coupled with the potential problems associated with the estimation of expenditure on education, the proxy for human capital in Dominica, may have contributed to the negative influence of the variable on economic growth. Time varying coefficients and 95% confidence intervals for the intercept, the growth in total exports, the growth in total imports, and diversification are shown in Tables 5-7 and 5-8, and also plotted in Figures 5-5 to 5-8. The data cover the period 1987-1998.

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146 Except for some fluctuations in the intercept (Figure 5-5) the other coefficients remained virtually constant throughout the estimation period (Figures 5-6 to 5-8). The estimated coefficients stood at about 0.105, -0.034, and 0.021 for the growth in total exports, total imports, and diversification, respectively (Tables 5-7, 5-8). Hence, a 1% increase in exports, and the implied level of diversification generated a 0.105%, and 0.021% increase in economic growth, respectively. A 1% increase in imports would have caused the rate of economic growth to decline by 0.034%. The constancy of the estimated coefficients implies that there was no shift in the nature of the relationship between each of these variables and economic growth in Dominica. Furthermore, the constancy of the estimated coefficients suggests that there was no evidence of structural changes taking place in Dominica during the period 1987-1998 (during which Dominica pursued an outward-oriented development strategy). Like Belize, the coefficients of the growth in total exports, total imports, and diversification were statistically significant, but the variables had only a small impact on economic growth. The foregoing analysis indicates that domestic investment, foreign investment, labor, exports, and diversification encouraged economic growth in Dominica. Imports, and human capital taxed economic growth. Exports had a greater effect than imports, on economic growth in Dominica. Furthermore, both exports and imports had greater impacts than agricultural export diversification, on economic growth in Dominica. Jamaica For Jamaica, the model was estimated with data covering the period 1971-2001. Estimated time varying coefficients and supporting statistics for 2001 are presented in Table 5-3. Based on the diagnostic statistics, the model performed relatively well. All

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147 explanatory variables were statistically significant at the 5% level. Exports, and diversification had positive impacts on economic growth. The coefficient for exports ranged from 0.350-0.409. The positive economic impact of diversification on economic growth ranged from 0.099-0.135. Foreign investment, labor, imports, and human capital impacted economic growth negatively. The magnitudes of these negative effects on economic growth ranged from 0.016-0.023 for foreign investment, 3.382-6.572 for labor, 0.370-0.635 for imports, and 5.402-8.365 for human capital. Foreign capital is measured as net capital inflows. Since Jamaica is a small open economy, it is possible that the negative effects on economic growth of Jamaicans investing abroad is probably very strong and outweighed the positive benefits associated with foreign capital inflows (hence the negative impact of foreign investment on economic growth). That idea seems plausible in Jamaica given the countrys history of economic instability (resulting in part from political unrest, and other social disorders such as crime and violence). In terms of labor, Jamaica (probably more so than any other Caribbean country) suffered from a serious brain-drain syndrome in which many highly skilled and trained workers have migrated to foreign countries such as the USA to take up employment opportunities in several areas ranging from nursing to teaching. This reasoning plus the inadequacy of the literacy rate as a proxy for human development may explain the negative relationships between economic growth, labor, and human capital in Jamaica. Time varying coefficients and 95% confidence intervals for the intercept, the growth in total exports, the growth in total imports, and diversification are reported in Tables 5-9 and 5-10, and also plotted in Figures 5-9 to 5-12. The data cover the period

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148 1981-2001. The intercept, growth in total exports, and diversification impacted economic growth positively throughout the period of analysis. There were no changes in the signs of the estimated coefficients. The intercept, and the estimated coefficients of export and diversification declined over the period of analysis (Figures 5-9, 5-10, and 5-12, respectively). This fact suggests that these variables were having less impact on the rate of economic growth in the latter years. The impact of the intercept on economic growth declined from 637.510 in 1981 to 455.152 in 2001, a 28.6% reduction (Table 5-9). The evolution of the intercept is probably related to the impact of several policy changes in Jamaica throughout the 1980s and 1990s documented in Chapter 3 on other sources of economic growth that have not been included in Equation 5-10. These variables have apparently lost significance in terms of their impact on economic growth. The estimated coefficient of exports fell from 0.409 in 1981 to 0.350 in 2001, a reduction of 14.4% (Table 5-10). Reduction in the magnitude of the coefficient means than a 1% increase in exports generated a 0.409% increase in economic growth in Jamaica in 1981. The economic effect of a 1% rise in exports on economic growth in Jamaica declined to 0.350% in 2001. Exports from Jamaica may have suffered from frequent macroeconomic policy changes as well as adjustments in trade policies. Problems encountered with traditional agricultural exports would have contributed to this realization as well. Trade policy reforms coupled with macroeconomic instability and exchange-rate adjustments may have played a great role in lowering the impact of exports on economic growth in Jamaica.

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149 Diversification was statistically significant and positive, but it did not enhance economic growth very much. Jamaica experienced some degree of agricultural export diversification discussed in Chapter 4. Agriculture remained relatively unimportant in the economy (Chapter 3). This may have been captured in the 26.7% reduction (from 0.135 in 1981 to 0.099 in 2001 as evident from Table 5-9) in the importance of diversification in the economy. Indeed, the change in the size of the coefficient indicates that the impact of a 1% increase in the implied level of diversification on economic growth in Jamaica fell from 0.135% in 1981 to 0.099% in 2001. Despite an inverse relationship between imports and economic growth in Jamaica, the negative effects of imports on the economy declined by 41.3% from -0.635 in 1981 to -0.373 in 2001 (Table 5-10). In 1981, a 1% increase in imports resulted in a 0.635% reduction in economic growth. In 2001, a 1% expansion in imports created a 0.373% fall in the rate of growth of the Jamaican economy. Clearly, these results pertaining to imports are particularly interesting. Since the 1980s, Jamaica has made some strides towards creating a more open and liberalized trading environment. Yet, imports impacted economic growth negatively throughout the period of analysis. This seems to be suggesting, for example, that the cost associated with foreign reserves losses as a result of increased imports have outweighed potential gains in domestic productivity due to increased competition from imports. Given the evolution of the various coefficients, there appears to be some evidence of structural changes in Jamaica in the late-1980s. It is difficult to determine what exactly may have contributed to this development. However, the governments efforts at structural adjustments, and frequent changes in governments policies (for example,

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150 adjustments in the countrys foreign exchange rules) discussed in Chapter 3 may have effected structural changes in the economy. The preceding analysis suggests that exports, and diversification promoted economic growth in Jamaica. Foreign investment, labor, imports, and human capital taxed growth in the Jamaican economy. The effect of imports was greater than exports, on economic growth. Moreover, agricultural export diversification had a smaller effect than either exports or imports, on economic growth in Jamaica. Trinidad and Tobago Like Jamaica, the model was estimated using data from 1971-2001 for Trinidad and Tobago. Table 5-4 shows estimated time varying coefficients for 2001 as well as related statistics. Based on the diagnostic statistics, the model performed relatively well. All explanatory variables were statistically significant. Signs for the growth in total imports, human capital, and diversification were positive. The magnitude of the impact of these variables on economic growth ranged from 0.492-1.933, 0.009-2.318, and 0.044-0.235, respectively. Domestic investment, foreign investment, labor, and exports impacted economic growth negatively. The negative economic effect of these variables on economic growth ranged from 0.259-0.780, 0.016-0.319, 1.634-3.584, and 0.039-0.203, respectively. In terms of the negative impact of domestic investment on economic growth in Trinidad and Tobago, the situation is probably similar to those of other countries. Since domestic investment usually involves the refurbishment of the countrys infrastructure (not expansion of the capital stock), current spending was probably taxing current growth.

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151 Prior to the 1980s, Trinidad and Tobago maintained little controls on the movement of foreign capital. Trinidadians were allowed to move foreign exchange freely in and out of the country. Since foreign physical capital is measured as net capital inflows, the negative effect on economic growth of Trinidadians investing abroad probably exceeded the positive externalities associated with foreigners investing in Trinidad and Tobago. Hence, foreign investment impacted economic growth negatively. Trinidad and Tobago (like other Caribbean countries) suffered from the migration of some of its highly skilled and trained personnel. However, a larger problem relates to the apparent lack of labor productivity in the workforce documented in Chapter 3. Such a lack is probably what has been reflected in the negative coefficient of labor. The performance of exports is probably linked to the sugar industry. Caroni (1975) Ltd. is the only exporter of sugar in Trinidad and Tobago. About one half of the countrys agricultural GDP is accounted for by sugar. Taylor (2003) noted that Caroni (1975) Ltd. has been a huge financial drain on the government. Further, it is possible that negative externalities associated with sugar may have affected the performance of other agricultural industries such as citrus and rice. The combined effects of these factors may have taxed growth in the economy and thus account for the negative relationship between the growth in total exports and economic growth in Trinidad and Tobago. Time varying coefficients and 95% confidence intervals for the intercept, the growth in total exports, the growth in total imports, and diversification are presented in Tables 5-11 and 5-12. The dynamic paths of adjustments of these coefficients for the period 1980-2001 are shown in Figures 5-13 to 5-16, respectively.

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152 The signs of the estimated intercepts changed from positive (1980-1982) to negative (1983-2001), suggesting a possible shift in the nature of the relationship between other sources of economic growth in Trinidad and Tobago excluded from Equation 5-10. The negative impact of these variables on economic growth increased significantly from -9.042 in 1983 to -224.826 in 2001 (Table 5-11). This significant increase signifies a growing importance (though negative) of these variables. Figure 5-14 illustrates the dynamic path of adjustment of the estimated coefficients of the growth in total exports. Between 1980-1985, exports impacted economic growth positively. In 1986, the nature of the relationship between exports and economic growth in Trinidad and Tobago changed from positive to negative. This negative relationship continued throughout the 1990s and the early years of the 2000s. Indeed, there was a 17.9% increase from -0.039 in 1986 to -0.046 in 2001 (Table 5-12) in the negative impact of exports on economic growth in the twin-island economy. The increase in the size of the coefficient means than a 1% increase in exports generated a 0.039% reduction in economic growth in Trinidad and Tobago in 1986. The negative economic effect of a 1% rise in exports on economic growth in Trinidad and Tobago increased to 0.046% in 2001. Estimated coefficients of imports decreased from 1.910 in 1980 to 0.492 in 2001, a reduction of 74.2% (Table 5-12). This change in the coefficient of imports suggests a relatively large reduction in the economic impact of imports. Indeed, 1% expansion in imports generated a 1.910% increase in economic growth in Trinidad and Tobago in 1980. However, a 1% rise in imports resulted in a 0.492% increase in economic growth in 2001. The downward trend in the coefficients of imports may be attributable to negative effects from trade policy reforms and exchange-rate adjustments, following the

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153 Structural Adjustment initiative undertaken by the government in the late-1980s, and additional policy reforms in subsequent years discussed in Chapter 3. Like Jamaica, Trinidad and Tobagos agricultural sector is relatively small in terms of its contribution to the economy. Export agriculture from Trinidad and Tobago did in fact diversify, especially after 1984. Given the relative unimportance of the sector to the economy, it is no surprise that the importance of agricultural exports diversification in promoting economic growth fell by 73.9% from 0.176 in 1980 to 0.046 in 2001 (Table 5-11). This finding means that the impact of a 1% increase in the implied level of diversification on economic growth in Trinidad and Tobago fell from 0.176% in 1980 to 0.046% in 2001. The dynamic paths of adjustments in the intercept, and the coefficients of the growth in total exports, total imports, and diversification, seem to suggest that some structural changes occurred in Trinidad and Tobago around the mid-to-late-1980s. The macroeconomic problems that emerged during that period and the subsequent structural adjustment measures instituted in 1988 and subsequent years may have accounted for any structural changes that took place in the economy of Trinidad and Tobago. The foregoing analysis indicates that imports, human capital, and diversification stimulated economic growth in Trinidad and Tobago. Domestic investment, foreign investment, labor, and exports taxed the rate of growth of the economy. The impact was higher for imports than for exports, and agricultural export diversification, on the economic growth rate in Trinidad and Tobago. However, the effect of agricultural export diversification was greater than exports, on economic growth in Trinidad and Tobago.

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154 Summary of Findings Belize, Dominica, Jamaica, and Trinidad and Tobago share some common characteristics documented in Chapter 1. Simultaneously, Chapter 3 highlights several differences in these countries in population size, resource endowment, economic performance, economic structure, and geography. These differences would be reflected in the econometric results. Nonetheless, it may be interesting to undertake a broad comparison of the link between trade and economic growth in these countries, and the influence of agricultural export diversification on the trade-growth relationship. To make these comparisons, estimated time varying coefficients for Belize (1990 and 2001), Dominica (1987 and 1998), Jamaica (1981 and 2001), and Trinidad and Tobago (1980 and 2001), are presented in Table 5-13. Exports had a positive effect on economic growth in Belize, Jamaica, and Dominica. The effect of exports on economic growth changed from positive to negative in Trinidad and Tobago. Imports impacted economic growth positively in Belize, and Trinidad and Tobago but negatively in Dominica, and Jamaica. Agricultural export diversification contributed positively to economic growth in all four countries. A comparison of the first year for each country shows that exports had the largest impact on economic growth in Jamaica, and Trinidad and Tobago. However, exports had the greatest effects on economic growth in Jamaica, and Belize in 2001. The contributions of imports to economic growth in Jamaica, and Trinidad and Tobago, exceeded those in Belize, and Dominica. Agricultural export diversification had the largest effect on economic growth in Belize, and the smallest impact in Dominica. The importance of exports, imports, and agricultural export diversification, remained unchanged in Dominica. The importance of exports decreased in Belize,

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155 Jamaica, and Trinidad and Tobago. Trinidad and Tobago experienced the largest reduction in the importance of exports. The importance of imports increased in Belize but declined in Trinidad and Tobago. There was a reduction in the negative impact of imports on economic growth in Jamaica. The importance of agricultural export diversification declined in Belize, Jamaica, and Trinidad and Tobago. The largest reduction occurred in Trinidad and Tobago.

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156 Table 5-1 Estimated time varying coefficients for Belize, 2001 Variable CoefficientStd. Errort-value P-value Intercept 129.52729.9914.319 [.000] Growth in Domestic Investment-0.1230.001-11.082 [.000]Growth in Foreign Investment 0.0150.0027.080 [.000]Growth in Labor Force -8.3841.141-7.349 [.000]Growth in Total Exports 0.1310.0255.140 [.000]Growth in Total Imports 0.2200.0297.577 [.000]Growth in Human Capital -1.4690.328-4.478 [.000]Diversification Index 0.2110.0258.328 [.000] Diagnostics Statistics Sum of squared residuals 0.023 Schwarz B.I.C. 4.195 Variance of residuals 0.023 Log likelihood -4.195 Table 5-2 Estimated time varying coefficients for Dominica, 1998 Variable CoefficientStd. Errort-value P-value Intercept 1.7026.1740.276 [.815] Growth in Domestic Investment0.1080.001113.008 [.000]Growth in Foreign Investment 0.0150.0034.821 [.000]Growth in Labor Force 1.3420.1917.016 [.000]Growth in Total Exports 0.1050.00258.382 [.000]Growth in Total Imports -0.0340.003-11.841 [.000]Growth in Human Capital -0.7910.310-2.547 [.011]Diversification Index 0.0210.0045.214 [.000] Diagnostics Statistics Sum of squared residuals 7.103E-05 Schwarz B.I.C. 2.559 Variance of residuals 7.103E-05 Log likelihood -2.559

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157 Table 5-3 Estimated time varying coefficients for Jamaica, 2001 Variable CoefficientStd. Errort-value P-value Intercept 455.15216.07028.323 [.000] Growth in Foreign Investment-0.0160.001-15.945 [.000]Growth in Labor Force -3.4060.926-3.678 [.000]Growth in Total Exports 0.3500.0447.958 [.000]Growth in Total Imports -0.3730.037-10.018 [.000]Growth in Human Capital -5.4050.176-30.688 [.000]Diversification Index 0.0990.00714.726 [.000] Diagnostics Statistics Sum of squared residuals 0.096 Schwarz B.I.C. 2.728 Variance of residuals 0.097 Log likelihood -2.728 Table 5-4 Estimated time varying coefficients for Trinidad and Tobago, 2001 Variable CoefficientStd. Errort-value P-value Intercept -224.82663.802-3.524 [.000] Growth in Domestic Investment-0.2590.044-5.943 [.000]Growth in Foreign Investment -0.0160.004-4.439 [.000]Growth in Labor Force -6.2542.604-2.401 [.000]Growth in Total Exports -0.0460.023-1.974 [.048]Growth in Total Imports 0.4920.1812.723 [.000]Growth in Human Capital 2.3180.6793.415 [.000]Diversification Index 0.0460.0172.706 [.000] Diagnostics Statistics Sum of squared residuals 0.013 Schwarz B.I.C. 2.244 Variance of residuals 0.013 Log likelihood -2.244

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158Table 5-5 Estimated time varying intercepts and coefficients of diversification for Belize, 1990-2001 Intercept Diversification Standard Confidence Interval Standard Confidence IntervalYear Coefficient error t-value lower upper Coefficient error t-valuelower upper 1990 186.447 4.50941.351177.654195.2390.2580.00472.7770.2510.264 1991 182.543 12.48614.620158.196206.8910.2520.01026.0650.2330.2711992 149.413 29.6455.04091.606207.2200.2330.0249.6650.1860.2801993 149.833 26.6395.62597.888201.7790.2320.02210.7080.1900.2751994 148.896 24.4146.099101.290196.5020.2320.02011.5420.1930.2711995 149.409 24.6396.064101.363197.4550.2300.02011.3450.1910.2701996 143.023 29.9674.77384.587201.4580.2210.0249.0370.1730.2681997 143.462 28.6075.01587.680199.2450.2210.0239.3990.1750.2661998 143.784 27.5355.22290.090197.4770.2210.0239.7040.1760.2651999 140.440 26.9695.20787.849193.0300.2200.0229.7810.1760.2642000 141.779 28.4474.98486.307197.2510.2180.0249.1800.1710.2642001 129.527 29.9914.31971.045188.0080.2110.0258.3280.1610.260

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159 Table 5-6 Estimated time varying coefficients of the growth in total exports and imports for Belize, 1990-2001 Growth in total exports Growth in total imports Standard Confidence Interval Standard Confidence IntervalYear Coefficient error t-value lower upper Coefficient error t-value lower upper 1990 0.176 0.00447.0250.1690.1830.1690.00443.5450.1620.177 1991 0.171 0.01016.8550.1510.1900.1750.01116.4320.1550.1961992 0.153 0.0256.0670.1040.2020.1940.0277.1890.1420.2471993 0.152 0.0226.7570.1080.1950.1950.0248.0020.1480.2431994 0.152 0.0217.3240.1110.1920.1950.0238.6080.1510.2401995 0.149 0.0217.1990.1090.1900.1980.0238.6420.1530.2431996 0.139 0.0255.6130.0910.1870.2090.0287.5660.1550.2631997 0.139 0.0245.8580.0930.1850.2090.0277.8540.1570.2611998 0.139 0.0236.0680.0940.1840.2090.0268.0960.1590.2601999 0.138 0.0236.1210.0940.1820.2090.0268.1770.1590.2592000 0.135 0.0245.6970.0890.1810.2130.0277.8700.1600.2652001 0.131 0.0255.1400.0810.1800.2200.0297.5770.1630.276

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160Table 5-7 Estimated time varying intercepts and coefficients of diversification for Dominica, 1987-1998 Intercept Diversification Standard Confidence Interval Standard Confidence IntervalYear Coefficient error t-value lower upper Coefficient error t-value lower upper 1987 5.992 0.00022.87E+045.9925.9920.021 1.107E-071.86E+050.0210.021 1988 5.992 2.8072.1340.51811.4660.021 0.00119.9270.0190.0231989 0.779 4.5680.171-8.1299.6880.021 0.00113.8450.0180.0231990 5.463 5.9020.926-6.04616.9710.021 0.00212.2000.0170.0241991 5.561 12.4200.448-18.65829.7800.021 0.0037.4090.0150.0261992 0.279 7.5460.037-14.43514.9930.021 0.0044.9680.0120.0291993 1.547 12.7120.122-23.24126.3360.021 0.0045.0960.0130.0281994 -4.742 5.232-0.906-14.9445.4600.021 0.0045.1210.0130.0281995 -8.054 3.053-2.638-14.009-2.1000.021 0.0044.8160.0120.0291996 -5.587 10.255-0.545-25.58414.4090.021 0.0045.0050.0130.0291997 -9.531 11.476-0.831-31.91012.8480.021 0.0045.0490.0130.0281998 1.702 6.1740.276-10.33813.7410.021 0.0045.2140.0130.028

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161 Table 5-8 Estimated time varying coefficients of the growth in total exports and imports for Dominica, 1987-1998 Growth in total exports Growth in total imports Standard Confidence Interval Standard Confidence IntervalYear Coefficient error t-value lower upper Coefficient error t-value lower upper 1987 0.105 0.000 2.496E+060.1050.105-0.034 8.404E-08-4.056E+05-0.034-0.034 1988 0.105 0.000 260.5460.1040.106-0.034 0.001-43.694-0.036-0.0331989 0.105 0.001 177.0390.1040.106-0.034 0.001-30.554-0.036-0.0321990 0.105 0.001 152.6150.1040.106-0.034 0.001-26.983-0.037-0.0321991 0.105 0.001 90.9870.1030.107-0.034 0.002-16.461-0.038-0.0301992 0.105 0.002 60.0960.1010.108-0.034 0.003-11.115-0.040-0.0281993 0.105 0.002 60.7240.1010.108-0.034 0.003-11.450-0.040-0.0281994 0.105 0.002 60.2320.1010.108-0.034 0.003-11.567-0.040-0.0281995 0.105 0.002 55.9600.1010.108-0.034 0.003-10.926-0.040-0.0281996 0.105 0.002 57.4730.1010.108-0.034 0.003-11.392-0.040-0.0281997 0.105 0.002 57.3390.1010.108-0.034 0.003-11.521-0.040-0.0281998 0.105 0.002 58.3820.1010.108-0.034 0.003-11.841-0.040-0.028

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162 Table 5-9 Estimated time varying intercepts and coefficients of diversification for Jamaica, 1981-2001 Intercept Diversification Standard Confidence Interval Standard Confidence IntervalYear Coefficient error t-value lower Upper Coefficient error t-valuelower upper 1981 637.510 4.523140.941628.690646.3300.1350.00263.7340.1310.139 1982 637.510 15.66740.691606.959668.0610.1350.00718.8300.1210.1491983 637.510 14.43544.166609.363665.6570.1350.00720.6060.1220.1481984 637.510 13.09448.685611.976663.0440.1350.00622.7700.1230.1461985 637.510 15.72340.546606.850668.1700.1350.00718.9270.1210.1491986 637.510 14.45944.092609.316665.7040.1350.00720.0850.1220.1481987 637.510 13.41447.526611.353663.6670.1350.00621.2570.1230.1471988 541.629 16.23333.365509.974573.2840.1120.00814.7000.0970.1261989 540.198 19.32727.951502.512577.8850.1120.00912.6520.0950.1291990 544.411 18.71229.094507.922580.8990.1110.00912.9870.0940.1271991 536.082 18.27529.334500.445571.7190.1110.00813.3900.0950.1271992 519.528 17.90229.020484.618554.4370.1100.00813.6930.0940.1251993 494.700 17.62428.069460.333529.0680.1060.00813.6410.0910.1211994 485.057 17.33027.990451.263518.8500.1050.00813.7580.0900.1191995 463.715 17.12627.076430.319497.1110.1010.00713.6450.0870.1161996 460.486 16.73227.521427.858493.1140.1010.00713.9710.0870.1161997 460.058 16.50027.882427.883492.2330.1010.00714.2520.0870.1151998 460.798 16.33028.218428.955492.6410.1010.00714.4370.0880.1151999 461.306 16.16828.533429.779492.8320.1010.00714.6880.0880.1152000 451.887 16.01328.221420.662483.1110.0990.00714.6540.0860.1132001 455.152 16.07028.323423.816486.4890.0990.00714.7260.0860.113

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163 Table 5-10 Estimated time varying coefficients of the growth in total exports and imports for Jamaica, 1981-2001 Growth in total exports Growth in total imports Standard Confidence Interval Standard Confidence IntervalYear Coefficient error t-value lower upper Coefficient error t-value lower upper 1981 0.409 0.01234.2790.3860.433-0.6350.011-58.623-0.656-0.614 1982 0.409 0.0419.9890.3290.489-0.6350.037-17.166-0.707-0.5631983 0.409 0.03810.8160.3360.483-0.6350.034-18.648-0.701-0.5691984 0.409 0.03511.8020.3420.477-0.6350.031-20.445-0.696-0.5741985 0.409 0.0429.7070.3270.492-0.6350.038-16.870-0.708-0.5621986 0.409 0.03910.4040.3330.486-0.6350.035-17.971-0.704-0.5661987 0.409 0.03810.8880.3360.483-0.6350.034-18.890-0.701-0.5691988 0.372 0.0458.2400.2840.460-0.5020.040-12.504-0.580-0.4231989 0.372 0.0536.9990.2680.476-0.4980.047-10.579-0.590-0.4071990 0.372 0.0527.1900.2710.473-0.5010.046-10.986-0.589-0.4121991 0.373 0.0507.4040.2750.471-0.4930.044-11.094-0.579-0.4061992 0.370 0.0497.5240.2740.466-0.4680.043-10.839-0.553-0.3841993 0.362 0.0487.5210.2680.455-0.4320.042-10.309-0.513-0.3501994 0.359 0.0477.5790.2660.451-0.4230.041-10.316-0.502-0.3431995 0.354 0.0477.5890.2630.444-0.3910.040-9.783-0.469-0.3131996 0.354 0.0467.7280.2650.443-0.3880.039-9.907-0.464-0.3111997 0.354 0.0457.8260.2660.442-0.3860.039-10.018-0.462-0.3111998 0.354 0.0457.8910.2670.442-0.3870.038-10.125-0.461-0.3121999 0.354 0.0447.9640.2670.440-0.3860.038-10.233-0.460-0.3132000 0.351 0.0447.9930.2650.437-0.3700.037-9.960-0.442-0.2972001 0.350 0.0447.9580.2640.435-0.3730.037-10.018-0.445-0.300

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2001 -224.826 63.802-3.524-349.240-100.4110.046 0.0172.7060.0130.079 164 Table 5-11 Estimated time varying intercepts and coefficients of diversification for Trinidad and Tobago, 1980-2001 Intercept Diversification StandardConfidence Interval StandardConfidence IntervalYear Coefficient errort-valuelowerupperCoefficient errort-valuelowerupper1980 33.713 4.7547.09224.44342.9830.176 0.00439.2280.1670.185 1981 37.847 64.2280.589-87.398163.0910.235 0.0593.9710.1200.3511982 0.276 59.7780.005-116.291116.8430.198 0.0563.5450.0890.3071983 -9.042 58.203-0.155-122.538104.4550.157 0.0532.9740.0540.2601984 -5.209 61.602-0.085-125.334114.9160.146 0.0562.6010.0370.2561985 -36.704 66.401-0.553-166.18692.7780.122 0.0313.9380.0620.1821986 -216.309 69.094-3.131-351.043-81.5750.062 0.0341.794-0.0050.1291987 -207.603 66.417-3.126-337.116-78.0900.083 0.0332.5380.0190.1471988 -212.442 65.918-3.223-340.982-83.9020.077 0.0332.3630.0130.1411989 -205.983 64.992-3.169-332.718-79.2490.082 0.0322.5320.0190.1451990 -211.181 62.836-3.361-333.711-88.6510.079 0.0322.5050.0180.1411991 -208.266 65.127-3.198-335.264-81.2670.069 0.0332.0980.0050.1331992 -210.616 63.586-3.312-334.609-86.6230.070 0.0322.1530.0070.1331993 -209.368 62.319-3.360-330.890-87.8460.071 0.0322.2240.0090.1331994 -201.680 64.613-3.121-327.675-75.6850.070 0.0332.1130.0050.1341995 -225.748 67.170-3.361-356.730-94.7660.050 0.0321.581-0.0120.1121996 -222.566 67.139-3.315-353.487-91.6450.049 0.0311.586-0.0110.1091997 -225.008 66.545-3.381-354.771-95.2450.046 0.0231.9700.0000.0921998 -224.826 65.767-3.419-353.073-96.5800.046 0.0192.3770.0080.0841999 -222.761 65.135-3.420-349.774-95.7480.047 0.0172.7100.0130.0812000 -227.080 64.400-3.526-352.660-101.5000.044 0.0152.8730.0140.074

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2000 -0.045 0.022-2.067-0.087-0.0030.498 0.1822.7310.1420.8532001 -0.046 0.023-1.974-0.091-0.0010.492 0.1812.7230.1400.845 165 Table 5-12 Estimated time varying coefficients of the growth in total exports and imports for Trinidad and Tobago, 1980-2001 Growth in total exports Growth in total imports StandardConfidence Interval StandardConfidence IntervalYear Coefficient errort-valuelowerupperCoefficient errort-valuelowerupper1980 0.203 0.00290.0900.1990.2081.910 0.016118.0641.8781.941 1981 0.128 0.0304.2660.0690.1861.933 0.2168.9481.5112.3541982 0.129 0.0294.5270.0740.1851.772 0.2008.8551.3822.1621983 0.138 0.0275.0460.0850.1911.598 0.1828.7771.2431.9531984 0.135 0.0294.6460.0780.1911.528 0.1917.9841.1551.9021985 0.134 0.0324.2110.0720.1971.448 0.2096.9301.0411.8561986 -0.039 0.017-2.359-0.072-0.0070.760 0.2183.4800.3341.1861987 -0.059 0.016-3.734-0.090-0.0280.769 0.2103.6720.3611.1781988 -0.055 0.016-3.506-0.085-0.0240.753 0.2083.6250.3481.1591989 -0.058 0.015-3.775-0.088-0.0280.752 0.2053.6620.3521.1531990 -0.059 0.015-3.928-0.089-0.0300.748 0.2013.7210.3561.1401991 -0.052 0.016-3.324-0.082-0.0210.730 0.2093.4910.3221.1381992 -0.053 0.015-3.462-0.083-0.0230.739 0.2043.6200.3411.1371993 -0.053 0.015-3.562-0.082-0.0240.738 0.2013.6790.3471.1291994 -0.051 0.015-3.273-0.081-0.0200.706 0.2073.4080.3021.1091995 -0.047 0.016-2.901-0.079-0.0160.561 0.2042.7450.1620.9591996 -0.047 0.016-2.851-0.078-0.0150.537 0.2022.6580.1430.9321997 -0.045 0.016-2.791-0.077-0.0140.524 0.1972.6620.1400.9091998 -0.045 0.018-2.473-0.081-0.0100.523 0.1882.7760.1560.8901999 -0.045 0.020-2.213-0.084-0.0050.520 0.1882.7670.1530.886

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166 Table 5-13 Estimated time varying coefficients of trade and diversification for the first and last periods for each country BelizeDominica JamaicaTrinidad and Tobago Estimated coefficients 1990200119871998 1981200119802001Growth in total exports 0.1760.1310.1050.105 0.4090.3500.203-0.046 Absolute change -0.0460.000 -0.060-0.250 Percentage change -25.860.00 -14.58-122.78Growth in total imports 0.1690.220-0.034-0.034 -0.635-0.3731.9100.492 Absolute change 0.0500.000 0.262-1.417 Percentage change 29.700.00 -41.32-74.23Diversification 0.2580.2110.0210.021 0.1350.0990.1760.046 Absolute change -0.0470.000 -0.035-0.130 Percentage change -18.240.00 -26.27-73.89

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167 60 80 100 120 140 160 180 200 220 90 91 92 93 94 95 96 97 98 99 00 01 Coefficient Lower CI Upper CI Figure 5-1 Dynamic path of the intercept for Belize, 1990-2001 .08 .10 .12 .14 .16 .18 .20 .22 90 91 92 93 94 95 96 97 98 99 00 01 Coefficient Lower CI Upper CI Figure 5-2 Dynamic path of adjustment in the coefficients of the growth in exports for Belize, 1990-2001

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168 .14 .16 .18 .20 .22 .24 .26 .28 90 91 92 93 94 95 96 97 98 99 00 01 Coefficient Lower CI Upper CI Figure 5-3 Dynamic path of adjustment in the coefficients of the growth in imports for Belize, 1990-2001 .16 .18 .20 .22 .24 .26 .28 .30 90 91 92 93 94 95 96 97 98 99 00 01 Coefficient Lower CI Upper CI Figure 5-4 Dynamic path of adjustment in the coefficients of diversification for Belize, 1990-2001

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169 -40 -30 -20 -10 0 10 20 30 40 87 88 89 90 91 92 93 94 95 96 97 98 Coefficient Lower CI Upper CI Figure 5-5 Dynamic path of the intercept for Dominica, 1987-1998 .101 .102 .103 .104 .105 .106 .107 .108 .109 87 88 89 90 91 92 93 94 95 96 97 98 Coefficient Lower CI Upper CI Figure 5-6 Dynamic path of adjustment in the coefficients of the growth in exports for Dominica, 1987-1998

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170 -.042 -.040 -.038 -.036 -.034 -.032 -.030 -.028 -.026 87 88 89 90 91 92 93 94 95 96 97 98 Coefficient Lower CI Upper CI Figure 5-7 Dynamic path of adjustment in the coefficients of the growth in imports for Dominica, 1987-1998 .012 .016 .020 .024 .028 .032 87 88 89 90 91 92 93 94 95 96 97 98 Coefficient Lower CI Upper CI Figure 5-8 Dynamic path of adjustment in the coefficients of diversification for Dominica, 1987-1998

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171 400 450 500 550 600 650 700 82 84 86 88 90 92 94 96 98 00 Coefficient Lower CI Upper CI Figure 5-9 Dynamic path of the intercept for Jamaica, 1981-2001 .25 .30 .35 .40 .45 .50 82 84 86 88 90 92 94 96 98 00 Coefficient Lower CI Upper CI Figure 5-10 Dynamic path of adjustment in the coefficients of the growth in exports for Jamaica, 1981-2001

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172 -.8 -.7 -.6 -.5 -.4 -.3 -.2 82 84 86 88 90 92 94 96 98 00 Coefficient Lower CI Upper CI Figure 5-11 Dynamic path of adjustment in the coefficients of the growth in imports for Jamaica, 1981-2001 .08 .09 .10 .11 .12 .13 .14 .15 82 84 86 88 90 92 94 96 98 00 Coefficient Lower CI Upper CI Figure 5-12 Dynamic path of adjustment in the coefficients of diversification for Jamaica, 1981-2001

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173 -400 -300 -200 -100 0 100 200 80 82 84 86 88 90 92 94 96 98 00 Coefficient Lower CI Upper CI Figure 5-13 Dynamic path of the intercept for Trinidad and Tobago, 1980-2001 -.10 -.05 .00 .05 .10 .15 .20 .25 80 82 84 86 88 90 92 94 96 98 00 Coefficient Lower CI Upper CI Figure 5-14 Dynamic path of adjustment in the Coefficients of the growth in exports for Trinidad and Tobago, 1980-2001

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174 0.0 0.4 0.8 1.2 1.6 2.0 2.4 80 82 84 86 88 90 92 94 96 98 00 Coefficient Lower CI Upper CI Figure 5-15 Dynamic path of adjustment in the coefficients of the growth in imports for Trinidad and Tobago, 1980-2001 -.1 .0 .1 .2 .3 .4 80 82 84 86 88 90 92 94 96 98 00 Coefficient Lower CI Upper CI Figure 5-16 Dynamic path of adjustment in the coefficients of diversification for Trinidad and Tobago, 1980-2001

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CHAPTER 6 SUMMARY, CONCLUSIONS, AND CONSIDERATIONS FOR FURTHER RESEARCH Summary The objective of our study was to examine the relationship between trade (imports and exports) and economic growth in the Caribbean during the past 30 years. Our study focused on Belize, Dominica, Jamaica, and Trinidad and Tobago. These economies have all been dominated by services. While Belize cannot be considered small in relation to Jamaica, and Trinidad and Tobago geographically, Dominica can. Economic activity in Jamaica is fueled by Tourism, but other important sectors of manufacturing and mining are declining. In the case of Trinidad and Tobago, the industrial sector plays an important role in economic activity, largely due to oil and natural gas. Manufacturing is also very important. Agriculture plays only a relatively small role in both Jamaica, and Trinidad and Tobago. Unlike Jamaica, Trinidad and Tobagos tourism is not a major player in economic activity. The past 30 years represent an interesting historical period in Caribbean economic development. During the 1970s, the primary development paradigm was predicated on import substitution industrialization and protected domestic markets. These policies were arguably biased against agricultural exports. Beginning in the mid-1980s, the strategy shifted from ISI to outward orientation, which favored export-led growth and openness to international markets. At center stage were agricultural exports and export 175

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176 diversification. Hence, the influence of agricultural export diversification on the trade-growth nexus was also incorporated into the empirical analysis. To accomplish the objectives of our study, a comprehensive review of the literature on the relationship between trade and economic growth; literature on agricultural diversification, within the context of trade; and literature on economic growth theory and empirical analysis were conducted. The review of the literature was followed by a brief overview of the structure and performance of each economy, and some policies implemented to promote economic growth and development. The presentation also included some country-specific background information. These discussions were followed by an examination of the extent, and nature of agricultural export diversification since 1970. Entropy indexes of diversification (total, and within and across commodity groups) were estimated and analyzed for each of the four countries. The final aspect of our study involved the development, specification, and estimation of economic growth models that allowed exploration of the relationship between trade and economic growth (capturing, in the process, the impact of agricultural export diversification). This included a discussion of the empirical findings. The main objective of the empirical analysis was to evaluate relationships among trade, agricultural export diversification, and economic growth over the past 30 years. Whether diversification was taxing or helping the economy was also examined. Conclusions Our study explored the relationship between trade and economic growth in the Caribbean over the past 30 years, incorporating the influence of agricultural export diversification. Our study addressed 3 key questions: Has agricultural export diversification occurred and when?

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177 To what extent did agricultural export diversification occur, and what was the nature of its evolution? What has been the link between trade and economic growth in the Caribbean taking into account the influence of agricultural export diversification on this relationship? All four countries experienced varying degrees of agricultural export diversification since 1970. Most of the diversification of export agriculture took place after 1990 for Belize. This country also experienced a decline in the sugar industry, but an expansion in the citrus, and banana industries after 1990. However, diversification occurred during the periods 1970-1975 for Dominica (mostly within commodity groups), and after 1989 (when most of the diversification occurred across commodity groups). This countrys exports of bananas dominated across the decades. However, oil of coconuts, and other nontraditional crops are also important. Furthermore, some degree of diversification in export agriculture occurred during the period 1976-1985 for Jamaica. For Jamaica, most of this diversification occurred across commodity groups. This countrys most striking development in export agriculture was the significant decline of sugar. A fair amount of diversification since 1970 occurred in Trinidad and Tobago, with noticeable increases in the implied levels of agricultural export diversification after 1984, attributable to a combination of a decline in sugar exports, and an increase in the export of a range of processed agricultural products, most significantly nonalcoholic beverages. Most of the diversification in Trinidad and Tobago took place across commodity groups. Like Jamaica, Trinidad and Tobago witnessed a reduction in the dominance of sugar; but alcoholic beverages replaced sugar as the leading agricultural export by 2000 for Trinidad and Tobago. These results are consistent with the conclusions that the promotion of agricultural export diversification in Caribbean countries was to some degree successful. Despite

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178 data limitations, it may be conjectured that the level of diversification resulted from export promotion programs funded by international donors, and diversification initiatives undertaken at the country-specific, and wider Caribbean levels. The empirical analyses conducted in Chapter 5 suggested that generally economic growth in Belize, Dominica, Jamaica, and Trinidad and Tobago have been associated with increases in the growth of domestic investment, foreign investment, labor, total exports, total imports, human capital, and agricultural export diversification. Indeed, the results confirmed that trade played a significant role in economic growth in the Caribbean. In Belize, exports and imports impacted economic growth positively. The importance of exports declined during the 1990s and beyond. The importance of imports increased. In Dominica, exports impacted economic growth positively, while imports had a negative effect on economic growth. The importance of both exports and imports in Dominicas growth experience remained unchanged throughout the latter parts of the 1980s and 1990s. Exports impacted economic positively in Jamaica, but the country witnessed a reduction in the importance of exports during the period 1981-2001. Imports impacted economic growth negatively throughout the period of analysis. However, the negative effects of imports on the economy declined. Between 1980-1985, exports impacted economic growth positively in Trinidad and Tobago. In 1986, the nature of the relationship between exports and economic growth in Trinidad and Tobago changed from positive to negative. This negative relationship continued throughout the 1990s and the early years of the 2000s. The negative impact of exports on economic growth in Trinidad

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179 and Tobago increased from 1986 to 2001. Imports had a positive effect on economic growth in Trinidad and Tobago, but its importance decreased from 1980 to 2001. The statistically significant and positive impact of agricultural export diversification on economic growth in all four countries are consistent with the view that in the long run export diversification enhances economic growth performance relative to what it would have been with a more specialized export structure. This is plausible within the context of the Caribbean given the existence of narrow export bases. Certainly, agricultural export diversification in the Caribbean promoted economic growth. In terms of policy implications, the econometric results revealed that the relationship among trade, agricultural export diversification, and economic growth varied from country to country. These results suggest that policies aimed at stimulating both economic growth and agricultural export diversification should be on a country-to-country basis, rather than one size fits all. Considerations for Further Research The unavailability of detailed and specific information on agricultural diversification initiatives in Belize, Dominica, Jamaica, and Trinidad and Tobago limited the discussions of pertinent policies, projects, and programs (especially issues such as the costs, funding agencies, duration, objectives, and outcomes of various projects). This prevented a linkage of the degree of diversification to the policies and programs to determine whether the implied levels of diversification were consistent or inconsistent with the initiatives undertaken. Undeniably, a vast amount of discussions have been done recognizing the importance of agricultural diversification to the Caribbean (CARICOM, 1990) but little documentation exists of actual policies, projects, and programs implemented. Clearly, detailed and specific information on agricultural diversification

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180 needs to be generated. Such exercise and a detailed evaluation of the specific initiatives and programs could form the basis of a future research project. A more detailed analysis of agricultural export diversification using separate indexes for primary and processed commodities may generate some useful insights from a policy perspective. Processed commodities are important since they represent a greater source of value-added. Primary agricultural exports generally do not attract high prices, except under certain trading arrangements such as that between the EU and ACP countries. In terms of econometrics, given the use of time series data in our study, the empirical analysis could have been done using cointegration. Cointegration is a technique that seeks to address the issue of nonstationarity in the variables used in a time series model, which could generate spurious regression results if ignored. By applying the Engle-Granger Two-Step procedure, it is also possible to investigate the short-run relationship among economic growth and the independent variables using an Error Correction Model. Furthermore, given recent efforts on the part of CARICOM to establish a Single Market and Economy, it would be useful to extend the research to the remaining countries on both an individual basis and with the use of panel data. Panel data analysis is important in determining whether any commonality exists in the growth process in the Caribbean as a whole and whether common policies could be prescribed to boost economic growth in the various countries. Future research can also be designed to capture any possible feedback relationships among the variables included in the model. Many writers have argued, for example, that

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181 while exports contribute to economic growth, economic growth also generates growth in exports. This, as well as other areas of bi-directional causality could be explored using a simultaneous equation model. The simultaneous equation model could be estimated for each country individual using time series data and for the Caribbean as a whole using pooled data. Each variable in the estimated models could be standardized by dividing it by its mean for all four countries, thereby removing any size or scale effects arising from differences across the countries. Using the standardized variables, the TVC model could be re-estimated to determine the effects of all of the exogenous variables in the models on economic growth. This approach allows for a much better comparison of the performance of the models among the countries. The use of the standardized variables also provides an opportunity to determine whether there would be real differences in the results using different measures of diversification. Also, simulations could be carried out to determine the effectiveness of trade as a single policy instrument to increase economic growth in Caribbean economies. While the magnitudes and signs of the estimated coefficients of exports and imports are important, there is nothing a policy maker could do to influence the coefficients. However, policies could be designed to influence the levels of exports and imports, which in turn, could stimulate the economy. The extent of the adjustments in exports and imports (as policy instruments) needed to generate certain levels of economic growth is important from a policy perspective and worth exploring. Finally, the continued data limitation problems in the Caribbean suggests that following Bulmer-Thomas and Nicholls (2000), future research on economic growth can

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182 benefit from the development of a wider array of data, aggregated and disaggregated, on various additional variables considered important sources of growth from a theoretical perspective. Such a dataset has the extra advantage of generating time series that are consistent across countries in terms of definitions and units of measurements.

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APPENDIX A DEFINITION OF VARIABLES FROM WORLD BANK DATA Per-Capita GNI, Atlas Method (Current US$) Per-capita GNI is the gross national income, converted to U.S. dollars using the World Banks Atlas method, divided by the midyear population. Gross national income (GNI) is the sum of value added by all resident producers plus any product taxes (less subsidies) not included in the valuation of output plus net receipts of primary income (compensation of employees and property income) from abroad. Calculated in national currency, GNI is usually converted to U.S. dollars at official exchange rates for comparisons across economies, although an alternative rate is used when the official exchange rate is judged to diverge by an exceptionally large margin from the rate actually applied in international transactions. To smooth fluctuations in prices and exchange rates, a special Atlas method of conversion is used by the World Bank. This applies a conversion factor that averages the exchange rate for a given year and the two preceding years, adjusted for differences in rates of inflation between the country and the G-5 countries (France, Germany, Japan, the United Kingdom, and the United States). Gross Domestic Product (Constant 1995 US$) Gross Domestic Product (GDP) is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products. It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources. Data are in 183 constant 1995 U.S. dollars. Dollar figures for GDP are converted from domestic

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184 currencies using 1995 official exchange rates. For a few countries where the official exchange rate does not reflect the rate effectively applied to actual foreign exchange transactions, an alternative conversion factor is used. Gross Domestic Product (Current US$) Gross Domestic product (GDP) is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products. It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources. Data are in current U.S. dollars. Dollar figures for GDP are converted from domestic currencies using single year official exchange rates. For a few countries where the official exchange rate does not reflect the rate effectively applied to actual foreign exchange transactions, an alternative conversion factor is used. Agriculture, Value Added (% of GDP) Agriculture corresponds to ISIC divisions 1-5 and includes forestry, hunting, and fishing, as well as cultivation of crops and livestock production. Value added is the net output of a sector after adding up all outputs and subtracting intermediate inputs. It is calculated without making deductions for depreciation of fabricated assets or depletion and degradation of natural resources. The origin of value added is determined by the International Standard Industrial Classification (ISIC), revision 3. Industry, Value Added (% of GDP) Industry corresponds to ISIC divisions 10-45 and includes manufacturing (ISIC divisions 15-37). It comprises value added in mining, manufacturing (also reported as a separate subgroup), construction, electricity, water, and gas. Value added is the net output of a sector after adding up all outputs and subtracting intermediate inputs. It is calculated

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185 without making deductions for depreciation of fabricated assets or depletion and degradation of natural resources. The origin of value added is determined by the International Standard Industrial Classification (ISIC), revision 3. Services, Value Added (% of GDP) Services correspond to ISIC divisions 50-99 and they include value added in wholesale and retail trade (including hotels and restaurants), transport, and government, financial, professional, and personal services such as education, health care, and real estate services. Also included are imputed bank service charges, import duties, and any statistical discrepancies noted by national compilers as well as discrepancies arising from rescaling. Value added is the net output of a sector after adding up all outputs and subtracting intermediate inputs. It is calculated without making deductions for depreciation of fabricated assets or depletion and degradation of natural resources. The industrial origin of value added is determined by the International Standard Industrial Classification (ISIC), revision 3. Labor Force (Total) Total labor force comprises people who meet the International Labor Organization definition of the economically active population: all people who supply labor for the production of goods and services during a specified period. It includes both the employed and the unemployed. While national practices vary in the treatment of such groups as the armed forces and seasonal or part-time workers, in general the labor force includes the armed forces, the unemployed, and first-time job-seekers, but excludes homemakers and other unpaid caregivers and workers in the informal sector.

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186 Population (Total) Total population is based on the de facto definition of population, which counts all residents regardless of legal status or citizenshipexcept for refugees not permanently settled in the country of asylum, who are generally considered part of the population of their country of origin. Gross Capital Formation (Current US$) Gross capital formation (gross domestic investment) consists of outlays on additions to the fixed assets of the economy plus net changes in the level of inventories. Fixed assets include land improvements (fences, ditches, drains, and so on); plant, machinery, and equipment purchases; and the construction of roads, railways, and the like, including schools, offices, hospitals, private residential dwellings, and commercial and industrial buildings. Inventories are stocks of goods held by firms to meet temporary or unexpected fluctuations in production or sales, and work in progress. According to the 1993 SNA, net acquisitions of valuables are also considered capital formation. Data are in current U.S. dollars. Foreign Direct Investment, Net Inflows (BoP, Current US$) Foreign direct investment is net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments. This series shows net inflows in the reporting economy. Data are in current U.S. dollars.

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187 Merchandise Exports (Current US$) Merchandise exports show the f.o.b. value of goods provided to the rest of the world valued in U.S. dollars. Data are in current U.S. dollars. Exports of Goods and Services (Current US$) Exports of goods and services represent the value of all goods and other market services provided to the rest of the world. They include the value of merchandise, freight, insurance, transport, travel, royalties, license fees, and other services, such as communication, construction, financial, information, business, personal, and government services. They exclude labor and property income (formerly called factor services) as well as transfer payments. Data are in current U.S. dollars. Merchandise Imports (Current US$) Merchandise imports show the cost, insurance and freight (c.i.f.) value of goods received from the rest of the world valued in U.S. dollars. Data are in current U.S. dollars. Imports of Goods and Services (Current US$) Imports of goods and services represent the value of all goods and other market services received from the rest of the world. They include the value of merchandise, freight, insurance, transport, travel, royalties, license fees, and other services, such as communication, construction, financial, information, business, personal, and government services. They exclude labor and property income (formerly called factor services) as well as transfer payments. Data are in current U.S. dollars.

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188 Illiteracy Rate, Adult Total (% of People Ages 15 and Above) Adult illiteracy rate is the percentage of people ages 15 and above who cannot, with understanding, read and write a short, simple statement on their everyday life. Source: World Bank. CD-ROM World Development Indicators Washington, D.C.: World Bank. 2001.

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APPENDIX B DEFINITION OF VARIABLE FROM BULMER-THOMAS AND NICHOLLS Public Expenditure on Education per Head ($), 1960-1998 Figures for 1960-1998 are taken either from the IMFs Government Financial Statistics, from the UNESCO Web site, or from British colonial reports. Wherever possible, figures refer to total educational expenditures. Figures on the Web site in blue are interpolated and in red are guesstimates. For Dominica, the 1990 figure is a guesstimate; 1991-1998 data are based on growth in government spending. Source: Bulmer-Thomas, Victor and Nicholls, Shelton. Statistical Appendix: Examining the Gap in Per Capita Income Between Countries in the Caribbean. http://www.ssrc.org/programs/latinamerica/program_initiatives/percapitagaps-Caribbean/ database-intro.page. 2000. 189

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193 Cho, Dongchul. An Alternative Interpretation of Conditional Convergence Results. Journal of Money, Credit and Banking 28.4 (1996): 669-681. Ciccone, Antonio. Externalities and Interdependent Growth: Theory and Evidence. Development Bank. (1987): 46 pages. Manuscript University of California, Berkeley. http://ideas.repec.org/p/upf/upf gen/194.html (08/21/03). 1996. Conroy, Michael E. The Diversification of Central American Exports: chimera or reality? Paper prepared for the XV International Congress of the Latin American Studies Association, Miami, Florida, December 4-6, 1989. (1989): 15 pages. Cooley, Thomas F. and Prescott, Edward C. Tests of an Adaptive Regression Model. Review of Economics and Statistics 55.2 (1973a): 248-256. ----------. An Adaptive Regression Model. International Economic Review 14.2 (1973b): 364-371. Copeland, Brian R. and Taylor, M. Scott. Trade, Growth and the Environment. NBER Working Paper: w9823 http://www.nber.org/papers/w9823 (08/15/03). July. (2003): 1-103. Davis, Carlton. Product-Product Dimensions of Agricultural Diversification Strategy in the Caribbean Community: Prospects and Dilemmas. Staff Paper 334. In Staff Paper Series 329-342 Gainesville, Florida: Institute of Food and Agricultural Science, University of Florida. (1988): 1-18. Davis, Donald R. Understanding International Trade Patterns: Advances of the 1990s. Trade and Integration 4.10 (2000): 61-79. Deere, Carmen and Melendez, Edwin. When Export Growth Isnt Enough: US Trade Policy and Caribbean Basin Economic Recovery. Caribbean Affairs 5.1 (1992): 61-70. Delgado, Christopher L. Agricultural Diversification and Export Promotion in Sub-Saharan Africa. Food Policy 20.2 (1995): 225-243. De Long, J. Bradford. Productivity Growth, Convergence, and Welfare: Comment. American Economic Review 78.5 (1988): 1138-1154. ---------and Summers, Lawrence H. Equipment Investment and Economic Growth. Quarterly Journal of Economics 106.2 (1991): 445-502. Demas, William G. Agricultural Diversification in the Caribbean Community: Some Issues. Statement made at the Seventeenth Annual Meeting of the Board of Governors of the Caribbean Development Bank, held at the Ramada Renaissance Hotel, Grand Anse, Grenada, May 13 and 14. Bridgetown, Barbados: Caribbean

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BIOGRAPHICAL SKETCH Brian Michael Francis is a Grenadian by birth, born on October 13, 1966. He is married to a Barbadian. Brian holds a Master of Science degree in development finance from the University of London and a Bachelor of Science degree in economics, with first class honors, from the University of the West Indies, Cave Hill Campus, Barbados. In 1993, he was presented with a National Independence Award in Grenada for Academic Achievement in Economics. Brian is a former Permanent Secretary and Director General of Finance in the Ministry of Finance, Planning, Trade and Development in Grenada; Economic Advisor to the Government of Grenada; and Permanent Secretary in the Prime Ministers Ministry, Grenada, with responsibility for Project Development and Human Resources. In terms of Regional experience, he worked as an Economist at the Eastern Caribbean Central Bank; a Research Assistant with the Inter American Institute for Cooperation on Agriculture (IICA, Barbados office); a Senior Research Officer in the Ministry of Tourism, Barbados; and a lecturer/tutor/examiner at the U.W.I., Cave Hill Campus, Barbados. Brian has served on the Board of Directors of various local, regional and international organizations including the Grenada Development Bank, the Government of Grenada Tenders Board, the Caribbean Development Bank, the Eastern Caribbean Central Bank Monetary Council, the International Monetary Fund and the World Bank. In August 2001, Brian began a Graduate Research Assistantship in the doctoral program of the Food and Resource Economics Department at the University of 208 Florida. His doctoral degree was awarded in December 2003.


Permanent Link: http://ufdc.ufl.edu/UFE0001700/00001

Material Information

Title: Trade and economic growth in the Caribbean
Physical Description: Mixed Material
Language: English
Creator: Francis, Brian M. ( Dissertant )
Taylor, Timothy G. ( Thesis advisor )
Schmitz, Andrew ( Reviewer )
Ward, Ronald ( Reviewer )
Seale, James ( Reviewer )
McCoy, Terry ( Reviewer )
Publisher: University of Florida
Place of Publication: Gainesville, Fla.
Publication Date: 2003
Copyright Date: 2003

Subjects

Subjects / Keywords: Food and Resource Economics thesis, Ph.D
Dissertations, Academic -- UF -- Food and Resource Economics

Notes

Abstract: During the 1970s, the primary development paradigm in the Caribbean was predicated on import substitution industrialization (ISI) and protected domestic markets, which were arguably biased against agricultural exports. A shift began in the mid-1980s from ISI to outward orientation, which favored export-led growth and openness to international markets. At center stage were agricultural exports and export diversification. Our studyexamines the relationship between trade and economic growth in Belize, Dominica, Jamaica, and Trinidad and Tobago across the past 30 years, incorporating the effect of agricultural export diversification. The measurements for diversification used entropy indexes for total, and within and across commodity groups. The estimation was carried out using the Cooley-Prescott procedure for handling time varying coefficients. Analyses of the entropy indexes revealed some evidence of diversification in all four countries. The data suggested that most of the diversification occurred across commodity groups. Trade played a significant role in economic growth in the Caribbean. In Belize, Dominica, and Jamaica exports impacted economic growth positively. The importance of exports remained unchanged in Dominica although it declined in Belize and Jamaica. The impact of exports on economic growth changed from positive to negative after 1985 in Trinidad and Tobago. The negative effect increased. Imports had a positive effect on economic growth in Belize, and Trinidad and Tobago. The importance of imports increased in Belize but declined in Trinidad and Tobago. In Dominica and Jamaica, imports impacted economic growth negatively. However, the negative effects of imports on economic growth in Jamaica declined but remained unchanged in Dominica. Diversification helped economic growth in all four countries. In terms of policy implications, the econometric results revealed that the relationship among trade, agricultural export diversification, and economic growth varied from country to country. These results suggest that policies aimed at stimulating both economic growth and agricultural export diversification should be on a country-to-country basis, rather than one size fits all.
Subject: development, diversification, entropy, growth, trade
General Note: Title from title page of source document.
General Note: Includes vita.
Thesis: Thesis (Ph.D.)--University of Florida, 2003.
Bibliography: Includes bibliographical references.
General Note: Text (Electronic thesis) in PDF format.

Record Information

Source Institution: University of Florida
Holding Location: University of Florida
Rights Management: All rights reserved by the source institution and holding location.
System ID: UFE0001700:00001

Permanent Link: http://ufdc.ufl.edu/UFE0001700/00001

Material Information

Title: Trade and economic growth in the Caribbean
Physical Description: Mixed Material
Language: English
Creator: Francis, Brian M. ( Dissertant )
Taylor, Timothy G. ( Thesis advisor )
Schmitz, Andrew ( Reviewer )
Ward, Ronald ( Reviewer )
Seale, James ( Reviewer )
McCoy, Terry ( Reviewer )
Publisher: University of Florida
Place of Publication: Gainesville, Fla.
Publication Date: 2003
Copyright Date: 2003

Subjects

Subjects / Keywords: Food and Resource Economics thesis, Ph.D
Dissertations, Academic -- UF -- Food and Resource Economics

Notes

Abstract: During the 1970s, the primary development paradigm in the Caribbean was predicated on import substitution industrialization (ISI) and protected domestic markets, which were arguably biased against agricultural exports. A shift began in the mid-1980s from ISI to outward orientation, which favored export-led growth and openness to international markets. At center stage were agricultural exports and export diversification. Our studyexamines the relationship between trade and economic growth in Belize, Dominica, Jamaica, and Trinidad and Tobago across the past 30 years, incorporating the effect of agricultural export diversification. The measurements for diversification used entropy indexes for total, and within and across commodity groups. The estimation was carried out using the Cooley-Prescott procedure for handling time varying coefficients. Analyses of the entropy indexes revealed some evidence of diversification in all four countries. The data suggested that most of the diversification occurred across commodity groups. Trade played a significant role in economic growth in the Caribbean. In Belize, Dominica, and Jamaica exports impacted economic growth positively. The importance of exports remained unchanged in Dominica although it declined in Belize and Jamaica. The impact of exports on economic growth changed from positive to negative after 1985 in Trinidad and Tobago. The negative effect increased. Imports had a positive effect on economic growth in Belize, and Trinidad and Tobago. The importance of imports increased in Belize but declined in Trinidad and Tobago. In Dominica and Jamaica, imports impacted economic growth negatively. However, the negative effects of imports on economic growth in Jamaica declined but remained unchanged in Dominica. Diversification helped economic growth in all four countries. In terms of policy implications, the econometric results revealed that the relationship among trade, agricultural export diversification, and economic growth varied from country to country. These results suggest that policies aimed at stimulating both economic growth and agricultural export diversification should be on a country-to-country basis, rather than one size fits all.
Subject: development, diversification, entropy, growth, trade
General Note: Title from title page of source document.
General Note: Includes vita.
Thesis: Thesis (Ph.D.)--University of Florida, 2003.
Bibliography: Includes bibliographical references.
General Note: Text (Electronic thesis) in PDF format.

Record Information

Source Institution: University of Florida
Holding Location: University of Florida
Rights Management: All rights reserved by the source institution and holding location.
System ID: UFE0001700:00001


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TRADE AND ECONOMIC GROWTH IN THE CARIBBEAN


By

BRIAN M. FRANCIS













A DISSERTATION PRESENTED TO THE GRADUATE SCHOOL
OF THE UNIVERSITY OF FLORIDA IN PARTIAL FULFILLMENT
OF THE REQUIREMENTS FOR THE DEGREE OF
DOCTOR OF PHILOSOPHY

UNIVERSITY OF FLORIDA


2003

































Copyright 2003

by

Brian Michael Francis
































This dissertation is dedicated to my sumptuous wife, Angela Francis.















ACKNOWLEDGMENTS

Firstly, I wish to give thanks and praise to God Almighty because without him none

of this research would have been possible. God has been with me every step of the way,

providing guidance and blessings. At times when problems seemed insurmountable, he

was there to help me resolve them and gave me the strength and determination to

persevere.

The combined and timely efforts of many individuals made the completion of this

research exercise possible. I am thankful for the opportunity to have worked with my

entire supervisory committee-Drs. Timothy Taylor; Andrew Schmitz; Ronald Ward;

James Seale, Jr.; and Terry McCoy. My experience working with them was extremely

revealing. I came away armed with knowledge of what research in general and graduate

training at the University of Florida in particular should and should not involve. The

interactions with my supervisory committee brought to the fore several very important

and interesting lessons-lessons that can benefit every graduate student.

Dr. Timothy Taylor, my supervisory committee chair, has been a source of major

ideas. He worked conscientiously to shape the final outlook of the research. Throughout

my stay at the University, he acted as an academic mentor. The degree of flexibility with

which he operated is amazing and enviable. His indefatigable desire to achieve

perfection and his fervent aspiration for excellence were the ingredients that challenged,

stimulated, and kept me alert. I am very appreciative of the opportunity to have worked









with him. Most importantly, Dr. Taylor opened my eyes to some of the major pitfalls

gradate students should avoid.

Dr. Ronald Ward deserves special recognition for his unselfish attitude,

thoroughness, and guidance (especially in the development, specification, and estimation

of the empirical model used in the research). He gave freely of his time and advice. I

am enormously grateful for and impressed by his positive approach and willingness to

provide assistance whenever called upon to do so.

The other members of my supervisory committee-Drs. Andrew Schmitz; James

Seale, Jr.; and Terry McCoy-provided useful criticisms and suggestions that shaped and

overpoweringly influenced the final outcome of the research.

Ms. Anne Taylor of the Editorial Office, and Ms. Joyce Dolbier of the Institute of

Food and Agricultural Sciences, have contributed significantly to the quality of the

dissertation through their thorough editing of the manuscript. I wish to record my thanks

and appreciation to them for their very kind assistance.

Drs. Tom Spreen, Chairperson; Jeff Burkhardt, Graduate Coordinator; Chris

Andrew, former Graduate Coordinator; and Carlton Davis, Distinguished Professor;

Department of Food and Resource Economics, respectively, deserve special mention for

their roles in gaining my acceptance by the University of Florida. They paved the way by

granting to me a graduate research assistantship. Their continuous support,

encouragement, and insightfulness were invaluable to me.

To the professors who taught me, the students with whom I studied, and the other

faculty and staff with whom I interacted, I say "well done." They brought to the fore









many qualities and attributes I never knew I had; and as a result they made me a better

person altogether.

My sojourn at the University of Florida was indeed a very interesting one,

especially during the last 6 months. It was quite an experience, eye opening in many

ways. With strong support and commitment from my wife, family, friends, and

supervisory committee, I triumphed.

In this regard, I wish also to recognize tremendous support and inspiration. I offer

sincere appreciation to my entire family and to all of my friends. Special expressions of

gratitude are extended to my brothers Allan, Alvin, Carlton, Christopher, Desmond, and

John; to my sisters Suzette, Thessa, and Veronica; to Abigail, Alisha, Jumal, and Marlon;

to my mother-in-law, Ms. Clarence Murray; and other in-laws; and to Mr. Rodney

Jerome, Mrs. Maria Ollivierre, and their children.

Mr. Wilfred Hercules, Mr. Victor Ashby, Mr. William Samuel, Mr. Richard

Duncan, and Professor Frank Alleyne, merit distinctive acclaim. Their teachings,

unwavering expressions of confidence in my abilities, and moral support, have inspired

me to achieve success at the highest level of my discipline.

My mother, Ms. Mavis Francis, has contributed significantly to my upbringing.

Her excellent moral teachings and values laid the foundations and prepared me to face the

challenges of life in general and graduate education in particular. I wish to thank her

most sincerely.

Finally, to my lovely wife, Angela, to whom this dissertation is dedicated, I wish to

express my deepest love and gratitude. Without her drive, love, perceptiveness, support,

and commitment, this dissertation would not have been possible.
















TABLE OF CONTENTS
Page

A C K N O W L E D G M E N T S ................................................................................................. iv

LIST OF TABLES ....................................................... ............ ....... ....... xi

L IST O F FIG U R E S .............. ............................ ............. ........... ... ........ xiii

A B S T R A C T .......................................... ..................................................x v

CHAPTER

1 IN TR OD U CTION ............................................... .. ......................... ..

Economic Characteristics of Caribbean Countries .....................................................5
P problem atic Situation ........... ................................................................ ........ .. .. ..
Problem Statem ent .................. ................................ ....... .. ....... .... 10
R research O bjectives.......... .................................................................. ....... ....... 12
Scope of the Research ............................................. .. ...... ................. 12

2 LITERATURE REVIEW ........................................................................... 15

Trade and Economic Growth: Theoretical Considerations .....................................15
Sources of A m biguity ................. .......... ............................ ....... .. .......... 17
Theories of Absolute and Comparative Advantage................... ........... 18
Bhagw ati's Im m ism erizing G row th ........................................ .....................20
E ndogenous Theories ................................................ .............................. 21
K aldor's Export-led M odel.................. .......... .......................... ............... 22
Taylor's Open Structuralist M odel ...................... ........... .... ............... 23
Trade and Economic Growth: Empirical Evidence ..............................................24
Growth Theory and Em pirics .............................................................................. 27
G row th Theory .......................... .............. ................. .... ....... 28
N eoclassical theory ............................................ .................. ..............29
Endogenous grow th theory...................................... ......................... 29
T heoretical R eview ........... .......................................................... .............. 3 1
N eoclassical theory ............................................ ............ ..............
Endogenous grow th theory...................................... ......................... 32
G row th E m pirics ............................. .... ...................... .. ...... .... ...... ...... 33
Sim ulation exercises.......... ................................... .... ........ ........ 36
G row th accounting ................... ........ ........................................... 36
Time series regression ...... ........ ............... ........... ... ............ 37









C ross-sectional studies ............................................ ........................... 38
Panel data regression ..................................... ...................................... 41
Problems faced in empirical analysis .......................................................43
Previous Caribbean Studies ......................... ................................................ 44
Agricultural Diversification: Theoretical Considerations .......................................46
Meaning and Purpose of Agricultural Diversification .................................. 46
Agricultural Diversification within the Context of Trade .................................50

3 OVERVIEW OF COUNTRIES ............................................ ........................... 56

B background on C countries ........................................... ...........................................56
B e liz e ............. ......... .. .............. .. .......................................................5 6
D o m in ica ....................................................... 5 7
Ja m a ic a ................................................................5 8
T rin id ad an d T ob ag o ...................................................................................... 5 8
E con om ic P perform an ce .......................................................................................... 59
B e liz e .............................................................................................................. 6 0
D o m in ica ....................................................... 6 0
Ja m a ic a ................................................................6 2
T rin id ad an d T ob ag o ...................................................................................... 6 3
G ro ss N ation al In com e ................................................................................... 6 5
E conom ic Structure ..............................................................65
Sectoral Contribution................................... 65
B e liz e ....................................................................................................... 6 6
D o m in ica ................................................................................... ........... 6 7
J a m a ic a .................................................................................................... 6 9
Trinidad and Tobago ................................................69
Trade D dependency ..................................... ....................... 70
B e liz e ....................................................................................................... 7 1
D o m in ic a ................................................................................... ........... 7 1
J a m a ic a .................................................................................................... 7 2
Trinidad and Tobago ................................................73
Economic Development Policies................................ ................... 74
B e liz e ................................. ....................................................7 7
D o m in ica ....................................................... 8 0
Jam aica .............. .................................................................................. ...... 82
T rin id ad an d T ob ag o ...................................................................................... 87

4 AGRICULTURAL EXPORT DIVERSIFICATION ..................................... 95

In tro d u ctio n .................. .............. ............. ........................................................ 9 5
Measuring Agricultural Export Diversification...................... .............97
Extent of Agricultural Export Diversification in the Caribbean ...........................101
B e liz e .......................................................................................1 0 1
D o m in ica ...............................................................10 4
J a m a ic a ..................................................................................................... 1 0 6
Trinidad and Tobago ............................................... ............... 108


viii









Su m m ary of F in ding s ............................................................. ..................... 110

5 MODEL DEVELOPMENT, SPECIFICATION, ESTIMATION, AND EMPIRICAL
A N A L Y S IS ....................................................... ................ 12 6

M odel D evelopm ent ................................................. ........ .. ............ 126
E m pirical Specification ................................................. ............................... 129
E stim action T echniqu e .................................................................... .. ................... 134
Cooley-Prescott Procedure ................................................... ............... ... 136
C confidence Intervals........... ..... .......................................... ...... ............. 139
D ata and Em pirical Findings ............................................................................. 140
B elize ............................................................... ... ..... ......... 141
D om inica ........................................................................ 144
Jam aica ..................................... ................................ .......... 146
T rinidad an d T ob ag o ........................................... ........................................ 150
Sum m ary of Findings ............................................... ............................. 154

6 SUMMARY, CONCLUSIONS, AND CONSIDERATIONS FOR FURTHER
R E SE A R C H ........................................... .......... ................. 175

Sum m ary .................................... ........................... ........ .......... 175
C onclu sions .................................................... ......................... 176
Considerations for Further Research ................................. ............ ................... 179

APPENDIX

A DEFINITION OF VARIABLES FROM WORLD BANK DATA..........................183

Per-Capita GNI, Atlas M ethod (Current US$) .............. ............ ..................... 183
Gross Dom estic Product (Constant 1995 U S$) ....................................................... 183
Gross Domestic Product (Current US$) ........................................ ............... 184
Agriculture, Value Added (% of GDP) ...................................................... 184
Industry, Value Added (% of GDP) .............. .... ........................................... 184
Services, Value Added (% of GDP) .............. .... ........................................... 185
Labor Force (Total).............. .... ........................... .... 185
Population (Total) .................................. .. ................ ... .. .. ........ .. .. 186
Gross Capital Formation (Current US$)............................................................... 186
Foreign Direct Investment, Net Inflows (BoP, Current US$) ...............................186
M merchandise Exports (Current U S$) ............................................. ..................... 187
Exports of Goods and Services (Current U S$)....................................................... 187
M merchandise Im ports (Current U S$) ............................................. ............... 187
Imports of Goods and Services (Current U S$) ........................................................ 187
Illiteracy Rate, Adult Total (% of People Ages 15 and Above) .............................. 188









B DEFINITION OF VARIABLE FROM BULMER-THOMAS AND NICHOLLS..189

L IST O F R E F E R E N C E S ...................................................................... ..................... 190

B IO G R A PH IC A L SK E T C H ................................................................ .....................208
















LIST OF TABLES


Table p

3-1 Gross National Income (GNI) per-capita in current US$ based on the Atlas Method
for selected years, 1980-2001 ........................................................ ............... 92

3-2 Annual average growth rate of real GDP, 1970s-1990s, and 2001 ............................93

3-3 Annual average growth rate of current GNI per capital, 1970s-1990s, and 2001 ........93

3-4 Sectoral contributions to GDP in selected countries, 1980-2001 ..............................93

3-5 Total exports and imports as percentages (%) of GDP for selected years,
1980-2001 ..................................... .......................... .... ..... ......... 94

4-1 Commodity group aggregates for the classification of agricultural exports .............111

4-2 Entropy indexes for Belize, 1970-2001 ........... .... .................................. 112

4-3 Entropy indexes for Dominica, 1970-2001 .................................. ...........113

4-4 Entropy indexes for Jamaica, 1970-2001 ......................................114

4-5 Entropy indexes for Trinidad and Tobago, 1970-2001 .................. .................115

4-6 Major agricultural exports from Belize for selected years by value ($1000)............16

4-7 Shares of major agricultural exports from Belize for selected years (%) .................. 117

4-8 Major agricultural exports from Dominica for selected years by value ($1000) .....118

4-9 Shares of major agricultural exports from Dominica for selected years (%)............19

4-10 Major agricultural exports from Jamaica for selected years by value ($1000) .......120

4-11 Shares of major agricultural exports from Jamaica for selected years (%).............121

4-12 Major agricultural exports from Trinidad and Tobago for selected years by value
($1000) ..................................... .................. .............. .......... 122

4-13 Shares of major agricultural exports from Trinidad and Tobago for selected years
(% ) ................................... ................................ ................... 123









5-1 Estimated time varying coefficients for Belize, 2001 .................... ..................156

5-2 Estimated time varying coefficients for Dominica, 1998 ............... .....................156

5-3 Estimated time varying coefficients for Jamaica, 2001....................................157

5-4 Estimated time varying coefficients for Trinidad and Tobago, 2001.....................157

5-5 Estimated time varying intercepts and coefficients of diversification for Belize,
1990-2001 ............ ... .. ...... .. ......... ......... ................................158

5-6 Estimated time varying coefficients of the growth in total exports and imports for
B elize, 19 9 0 -2 0 0 1 ................................................................. 159

5-7 Estimated time varying intercepts and coefficients of diversification for Dominica,
1 9 8 7 1 9 9 8 .................................................................... 1 6 0

5-8 Estimated time varying coefficients of the growth in total exports and imports for
D om inica, 1987-1998 ..................................... ........ .. ...... ... ...... .... 161

5-9 Estimated time varying intercepts and coefficients of diversification for Jamaica,
198 1-200 1 ...................................................... ................... .... ... ... 162

5-10 Estimated time varying coefficients of the growth in total exports and imports for
Jam aica, 1981-2001 .................. ..................... ................ ........ 163

5-11 Estimated time varying intercepts and coefficients of diversification for Trinidad
and T obago, 1980-2001................................................ .............................. 164

5-12 Estimated time varying coefficients of the growth in total exports and imports for
Trinidad and Tobago, 1980-2001 ................................................ ........ ....... 165

5-13 Estimated time varying coefficients of trade and diversification for the first and
last periods for each country ............................................................................ 166
















LIST OF FIGURES


Figure p

4-1 Estimated entropy indexes for Belize, 1970-2001....................................................124

4-2 Estimated entropy indexes for Dominica, 1970-2001 ..............................................124

4-3 Estimated entropy indexes for Jamaica, 1970-2001 ............................................. 125

4-4 Estimated entropy indexes for Trinidad and Tobago, 1970-2001 .............................125

5-1 Dynamic path of the intercept for Belize, 1990-2001 ..............................................167

5-2 Dynamic path of adjustment in the coefficients of the growth in exports for Belize,
1990-2001 .............. .................................... .............. .......... 167

5-3 Dynamic path of adjustment in the coefficients of the growth in imports for Belize,
1990-2001 .............. .................................... .............. .......... 168

5-4 Dynamic path of adjustment in the coefficients of diversification for Belize, 1990-
2 0 0 1 ......... ..... ..... .......... .......... ............................................ 1 6 8

5-5 Dynamic path of the intercept for Dominica, 1987-1998 .............. .... .......... 169

5-6 Dynamic path of adjustment in the coefficients of the growth in exports for
D om inica, 1987-1998 .......... .. ................................ ....... .... ... ...... .... 169

5-7 Dynamic path of adjustment in the coefficients of the growth in imports for
D om inica, 1987-1998 ..................................... ........ ........ ........ .......... ... ...... .... 170

5-8 Dynamic path of adjustment in the coefficients of diversification for Dominica,
1 9 8 7 1 9 9 8 .................................................................... 1 7 0

5-9 Dynamic path of the intercept for Jamaica, 1981-2001...........................................171

5-10 Dynamic path of adjustment in the coefficients of the growth in exports for
Jam aica, 19 8 1-2 0 0 1 ............................................................ ........ ..................... 17 1

5-11 Dynamic path of adjustment in the coefficients of the growth in imports for
Jam aica, 19 8 1-2 0 0 1 ............................................................ ........ ..................... 172









5-12 Dynamic path of adjustment in the coefficients of diversification for Jamaica,
1981-200 1 ................................. ......................... ... ...................... 172

5-13 Dynamic path of the intercept for Trinidad and Tobago, 1980-2001 ..................173

5-14 Dynamic path of adjustment in the Coefficients of the growth in exports for
Trinidad and Tobago, 1980-2001 ................................ ............... 173

5-15 Dynamic path of adjustment in the coefficients of the growth in imports for
Trinidad and Tobago, 1980-2001 ................................ ............... 174

5-16 Dynamic path of adjustment in the coefficients of diversification for Trinidad and
Tobago, 1980-2001 .................... ................... ..... ..........174















Abstract of Dissertation Presented to the Graduate School
of the University of Florida in Partial Fulfillment of the
Requirements for the Degree of Doctor of Philosophy

TRADE AND ECONOMIC GROWTH IN THE CARIBBEAN

By

Brian M. Francis

December 2003

Chair: Timothy G. Taylor
Major Department: Food and Resource Economics

During the 1970s, the primary development paradigm in the Caribbean was

predicated on import substitution industrialization (ISI) and protected domestic markets,

which were arguably biased against agricultural exports. A shift began in the mid-1980s

from ISI to outward orientation, which favored export-led growth and openness to

international markets. At center stage were agricultural exports and export

diversification.

Our study examines the relationship between trade and economic growth in Belize,

Dominica, Jamaica, and Trinidad and Tobago across the past 30 years, incorporating the

effect of agricultural export diversification. The measurements for diversification used

entropy indexes for total, and within and across commodity groups. The estimation was

carried out using the Cooley-Prescott procedure for handling time varying coefficients.

Analyses of the entropy indexes revealed some evidence of diversification in all

four countries. The data suggested that most of the diversification occurred across

commodity groups.









Trade played a significant role in economic growth in the Caribbean. In Belize,

Dominica, and Jamaica exports impacted economic growth positively. The importance

of exports remained unchanged in Dominica although it declined in Belize and Jamaica.

The impact of exports on economic growth changed from positive to negative after 1985

in Trinidad and Tobago. The negative effect increased. Imports had a positive effect on

economic growth in Belize, and Trinidad and Tobago. The importance of imports

increased in Belize but declined in Trinidad and Tobago. In Dominica and Jamaica,

imports impacted economic growth negatively. However, the negative effects of imports

on economic growth in Jamaica declined but remained unchanged in Dominica.

Diversification helped economic growth in all four countries.

In terms of policy implications, the econometric results revealed that the

relationship among trade, agricultural export diversification, and economic growth varied

from country to country. These results suggest that policies aimed at stimulating both

economic growth and agricultural export diversification should be on a country-to-

country basis, rather than one size fits all.















CHAPTER 1
INTRODUCTION

The current economic landscape in the Caribbean1 is to a large extent a reflection of

the historical relationship between these countries individually and also collectively with

Europe and North America. This relationship has shaped the economic structure of

Caribbean countries and ultimately dictated the pattern of production and trade. In the

opinion of Demas (1992), every country has evolved with several characteristics which

include

* Relatively narrow economic bases, specializing in the production and export of a
small range of agricultural staples (for example, bananas, bauxite, petroleum, and
sugar)2

* Small or virtually non-existent manufacturing sectors that produce mostly for
domestic consumption

* Heavy dependence on imported items such as food and manufactured goods

* No well-developed local or regional capital markets

* Absence of diversified economies

* Extensive trading relationships with Europe and North America.

The colonial and historical relationship between the Caribbean and Europe meant

that the economic performance of the countries was inextricably linked to the





1Caribbean refers to the following CARICOM countries: Antigua and Barbuda, the Bahamas, Barbados,
Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, St. Kitts and Nevis, St. Lucia, St. Vincent
and the Grenadines, Suriname, and Trinidad and Tobago.

2See Nelson (1992a) for information on trading arrangements involving bananas and sugar.









preservation of this relationship.3 Furthermore, the benefits to be derived from these

relationships depended on a number of factors (such as stability in the prices of exports to

Europe, favorable terms of trade, and continued access to preferential arrangements).

Notwithstanding the benefits expected from existing relationships with Europe,

Caribbean countries were nonetheless interested in pursuing development strategies that

involved some degree of industrialization. In this respect, two distinct periods in

Caribbean economic development can be identified: the 1960s and 1970s; and the 1980s

to present.

Lewis (1950, 1954) represented the first attempt at constructing an economic model

or theory specific to the problems of the Caribbean. Given the period in which he wrote,

it is no surprise that Lewis' ideas paralleled classical thinking. To a large extent, his

views reflected some degree of dissatisfaction with the vast deterioration in the economic

and social conditions of Caribbean countries and the manner in which the colonial

authorities handled the developments. To arrest these declining fortunes and begin the

process of economic transformation of Caribbean economies, Lewis advocated a strategy

of industrialization, mainly in light manufacturing, to transform Caribbean countries

economically. This strategy, Lewis argued, was the only way that these economies could

solve their main problems of overpopulation and poverty. His strategy called for the

insertion of foreign enterprise and capital or investment into Caribbean economies to take

advantage of cheap labor in the traditional agricultural sector and to manufacture for

metropolitan markets. In terms of policy, Lewis prescribed

* Export-based industrialization for the regional Caribbean economy


3Blackman (1991) discussed issues relevant to this relationship.









* Inviting foreign capitalists to invest in the domestic economies

* Offering tax and other incentives to encourage overseas investment in the countries.

As brilliant as Lewis' ideas were, they received severe criticism, mostly from the

Plantation School.4 Plantation economies of the Caribbean were said to have sufficiently

special and unique historical, structural and institutional features so as to require a new

analysis that make these features central to the model. The central hypothesis of the

plantation economy model is that the plantation legacy deprived the region of internal

dynamics and the legacy involved patterns of income distribution that discriminated

against economic transformation.

Clearly, unlike Lewis' model of industrialization through attracting foreign direct

investment and promoting exports, the plantation model is one of internally propelled

growth and development. In terms of policy prescriptions, the plantation economy model

proposes that production be reorganized around the domestic economy, with the local

sectors becoming the target for investment and long-term capital accumulation. A policy

of import substitution industrialization (ISI) was favored. This paradigm dominated

development policy in Caribbean countries from the 1960s to the early 1980s.

Import substitution industrialization involved the domestic production of goods that

substituted for imports. Domestic industries were therefore afforded quota or tariff

protection to shield them from import competition. Import substitution industrialization

was predicated on the idea that developing countries (the South) must protect themselves

from imports from industrialized countries (the North) and place emphasis on developing

manufacturing activities that would foster structural economic change. Import

4For some of the criticisms levied against Lewis and an in-depth exposition on the plantation school, see
Beckford (1972), Best (1968), and Thomas (1968).









substitution industrialization achieved only partial success in the Caribbean. A major

factor that may have limited the success of ISI in the Caribbean is the small size of the

domestic markets (McCoy 1993).

Faced with macroeconomic problems in the 1980s5 and spurred on by the

International Monetary Fund (IMF) and the World Bank, many Caribbean countries

abandoned their inward-looking strategy of industrialization in favor of an outward-

oriented policy that intended to promote growth through export expansion. This strategy

promoted exportation of processed products, semi-manufacturers, light manufacturing,

and nontraditional agricultural commodities (rather than continue to focus on the export

of a few major unprocessed primary products). In essence, import substitution

industrialization was replaced by an outward-oriented development strategy (Thorpe

1997, Weeks 1995).

Export promotion (including agricultural exports) formed an integral part of the

outward-oriented development strategy. Many organizations and writers alluded to the

significance of agriculture to developing countries. The Inter-American Development

Bank (IADB), for example, highlighted the importance of agriculture and agricultural

exports to economic growth and rural development in Caribbean countries.

Deere and Melendez (1992) noted that promoting nontraditional exports (an

integral component of the Caribbean Basin Initiative) did not adequately compensate for




5Some of the economic problems of the 1980s included reductions in gross per-capita investment,
deterioration in physical and human capital, rising levels of malnutrition, rising levels of debt, sharp
contraction in private capital inflows, an increase in net outflows of capital, weak economic structures, and
inappropriate economic policies (Wilson 1992). The 1970s oil crises significantly aggravated these
economic problems. For a detailed discussion of the oil crises see Lee et al. (1990), Fleay (2000) and Odell
(2001).









the declines in traditional exports such as sugar and petroleum.6 The effects of export

growth and diversification on economic growth reflected

* The fact that the fastest growing exports were assembly operations in free trade
zones, which had limited linkages to the domestic economies of the Caribbean

* The overall decline in the value of agricultural exports from the Caribbean
associated with the reduction in sugar exports

* The overlapping of the CBI's coverage with various existing programs that granted
duty-free treatment to Caribbean exports-programs such as the Generalized System
of Preferences (GSP), and sections 806.3 and 807 of the U.S. tariff code.

Notwithstanding these effects, the extent to which agricultural export

diversification is related to economic growth in Caribbean countries is unknown

empirically. Given mounting pressures for the elimination of trade preferences for

Caribbean exports to the European Union, important actions will be to diversify

agriculture and determine the impact of agricultural exports diversification on economic

growth in the Caribbean within the context of the trade-growth nexus.

Economic Characteristics of Caribbean Countries

Though different in physical dimensions, population sizes, and endowment of

natural resources, the economies of the Caribbean are similar in many respects. The

Economic Commission for Latin America and the Caribbean (ECLAC, 1986) and Jesson

and Rodriguez (1999) presented a vivid picture of the structure of Caribbean economies.

Caribbean countries are characterized by

* Relatively small economies, land mass, and population. In 2001, Caribbean
countries had a combined nominal gross domestic product (GDP) of US $33



6In the early 1980s, sugar and petroleum were the major Caribbean Basin exports to the U.S. The sugar
import quota for Caribbean Basin countries was reduced from an annual average of 1.6 million tons in
1979-1981 to 268,000 tons in December 1987. Consequently, Caribbean Basin producers lost an estimated
$1.8 billion between 1982 and 1989 (Deere and Melendez 1992, p. 62-63).










billion, a combined land area of 462,834 square km, and total population of 14.6
million7

* High degree of trade dependency

* Price taking in international markets

* Narrow export base, mainly agricultural products such as bananas, rice, rum and
sugar; tourism and offshore financial services; oil and natural gas; and bauxite

* Heavy dependence on taxes on international trade and transactions

* Acute reliance on trade preferences

* Favorable, yet challenging locations. Caribbean countries are near the U.S. and
feature tropical conditions. However, they suffer from high per-unit transportation
cost.8

Interestingly, the World Bank classifies the Bahamas as a high-income country.

Antigua and Barbuda, Barbados, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and

Trinidad and Tobago are classified as upper-middle-income countries; and Belize,

Guyana, Jamaica, St. Vincent and the Grenadines, and Suriname as lower-middle-income

countries. Haiti, one of the poorest countries in the Western Hemisphere, is classified as

a low-income country.9






The figure for land mass was obtained from the Central Intelligence Agency (CIA 2002), The World
Factbook 2002. The data on nominal GDP and total population came from the World Bank, World
Development Data group.

8These clearly distinguishing features of Caribbean countries pose unique challenges for their quest toward
achieving sustained levels of economic growth.

9World Bank (2003), World Development Report 2003, p. 243. Classifications are as of June 30, 2003 and
are based on 2001 Gross National Income (GNI) per capital, calculated using the World Bank's Atlas
method. A country with a GNI per capital of US $745 or less is considered low-income; US $746-2,975 as
lower-middle-income; US $2,976-9,206 as upper-middle-income; and US $9,206 and above as high-
income. Although Bardados' GNI per capital in 2001 exceeded US $9,206, the country was classified as
upper-middle-income. These classifications should be weighed against some of the risks facing small
islands developing states like those in the Caribbean. For some discussions on these risks, see Blackman
(1991).









Problematic Situation

By the 1970s, evidence on the results of ISI policies in the Caribbean as well as

other developing countries began to accumulate and suggested that the anticipated results

had not been realized. According to Bruton (1998), important lessons learned from two

decades of pursuing ISI policies included

* The global post-war economic boom tended to undermine the argument that
developing countries could not export

* Physical (central) planning could not avert economic bottlenecks and
misallocations

* Imports rose faster than expected and economic independence declined rather than
increased.

Beginning in the 1980s, the continued poor economic performance of developing

countries (and the evolution of development thought in concert with contemporary

economic events) increasingly questioned the wisdom of the ISI paradigm. The new

consensus that emerged argued that an outward-oriented approach that focused on trade

in general, and exports in particular, should be pursued. The basic argument supporting

this view was that openness to foreign competition, foreign capital, and elimination of

export biases would engender structural change in accordance with the dictates of

comparative advantage. In this regard, Krueger (1995) recognized that an outer-oriented

trade strategy would not succeed without adequate infrastructure (such as ports, roads,

railroads, electric power, and communications), increasing educational attainment, and

several other policies conducive to growth.

As the outward-oriented paradigm gained favor with the United States Agency for

International Development (USAID) and the World Bank, access to development funds

became increasingly dependent on adopting polices consistent with this approach.









During the period 1978-1988, the Organization for Economic Cooperation and

Development (OECD 1992) documented the huge amount of resources in the form of

official/overseas development assistance (ODA) to the Caribbean from various bilateral

and multilateral donors including the U.S.,10 Canada, the United Nations Development

Program (UNDP), and the Inter-American Development Bank (IADB). Net ODA

disbursements to the Caribbean from all sources (at 1987 prices and exchange rates)

totaled $572 million in 1978, and $509 million in 1988 (OECD 1992, p. 98-99).

Agriculture benefited tremendously.

Thus, the Caribbean, like many other developing countries, had little choice but to

move in the direction of outward-oriented policies, despite continued skepticism

regarding the efficacy of those policies. This state of affairs led to the outward-oriented

paradigm being identified as the Washington Consensus.11 The Washington Consensus

seemed opposed to all forms of import protection.

Over time, and as attempts to adopt policies consistent with the Washington

Consensus intensified, the outward-oriented paradigm came under increasing scrutiny

and criticisms in a number of areas. For instance, while the benefits of nontraditional

exports continued to be acknowledged, understanding the complex interactions among

exports, technology transfer, and domestic learning remained elusive.

Despite seeking independence from Britain, thereby ending many years of

colonization, many Caribbean countries continue to rely heavily on preferential access to

10The U.S. efforts towards boosting agricultural export expansion from the Caribbean was strongly
supported by the passage of the Caribbean Basin Economic Recovery Act (CBERA) in 1983 and its
successors, the Caribbean Basin Trade Partnership Act (CBTPA). The CBTPA expanded duty-free access
to the U.S. market granted under the original CBERA and provided near NAFTA parity to eligible
beneficiaries.

1John Williamson is credited with the creation of the concept know as the Washington Consensus.









the European markets for their traditional agricultural commodities such as bananas,

minerals and sugar-commodities whose comparative advantages are clearly declining

(ECLAC 1986). According to ECLAC (1986), banana exports suffered from a lack of

price competitiveness and inferior quality control relative to producers in Africa and

Central America. The loss in comparative advantage for sugar resulted from the

production of other sources of sugar, such as corn syrup and beet sugar, and the changing

nature of preferences.12

These factors plus mounting macroeconomic difficulties forced many Caribbean

countries to pursue stabilization and structural adjustment programs under the auspices of

the IMF and the World Bank.13 The main objective of the IMF and World Bank was to

transform Caribbean countries into more open, market-oriented economies, and to

promote economic efficiency and growth. The IMF and the World Bank advocated

major policies such as trade liberalization, export promotion, privatization, deregulation,

fiscal reform, and exchange-rate adjustments.

Despite the shift in paradigm from ISI to outward orientation during the mid-1980s,

many Caribbean countries are failing to achieve continuously the high and positive

economic growth rates expected. The debate over the choice between closed or open

economic policies continues unabated with no clear answers in sight. Indeed, Jesson and

Rodriguez (1999) observed that despite important policy changes, export diversification


12ECLAC (1986) observed although there are mounting pressures for the elimination of preferences,
Caribbean countries still benefit from the Cotonou partnership, the trade and aid agreement between the EU
and the African, Caribbean and Pacific (ACP) countries; the CBI; the US-Caribbean Basin Trade
Partnership Act; and Caribcan, a preferential trade program maintained by Canada for the Caribbean.

13For a discussion of some of the issues and policy lessons regarding the stabilization efforts of Barbados,
Guyana, Jamaica, and Trinidad and Tobago in the 1980s and 1990s see Hilaire (2000). See also King
(2001) for further details on Jamaica's experience with stabilization and structural adjustment programs.









has been limited, and insufficient for generating satisfactory rates of economic growth in

CARICOM. They also noted that the region's overall export performance has been

unsatisfactory, despite advantageous market access situations. Further, Jesson and

Rodriguez (1999) noted that those conditions are becoming less favorable; and foreign

aid, a major contributor to development in past decades, is also diminishing. Based on

these factors, Jesson and Rodriguez (1999) concluded that CARICOM is in fact clearly at

a crossroads.

Problem Statement

The shift from import substitution industrialization to an outward-oriented

development strategy in the mid-1980s raised concerns about the efficacy of either

paradigm for stimulating economic growth and development in Caribbean countries.

Bruton (1998) noted that there is increasing doubt that growth is as simple as it appears in

the export-oriented arguments, and that renewed focus is given to more basic

characteristics of an economy, especially entrepreneurship, institutions, and knowledge

accumulation.

Under the ISI strategy, the substitution of domestic production with imports was

deemed necessary for enhanced economic growth and development. The outward-

oriented development paradigm places tremendous emphasis on the role of both exports

and imports in stimulating economic activity. Most empirical studies on the trade-growth

relationship were conducted within the context of an export-led growth strategy (which,

unfortunately, was misconstrued as an outward-oriented development paradigm).

The link between exports and economic growth has received widespread attention,

especially in relation to the success of the East Asian economies. Balassa (1985), Feder

(1983), Kavoussi (1984), Ram (1985), and Tyler (1981), have all examined the









relationship between exports and economic growth14 in a cross-section of countries.

Frankel and Romer (1999) also explored the relationship between exports and economic

growth by examining the direction of causation. Generally, exports impacted economic

growth positively.

Unfortunately, the role of imports in the economic growth process received little

attention in the literature relative to exports'. The inclusion of both imports and exports

as separate arguments in the neoclassical type of production function typically used to

model economic growth is justified in the literature (Esfahani 1991). Esfahani (1991)

found that exports had a positive impact on economic growth through the provision of

foreign exchange and positive externalities arising from increased competition. Further,

he justified the inclusion of imports as an additional explanatory variable in the growth

model because imports tend to be correlated with exports. If imports are excluded from

the model, Esfahani (1991) argued that the impact of exports would be overestimated.

The purpose of our study is to examine the relationship between trade (imports and

exports) and economic growth in the Caribbean over the past 30 years. The influence of

agricultural export diversification on the trade-growth nexus is also incorporated.

Diversification in agriculture became a major focus of export promotion because of the

threat of removal of preferential access to the European market for traditional agricultural

exports under the trade agreement between the European Union and the African-

Caribbean-Pacific countries (EU-ACP Trade Agreement). The pursuit of agricultural

14"One of the most influential arguments that link growth and openness has been the NBER multi-country
project on 'trade regimes and economic development'. In that study, Krueger (1978), and Bhagwati
(1978), coordinated studies of ten countries that had undergone major liberalizations. These studies gain
credibility from the degree and kind of institutional knowledge that they reveal. Their ultimate appeal,
however, probably comes from the readers' feeling that these observations come about as close to a
controlled experiment as we are likely to get. Another study in the same genre is Edwards and Edwards
(1987) which deals informatively with the Chilean liberalization from 1973 to 1983." (Leamer 1995, p. 94)









diversification is also linked to the fact that Caribbean countries have narrow export

bases. Our study addresses 3 key questions:

* Has agricultural export diversification occurred and when? To determine whether
export agriculture has in fact diversified and when, the entropy index of total
diversification is estimated and analyzed over the period 1970-2001

* What was the extent and nature of agricultural export diversification? To establish
these issues, entropy indexes for across and within commodity groups are estimated
and analyzed. The agricultural export structure of each country in our study is
analyzed with particular focus on the changing composition of major commodities
exported since 1970

* What has been the link between trade and economic growth in the Caribbean taking
into account the influence of agricultural export diversification on this relationship?
To achieve this goal, an empirical economic growth model is developed and
estimated with time varying coefficients using the Cooley-Prescott procedure.

Research Objectives

The broad objectives of our study are

* To measure the extent to which export agriculture has diversified, and examine the
nature of its evolution

* To examine the role of trade in the economic growth experience of Caribbean
countries over the past 30 years, incorporating the influence of agricultural export
diversification on the trade-growth relationship.

The specific objectives of our study are

* To measure and analyze the extent to which agricultural exports have diversified
using entropy indexes (total, and within and across commodity groups)

* To explore the relationship between trade and economic growth during the past
three decades, with special focus on the influence of agricultural export
diversification on the trade-growth nexus.

Scope of the Research

To accomplish these objectives, our study focuses on four Caribbean countries:

Belize, Dominica, Jamaica, and Trinidad and Tobago. These countries were chosen for


two reasons:









* They allow for a more in-depth analysis of the issues germane to trade, agricultural
diversification, and economic growth

* They encompass the major characteristics of Caribbean economies relating to size,
resource endowment, and economic diversity.

Chapter 2 reviews literature on the relationship between trade and economic

growth; literature on agricultural diversification, within the context of trade; and literature

on economic growth theory and empirical analysis.

Chapter 3 presents a brief overview of the structure and performance of the

economies of Belize, Dominica, Jamaica, and Trinidad and Tobago, and some of the

economic policies implemented to promote economic growth and development. Chapter

3 also gives some country-specific background information.

Chapter 4 examines the extent and nature of agricultural export diversification

since 1970. Entropy indexes are estimated and analyzed for each of the four countries.

Previous empirical studies that used the entropy index were mostly concerned with the

measurement of corporate diversification and its effect on firm growth.15

Chapter 5 focuses on development, specification, and estimation of economic

growth models that allow exploration of the relationship between trade and economic

growth (capturing, in the process, the impact of agricultural export diversification).

Chapter 5 also discusses empirical findings. The main objective of Chapter 5 is to

evaluate relationships among trade, agricultural export diversification, and economic

growth over the past three decades. Whether diversification is taxing or helping the

economy will also be examined. Chapter 6 summarizes the main findings of our study




15These studies include Baldwin and Caves (2001), Gollop and Monahan (1991), and Jacquemin and Berry
(1979).






14


and presents some conclusions based on these findings. Chapter 6 also considers areas

for further research.














CHAPTER 2
LITERATURE REVIEW

Given the multidimensional focus of our study, the literature review concentrates

on three broad issues: the relationship between trade and economic growth; economic

growth theories and empirical analysis; and theoretical aspects of agricultural

diversification, with specific reference to trade.

Trade and Economic Growth: Theoretical Considerations

The relationship between trade and economic growth occupies a vast literature,

covering both traditional and modern models. Trade theories date back to Adam Smith,

who linked development with the role of trade as a "vent for surplus" (Myint 1958).

Hicks' (1953) illustrious "Inaugural Lecture" at Oxford paved the way for the

development of postwar theoretical literature, which focused mainly on the comparative

static effects of economic expansion on the terms of trade and balance of payments.

Analysis of the determinants of terms of trade between rich and poor countries (the so-

called North-South models, otherwise called center-periphery models), with differential

demand structure, labor market conditions, and patterns of growth, forms part of this

literature.

More recent developments include endogenous trade theories dealing with, among

other things, the spillover effects of research and development (Grosman and Helpman

1990, 1991). These theories emerged in the 1960s and for much of the next two decades

dominated the literature. These brands of models focused heavily on the effect of trade

policy on the rate of economic growth. Based on empirical evidence, these models









generate ambiguous results on the relationship between trade and economic growth

(Harrison and Revenga 1995).

Several excellent publications have dealt with trade in general and the relationship

between trade and economic growth in particular. These include Baldwin (2003),

Bhagwati (1964), Chipman (1965a,b; 1966), Copeland and Taylor (2003), Davis (2000),

Grossman and Helpman (1990, 1991), Harrison and Revenga (1995), Hicks (1953),

Jayme (2001), Myint (1958), and Young (1991).

Chipman (1965a,b; 1966) grouped trade models into three categories: classical,

neoclassical, and modem. These categories merely reflected differences in emphasis

(Chipman 1965a). In Chipman's (1965a,b; 1966) categorization, classical trade theories

refer to the works of Mill, Ricardo, and Torrens, all of which brought out the nature of

the issue of international specialization in production. The neoclassical school includes

the works of early Leontief, Edgeworth, Haberler, Lerner, Marshall, Meade, and Viner.

These theories addressed issues on both the consumption and production sides, as

reflected in the notions of opportunity cost and community indifference. The modern

theories, which began with the work of Heckscher and Ohlin and were extended by

Lemer and Samuelson, focused on the role of factor endowment. Endogenous growth

models form a significant component of modern theories.

Logically, to exhaustively survey this huge body of literature in any single

undertaking is virtually impossible. In fact, such an exercise is far beyond the scope of

our study. Indeed, according to Chipman (1965a):

.the field of international trade is particularly well provided with surveys,
especially (although not exclusively) of a non-mathematical kind, and it would be
pointless to try to cover ground that others have covered so well. (Chipman 1965a,
p. 478)









Against this backdrop, the presentation in this section of our study follows closely

Baldwin (2003) and Jayme (2001). The discussions focus on the more popular theories,

which provide a rationale for the nature of the relationship between trade and economic

growth. For each theory, only the main points are highlighted. Underlying assumptions

and detailed workings of the models can be found in the studies cited earlier.

Sources of Ambiguity

Baldwin (2003) acknowledged the continued disagreement among economists

concerning the nature of the relationship between trade and economic growth, despite the

existence of several multi-country case studies using comparable analytical frameworks,

various econometric publications with large cross-country data sets, and important

developments in growth theory. Baldwin (2003) offered three explanations for this

situation

* Differences among researchers in the definition of the issues being studied. Some
writers address the causal relationship between increases in trade and increases in
growth rates (or between increases in growth and increases in trade), irrespective of
why these economic variables change. Others are interested in the effects of
differences in government policies on economic growth

* The impact of policies affecting the "openness" of a country to trade or its "inward-
orientation" or "outward-orientation" is the concern of many studies. The findings
of such studies are sensitive to how the various terms are defined. For example,
openness may be defined in narrow terms to include only import and export taxes
or subsidies. It could also be defined to include explicit non-tariff distortions of
trade. Alternatively, it could be defined broadly to capture issues such as
exchange-rate policies, domestic taxes and subsidies, competition and other
regulatory policies, education policies, the nature of the legal system, the form of
government, and the general nature of institutions and culture

* Differences in quality and detail of the data being analyzed, specifically in relation
to developing countries. Many studies have been affected by a lack of good data on
basic factors (for example, the levels of import protection).

Given these problems, some economists and policy makers have become skeptical

of the true nature of the relationship between trade and economic growth. They are also









hesitant to draw broad generalizations from empirical findings because of their specificity

and the bias that the personal viewpoints of the researchers may have introduced into the

analyses (Baldwin 2003). Despite these shortcomings, interest in the trade-growth nexus

remains and continues to receive a significant amount of attention in both the theoretical

and empirical literature on trade and economic growth.

Theories of Absolute and Comparative Advantage

The relationship between trade and economic growth was first explored in the

context of the theories of absolute and comparative advantage by Ricardo and within the

context of the Hecksher-Ohlin (H-O) model and their cohorts (Jayme 2001). Baldwin

(2003) noted that under the traditional comparative-statics framework (including or

excluding economic distortions), a change in trade policy would generate a one-time

change in the level of production (although in the real world of economic frictions one

might observe a shift to a new equilibrium over several years). Similarly, in the standard

neoclassical model of exogenous growth, an adjustment in trade policy creates a change

in the pattern of product specialization, but not in the steady-state rate of growth.

Jayme (2001) suggested that the theory of comparative advantage is the starting

point for a discussion of trade and its relationship with economic growth. Within the

context of the theory of comparative advantage trade creates a more efficient use of an

economy's resources by enabling imports of goods and services that could otherwise only

be produced at home, at higher resource costs (for instance, developing countries often

import capital and intermediate goods that are crucial to long-run economic growth; it

would be costly to produce these goods domestically).

According to the theory, countries that engage in trade can be assured the benefits

of welfare gains in a static model. The Ricardian model, according to Jayme (2001),









explains the welfare gains if a country specializes in producing goods in which it has a

comparative advantage. The Hecksher-Ohlin-Samuelson (H-O-S) model, on the other

hand, shows welfare gains in the two-country case, with both countries specializing in the

production of goods based on their factor endowments. The essential argument in these

theories is that trade is the way to achieve static productivity efficiency and international

competitiveness, leading, in turn, to economic growth. Jayme (2001) cautioned that it is

not clear, under the Ricardian or the H-O-S model, if and how trade impacts economic

growth in the long run.

Jayme (2001) noted that the Ricardian static model and the Viner (1937) version of

it suggest an improvement in income and welfare when countries engage in international

trade. However, Findlay (1984) presented a dynamic Ricardian model in which trade

reduces the rate of economic growth in comparison to autarky in any country that exports

agricultural goods and imports industrial commodities, because the rise in rents is

absorbed by luxury consumption while the fall in the rate of profit reduces accumulation.

North-south models of trade, according to Jayme (2001), adopt this dynamic version of

the Ricardian model, in which free trade hurts growth in underdeveloped, agricultural

economies.

A corollary of the H-O model is the factor price equalization theorem, which argues

that prices equalize across countries under international immobility of factors (Jayme

2001). Under given assumptions, countries that engage in international trade in the

fashion of the H-O model improve welfare and income, and also realize changes in

income distribution, due to a better allocation of factors in comparison to autarky.16


16Jayme (2001) noted there is an extensive discussion in the international trade literature about the validity
of the H-O model. The most known limitation of this model is the Leontief Paradox. Leontief (1953) found









The Hecksher-Ohlin-Samuelson (H-O-S) model analyzes the implications of

international trade on employment and income distribution, and the consequent impact on

economic growth (Jayme 2001). Within the context of this theory, international trade

generates a higher Pareto-efficient equilibrium by reallocating resources between sectors.

Changes in relative prices create inter-sectoral factor reward differentials that encourage

businessmen to move the factors of production until these differentials in factor reward

are eliminated. If a country's importable-sector is capital-intensive and its exportable-

sector is labor-intensive, a shift from an import substitution strategy to an exported-

oriented strategy reduces the domestic relative prices of imports. If the economy is on a

production possibility frontier, output will increase in the exportable sector and will

decrease in the importable one. Since the exportable segment is less capital-intensive than

the importable sector, a change in the composition of output increases the aggregate

demand for labor and reduces that for capital. The result will be a new equilibrium where

real wages increase and capital rental falls, changing the income distribution of the

economy. Thus, according to the H-O-S model, trade liberalization is an important policy

for countries to increase their rates of economic growth.

Bhagwati's Immismerizing Growth

Bhagwati's (1958) immismerizing growth is a neoclassical model that explores the

relationship between trade and economic growth in which national welfare declines as a

result of economic growth pushed by technological progress (Jayme 2001). The

implication of the model is based on the deterioration of the terms of trade after growth.

The fundamental argument is that after technological progress, national welfare can

that the United States exported labor-intensive commodities and imported capital-intensive ones, a practice
that clearly contradicts the predictions of the H-O model.









decline as a result of economic growth. This may result from a deterioration of the terms

of trade that exceeds the favorable effect on welfare due to economic growth at constant

relative product prices. Therefore, if a country opens to trade in the presence of

distortions, the effects on growth can be immismerizing, in turn, decreasing the welfare

of the economy.

Endogenous Theories

By the late 1980s and early 1990s, according to Baldwin (2003), endogenous

growth theory emerged, spearheaded by Romer (1986), Lucas (1988), and Grossman and

Helpman (1991). The relationship between international trade and economic growth

formed a major area of focus of endogenous models. Grossman and Helpman (1991), for

example, addressed the question of how trade policy can affect growth rates, in a two

"small" country case-small in the sense of facing fixed world prices for the two final

goods produced. There are two factors of production, human capital (skilled labor) and

unskilled labor whose supplies are fixed. One of the final goods is produced with human

capital and a fixed amount of differentiated, non-traded intermediate inputs, while the

other is produced with unskilled labor and the same bundle of intermediate inputs.

Baldwin (2003) noted that in Grossman and Helpman's (1991) formulation, if a

country is importing the good that only uses human capital as a direct input and exporting

the good intensively using unskilled labor, the import duty would raise the relative

domestic price of the human capital-intensive good and, via the Stolper-Samuelson

theorem, raise the relative wages of skilled labor. This increase in the price of human

capital will lower the level of research and development activity by raising its costs and

thus lead to a lower equilibrium growth rate. In contrast, if the country imports the

unskilled labor-intensive goods, import protection will lower the relative wages of skilled









labor and accelerate the growth rate. Thus, in this model there is no definite answer to

whether protection increases or decreases the growth rate. It depends on the pattern of

imports and exports. Besides using the concept of increasing returns as the driving force

for endogenous growth, Grossman and Helpman (1991) and other growth theorists,

according to Baldwin (2003), have introduced such concepts as knowledge spillovers

resulting from trade in goods as well as the ability to imitate the products of foreign

producers as engines of endogenous growth. Import protection generally reduces growth

rates under these formulations.

Kaldor's Export-led Model

According to Jayme (2001), Kaldor (1970) developed an export-led growth model

built on the notion of cumulative causation, taking into consideration the fact that exports

are the main component of demand. The model highlighted the role played by the rate of

growth of foreign demand in stimulating higher levels of output in the domestic

economy. In this model, it is the rate of growth of autonomous demand that determines

the rate of growth of output. Expansionary demand policies have cumulative effects,

since the higher the rate of growth of output, the faster the rate of growth of productivity;

whereas the faster the rate of growth of productivity the lower the rate of increase in unit

costs and, hence, the faster the rate of growth of exports. This feature contributes to the

explanation of income disparities between developed and underdeveloped countries,

since cumulative causation can operate in opposite ways. This is especially so in

countries facing balance of payments constraints and high-income elasticity of demand

vis-a-vis their income elasticity of exports. Such is the case of underdeveloped countries,

in which balance of payments constraints lead to impediments to economic growth.

Indeed, the lower the rate of growth of output, the lower the growth rate of productivity,









and the lower the rate of growth of productivity the higher the increase in unit costs,

lowering the rate of growth of exports (Jayme 2001).17

Some economists extended Kaldor's model by incorporating the balance-of-

payments constraints (Jayme 2001). Thirlwall (1979), for example, applied the balance-

of-payments constrained economic growth model to look at industrialized economies. He

later extended the model to capture the effects of capital flows, an important issue for

developing countries. The basic idea behind the model is that differences among

countries' long-run growth rates can be explained by difference in demand.

Taylor's Open Structuralist Model

Taylor (1993) developed a stylized model that sought to explain the relationship

between trade, financial openness, and economic growth (Jayme 2001). Based on an

analysis of trade policy and economic growth in a sample of countries, Taylor (1993),

according to Jayme (2001), found no clear evidence linking trade to the performance of

the economies. Fast-growing countries, more or less open, had diverse patterns of

specialization, but their success was not led by growth in exports, industrial or otherwise.

Trade policy did not appear to be promoting economic growth. In fact, there was no

evidence, empirically or theoretically, that trade and liberalized trade policies stimulated

economic growth in the countries included in our study.18

Jayme (2001) concluded Taylor's (1993) stylized model revealed that trade does

not necessarily affect growth by way of liberalization of current and capital accounts.





1For a detailed mathematical treatment of the model, see Jayme (2001).

18See Jayme (2001) for a detailed mathematical development and workings of Taylor's (1993) model.









This finding simply contributes to the ambiguous nature of the relationship between trade

and economic growth that is so predominant in the literature.

Trade and Economic Growth: Empirical Evidence

The relationship between trade and economic growth has been explored empirically

by several writers including Dollar (1992), Edwards (1998), Harrison (1996), Sachs et al.

(1995), Srinivasan and Bhagwati (1999), and Vamvakidis (1999). Harrison (1996)

observed that the strength of the relationship depended on whether the analysis was

conducted based on cross-section or panel data (a combination of cross-section and time

series).

In many studies the rate of growth of Gross National Product (GNP) or Gross

Domestic Product (GDP) is regressed on various macroeconomic variables including the

growth in labor and capital and the degree of openness (as measured by the ratio of

exports to GDP or GNP). The models are derived from a basic neoclassical type of

production function in which output is expressed as a function of several variables

including labor, capital, openness (or exports) and technology. They are usually

specified as log linear functions19 and have been criticized for their use of the degree of

openness rather than the growth in exports as an explanatory variable (Leamer 1995).

The choice of the degree of openness or the growth in exports depends on the dynamics

of the trade-growth relationship. These dynamics take on tremendous importance within

the context of orthodox comparative advantage theory that permits a one-off effect of

trade liberalization on the rate of growth, not a continuing effect.



19Other approaches to modeling economic growth include the multi-product Heckscher-Ohlin (H-O) Model
with constant returns to scale at the level of the industry and the Constant Elasticity of Substitution (CES)
Production Function.









Leader (1995) noted that models which link the rate of growth with the degree of

openness draw their dynamics from assumptions regarding economies of scale or the

nature of technological change. Nonetheless, he doubted trade theory would decisively

answer this modeling question. He also suspected that information embodied in

aggregate data sets is unlikely to be decisive about the growth-openness dynamics.

Leamer (1995) also hinted that the level of exports seems not to be a very good

indicator of openness since much of the cross-country variation in the ratio of exports to

GNP or GDP reflects differences in comparative advantage as opposed to government

intervention in international transactions. The problem, he indicated, is much greater than

a measurement-error because

* The comparative advantage components of the variation in export growth are
unlikely to be exogenous to the process that determines GDP or GNP

* Exports may be high because of export promotion, rather than non-interference.

Edwards (1989, 1991) tackled this problem by experimenting with many other

measures of openness, including some from Leamer (1988) that attempted to control for

differences in comparative advantage. The existence of these various measures of

openness will always generate a huge amount of debate in relation to inferences based on

them.

Frankel and Romer (1999) and Irwin (2001) examined the effects of the component

of openness that is independent of economic growth (that is, the part of bilateral trade

flows that are explained by populations, land areas, borders, and distances). According to

the OECD (2001), this component explained a significant proportion of the differences in

income levels and growth performance between countries. From this argument, we might









infer a general relationship running from increased trade to increased growth. The effect

is not perfectly defined numerically but is quite significant economically.

Another approach to exploring the relationship between exports (as measured by

the degree of openness) and economic growth involves testing for the direction of

causation between the growth in exports and economic growth (Jung and Marshall 1985,

and Sharma et al. 1991). The three most popular causality tests are Granger's test,

White's test, and Sim's test. Some of the procedures used included stationary data and

statistical techniques to determine the best possible lag length for the variables involved

in the tests. According to Ghartey (1973), other studies employed nonstationary data and

followed procedures developed by Granger (1969) and Sims (1972). In Ghartey's (1993)

view, studies based on these tests of causation suffered various limitations (such as the

arbitrary choice of lag length, arbitrary choice of pre-filters, non-stationary variables, and

omission of relevant variables that could allow for the occurrence of a causal feedback

relationship).

Leader (1995) criticized tests of causation, arguing that these studies are not

identifying causal directions between exports and economic growth but are only inquiring

whether movements in one variable precede or follow movements in the other. He

further questioned whether these studies relate at all to the growth-openness debate by

citing criticisms offered by Lal and Rajapatirana (1987), who argued that if a small

country is developing efficiently in line with its comparative advantage, it will specialize

and be compelled to turn to overseas markets to which to export goods that use the most

abundant factor of production most intensively. If this situation arises, GNP may appear

to 'Granger cause' exports. However, with a closed economy the internal growth spurt









would have been choked off due to lack of export markets. Hence, in Leamer's (1995)

opinion, causation is just a version of the weather and weatherman story.

Rodriguez and Rodrik (2001) critically examined the most prominent and recent

empirical studies on the relationship between trade and economic growth, and identified

weaknesses endemic to those studies.20 Rodriguez and Rodrik (2001) concluded that

primarily the strong results in those studies arose either from obvious misspecification or

from the use of measures of openness that are proxies for other policy or institutional

variables that have independent detrimental effects on economic growth. Further, they

suggested that the estimated coefficients on the openness indicators were fragile due to

particular sensitivity to controls for those other policy and institutional variables.

Regardless of the criticisms from Rodriguez and Rodrik (2001), the OECD (2001)

concluded that (despite econometrics difficulties) openness primarily enhanced economic

growth. The weight of the evidence quite clearly suggested that inference. Furthermore,

there was no coherent body of evidence that indicated openness was bad for economic

growth (OECD 2001).

Growth Theory and Empirics

The achievement of sustained levels of economic growth is an important objective

of many countries throughout the world. At the macroeconomic level, economic growth

is seen, among other things, as a means to eliminate poverty, raise the quality of life, and

influence the level and distribution of wealth within a country. Economic performances

differ from one country to another. Hence, the impact of economic growth on poverty

alleviation, the standard of living, and the distribution of wealth show some disparity.


20Weaknesses included flawed measures of openness and weak econometrics.









At the microeconomic level, studies on economic growth have concerned

themselves with issues such as why some countries have grown at more rapid rates than

others; what some of the critical factors are that impact economic growth within an

economy; and whether countries converge to steady state paths and at what rate, or

diverge. In search of answers to these questions, various empirical methodologies have

been proposed. Consequently, the economic growth literature is extensive and spans

many decades.

Growth Theory

Various theories have been advanced to provide a theoretical foundation for the

empirical analysis of economic growth. The neoclassical theory and endogenous growth

models (often called new growth theories) have received the most attention in the

literature.21 Other strands of theories include

* The evolutionary models of growth, based largely on case studies of innovation (for
a benign review of this class of models, see Nelson 1995)

* Technology gap models, described as "appreciative" theory (Fagerberg 1994).
Fagerberg (1994) credited the development of this class of models to historians and
historically oriented economists

* The GNP function approach, which originated with the work of Burgess (1974) and
Kohli (1978).

While it is feasible to undertake a thorough evaluation of the economic growth

literature, no single assessment could be completely exhaustive. The objective therefore

is to review comprehensively the literature on the theoretical analysis of economic

21As Rogers (2003) pointed out, there is a long history of ideas on economic growth prior to the
neoclassical and endogenous growth theories. Eltis (2001) contained a classic account of the theories of
growth and distribution of Karl Marx, Franqois Quesnay, Robert Malthus, David Ricardo, and Adam
Smith. Recent books presenting excellent reviews of economic growth include McCombie and Thirlwall
(1994), Rostow (1990), and Ruttan (2001). McCombie and Thirlwall (1994) is particularly interesting.
They discussed several theories of economic growth (old and new) that are both demand and supply
oriented as well as balance-of-payments-constrained growth models.









growth. The discussions focus on the neoclassical and endogenous growth theories

because they provide the theoretical foundations to most of the empirical models found in

the growth literature.

Neoclassical theory

The neoclassical approach to economic growth usually starts with an examination

of Solow (1956, 1957) and Swan (1956), to such an extent that the model is often referred

to as the Solow-Swan growth model.22 An important aspect of Solow's (1956) work was

the incorporation of factor substitutability to generate a stable equilibrium growth path.

From 1956 to the mid 1980s, a huge volume of literature developed, representing various

adaptations to the basic neoclassical framework (Edwards 1989, Renelt 1991, Rogers

2003, Temple 1999).

The basis of the neoclassical approach is a simple aggregate production function of

the form

Y = Af(K,L), (2-1)

where f is a functional notation which relates national income or output (Y) to technical

change (A) and two basic factors of production (physical capital, K; and labor, L). In

Solow's (1956) conceptualization, technical change is any development that shifts the

production function (for example, an improvement in education of the labor force). The

production function is assumed to display constant returns to scale.

Endogenous growth theory

This approach linked permanent changes in certain policy variables to permanent

changes in economic growth rates. Endogenous growth models may be classified into

22McCallan (1996) noted that the development of the neoclassical growth model is often attributed to Brock
and Mirman (1972), Cass (1965), Koopmans (1965), and Ramsey (1928) in the context of social planning.









two groups. The first or early set of models, generally referred to in the literature as AK-

models, were based on the writings of Lucas (1988), Rebelo (1991), and Romer (1986,

1987). The second strand of endogenous growth models, which focused more explicitly

on endogenous technological change, included Aghion and Howitt (1992); Grossman and

Helpman (1990, 1991); and Romer (1990a). These models emphasized the role of

research and development in technological change and promotion of economic growth. In

essence (unlike the neoclassical model), endogenous growth theory treated technical

change as endogenous, not as exogenous.

Romer (1986) was the pioneering work in endogenous growth theory. Following

Arrow's (1962) learning-by-doing framework, Romer (1986) argued that the generation

of knowledge is positively linked to the scale of economic activity, which is assumed to

be proportional to capital accumulation. For sustained growth, constant returns to the

reproducible factors are required. Romer (1986) recognized the possibility of knowledge

spillovers (positive externalities), which may cause a single firm to experience

diminishing returns to capital, but overall, there would be increasing returns to scale.

Following in this tradition, Lucas (1988) adopted an aggregate production function

approach that allowed for an externality to human capital.

Aghion and Howitt (1992) advanced a Schumpeterian model of growth through

creative destruction, allowing for learning-by-doing and the fact that new innovations

may make old ones obsolete.

A thorough discussion of some of the microeconomic and macroeconomic issues

pertaining to education and economic growth can be found in Krueger and Lindahl

(2001).









Theoretical Review

Broadly speaking, the theoretical approaches have examined two issues:

* Convergence and divergence

* The sources of economic growth.

While the foundations of the theoretical approaches themselves have been heavily

criticized, the theoretical review presented here is mainly concerned with problems

related to empirical research.

Neoclassical theory

Despite the popularity of neoclassical growth theory up until the mid 1980s, the

literature points to a number of weaknesses associated with this approach. A major

problem ascribed to the neoclassical theory was the huge amount of focus on achieving

some degree of consistency with one or more of the "stylized facts" rather than

developing models that would allow for empirical estimation and evaluation.

Easterly and Levine (2001) listed five stylized facts pertaining to total factor

productivity (TFP) and its determinants:

* Factor accumulation does not account for the bulk of cross-country differences in
the level or growth rate of GDP per capital; TFP does

* There are huge and growing differences in GDP per capital; divergence-not
conditional convergence-is the big story

* Growth is not persistent over time, but capital accumulation is

* All factors of production flow to the same places, suggesting important
externalities

* National policies influence long run growth.

To address this criticism, Mankiw et al. (1992), derived a growth equation or model

based on the neoclassical theory that allowed for econometrics estimation. Though









Mankiw et al. (1992) is widely cited, their approach is not without problems. To estimate

their model, the rate of depreciation, for example, has to be approximated. According to

Temple (1999), Benhabib and Spiegel (1994) suggested an alternative approach.

Renelt (1991) undertook an extensive review of the theoretical and empirical

literature on economic growth. One reason for the success of the standard neoclassical

growth model, Renelt suggested, is that it provided a convenient tool for organizing data

on the sources of economic growth. However, he continued, the model left much of the

growth unexplained. An implication of the model is that countries with similar

technologies and preferences will converge to the same steady state output levels. While

this is true for some countries, there is little evidence of convergence, particularly in

developing countries (De Long 1988; Easterly 1993; Quah 1989; Romer 1990a, b).

Some empirical findings have shown that GNP does display long-term persistence to

shocks (Campbell and Mankiw 1987, 1989; Kormendi and Meguire 1990; Nelson and

Plosser 1982).

McCallan (1986) suggested that the main problem with the neoclassical theory was

its failure to explain many basic facts of economic growth behavior. Given the

fundamental premise upon which neoclassical theory was built, this theory tended to

suggest either equal or different growth rates for all countries, which the model itself

cannot explain. These results were inconsistent with reality because different economies

have in fact recorded different growth rates in the long run.

Endogenous growth theory

Like the neoclassical model, the endogenous growth theory suffered form certain

limitations. Firstly, problems were associated with the treatment of human capital. The

difficulty with measuring human capital has led to the use of many different proxies for









the variable, including primary and secondary enrollment ratios, literacy rates, and

expenditure on education. Though the theory was itself unclear on the correct

measurement of human capital in relation to growth, there is some doubt about whether

any of the proxies used is consistent with the theoretical meaning of human capital.

Furthermore, the lag structure is vitally important.23 Secondly, lack of clarity in defining

human capital has led to huge variations and disparities in the definition and

measurement of the various proxies used over time and across countries.

Moreover, McCallan (1986) pointed to the possibility of knowledge externalities

and the allocation of resources to the production of human capital as attractive

characteristics of endogenous growth models. However, he cited two logical difficulties

associated with these models. Firstly, the achievement of "never-ending" growth, as he

referred to it, requires never-ending increases in human capital; but never-ending growth

requires increases in knowledge, not human capital.24 Secondly, the assumption of

constant returns to scale in the production function (if satisfied) may suggest that these

models would not generate steady, continuous growth without exogenous technical

progress.

Growth Empirics

Growth theories provide no definitive answer as to which exogenous variables

should be included in the empirical model. There are several growth theories and

competing models; some emphasize the domestic resource base; others underscore the


23Easterlin (1981) discussed this issue.

24McCallan (1986) distinguished between human capital and knowledge. He defined human capital as the
productive skills of an individual worker that is not passed on to other generations. Knowledge, on the
other hand, represents the aggregate of human capital in the society, which is passed on from one
generation to the next.









openness of markets and the extent of international trade; others stress the importance of

factors such as human capital, infrastructure of the economy, the "quality" of government

(for example, the extent of corruption), domestic and foreign investment, and the level of

international debt. While trade (exports and imports) as well as diversification may play

a role in the economic growth process in the Caribbean, the omission of some of these

additional considerations from the empirical growth model could lead to serious bias in

the results. Regarding the plethora of research on economic growth, Rogers (2003)

observed

Most empirical models are not based on a specific theoretical model; instead the
empirical specifications are somewhat ad hoc, with motivation for the variables
included being taken from a wide range of sources. This is less than ideal, but the
complexity of economic growth and the lack of an encompassing model make it a
necessity. (Rogers 2003, p. 122)

Further, growth theories are silent regarding functional form. In the absence of any

theoretical structure requiring that specific properties be met, any functional form that

makes intuitive sense in the context of the problem under investigation could be used.

The literature should be a good guide in determining the type of functional form applied.

Linear, semi-log, and quadratic are all simple functional forms that have been applied in

previous studies. The appropriateness of a functional form can be determined using

Ramsey's RESET test or a Box-Cox transformation of the model (which determines

whether one functional form or specification is appropriate in contrast to another).

In terms of empirical methodology, Svedberg (2002) identified five approaches to

studying economic growth: simulations of growth models, growth accounting, time series

regression, cross-country studies, and panel data regressions. Simulations and growth

accounting are essentially analytical tools based on simple computational procedures.

These methods will be discussed only briefly. Hence, the discussions focus mostly on









times series regression, cross-sectional studies, and panel data regression since all three

methods involve the use of econometrics analysis and techniques.

Durlauf and Quah (1998) noted that the critical empirical implications of the

neoclassical theory rested exclusively on the nature of the production function and

preferences. Although some writers endogenized the technical change variable in the

production function, Durlauf and Quah (1998) questioned such parameterization on the

basis that while that approach might have been useful for fitting the regression, results

became difficult to interpret in relation to the underlying economic analysis. Despite the

emergence of the endogenous growth models, there is little evidence in the empirical

literature that pointed to a conclusive rejection of the neoclassical Solow-type models25

Easterly (2001) advanced two main explanations for the inability of growth

regressions to explain what he called the "cross-decade slowdown." Firstly, the models

were misspecified because they regressed stationary growth rates on nonstationary

variables. Jones (1995) argued similarly. Secondly, many models failed to incorporate

into the analysis the impact of external factors such as the industrial slowdown and the

world interest rate.

Indeed, the lack of consensus on the sources of economic growth left many

economists to wonder whether economic growth is the result of good economic policies

or good fortune (Easterly et al. 1993).26




2For a more detailed technical discussion of economic growth empirics, see Brock and Durlauf (2001),
Easterly and Levine (2001), Klenow (2001), Pritchett (2001), Romer (2001), Sala-i-Martin (2001), Solow
(2001).

26Easterly et al. (1993) tested the good-luck hypothesis by incorporating into the growth regression luck
factors such as terms of trade shock and external transfers.









Simulation exercises

This empirical methodology involves an assessment of the economic growth

process under different scenarios. The approach seeks to determine the impact on

economic growth and other related factors of changing circumstances. For example, this

methodology may be applied to ascertain the effect on economic growth of differences in

production techniques, differences in the underlying technologies, or differences in the

quality of human capital. Furthermore, the approach allows for an evaluation of the

robustness of various model specifications by investigating the performance of each

model using different combinations of independent variables and different assumptions

about the evolution of the growth process. Anderson and Strutt (1999) was a good

example of the usefulness of this kind of approach for analyzing economic growth.

Growth accounting

Growth accounting provides a framework within which data can be organized and

analyzed in order to describe the economic growth process.27 The goal is to measure the

contribution of the various factors of production to economic growth. The growth

accounting exercises usually work with time-series data for a single country. The

flexibility of this approach allows for the incorporation of the effects of increasing returns

and externalities on economic growth. According to Chen (1977), growth accounting is

associated with writers such as Denison, Kendrick, and Solow.








27Some studies along the line of growth accounting included Baily and Schultze (1990); Elias (1978);
Jorgenson, Gollop, and Fraumeni (1987); Maddison (1987).









A prominent feature of studies based on growth accounting is the high share of

total factor productivity (TFP) that is unexplained in the models.28 Barro (1998)

discussed growth accounting in details.

Time series regression

Time series regression is particularly useful to gain insights into the economic

growth process in an individual country over a given number of years. The approach is

mostly applied to determine the sources of growth and to model the causal relationship

between economic growth and numerous variables such as exports and imports.

According to Temple (1999), some time-series econometricians argued that because

cross-sectional regressions ignore pertinent information, while panel data analysis

unjustifiably assumes parameter homogeneity,29 growth models should be estimated for

individual countries using time series regressions.

The major problem using this approach is spurious regression. The main argument

here is that the regression results (as indicated by, for example, a high R2) may be

reflecting common trends in the time series but not a significant relationship between the

dependent and independent variables. This problem can be resolved by eliminating the

trend component of the time series. If the trend is removed, the de-trended series may

become stationary. A stationary series will satisfy all of the required properties of

regression analysis: constancy of the mean, constancy of the variance, and constancy of

the auto-covariance.30


28For a discussion of some of the findings across countries, see Chenery (1986).

29This observation is not necessarily so. The literature contains panel data studies that incorporate
parameter heterogeneity.

30Gujarati (1995) discussed time-series analysis succinctly. The use of growth rates for the variables in the
estimation of the empirical growth models negates the problem of nonstationarity.









Temple (1999) alluded to three major problems associated with time series

regression

* The lack of quality data, particularly for developing countries and insufficiently
long data sets

* Long lags of the regressors are required in order to prevent short run business cycle
effects driving apparent long run correlations, leading inevitably to degrees of
freedom problems

* Time series data do not provide sufficient basis for examining the determinants of
long run growth with any degree of confidence.31

Another problem associated with time series models is the use of linear

specifications, especially in relation to the analysis of shocks. Potter (1995), for example,

argued that in the case of post-1945 US GNP, a nonlinear model predicted that output

would return to trend quickly if hit by a negative shock, while linear models show no

evidence of increased stability. Hence, a linear model would wrongly predict that output

remain below trend for many years. He concluded that linear models could fail to

highlight interesting economic structure.

Cross-sectional studies

The use of cross-sectional regressions is linked in part to the absence of sufficiently

long time series data for many variables over a wide range of countries. In fact, in some

instances, data may only be available for a single year. Cross-sectional regression

techniques are rooted in the neoclassical growth theory. At the most rudimentary level of

analysis, the growth rate is regressed on a number of explanatory variables. The list of

explanatory variables depends on the issue being examined. Temple (1999) noted that

cross-sectional studies dealt with several issues such as


31Of these problems, the major drawback in our study relates to insufficiently long data series.









* The evolution of world income, that is, whether or not poor countries have been
catching up with rich economies

* Whether countries converge to steady state paths and at what rate

* The rate at which returns to various inputs such as human and physical capital
diminish

* Whether countries are poor because of a lack of inputs or major differences in
technology

* Differences in growth rates over long periods

* Economic growth performance in the long run.

Within the context of the neoclassical framework, convergence and divergence in

economic growth and performance have received a tremendous amount of attention.32

The economic literature identifies two broad concepts of convergence. 'Absolute

convergence' implies that poor countries will grow faster than rich countries, thus

catching up over time. Generally, cross-country studies have not supported this

hypothesis. Most findings suggest that there is instead divergence. The second concept

is that of 'conditional convergence,' which suggests that for two countries with the same

steady state, the one further away from the steady state will grow faster than the one

closer to the steady state; that is, growth is conditional on factors such as savings rates,

population growth, education, and technology; and poor economies will grow faster

initially than rich ones. In the Solow (1956) type model, diminishing returns will imply

conditional convergence.




32Endogenous models have also been used to study convergence. For a discussion of some of these models
and results, see Barro and Sala-i-Martin (1999). Other studies based on cross-sectional regressions
included Balassa (1985); Barro (1991); Cardoso and Fishlow (1989); De Long (1988); De Long and
Summers (1991); Diamond (1989); Dollar (1992); Easterly and Wetzel (1989); Edwards (1989); Feder
(1983); Gupta and Islam (1983); Hwa (1988); Khan and Reinhart (1990); Kormendi and Meguire (1985);
Mankiw et al. (1992); Moschos (1989); Romer (1989a, 1990c).









Empirically, a negative partial correlation between initial income and subsequent

economic growth may be interpreted as conditional convergence. In such cases, one may

conclude that cross-country income levels are converging. A positive partial correlation

between initial income and ensuing economic growth would indicate that cross-country

income levels are diverging. Indeed, there was evidence of a negative partial correlation

between initial income and economic growth after controlling for factors that were likely

to affect steady-state output per effective labor (Barro 1991, Barro and Sala-i-Martin

1992, Cho 1996, Durlauf and Quah 1998, Mankiw et al. 1992). Whether all economies

converged to the same level of per-capita income is a reflection of interactions across

countries and the nature of the production function assumed (Durlauf and Quah 1998).

A major limitation of cross-section studies (highlighted in the growth literature) is

the notion that many studies fail to address the simultaneous equation problems that are

often inherent in the analysis. Simultaneity bias arises because the basic model treats the

independent variables as exogenous. However, many explanatory variables in growth

equations may very well be endogenously determined. This potential creates bias in OLS

estimates.

Another criticism is that in many applications of this approach, heterogeneous

countries are treated as if they were homogeneous.33 This allows for the use of a single

model specification across all countries in the analysis. Some writers have argued that

the results from cross-section studies may be improved significantly if mechanisms are

developed to allow for differences among the countries in the group.



33This problem is not limited to cross-sectional regressions alone. Panel data analysis suffers a similar
drawback.









Further, because most cross-sectional studies within the neoclassical tradition

simply regress economic growth on a number of independent variables, the results

usually appear reasonable, but the analyses ignore the potential problems of reverse

causality and spurious correlation.34 Scholing and Timmermann (1988) included 118

independent variables in their study and found most of the socio-economic variables to

significantly impact growth either directly or indirectly.

Finally, linearity in the specified regressions presents yet another methodological

problem when using the cross-sectional approach. The literature does raise the

possibility of non-linear relationships between independent variables and growth35 and

the existence of threshold effects and low-level traps.

Panel data regression

Panel data regression involves the analysis of economic data that are pooled over

time and across countries. In essence, therefore, this empirical approach combines both

time series and cross-sectional data. Panel data analysis reduces degrees of freedom

problems in cases where time series data on individual countries are limited to only a few

years. It is sometimes considered more appropriate for the analysis of growth dynamics

(Durlauf and Quah 1998).

According to Temple (1999), panel data analysis presents other advantages.

Firstly, it allows the researcher to control for omitted variables that are persistent over

time. Secondly, the use of several lags of the explanatory variables as instruments to

34Simple Granger causality tests were performed to ensure that the direction of causality runs from the
exogenous variables included in the model to economic growth and not the reverse. The tests were carried
out using Econometrics View (E\ IC version 4.1). The results are not reported because they are not
central to the objectives of our study.

35This problem is not unique to cross-sectional studies. It is also possible to have non-linear relationships
in time-series analysis. This was not considered a problem in our study.









overcome the problems of measurement error and endogeneity biases is feasible due to

additional degrees of freedom. Despite potential reasons to be skeptical about their

results, Temple (1999) cited the approach of Caselli, Esquivel, and Lefort (1996), who

applied the General Method of Moments to estimate a dynamic panel data model that

illustrated severe biasedness in certain cross-sectional estimates of convergence rates, as

encouraging. Thirdly, panel data analysis can be used to study the determinants of total

factor productivity growth, while avoiding the complexities of dynamic models.

In terms of problems associated with the use of panel data, Temple (1999), alluded

to

* The use of fixed effects models to analyze the impact of variables that are fairly
constant over time, or that will affect growth only with a long lag

* The presence of cyclical effects raises doubts over the use of annual data covering a
long period as opposed to splitting the data set into various intervals over which the
analysis should be conducted. Given the possibility of heterogeneity, the modeling
of the short-run dynamics may be extremely important.

In practice, researchers can carry out tests for parameter heterogeneity. Dummy

variables are usually added to the model in order to capture or control for country-

specific effects. Often, the dummies turned out to be statistically significant. Ciccone

(1996), for example, attributed the significance of the dummies to neighborhood effects

(that is, a country's growth rate is affected by the economic performance of neighboring

countries). That result was similar to Manski's (1993) social effects. Indeed, the stronger

the estimated neighborhood effects are, the greater the chance is that some important

variables have been omitted from the growth regressions. Easterly and Levine (1997)

demonstrated this issue.









Problems faced in empirical analysis

Temple (1999) noted that growth empirics present several problems for applied

econometricians including

* The issue of omitted variables

* Inappropriate functional form

* Parameter heterogeneity, which arises due to differences in social, political, and
institutional features across countries

* The issue of endogeneity, that is, many variables that enter growth regressions as
exogenous may in fact be endogenous, creating a simultaneity problem

* Measurement errors in the data

* Correlations among the disturbances, creating problems for the interpretation of the
results

* Uncertainty related to model specification, which highlights a lack of robustness in
various specifications. Hence, variables that tend to be significant in one
specification may very well turn out to be insignificant in another.36

Indeed, Levine and Renelt (1992), and Sala-i-Martin (1997) found a general lack of

robustness among growth equations. Moreover, Durlauf and Quah (1998) observed that

the problem with both Levine and Renelt's (1992), and Sala-i-Martin's (1997)

approaches is that they attempted to use mechanical statistical criteria in identifying

factors whose interest and plausibility are motivated by economic (or social science)

theory. Durlauf and Quah (1998) suggested that the dimensions along which we want

estimates to be robust should be determined by the goals of the researcher, which cannot

be reduced to algorithms of the kinds employed by Levine and Renelt (1992), and Sala-i-

Martin (1997).


36See Temple (1999) for more detailed discussions of these problems and proposed solutions. Temple
(2000) also presented further considerations vis-a-vis model uncertainty, parameter heterogeneity and
outliers.









Further, Bleaney and Nishiyama (2002) presented a benchmark model that

encapsulated three existing models in the literature. They found the model that best fits

the data reflected elements of all three existing models. Hence, they concluded that many

of the independent variables included in recent growth models were indeed significant

determinants of economic growth.

Despite the many challenges associated with the empirical analysis of economic

growth, a tremendous amount of progress has been made in dealing with some of the

problems identified. At a technical level, the inability of growth theory to suggest

appropriate independent variables for inclusion in growth regressions and a specific

functional form leave these issues open to interpretation. In the absence of a generally

accepted specification for a growth model, empirical research will continue to be

conducted using new models and estimation techniques consistent with the objective of

the research. The final outcome will reflect the experience of the researcher and the

available data. The best approach is to design models that are simple, consistent with

theory, and are capable of providing answers to the questions of interest to the researcher.

These criteria are applied in Chapter 5.

Previous Caribbean Studies

In terms of previous empirical work on the Caribbean, a few studies have been

reported on the sources of economic growth (for example, Lewis and Craigwell 1998;

Nicholls 2001a, b; Nicholls 2001c). However, none of these studies addressed

specifically the relationship between trade and economic growth.

Lewis and Craigwell (1998) used cointegration to investigate the determinants of

economic growth in Barbados during the period 1960-1991. Their results supported an

important role for government policy in the growth process. They found an inverse









relationship between government investment and growth. No significant relationship

between human capital and economic growth existed, although the writers cautioned that

their findings should not be interpreted as indicative of the unimportance of human

capital accumulation in stimulating economic growth in Barbados. According to Lewis

and Craigwell (1998), the insignificance of human capital may be due to the collinearity

of enrollment indices with physical capital accumulation, arguments put forward by

Romer (1989), and De Gregorio (1992). Lewis and Craigwell (1998) also suggested that

enrollment rates do not accurately capture investment in human capital and do not allow

for differences in quality. According to Lewis and Craigwell (1998), Benhabib and

Spiegel (1994) noted that at best, enrollment ratios represent investment levels in human

capital.

Nicholls (2001a,b) applied a growth accounting framework to assess the sources of

economic growth in Antigua and Barbuda and St. Vincent and the Grenadines,

respectively. The analysis for Antigua and Barbuda focused on the period 1900-1998.

The findings revealed three patterns of economic growth:

* Economic growth during the period 1900-1950 was driven largely by the export of
sugar and sea-island cotton, based on private sector activity

* During the period 1950-1977, economic growth was driven by private foreign
investment in hotels and other tourist infrastructure, with minimal assistance from
government

* A huge build up of public sector debt accounted for most of the economic growth
observed during the third period, 1977-1998.

For St. Vincent and the Grenadines, Nicholls (2001b) analyzed the sources of

economic growth during the period 1978-1996. Capital accumulation, whose importance

grew over time, accounted for the majority of economic growth. Growth in total factor

productivity proved to be the second most important determinant of economic growth.









Nicholls (2001c) reviewed the main determinants of economic growth in 28

Caribbean countries over the period 1960-1998, using a data set developed by Bulmer-

Thomas and Nicholls (2001). The study evaluated the impact on economic growth,

measured as growth in per capital gross domestic production, of human capital formation

(measured by public expenditure on education), trade (measured by the growth in per

capital exports), the stability of institutions (measured by the exchange-rate), and the

management of the environment. The empirical analysis employed both pooled

regression and fixed effects panel data modeling techniques. The main result of the

research suggested the rate of growth of per capital exports as the single most important

determinant of economic growth in the Caribbean.

Agricultural Diversification: Theoretical Considerations

The concept of agricultural diversification and the theoretical nexus between

diversification and international trade have been addressed in several interesting papers

including Delgado (1995), Foster (1975), Foster et al. (1990), Hayami (1996), Kerr

(1989), Klein and Chase-Wilde (1989), McCalla and Valdes (1995), Pingali and

Rosegrant (1995), Quiroz and Valdes (1995), Schmitz (1989b), Schmitz and Noeth

(1999), and Taylor (2003a). McCalla and Valdes (1995), and Taylor (2003a) provided

the most detailed treatment of the theoretical underpinnings of agricultural

diversification. The discussions reflect this assertion.

Meaning and Purpose of Agricultural Diversification

Agricultural diversification has no unique meaning (Schmitz 1989a). Schmitz

(1989a) offered two alternative definitions of agricultural diversification found in the

literature. Agricultural diversification is a process whereby more and more activities are

added either to a single farm enterprise or to a region. For example, through irrigation,









diversification could take place if a wider set of production activities is added to the

resource base over time. For example, if the production of livestock adds to grain

activities as a result of irrigation, then, irrigation would have generated agricultural

diversification. An alternative view considers agricultural diversification as a process

that creates greater income stability to producers than they would otherwise have

realized. Hence, if a country engages in, for example, five activities, all of which are

correlated in the same manner, then, the country is not diversified since increases in

prices will result in higher profitability for all industries. A reduction in prices will make

all of the industries unprofitable at the same time. Therefore, a country that engages in

several agricultural activities is not necessarily diversified. Real diversification requires

some of the activities to be negatively correlated. In this scenario, growth in one industry

should generate opposite characteristic in other industries.

Agricultural diversification is often conceptualized as an enviable outcome of the

dynamics of economic development or the result of intentional policy option (McCalla

and Valdes 1999). Agricultural diversification is a typical response to instability at the

farm level. With regards to exports, agricultural diversification is a potentially efficient

mechanism for diminishing the impact of risk on producers' welfare (McCalla and

Valdes 1999). The inclusion of new products to the mix of commodities exported, the

movement from primary to processed commodities and increasing the market share of

existing products should all redound to a reduction in the variance of the value of

production at both the farm and industry levels. The extent of the reduction depends on

the correlation between different prices. According to McCalla and Valdes (1999), if the

correlation is -1.0, the variance of the portfolio will be lowered to zero (0); if it is +1.0,









the variance of the portfolio is unaffected. Newbery and Stiglitz (1981), according to

McCalla and Valdes (1999), argued that for all scenarios in between, some reduction in

the variance will be obtained.

McCalla and Valdes (1999) suggested that agricultural diversification provides two

advantages:

* It expands the production possibility set, thereby generating more opportunities for
income generation and employment creation

* It lowers the risk of having all of one's eggs in a single basket containing a small
number of commodities with potentially high covariance risk.

Langham and Davis (1998), and McCalla and Valdes (1999) suggested that

agricultural diversification could be pursued with two broad objectives in mind:

* To expand the production and distribution of commodities to satisfy a higher
proportion of domestic food consumption. In this scenario, agricultural
diversification is seen as a means of generating domestic food security, or as an
import substitution policy

* To increase the mix of agricultural commodities targeted for the export market in
order to stabilize foreign exchange earnings. In this context, agricultural
diversification forms part of an export promotion strategy within the context of
international trade.

Moreover, McCalla and Valdes (1999) noted agricultural diversification is less of a

policy issue in developed economies due to the presence of institutions that enable

economic agents to manage risk to stabilize their consumption over time. Caribbean

countries lack these risk markets. Hence, producers of agricultural commodities absorb

the full extent of price and production risks. If they are risk averse, they will increase

diversification, trading off income for lower risks. Simultaneously, some producers will

accept increased risks if they are associated with higher income, purchasing insurance to

grant them some degree of protection.









For Caribbean countries, agricultural export diversification is an important

component of export promotion, structural adjustment, and employment generation

(particularly in rural communities due to the dominance of agriculture). According to

McCalla and Valdes (1999), Delgado (1995) provided three justifications for agricultural

export diversification (all of which applies to the Caribbean)

* Some countries depend heavily on income from traditional agricultural exports,
many of which suffer from falling world prices

* Many countries are characterized by the existence of a relatively large non-tradable
sector due to high transactions costs (transport and others), which would remain
largely underdeveloped even if price distortions are eliminated

* Externalities and market failures, which give governments tremendous flexibility to
influence the factor intensity of long run growth. Such options favor an active pro-
diversification policy as an avenue for improving competitiveness.

On the basis of Delgado's (1995) rationale, an agricultural diversification strategy

should be directed towards

* The encouragement of agricultural exports to reduce the risk of food insecurity

* The implementation of trade-creating policies between low and high potential
zones

* The promotion of non-traditional agricultural exports, both primary and processed
commodities.37

The extent of government's participation in the promotion of agricultural export

diversification remains a moot issue because of a lack of agreement in the literature.

McCalla and Valdes (1999) supported the case for a proactive role of government in

promoting agricultural export diversification. Government's intervention should be

limited to partial funding of the cost of searching for new export markets, through a



37This third element of this strategy is probably the most important from a Caribbean perspective and has in
fact received tremendous attention, particularly since 1984.









subsidy and/or direct assistance from export promotion agencies for the search of new

markets. The rationale for government's participation is that unlike industrial products,

private producers of agricultural commodities will more than likely under-invest in

searching for new markets for their commodities. The cost associated with searching for

additional foreign markets is often high and could lead to the free rider problem among

producers since any new markets penetrated will also become accessible to other

producers and exporters. These arguments are theoretically appealing, but Caribbean

governments may have to take an even greater explicit role in the promotion of

agricultural export diversification given anticipated changes in the EU-ACP trading

agreement, and the limited resources available to producers of agricultural

commodities.38

Agricultural Diversification within the Context of Trade

Trade liberalization and structural adjustment usually involve initiatives such as a

reduction in trade barriers on imports and exports, an alignment of macroeconomic

policies, and the deregulation of internal factor and product markets in general.

Agricultural diversification emerges as a strategic response to these measures with the

overall objective being an acceleration in the development of new production

possibilities; that is, greater levels of diversification (McCalla and Valdes 1999).

At both the producer and sectoral levels, the scope for agricultural diversification

(as a risk management strategy in response to trade liberalization) is restricted by the co-

movements of the prices of agricultural commodities on the international market

(McCalla and Valdes 1999). In support of this view, McCalla and Valdes (1999) pointed

3Caribbean governments also have the constraint of limited resources. They have to allocate more
resources to agriculture if the sector is as important to the economies as have been argued.









to Quiroz and Valdes (1995) who found (for the period 1970-1991) that 22 of 28

correlations in world prices were positive. Commodity combinations like wheat-maize,

rice-wheat, cotton-maize and cocoa-coffee, among others, exhibited substantial positive

correlations in world prices. Within this range of products, one should not be overly

optimistic regarding the returns in terms of export price risk reduction by diversification.

Negative correlations were small and limited to bananas and rice.39 The diagnosis

pertaining to horticultural products was less clear, requiring further analysis.

McCalla and Valdes (1999) added that it is reasonable to expect that over time

these correlations should increase in response to changing conditions on both the demand

and supply sides and to improvements in transport and communications. Demand

conditions include income growth and factors associated with it (urbanization, increase in

the value of time, technological developments which increase the shelf-time duration of

products), and food consumption patterns that are increasingly becoming more flexible

and diversified. For example, countries which traditionally had a diet concentrated on rice

or legumes, have witnessed an expansion in wheat and livestock consumption. Trade

liberalization reinforces this trend by lowering the price of substitutes for these traditional

staples. Hence, over time, substitution possibilities will likely increase, in turn, inducing a

higher correlation on world prices.

In terms of supply factors, new technologies and new investments in infrastructure

(such as irrigation, roads, and storage facilities) will increase the possibility of higher

output levels from diversification. Freer trade fortifies this trend towards substitution



39These arguments imply that Caribbean countries should not produce bananas and rice. Practically
(especially for bananas), the countries will continue to produce these commodities since they represent
important sources of farmers' income (weekly income in the case of bananas).









possibilities in production and, by extension, diversification of production and trade. As

more and more countries worldwide eliminate taxes on agricultural exports, adopt a more

flexible diet, and create a more diversified mix of commodities, the more positive should

be the correlation between prices.

In addition to the higher substitution possibilities in consumption and production

over time and improvements in transport and communications, the prices of agricultural

and non-agricultural commodities on the world market are also positively correlated

because they react in a similar fashion to macroeconomic conditions such as movements

in interest rates. Therefore, one would expect an increase in correlations in world prices

between the prices of imports and exports of developing countries. In reality, these

correlations tend to provide tremendous price insurance for developing countries

(McCalla and Valdes 1999).

Orthodox trade theories argue that trade should be driven by comparative

advantage. McCalla and Valdes (1999) noted countries opening to trade should

specialize in commodities for which they are good at producing (exportables) and limit or

cease production of commodities for which they do not have a comparative advantage

(importables). Further, if the agricultural sector suffers from a lack of significant

comparative advantage in a wide array of commodities, trade could lead to reduced

diversity of production. Additionally, by opening the economy through the removal of

border controls such as quantitative restrictions and/or export taxes, the domestic

economy could suffer from high levels of variability in prices on the international market,

generating, in the process, increased domestic price variability and income uncertainty.

Under such scenarios, trade is antithetical to agricultural diversification.









On the contrary, the impacts of new technology, and new investment in irrigation,

roads, and storage facilities, make a greater diversified agricultural output more possible

(McCalla and Valdes 1999). Trade liberalization buttresses this argument and stimulates

higher substitution possibilities in production and thus diversification of production and

trade (exports and imports). In this setting, trade and agricultural diversification are

complements.

Taylor (2003a) discussed the issues of specialization and diversification in a rather

succinct manner, drawing on technology gaps models of economic growth. Taylor

(2003a) noted technology gaps models are less formal and are based on what Fagerberg

(1994) called "empirically based appreciative" investigations. Abramovitz (1956),

according to Taylor (2003a), captured a critical aspect of technology gaps models,

arguing that the potential of countries to close technology gaps is dependent on two major

factors: technological congruence and social capability.

Technological congruence refers to the ability of countries (for example, those in

the Caribbean) to adopt technological innovations arising in developed countries that are

the clear leaders in technological innovation. This directly impacts the extent to which

technology transfers take place.

Social capability addresses the array of factors including levels of human capital,

economic infrastructure, and institutional capacities that influence a country's capacity to

embrace available technology. Social capability also promotes economic efficiency.

Taylor (2003a) noted that these ideas suggest two important sets of factors that

could impact the ability of Caribbean countries to innovate and, in effect, catch-up with

developed countries









* The basic characteristics of technology available for transfer (for example, by
foreign direct investment) or imitation. If technological developments by
developed countries are biased toward large scales of operation or are extremely
complex, then, Caribbean countries may not be able to adopt or imitate

* The internal ability of Caribbean countries to realize technological innovations or
adopt. This ability is closely connected with human resource factors such as
education and managerial acumen as well as economic, political and physical
infrastructure characteristics that define the commercial environment in the
Caribbean.

These factors will influence the realized technological innovation, which,

subsequently, impacts the production structure and, hence, the export structure of the

countries, by changing the competitive position of various industries in both Caribbean

and foreign markets. Given that many of the factors noted, especially those relating to

social capability, are generally reluctant to change, the export structure of those countries

is likely to be characterized by some degree of stability. Put differently, it is possible that

export diversification initiatives may inherently be faced with significant social and

economic barriers that are difficult to overcome. This belief plus the existence of

preferences may create strong economic and institutional disincentives to export

diversification in general and agricultural export diversification in particular.

Furthermore, Taylor (2003a) observed that many countries pursuing export

diversification strategies place a significant amount of emphasis on "picking winners"

and identifying suitable technologies. Unless the winners picked are technologically

congruent and factors affecting social capabilities are appropriately addressed, only small

changes in export structures are likely to emerge. Under such circumstances, export

agriculture may display a high degree of specialization.

For Caribbean countries, agricultural export diversification is a strategic and

deliberate policy choice as a response to the reduction in, and potential loss of,









preferential access of major traditional commodities, particularly to the European market.

Agricultural export diversification is also intended to address the issue of instability in

export earnings, which is often associated with lower income to producers and suppliers

of inputs, and reduced government revenue, both occurring directly from taxes and

indirectly from consumption expenditures.

As appealing as these theoretical arguments for and against agricultural

diversification within the context of international trade are, McCalla and Valdes (1999)

concluded that there is no general rationale for an active policy of diversification, with

the exception of the case of export promotion. They opined that in both the static and

dynamic cases, the two traditional arguments for diversification (risk reduction, and

contributing to growth) are not strong arguments that warrant a proactive government

policy of diversification. Further, McCalla and Valdes (1999) argued that there is no

evidence that opening the economy to trade will have a significant impact on increasing

risk for agriculture. Indeed, diversification is a natural process of growth, and the opening

of the agricultural economy will probably contribute to accelerating the diversification of

production and trade. Therefore, trade and diversification are complementary; they are

not conflicting (McCalla and Valdes 1999).

Moreover, McCalla and Valdes (1999) noted that since initial conditions vary from

one country to another there would be some degree of variation in the outcome of

economic policies geared towards diversification. Essentially, some countries will realize

more specialization, while other will experience diversification.














CHAPTER 3
OVERVIEW OF COUNTRIES

Background on Countries

Belize

Belize (formerly British Honduras) is a small Caribbean country with a total area of

22,966 square km and a total population of approximately 263,000 people. Belize is the

most sparsely populated nation in Central America; it is larger than El Salvador and

compares in size to the state of Massachusetts. Slightly more than one half of the people

live in rural areas. About one-fourth live in Belize City, the principal port, commercial

center, and former capital. The population is diverse, consisting of various ethnic groups:

mestizo (48.7%), Creole (24.9%), Maya (10.6%), Garifuna (6.1%), and other (9.7%).

English is the official Language in Belize, but Spanish, Mayan, Garifuna (Carib), and

Creole are also widely used. The country borders the Caribbean Sea, between Guatemala

and Mexico and is 600 sea miles from Jamaica, its closest Caribbean neighbor (McCoy,

1993). Belize gained its independence from the United Kingdom (UK) in 1981 and has

since followed the Parliamentary Democracy model of government based on the

Westminster system. The country maintains strong ties to both the United Kingdom and

the United States. The country has a tropical climate; very hot and humid. In terms of

terrain, the country is flat and has a swampy coastal plain, and low mountains in the

south. Natural resources include arable land potential, timber, fish, and hydropower.

Because of its location, Belize is susceptible to natural hazards such as coastal flooding

especially in the south, and hurricanes. Belize follows a fixed exchange-rate regime, with









the Belizean Dollar (BZD) pegged to the U.S. Dollar (USD) at 1.00 USD = 2.0000 BZD.

Agriculture and Tourism are the mainstays of the economy.

Dominica

The Commonwealth of Dominica, an island located between the Caribbean Sea and

the North Atlantic Ocean, about one half of the way from Puerto Rico to Trinidad and

Tobago, has a total area of 754 square km and a population of 70,158 people. The

population is mostly black but includes other ethnic groups such as mixed black and

European, Europeans, Syrian, and Carib Amerindian. Indians still living on Dominica

are the only pre-Columbian population remaining in the eastern Caribbean. English is the

official Language in Dominica, but French patois is extremely common. Since gaining

its independence from Britain in 1978, Dominica has maintained a Republic form of

Parliamentary Democracy based on the Westminster system. Dominica features a tropical

climate, moderated by northeast trade winds, heavy rainfall, and rugged mountains of

volcanic origin. Natural resources include timber, hydropower, and arable land. Like

other Caribbean countries, Dominica is vulnerable to natural disasters such as flash

floods and hurricanes. Its spectacular, lush, and varied flora and fauna, which are

protected by an extensive natural park system; its many mountains, the most mountainous

country of the Lesser Antilles; and its volcanic peaks, which feature cones of lava craters

and include a boiling lake, the second-largest, thermally active lake in the world, have

earned Dominica the common title: "The Nature Island of the Caribbean." As a member

of the Eastern Caribbean Central Bank, Dominica's official currency is the East

Caribbean Dollar (XCD). Since 1976, the currency has been pegged to the U.S. Dollar at

1.00 USD = 2.7000 XCD. Agriculture is the most important sector in Dominica.









Jamaica

Jamaica, located in the Caribbean Sea, south of Cuba, is 10,991 square km in total

area and has a population of 2,680,029 people. The population divides among Black

(90.9%), East Indian (1.3%), White (0.2%), Chinese (0.2%), Mixed (7.3%), and Other

(0.1%). The main Languages used in Jamaica are English and patois English. Jamaica

gained full independence within the British Commonwealth in 1962. The form of

government practiced in Jamaica is Constitutional Parliamentary Democracy based on the

Westminster system. Jamaica is characterized by a tropical climate, with hot and humid

interior temperatures. The country's terrain is mostly mountains and has a very narrow,

discontinuous coastal plain. The terrain includes the popular Blue Mountain Peak at

2,256 m, the highest peak on the island. Natural resources include bauxite, gypsum, and

limestone. Jamaica is susceptible to destruction mainly from hurricanes. Jamaica

follows a flexible exchange-rate regime. The rate of exchange between the Jamaican and

U.S. Dollars is 1.00 USD = 59.0000 JMD.40 Tourism is the key economic sector in

Jamaica.41

Trinidad and Tobago

The Republic of Trinidad and Tobago is a twin-island small open economy, located

between the Caribbean Sea and the North Atlantic Ocean, northeast of Venezuela.

Tobago enjoys some degree of regional autonomy. Since gaining its independence from

Britain in 1962, Trinidad and Tobago has practiced the Parliamentary Democracy form of

40The exchange-rates for Jamaica and Trinidad and Tobago came from the Universal Currency Converter
(2003). The figures were the exchange-rates reported on October 10, 2003.


41See Stone (1991) for a good discussion of some of the socio-economic implications of the development of
tourism in Jamaica.









government based on the Westminster system. In 1976, the country adopted a republican

constitution, replacing Queen Elizabeth with a president elected by parliament. The

country has a total land area of 5,128 square km and a population of about 1,163,724

people, about 95% of which reside in the larger island of Trinidad (4,820 square km in

land mass). The population is ethnically diverse with about 39.6% African origin, 40.3%

East Indian, 14% Mixed, 1% White, 1% Chinese and 1% Other. English is the official

Language, but Hindi, French, Spanish, and Chinese are used. The country features a

tropical climate and in terms of terrain is characterized by mostly plains with some hills

and low mountains. Its natural resources include petroleum and natural gas. Trinidad

and Tobago is one of the most prosperous Caribbean countries largely because of its

petroleum and natural gas production and processing. Trinidad and Tobago uses a

flexible exchange-rate regime. The exchange-rate between the Trinidad and Tobago

Dollar (TTD) and the U.S. Dollar is 1.00 USD = 6.1500 TTD. Tourism is the most

vibrant sector in Tobago.

Economic Performance42

The economic performances of Belize, Dominica, Jamaica, and Trinidad and

Tobago are illustrated in Tables 3-1 and 3-2. As reflected in Table 3-1, Gross National

Income (GNI) per capital ranged from US $2,940 in Belize to US $5,960 in Trinidad and

Tobago in 2001. Trinidad and Tobago is the only country with per capital income in

excess of US $5,000. Per capital income in Belize, Dominica and Jamaica never

exceeded US $3,500.



42Most of the information presented on both economic performance and economic structure came from the
World Bank (2003), Countries' Briefs and Countries' Assistance Strategy and the International Monetary
Fund (2001,2002), Public Information Notices for the various countries.









Table 3-2 presents the annual average growth of real Gross Domestic Product

(GDP) for the past three decades from, the 1970s-1990s, and for 2000-2001.

Belize

Belize is the only country to have realized a continuous increase in per capital

income from 1980 to 2001 due partly to continuous positive average economic growth

rates. In 2001, the country witnessed a small increase in per capital income.

Belize experienced positive real growth rates across all three decades. Average real

growth rates fluctuated from one decade to the next, decreasing in magnitude from the

1970s to the 1990s (although the 1980s and 1990s recorded similar average growth rates).

Compared to the average growth rates recorded during the 1970s to 1990s, the economy

improved tremendously in 2001, growing by approximately 5.1%.

According to the World Bank (2002), the recent economic policies pursued by

Belize focused on restoring high growth rates. High growth rates have been achieved

through a program of fiscal expansion based on low taxes and high investment. Also, the

government has provided credit to the private sector through the Development Finance

Corporation (DFC) and the Social Security Board on very concessional terms. As a

result, growth increased from 1.5% per year in the 1990s to over 10% and 5% in 2000

and 2001, respectively. The IMF (2002) attributed the lower rate of growth in 2001 to

negative impacts of hurricanes, the terrorist attacks in the United States, and a shrimp-

virus epidemic.

Dominica

Dominica experienced fluctuating per capital incomes over the 20-year period

covering the 1980s and 1990s. In 2001, per capital income in Dominica declined to US

$3,200 (from US $3,250 in 2000).









Average real growth rates fluctuated from one decade to the next, decreasing in

magnitude from the 1980s to the 1990s. During the 1990s, Dominica's economy

continued to grow, though at a slower annual average rate compared to the 1980s. In the

1990s, annual growth averaged about 1.3%; it averaged approximately 1.5% in the 1980s.

Stronger growth in the 1980s was mainly due to a favorable external environment, when

preferential market access and strong prices resulted in a twofold increase in banana

export earnings. Large flows of concessional aid financed investments in infrastructure.

The external environment worsened in the 1990s as concessional aid flows declined

rapidly and preferential access to external markets began to be eroded. The World Bank

(2002) concluded that the WTO ruling against the preferential treatment of Caribbean

bananas accelerated this trend.

Further, over the past years, output and employment growth have been on the

decline. These developments reflect the ongoing retrenchment of the key banana

industry (due to weak export prices and the problems pertaining to preferential access to

the European Union market), and the weak growth of non-banana agriculture and stay-

over tourism (IMF 2002). Consequently, Dominica's real GDP stagnated in 2000 and

contracted by 4.3% in 2001 because

* Banana production fell by 35% (mostly due to adverse weather conditions)

* Other key sectors of the economy declined (reflecting the slowdown abroad)

* The events of September 11, 2001 occurred

* An increasingly difficult fiscal situation emerged.

The downturn in the economy appeared to have further increased unemployment

and poverty. These effects were mostly evident in the rural areas affected by the

continued displacement of banana farmers (IMF 2002).









Jamaica

Jamaica displayed no clear growth pattern over the past 30 years. Average real

growth rates varied across all three decades. Economic performance during the 1970s

was relatively weak, with the economy contracting by 1.2% on average per year.

According to the World Bank (2002), Jamaica has made measurable progress in

stabilizing the economy since the mid-1990s and, despite severe domestic and external

shocks in 2001, has returned to positive growth after four years of contraction.43

Jamaica, like the rest of the Caribbean, is also vulnerable to natural disasters, particularly

hurricanes and flooding, and faces many domestic and external risks. Firstly, despite the

government's policies to improve incentives for private investment, recovery in the

domestic economy could be held back by a slower-than-expected decline in domestic

interest rates, a weak private sector supply response, and austerity-driven labor action or

social unrest. Secondly, policy risk factors such as delays or setbacks in the

implementation of the government's program would arise, for example, as a result of

domestic consensus-building difficulties or shortcomings in implementation capacity.

Thirdly, the possibility of adverse commodity price movements (such as a decline in the

price of alumina and/or further oil price increases) would increase the current account

deficit. Fourthly, an increase in the current account deficit combined with a decline in

foreign direct investment (a significant source of financing), could affect recovery.



43The World Bank maintained that the weak performance of the Jamaican economy in the latter part of the
1990s resulted in part from a financial sector crisis that developed around 1996, when several domestic
financial institutions and insurance companies ran into severe liquidity and solvency problems. The
Government undertook wide-ranging intervention, which succeeded in averting a run on and collapse of the
financial system but led to rapid accumulation of high-cost domestic debt. The intervention has imposed
severe costs on the economy, such as high interest rates, crowding out of investment, reduction in
competitiveness, and a vitiation of financial sector intermediation, which in turn have resulted in a lack of
growth over the last four years.









In 2001, real growth in Jamaica was approximately 1.7%. Throughout the three

decades, Jamaica's average growth rate (in absolute terms) never exceeded 2%. The

World Bank (2002) claimed that long-term growth in Jamaica has been hampered by

consistently high real interest rates, a high level of crime and violence, a decline in

competitiveness, and structural rigidities.

Trinidad and Tobago

Trinidad and Tobago experienced an increase in per capital incomes since the

1970s, except for a significant reduction to US $3,700 in 1990 (from US $5,090 in 1980).

This development reflected the reduction in economic activity in the country associated

with the macroeconomic problems that began in the late 1980s. In 2001, the country

witnessed an increase (relative to 1990) in per capital income to US $5,960 as economic

recovery intensified.

Like Jamaica, Trinidad and Tobago experienced no clear growth pattern over the

past decades. Unlike the other countries, Trinidad and Tobago's economy contracted

during the 1980s by approximately 1% on average per year. The 1990s represented a

period of recovery for Trinidad and Tobago (average growth rate being 1.4%).

The World Bank (2002) noted a marked improvement in Trinidad and Tobago's

economic performance towards the end of the 1990s owing to sound policies and

significant new energy-related investments. The non-energy sector has also been buoyant,

reflecting a pickup in exports of manufactured goods, and strong demand in construction

and services. In late 1999 (to signal their commitment to sound policies) Trinidad and

Tobago requested that the IMF monitor their economic program covering the fiscal year

beginning in October. The program aimed at achieving adequate rates of economic

growth and job creation, and maintaining macroeconomic stability through a









strengthening of fiscal policy, credit restraint, and structural reforms (particularly

privatization). Performance under the program, in the World Bank's (2002) opinion, was

in line with the government's objectives: strong growth (just under 5% in 2000 and 5% in

2001), relatively low inflation (about 31/2%), an improvement in the balance of payments,

and a reduction in unemployment to 121/2% at mid-2000.

The World Bank (2002) continued, under the 1988 to 1994 reform program, and

Trinidad and Tobago's economy successfully stabilized; structural reforms were initiated.

Since 1994, the country recorded real GDP growth of over 3% per year and low inflation.

It also achieved small budget surpluses and balance in external accounts. The current

economic recovery is fueled by stronger than expected performance in the non-oil

sectors, primarily in services related to construction, distribution, tourism, financial, and

telecommunication sectors. While petroleum is supplemented by natural gas production,

the economic base remains narrow.

Indeed, economic performance in Trinidad and Tobago is a reflection of the

positive and negative features of the country. The World Bank (2002) identified as the

country's strengths

* The abundance of natural resources such as oil and gas in Trinidad, and bio-
diversity in Tobago

* A vibrant domestic private sector

* Proximity to the markets in North America

* A vibrant manufacturing and business center, providing financial and commercial
services

* A niche market in hydrocarbons such as liquefied natural gas, compressed gas,
ammonia and methanol

* An established market for sugar exports and for agricultural products such as fruit
juices and concentrates









* A potential to broaden its economic base in tourism, and financial and information
services, construction and entertainment services.

The disadvantages are mainly due to

* The small size of the country

* High unit costs in provision of public services

* Limited economic diversification

* Volatility in oil prices, which continues to exacerbate income fluctuations.

Gross National Income

Table 3-3 reflects the performance of Belize, Dominica, Jamaica and Trinidad and

Tobago in terms of current per capital GNI from the 1970s to 2001. Belize recorded

positive growth rates from one decade to the next. The other countries had mixed

performances. In 2001, the economies of Dominica and Jamaica contracted. Belize and

Trinidad and Tobago expanded, with Trinidad and Tobago growing by approximately

13.5%.

Economic Structure

The discussion of the economic structure focuses on two key issues: the sectoral

contribution of the agricultural, industrial, and services sectors to GDP; and trade

dependency.

Sectoral Contribution

Table 3-4 captures the evolution of the economic structure of Belize, Dominica,

Jamaica, and Trinidad and Tobago since 1980 with respect to the contributions of the

major sectors of the economy to GDP. Historically, agriculture44 has played an important

role in the economic development of Belize and Dominica. The sector has been less

44The definition of Agriculture corresponds to that used by the World Bank (2001). Agriculture includes
forestry, hunting, and fishing, as well as cultivation of crops and livestock production.









important to Jamaica, and Trinidad and Tobago. Though the sector's role has diminished

over the years in all four countries, it remains a significant earner of foreign exchange

and an important source of income for many rural households in Belize and Dominica.

A significant amount of economic activity in these countries takes place within the

industrial sector,45 dominated by manufacturing and mining. During the period 1980-

2001, the industrial sector's contribution to GDP in Dominica increased from 20.9% in

1980 to 22.8% in 2001. The importance of the sector declined in Belize, Jamaica, and

Trinidad and Tobago.

The services' sector46 is the largest and most significant in all four economies

(except Trinidad and Tobago in 1980 when industry dominated). Generally, the services'

sector accounts for more than one half of total GDP. It's importance increased in all four

countries from 1980 to 2001. Tourism is the largest activity in the services sector and the

most significant foreign-exchange earner in the Caribbean. In all of the countries, a large

amount of effort is directed at attracting stay-over visitors and cruise passengers

particularly from the USA and Europe.

Belize

Despite declining fortunes, agriculture remains a significant sector in Belize. The

economy of Belize depends primarily on agriculture (in particular bananas, sugar, and

citrus), which accounted for 23.0% and 22.7% of GDP in 2000 and 2001, respectively;



45The definition of the industrial sector follows that used by the World Bank. Industry comprises value
added in mining, manufacturing, construction, electricity, water, and gas.

46The definition employed here is that used by the World Bank (2001). Services include wholesale and
retail trade (including hotels and restaurants); transport; government, financial, professional, and personal
services such as education, health care, and real estate services. Also included are imputed bank service
charges, import duties, and any statistical discrepancies noted by national compilers as well as
discrepancies arising from rescaling.









and 68.0% of exports in 2000 (World Bank 2002). More recently, the economy has been

diversified towards tourism and other service industries. The services sector, which

accounted for 41.7% of GDP in 1980, contributed 52.3% to GDP in 2001. Tourism is not

a major activity in Belize. However, like many Caribbean countries, Belize encouraged

the development of the offshore financial sector, informatics, and betting and gaming as

part of its integration into the global economic environment.

Belize did not only diversify towards services, but also away from industry and

agriculture. The greatest declines (relatively) occurred in the industrial sector. In 1980,

the industrial sector contributed 30.9% to GDP. In 2001, the sector's contribution fell to

25% of GDP. Light manufacturing and construction dominate industrial activities in

Belize. The contribution of agriculture to the economy fell from 27.4% in 1980 to 22.7%

in 2001.

Dominica

In Dominica, agriculture remains a major source of economic activity for many

rural households and an important contributor to GDP, despite the reduction in the

sector's contribution to GDP from 30.7% in 1980 to 17.2% in 2001. Banana is the major

export crop produced in Dominica. The World Bank (2002) noted that Dominica has

continued to shift from agriculture to services, mainly through tourism, but also offshore

financial services and, more recently, telecom-related services. The island continues to

enjoy important comparative and competitive advantages that sustain its prospects for

further growth and diversification. In the World Bank's (2002) opinion, Dominica being

Anglophone and having a highly educated citizenry has been advantageous to the

country, given its relative proximity to the markets of North America and Europe. These

factors, combined with attractive natural resources, increase the potential of Dominica for









developing its eco-tourism sector and diversifying its economy. One of the main

challenges is to maintain the requisite macroeconomic environment and continue

investments in human, physical and institutional capital that would enable the country to

fully exploit its potential in the global economy.

In 1980, the industrial sector contributed 20.9% to GDP in Dominica. In 2001, the

sector's contribution rose to 22.8%. Light manufacturing and construction are the most

important industrial activities in Dominica. The main manufacturing industry in

Dominica is soap, which is produced from local coconuts.

The services sector has grown in importance in Dominica since 1980, with its

contribution to the economy increasing from 48.4% to 60.0% in 2001. The increased

contribution of services reflect the development of an offshore financial sector,

informatics, and betting and gaming as alternative sources of foreign exchange.47

Activities include the sale of passports to overseas investors, company registrations,

banking and Internet gambling. These initiatives were direct responses to the problems

plaguing traditional agriculture and pressing needs to diversify their economic bases.

The importance of tourism (though growing) is relatively small. However, given the

nature of Dominica, the potential for eco-tourism is great. Indeed, Dominica is actively

seeking to exploit its competitive advantage in attractions such as rainforests, volcanic

scenery and scuba diving.




47Reliance on the offshore financial sector as a means of earning foreign exchange is rather risky since, like
other nations, the offshore sector in the Caribbean is under tremendous scrutiny by the Financial Action
Task Force (FATF) of the OECD and the Financial Stability Forum. For example, all members of the
OECS, the Bahamas, Barbados and Belize, were listed in June 2000 by the OECD as tax havens. The
Bahamas, St Vincent, Dominica and St Kitts-Nevis were listed as non-co-operative jurisdictions. Later,
some of the countries, following extensive reforms, were removed from the FATF list.









Jamaica

The importance of agriculture to the Jamaican economy is small. Agriculture

contributed 8.2% to GDP in 1980. The sector's contribution has since fallen, reaching

6.4% in 2001. Agricultural activities in Jamaica are concentrated in bananas and sugar.

The industrial sector's contribution to GDP declined from 38.3% in 1980 to 30.8%

in 2001. Manufacturing is strong (relative to Belize, and Dominica) in Jamaica. Unlike

Trinidad and Tobago, Jamaica's manufacturing sector suffers from high energy and labor

costs. Jamaica also benefits extensively from bauxite and alumina.

Services remain the strongest area of economic activity in Jamaica. The

contribution of the services sector to GDP increased from 53.5% in 1980 to 62.8% in

2001. Tourism is a major earner of foreign exchange and generator of employment in

Jamaica and holds some prospects for continued growth. Jamaica has also encouraged

the development of the offshore financial sector, informatics, and betting and gaming as

alternative sources of foreign exchange.

Trinidad and Tobago

In Trinidad and Tobago, agriculture contributed 2.3% and 1.6% to GDP in 1980

and 2001, respectively. Alcoholic beverages, rice, and sugar provide the impetus to

agricultural activity in Trinidad and Tobago.

Not surprisingly, the industrial sector in Trinidad and Tobago contributed generally

in excess of 43% to GDP. The sector is driven largely by oil and natural gas, making the

country the strongest in terms of manufacturing. The importance of industry to the

economy of Trinidad and Tobago declined from 62.5% in 1980 to 43.8% in 2001.

Indeed, services have emerged as the leading sector in the economy of Trinidad and

Tobago. In 1980, the services sector accounted for 35.2% of GDP (second to industry).









In 2001, services accounted for 54.6% of GDP (exceeding industry and becoming the

major source of economic activity in Trinidad and Tobago). Tourism (the main

economic activity in Tobago) contributed to this development. The importance of

tourism in Trinidad and Tobago is small relative to Jamaica's.

Trade Dependency

Table 3-5 illustrates the relatively high degree of trade dependency of Belize,

Dominica, Jamaica, and Trinidad and Tobago for selected years during the period 1980-

2001. Dominica and Trinidad and Tobago experienced increases in their shares of total

exports in GDP. The share of total exports in GDP fell in Jamaica but remained almost

constant in Belize. In 1980, the ratios ranged from 22.0% in Dominica to 55.4% in

Belize. By 2001, the range had narrowed from 41.5% in Jamaica to 55.1% in Belize.

The contribution of total exports to GDP shows some degree of variation over the twenty-

year period.

Total imports continue to play an important role in economic activity in all of the

countries. The relative importance of imports to the economies fluctuated somewhat.

Except for Dominica (with a downward trend), no clear pattern is identifiable over the

range of countries from one decade to the next. However (since 1980) Belize, Jamaica,

and Trinidad and Tobago experienced increases in their shares of total imports in GDP.

In 1980, the ratios ranged from 39.0% in Trinidad and Tobago to 92.6% in Dominica. By

2001, the range narrowed from 43.0% in Trinidad and Tobago to 74.1% in Belize.

For all of the countries, the ratio of total imports to GDP is much higher than those

of total exports, suggesting current account deficits. Given the relatively small economic

bases of these countries, domestic production is highly concentrated on a select small

number of commodities. Consequently, local consumption and production needs have to









be satisfied by imports. Indeed, high levels of imports and exports are central features of

small countries (Demas 1992). The importation of intermediate and some consumer

goods is vitally important to Caribbean economies. Every Caribbean country should

increase its exports, focusing on a wider range of high-quality and technology-intensive

commodities.48

Belize

The contribution of total exports to GDP shows some degree of variation over the

twenty-year period. Belize experienced a marginal decline in the share of total exports in

GDP across the decades. The ratio moved from 55.4% in 1980 to 55.1% in 2001. The

reduction in exports is attributed partly to various exogenous shocks.

Total imports continue to play an important role in economic activity in Belize,

though its relative importance fluctuated somewhat. No clear pattern is identifiable over

the twenty-year period. In 1980, imports accounted for 68.6% of GDP. By 2001, the

share of imports in GDP expanded to 74.1%. This development reflects the rapid

increase in imports resulting from public investment (World Bank 2002). The

combination of Belize's export and import performances in 2001 led to an increase in the

current account deficit to 20% of GDP, increasing the risk of severe balance of payments

difficulties (World Bank 2002).

Dominica

In Dominica, the shares of total exports and imports in GDP fluctuated across the

decades, although there is evidence of a clear downward trend for imports. The ratio of



48In 2001, the share of total exports in GDP declined in Belize. The country recorded the strongest real
economic growth rate in 2001. The decline in the share of total exports in GDP resulted from a reduction
in earnings from agricultural exports.









exports to GDP increased from 22% in 1980 to 51.2% in 2001. In 1980, total imports

accounted for 92.6% of GDP. By 2001, the share of imports in GDP declined

significantly to 63.8%.

According to the IMF (2002), the external current account deficit widened to about

18% of GDP in 2000, on account of a sharp decline in banana exports, stagnant receipts

on services (including tourism), and higher interest payments, following the substantial

buildup of public sector external debt of previous years. The external current account

deficit narrowed to about 16.5% of GDP in 2001, due to lower imports.

Jamaica

Trade plays a very important role in economic activity in Jamaica. During the

period 1980-2001, Jamaica witnessed a reduction in the contribution of total exports to

GDP from 51.1% to 41.5%. The share of total imports in GDP increased from 51.0% in

1980 to 55.8% in 2001.

According to the World Bank (2002), Jamaica has been successful in maintaining

single digit inflation since 1997, largely through tight monetary policy and by preventing

a rapid nominal depreciation of the exchange rate. However, real appreciation of the

exchange rate prior to 1999/2000 and again in 2001/2002 has resulted in some loss of

competitiveness. Consequently, Jamaica's exports have contracted every year for the

past five years, reflecting weak performances in both the traditional and non-traditional

export sectors (World Bank 2002). Rising imports (mainly food and capital goods) since

1998/1999, combined with a slowdown in tourism receipts and increased investment

income outflows, resulted in a widening of the external current account deficit from 3%

of GDP in 1998/1999 to about 8.6% of GDP in 2001/2002 (World Bank 2002).









Trinidad and Tobago

In terms of the share of total exports in GDP, the ratio increased from 50.4% in

1980 to 54.8% in 2001. Exports play a significant role in Trinidad and Tobago,

particularly the exports of oil and natural gas. According to the World Bank (2002), until

recently Trinidad and Tobago's economic fortunes have closely followed the fluctuations

in world oil prices. During the 1970s, when oil prices were high, the oil revenue windfalls

were used for economic and social infrastructure, including infrastructure for gas

production. The collapse of oil prices in the 1980s generated a prolonged period of

economic contraction. Except for positive growth during 1990 and 1991, during the

remaining years of 1983-1993, Trinidad and Tobago recorded negative growth. During

this period, poverty and net emigration of skilled workers increased, thereby worsening

the country's economic performance.

Imports also play an important role in economic activity in Trinidad and Tobago.

In 1980, total imports contributed 39.0% to GDP. By 2001, the share of imports in GDP

had increased to 43.0%. In the World Bank's (2002) estimation, the performances of

exports and imports have raised Trinidad and Tobago's external current account surplus

to 5% of GDP in 2000, owing to higher export volumes and prices of petroleum and

natural gases that exceed and offset a surge in imports related mainly to public sector

projects.









Economic Development Policies

Although most of the policies adopted by Caribbean countries resulted from

ideological factors and the influence of institutions such as the IMF and World Bank,49 it

is imperative that one notes the role of socialism in the Caribbean: it did not transform the

economies by reordering the political equation in favor of the majority class (Stone

1989). Further, the outcome of economic management under socialism was not

significantly worse than conventional capitalist approaches. Stone (1989) suggested that

neither ideological solution has provided any easy path towards economic recovery or

transformation in the Caribbean. In his opinion, politics and ideology cannot provide

solutions to problems that are essentially rooted in the structure of Caribbean economies.

Blackman (1991) linked the policy prescriptions of the IMF and World Bank to the

prevailing "economic fad" in industrialized countries. He expressed the view that a

common facet of this advice is failure to take into account the characteristics of small

countries.

Best (1991) lamented the importance of every country to undertake programs and

design development policies that are unique to its realities, independent of the influences

of bilateral and multilateral institutions. Best (1991) cautioned that Caribbean countries

need to be precise about the particular ways in which ideology and technology (on a

world scale) impact upon them. He saw this issue as the challenge of that era. Hence,

the Caribbean should always exercise prudence in its relationships with countries and





49Grenada, Guyana and Jamaica have all experimented with Socialism/Marxism during the 1970s. Aided
by the IMF and World Bank, in particular, all three countries have embraced neo-liberal policy reforms
leading to more outward oriented economies.









institutions that seek to transfer enlightenment to them (whether through the integration

of capital, the transfer of technology, or the sheltering of markets).

Furthermore, evidence pertaining to analogous Adjustment Programs and economic

reform initiatives by many other countries suggests some degree of ambiguity in terms of

impact on macroeconomic performances (Khan 1990).

While many criticisms continue to be levied against the IMF and World Bank,

Demas (1992) acknowledged many difficulties associated with achieving economic

changes

* Administrative problems, which refer generally to difficulties entrenched in the
public sector, requiring extensive reforms

* Cultural factors, which are reflected in issues such as poor work ethics, incapacity
for improved training to develop and broaden skills, and disregard for savings,
preferring instead to increase spending on consumer goods and services

* Institutional difficulties, related to the role of organizations such as trade unions,
and other matters, for example, inadequate reforms in major social sectors
including education and health

* Political considerations, which generally speak to a lack of appreciation of the need
for effective government.

Despite these difficulties, Demas (1992) remained confident that Caribbean

countries could survive and prosper if adequate attention is given to economic policy

reform and due consideration taken of the exigencies of the global economic

environment. Demas (1992) explained

as sensible West Indians...by increasing our expertise in management,
marketing and technology and becoming sufficiently resourceful and
entrepreneurial to be able to switch from product to product in accordance with
shifts in external demand, we can create economies that are resilient and less
fragile. In this way we can also diversify our production and exports (in terms of
both the range of products and of countries with which we trade) and so achieve









self-reliant and self-sustaining development on the basis of competitiveness in
world trade in goods and services. (Demas 1992, p. 9)50

Additionally, Wilson (1992) observed that the low level of development of many

Caribbean countries presented a major barrier vis-a-vis the exploitation of the

opportunities arising from the implementation of more liberalized policies. Coupled with

the presence of significant levels of poverty and under-development, both of which

generate social and political problems, these factors represented major obstacles to

rational economic management in the Caribbean. Indeed, Wilson (1992) suggested that

contrary to the popular view, structural adjustment is required in bad times and also in

apparently good times. Indeed, if the adjustment is made as the situation changes

(particularly when those changes result from exogenous factors), then the need for severe

adjustments will be significantly minimized.

Furthermore, no one in the Caribbean is capable of criticizing the IMF and what it

represents in the broader context of capitalism on a global scale (Watson 1993). He

argued that to criticize the IMF one must understand the logic of capital and capitalism as

a system. Watson (1993) also suggested that in pursuit of stabilization, a country should

seek to

* Restore equilibrium in the external account through increased foreign exchange
earnings

* Acquire productive capital and technology to increase skills, boost productivity and
generate higher levels of export competitiveness.







50For a discussion of Caribbean competitiveness in the market place and strategies for gaining international
competitiveness, see Charles (1992).









Belize

Britain granted adult suffrage to Belize in 1954, which marked a new beginning for

the country. Belizeans seized the opportunity, which marked the demise of colonial

status and created an avenue for the people to determine the nature and subsequent

evolution of their own political economy (Palacio 1996). By 1964, Belize introduced

internal self-governance, placing the burden of economic development on the shoulders

of democratically elected political leaders. Development initiatives immediately

followed. Between 1960 and 1980, the government's development agenda included

central planning, building a platform to encourage private sector investment, and

initiating social and community development projects and programs (Palacio 1996).

These initiatives accounted for the evolution of the economy during the 1960s up to the

1980s.

The U.S. State Department (2003) observed that forestry was the only economic

activity of any consequence in Belize until well into the 20th century when the supply of

accessible timber began to dwindle. Cane sugar then became the principal export and

recently has been augmented by expanded production of citrus, bananas, seafood, and

apparel. The country has about 809,000 hectares of arable land, only a small fraction of

which is under cultivation. Domestic industry is limited, constrained by relatively high-

cost labor and energy and a small domestic market. Tourism attracts the most foreign

direct investment, although significant U.S. investment also is found in the energy,

telecommunications, and agriculture sectors. A combination of natural factors (such as

climate, the longest barrier reef in the Western Hemisphere, numerous islands, excellent

fishing, safe waters for boating, jungle wildlife, and Mayan ruins) supports the thriving

tourist industry. Development costs are high, but the government of Belize has designated









tourism as its second development priority after agriculture. In 2000, tourist arrivals

totaled 180,760 with more than 110,000 coming from the United States. Tourist receipts

amounted to $113.3 million. Belize's investment policy is codified in the Belize

Investment Guide, which sets out the development priorities for the country.5

According to the IMF (2002), Belize is strengthening regulatory frameworks in

critical sectors intended for private sector participation (e.g., power, solid waste

management, and water and sanitation) to help relieve infrastructure constraints. The

government is also assisting in the promotion of private sector participation in the

provision of services and maintenance of infrastructure (including through concession

arrangements and contracting services out). Improving the investment climate will also

require easing a number of other constraints including high domestic lending rates,

foreign exchange shortages, cumbersome investment approval process involving

ministerial discretion for duty exemptions, and weakness in land tenure and land titling

arrangements.

In the IMF's (2002) view, Belize has true growth potential and should be able to

further broaden its economic base. Belize's relative strengths are its abundance of land,

forest, and water resources, and its location in proximity to the large markets of Mexico

and the United States. Other advantages include a niche market for a multifaceted tourism

sector, and agribusiness. The government, therefore, needs to integrate Belize further into

the world economy and expand the country's trade and investment opportunities through

new agreements. Belize, according to the IMF (2002), continues to expand its trading

horizons by negotiating bilateral trade agreements with several countries such as Mexico,

51For further details, see "Country Commercial Guide" for Belize, available from the U.S. Department of
Commerce's (2002) Web site.









Spain, Cuba, Costa Rica, Guatemala, Nicaragua, El Salvador, and Honduras. It is also

seeking membership in the Free Trade Agreement of the Americas (FTAA), which is, at

the moment, targeted for conclusion by the year 2005. Furthermore, within the EU

context, and in collaboration with other African, Caribbean and Pacific (ACP) countries,

CARICOM is negotiating a new Lome Convention and a free-trade agreement with the

Andean countries. Belize has also concluded investment promotion treaties, such as

double taxation treaties, with the UK and CARICOM countries in recent years. Foreign

direct investment has been overwhelmingly concentrated in banking, resort tourism, and

land development.

Additionally, the IMF (2002) noted that Belize is subject to several external risks

arising from the uncertainty in preferential trade arrangements for its major exports to the

EU and the USA. Since the late-1980s, real prices for banana and sugar exports to the

preferential markets have declined sharply. Notwithstanding this problem, Belize has

been able to satisfactorily improve land productivity in traditional agriculture and

diversify its economic base.

Moreover, the IMF (2002) suggested that Belize must improve competitiveness in

traditional exports and diversify into new exports. Belize faces competitive pressures for

all its exports. The prices for bananas, citrus, and sugar could continue to decline during

this decade. If this occurs, real GDP could decline by about 1-2% per year, foreign

exchange earnings could drop by as much as 6% per year, and an additional 500 people

each year (0.5% increase in head count each year) could fall into poverty, unless Belize is

able to quickly restructure its agricultural operations, reduce its unit costs, and accelerate

the pace of economic diversification (IMF 2002).









Regarding trade policy, the IMF (2002) welcomed the removal of the ministerial

discretion to grant import duty exemptions, but noted that Belize still maintains extensive

tax and duty exemptions, and twenty nine (29) groups of goods under protectionist

quantitative non-tariff barriers. The IMF (2002) believed that these import restrictions

should be converted into tariffs to improve resource allocation, increase revenue, and

reduce administrative costs.

Dominica

The World Bank (2002) suggested that Dominica faces special development

challenges because of its small size and vulnerability to natural disasters and other

external shocks. With a small population, institutional capacity is limited and per capital

costs of basic social and infrastructure services are very high. Historically, Dominica has

promoted monocropping in agriculture, relying on preferential trade arrangements, which

now face certain, albeit phased, dismantling as a result of World Trade Organization

rulings. The World Bank (2002) also noted that Dominica has been engaged in the

development of an Eastern Caribbean Development Strategy, which includes key

elements such as

* Enhancing economic cooperation and macroeconomic stability through concerted
action on trade and sound fiscal and monetary policies, focusing in the short-to-
medium-term on improving fiscal discipline and public savings (paragraphs 8-10)

* Increasing private sector-led economic growth and diversification, including
through direct support to the private sector (paragraph 16)

* Indirect support for growth through improved financial services, infrastructure and
maintenance of the environmental heritage (paragraphs 18 and 20-22)

* Developing human capital through continued investments in better quality health
and education, especially improved access to secondary and tertiary education
(paragraphs 24-25)









* Building greater organizational capacity, through public sector reform, sub-regional
integration, better aid coordination (paragraphs 29-33) and private sector training
(paragraph 16).

According to the IMF (2002), Dominica's prospects for achieving an improved

balance of payments position and sustaining output growth in the medium term will

depend largely on strengthening competitiveness in the export and tourism sectors. Given

the fixed exchange rate regime the country follows, fiscal discipline, wage moderation,

and structural policies aimed at increasing factor productivity must be encouraged.

These must include the ongoing restructuring in the banana sector, reduction of

telecommunication costs, continued tax and trade reforms, and improvements in the

efficiency of public investment.

With respect to trade policies, Dominica lowered its maximum CET rate to 25% in

January 1999, two years behind the scheduled implementation date for Phase III of the

1992 CARICOM agreement. The authorities implemented the final reduction (to 20%)

under Phase IV (scheduled for January 1998) in July 2001 in the context of the 2001/02

Budget (IMF). In the IMF's (2002) opinion, Dominica needs to intensify its trade

liberalization policy to narrow the dispersion of tariff rates, phase out import licensing,

reduce the existing customs service charge to the approximate cost of processing import

transactions in line with World Trade Organization (WTO) guidelines, and eliminate all

remaining price controls (except those on fuels and cement which could be removed at a

later stage). Other important policy initiatives deserving of serious considerations include

reforming the telecommunication system, strengthening the oversight of the financial

system, continued restructuring of the banana industry, privatizing selected state-owned

enterprises such as banks, divesting government shares in the telephone company,

abolishing the monopoly of the Dominica Export Import Agency (DEXIA) on the









importation of sugar and bulk rice, and transforming the National Development

Corporation (NDC) into a self-financing agency.

Jamaica

During the 1960s, foreign multinational firms, mainly American, British and

Canadians, dominated most commercial activities in Jamaica, ranging from agriculture to

public utilities such as power, water, and transportation. According to the U.S. State

Department (2003), the discovery of bauxite in the 1940s and the subsequent

establishment of the bauxite-alumina industry shifted Jamaica's economy away from

sugar and bananas. By the 1970s, Jamaica had emerged as a world leader in export of

these minerals as foreign investment increased.

The 1970s marked an interesting period in the economic development of Jamaica.

This relates to Michael Manley's assumption of power in 1972. Stone (1989) noted

Manley's complete alienation of both the middle and capitalists classes. Moves in the

name of "democratic socialism" (such as acquiring control of primary production and

provision of infrastructure, taxing agricultural lands not in full production, extending

secondary education opportunities to the poor, instituting the National Youth Service, and

making an international cartel of bauxite)52 may have been attempts to give Jamaicans a

heroic self-image. Manley's reforms encountered tremendous opposition among local and

foreign elites.

Besides his frequent attacks on international capitalism, Manley shaped his agenda

based on his belief that Jamaica was characterized by four traits: nationalism, adverse

terms of trade, capital-dependency, and vulnerability in bargaining with industrialized

52Despite Manley's nationalization initiatives, some multinationals remained in Jamaica, but many of them
engaged mostly in joint ventures in activities owned or controlled by the Government.









countries (Langley 1989). Hence, his strategy for the development of Jamaica was two-

fold:

* Firstly, the formation of regional groupings that would give Jamaica and other
Third World countries greater power to negotiate with industrialized countries

* Secondly, the formulation of a common strategy vis-a-vis their relationship with
developed countries.

Faced with an increasing trade deficit during the 1970s,53 Manley promoted a

strategy of import substitution industrialization. This strategy granted protection to firms

to increase domestic production of goods and services that substituted for imports. It was

supported by the imposition of various forms of restrictions on trade, particularly imports.

The government also instituted price controls on several consumer goods.

In 1989, Manley returned to power with great reluctance to embark again on a

nationalist, non-capitalist path. In fact, he committed himself to promoting economic

reforms aimed at fostering the continued development of an outward oriented economy

(Langley 1989, Garrity 1996).

The 1980s heralded massive economic reforms in Jamaica, aimed at restructuring

the country's productive sectors, promoting exports, increasing productive employment,

reducing fiscal deficits, lowering inflation, and satisfying certain social imperatives.54

Aided principally by the IMF, World Bank, Inter-American Development Bank (IADB),

and the United States Agency for International Development (USAID), Jamaica began



53The Bank of Jamaica estimated that during 1960-1971 the external accounts showed an accumulated
surplus of US $95 million. These fortunes reversed, with the balance of payments recording an
accumulated deficit of US $ 679.2 million during the period 1972-1980 (Jamaica, Bank of Jamaica 1985).

54For a detailed discussion of the performance of various macroeconomic variables in Jamaica during the
1970s and 1980s, see Boyd (1988), Sharpley (1984), and Thomas (1999). The economic reforms resulted
from a combination of problems including social unrest, rising fiscal deficits, severe balance of payments
problems, rising inflation, and acute foreign exchange shortages.









moving away from its Socialist path and implemented policies aimed at creating a more

market-oriented and outward-looking economy.5 Trade liberalization and the attraction

of foreign investment became important pillars of the country's reform efforts. Major

strategies included

* The privatization of many state-owned enterprises. This included the sale of the
power company and the privatization of one airport.56 The government also invited
private participation in the provision of infrastructure

* Tax reforms

* Deregulation of various industries

* Restructuring of the financial sector.

Jamaica's economic reforms had far reaching implications for every sector of the

economy. Girvan (1992) noted some of the negative implications of adjustment

programs on Jamaica's social sector overshadowed the positive impacts. Girvan (1992)

cited the following as evidence of the adverse effects of adjustment programs on the

social sector in Jamaica:

* A huge reduction in living standards of a vast majority of Jamaican workers

* A marked decline in the share of wages and salaries in National Income

* Various crises in both the public health and education systems.





55Jamaica's experience with the IMF started in December 1976 with the negotiation of a Stand-by-
Agreement that included a wage freeze, fiscal restraint and a devaluation of the Jamaican dollar by 20 to
40%. In January 1977, Jamaica implemented a 'home grown' Adjustment program, as a rejection of the
IMF's package, that included policies such as a reversal of the wage freeze, imposition of import and
exchange controls, suspension of foreign debts for a year and a half, and sourcing bilateral funding from
sympathetic governments. Furthermore, to attract foreign investment, Jamaica entered into other
Agreements with the IMF in August 1977, and June 1979 (Boyd 1988). Under these programs, Jamaica
experienced mixed economic performances, forcing many cancellations and resumptions of cooperation
with the IMF.

56Stone (1992a) discussed Jamaica's experience with privatization in 1981.