Free Trade vs. Production Integration

• Author: Anthony J. Payne
• Profession: Professor of Politics, University of Sheffield, UK. He is the author of several books on Caribbean politics and international relations
• Pages: 34-66

34 | The Political History of CARICOM

Not until the second half of the 1960s did advocates of a West

Indian economic community turn their attention to the more serious

business of regional economic integration. The immediate cause of this

development was the publication in 1965 of an important new analysis

of the economic underdevelopment of the Commonwealth Caribbean.

The work was entitled The Economics of Development in Small Countries

with Special Reference to the Caribbean and its author was William

Demas.1 Demas is one of the central figures of our story. In 1965 he was

the Head of the Economic Planning Division of the Trinidad government

and thus a senior civil servant, but for five months from January to June

1964 he had been a guest fellow of the Centre for Developing Area

Studies at McGill University in Montreal. The outcome of this sabbatical

was the appearance of the slim, but influential, study of the West Indian

economy which we have just mentioned.

The book’s significance derived from the fact that Demas realised

earlier than most that the post-war pattern of economic growth in the

West Indies — for which so many extravagant claims had been made

by the various governments concerned — had not been accompanied

by any genuine development of the regional economy and was indeed

beset by a number of fundamental weaknesses. In the passage of time

these shortcomings can be seen to be many, but by 1965 two already

stood out.2 Firstly, the level of unemployment and underemployment

in the region was still high and, so far from decreasing over the previous

decade, was thought actually to have grown — and not only in absolute

numbers but also as a percentage of total population. The high wage

CHAPTER two

Free Trade vs.

Production Integration

Free Trade vs. Production Integration | 35

rates paid in the new mineral and manufacturing sectors had the perverse

effect of raising the reserve price of labour and thus of encouraging

people to sacrifice low-paid agricultural employment in order to join

the ranks of the urban unemployed. At the same time, most of the

imported technology used in these sectors was highly capital-intensive

and unsuited to the special needs of the labour surplus economies into

which it had been introduced. For example, the 146 industries which,

by the end of 1965, had been established in Jamaica under the incentive

legislation programme had provided a mere 9,000 jobs,3 whilst in

Trinidad the employment potential of industrialisation had been equally

disappointing: only 4,666 jobs were made available by ninety-nine new

industries between 1950 and 1963.4 Many more were needed, in view

of the steady year-by-year rise in the size of the total population of the

region,5 just to prevent the unemployment level from worsening.

Secondly, the use made of local West Indian resources in the process of

growth had been negligible. Foreign investors in the manufacturing

sector had preferred, on the whole, to locate within the Caribbean no

more of the production process than was necessary to be awarded the

tax incentives. The industries that grew up were usually, therefore, only

‘screwdriver’ final-assembly operations, producing shoes, cosmetics,

household chemicals, stoves, refrigerators and other similar consumer

goods. In the mineral sector, too, the value added locally to the region’s

major raw material exports was very small; for example, the bulk of the

bauxite mined in Jamaica and Guyana was shipped away in its original

form as an ore and its processing into alumina and aluminium — the

stages which contribute most to the final price — was undertaken outside

the region. Even the tourist industry was characterised by its failure to

create a web of linkages with local agriculture and was thus partly

responsible for the area’s growing imports of foodstuff.

Demas argued that the resulting failure of the West Indian states to

transform their economies during this period was no accident, but rather

that their capacity to achieve economic development was constrained

in a crucial manner by their small size, defined in terms of both land

area and population number.6 Here was the core of his analysis. The

smallness of the domestic market, he reasoned, imposed sharp limits on

36 | The Political History of CARICOM

the process of import-substitution industrialisation and thus removed

the option of balanced growth, incorporating a roughly equal mixture

of export stimulation and import substitution, a goal which could only

really be attained by large continental countries. In order to secure the

benefits of economies of scale, small economies had, therefore, of

necessity, to place special emphasis upon the production of a small

number of manufactures for export to world markets. The obstacles in

the way of capturing the necessary markets were, however, formidable:

the most prominent being restrictions against so-called ‘cheap

labour’ imports into the markets of the industrial countries; wage

rates in the under-developed countries which do not reflect the

true cost of labour as determined by relative factor supplies; the

low income-elasticity of demand in the advanced countries for

the simpler, labour-intensive products; the fear of creating excess

capacity in the face of the uncertainties of the world market; all

the numerous factors inhibiting incursions into export markets;

and, finally, the fact that nearly all underdeveloped countries are

protecting the simpler labour-intensive final consumer goods.7

In view of the difficulties thereby involved in the pursuit of both import

substitution and export stimulation, Demas turned his attention to two

alternative strategies. One was near or full economic integration with a

large country or large trading bloc on the lines of Puerto Rico’s relationship

with the United States or Luxembourg’s with the Benelux countries, but

that could be objected to on the grounds that it was a form of

‘neocolonialism’ unlikely to provide development in the smaller, poorer

partner of the alliance; the other was economic integration with

neighbouring underdeveloped countries. This was the direction, Demas

opined, ‘in which it appears more likely that many countries will move’,8

and which he was himself inclined to favour.

What in detail were the arguments which Demas marshalled behind

the case for regional economic integration? Let us start with a negative

point. They were not those of neo-classical customs union theory, for,

as he had already argued in an article on a West Indies customs union

written during the days of the Federation,9 the conventions of this theory