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Weathering the Caribbean Basin's Economic Sea Change
Area Development / June 1997

By Larry Luxner

WASHINGTON -- President Clinton's May 6-10 visit to Barbados, Costa Rica and Mexico has put new emphasis on the Caribbean Basin at a time when many leaders throughout the region feel the United States is neglecting them.

The main bone of contention is the North American Free Trade Agreement, which has resulted in lots of jobs and investment for Mexico, but not for the 23 small nations that qualify for U.S. trade preferences under the Caribbean Basin Initiative (CBI). Three years after NAFTA's passage, the New York Timesreported in a Jan. 30 front-page article, Caribbean economies "are reeling from that success."

Indeed, since NAFTA took effect in 1994, Mexican apparel/textile exports have grown three times as fast as those of the Caribbean. In 1996, Jamaican garment shipments to the United States fell by 7% (translating into a loss of 7,000 jobs), while similar or larger decreases were recorded by Belize, Guyana and St. Lucia.

According to the Caribbean Textile and Apparel Institute, more than 150 apparel plants have been closed and 123,000 jobs lost "as a direct result of trade and investment diversion to Mexico."

The main problem, officials say, is that under NAFTA, Mexico -- which is right next to the United States and offers wages under $1 an hour -- can now export its manufactured goods to the United States duty-free. This effectively undermines the duty-free advantage Caribbean Basin countries had long enjoyed under CBI, a package of trade and investment incentives established by the Reagan administration in the early 1980s to keep the region free of Communist influence.

Yet between 1985 and 1995, reports the monthly newsletter Caribbean Update, U.S. exports to the region exceeded $15 billion a year. The Caribbean is the only region in the world where the United States has recorded a favorable balance of trade every year during that period.

Efforts by Caribbean leaders to secure "parity" with NAFTA have fallen on deaf ears in Washington for two years in a row, and if Congress doesn't appear in the mood to extend NAFTA benefits to Chile -- a relatively high-wage nation thousands of miles from U.S. shores -- it's doubtful further benefits would be granted to Caribbean or Central American nations, where free zones often flourish thanks to low wages and the absence of labor unions.

Says Isaac Cohen, Washington chief of the UN's Economic Commission for Latin America and the Caribbean: "These islands are searching for NAFTA parity. Our suggestion for smaller economies of the Caribbean is: try to join NAFTA as fast as you can."

In fact, these countries may have less time than they think.

In its latest annual report, the Caribbean Development Bank says "the recent trend of declining importance of manufacturing in most of the Caribbean's economies continued in 1996, except for strong growth in Trinidad & Tobago," where the food-processing sector has maintained export competitiveness.

U.S. textile/apparel imports from the Caribbean Basin during 1996 rose by 10.14% to $6.107 billion, reports the U.S. Department of Commerce. The Caribbean's largest source of textile/apparel imports was the Dominican Republic, with 1996 shipments worth $1.802 billion, up less than 1% from the previous year.

In the sub-category of Item 807, 807-A and GAL exports, the Caribbean Basin racked up exports of exactly $5 billion, up 11.18% from 1995. But taken country by country, a mixed picture emerges. Major gains were achieved by Honduras (up 43.7% to $969 million); El Salvador (up 23% to $587 million); Guatemala (up 11.14% to $577 million) and Haiti (up 32% to $93 million), while declines were recorded by Costa Rica and Jamaica.

All told, manufacturing is clearly losing out to tourism and service industries -- which are important in themselves but rarely generate large numbers of well-paying jobs needed to keep pace with the Caribbean's rapid population growth.

"Manufacturing in general experienced another bad year, and remains an issue of serious concern for the region, given its potential to provide employment," says CDB President Neville Nichols. "Unemployment is one of the most pervasive problems in the region -- a scourge sapping the energies, and too often, the lives of our youth."

Not only has CBI declined in importance relative to NAFTA, the Caribbean's banana-dependent economies are also about to lose their protected markets in Western Europe. The Geneva-based World Trade Organization, in a victory for Latin American banana producers, has decided in a preliminary ruling that the European Union's long-established trade preferences for bananas produced by former colonies such as Dominica, Grenada, St. Lucia and St. Vincent are illegal and violate the rules of free commerce.

Further hurting the region is the demise of a Puerto Rican financing program known as "936 funds" that channeled loans at extremely low interest rates to qualified CBI nations. Over a 10-year period, the program loaned over $1.32 billion towards infrastructure projects in Barbados, Costa Rica, Grenada, Dominican Republic, Honduras, Jamaica, Trinidad & Tobago and the U.S. Virgin Islands. These funds were used in conjunction with regular commercial banking funds, so that total investment under the program reached $2.14 billion in 183 projects. This has all come to a halt with the phaseout by Congress last year of Section 936, a federal tax incentive program originally aimed at attracting manufacturing investment to Puerto Rico.

"You can still get a loan, but it's not going to be cheaper than anywhere else," says David Lewis of Caribbean/Latin American Action, a Washington lobby. "After 15 years of having low-interest money, this is not an insignificant issue."

Low-cost loans through other entities, such as the World Bank and the U.S. Agency for International Development, have remained flat, while direct U.S. economic assistance to the Caribbean Basin fell by nearly 57% over a decade, from $1.26 billion in 1984 to $544 million in 1994.

"We are at a stage in this region where the long-standing international trading arrangements under which our countries operated are coming to an end," said Nichols. "Some of the region's countries have been slow to move from primary production and from economic activity based on primary products -- whether it is sugar, bananas or mining -- to more knowledge-based activities."

One of those activities is information processing. Several Caribbean nations -- most notably the Dominican Republic, Barbados, Jamaica and St. Lucia -- are fast becoming centers for offshore data entry. This involves everything from toll-free and directory assistance to the processing of tickets for U.S.-based airlines. For instance, a call made in the United States on an 800 toll-free line could be answered in a Caribbean nation and the transaction completed in no more time than it would take a U.S. operator.

In addition to airline tickets, the people who work in Caribbean information processing companies -- mainly women -- handle insurance claims, mailing lists, coupons for credit-card companies, hospital records, hotel reservations and credit-card authorizations.

This pollution-free industry, lured to the Caribbean by low wages, highly skilled workers, lucrative tax incentives and a staff turnover of only 5% (compared to 35% in the United States), has grown by leaps and bounds since its introduction around 25 years ago. One official of the Barbados Industrial Development Corp. says U.S. firms spend $50 billion a year on information processing; the Caribbean hopes to get a fair chunk of that business, though the region must compete with the Philippines, Ireland and Singapore, among other countries.

In Jamaica, this activity is centered around the Montego Bay teleport, an $8.5 million joint venture between AT&T, Cable & Wireless and Telecommunications of Jamaica (TOJ). The teleport offers facilities for voice, fax and data transmission, as well as toll-free services and videoconferencing.

"Data processing is catching on very well in Montego Bay," says Calvin Brown, marketing and public-relations consultant for the Montego Bay Free Zone. "In fact, of our 6,000 workers, approximately a third of them are involved in information processing." He said companies involved in data-processing include Media Track, MRS, Satellite Imaging Systems, Bay Telemarketing and Standard Data.

Last year, Cable & Wireless and TOJ announced plans to install a fiberoptic cable system linking Jamaica with the Cayman Islands. The $28.3 million network will be able to handle 30,000 calls simultaneously. The 870-kilometer system will also support a number of advanced products and services, including regional and international banking/financial services, medical imaging, cable TV and long-distance educational services.

The latest project involves a venture between GTE Codetel, the dominant telecom provider of the Dominican Republic, and CAIS Internet (a division of CGX Communications) to construct the first Internet network access point in Santo Domingo to serve the growing needs of Internet customers in Latin America and the Caribbean.

"Internet traffic in the Caribbean and Latin America is growing at an explosive rate," said Codetel President Ernst Burri. "The Latin Internet Exchange will dramatically improve how Internet traffic is handled in this fast-growing sector of the world. Most importantly, the LIX will improve service for Latin customers, lower costs for Internet service and content providers, and create new growth opportunities for regional businesses."

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