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SMALL ECONOMIES AND GLOBALISATION

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SMALL ECONOMIES AND GLOBALISATION Powered By Docstoc
					      Small Economies
           of the
     Greater Caribbean
            and
Preparedness for Globalisation




           July 06, 2001
                                         Table of Contents

Title                                                                                        Page
Table of Contents                                                                             1
Executive Summary and Recommendations                                                         2
1.0 Introduction                                                                              7
2.0 Small Economies and International Trade Negotiations - the WTO and                       10
     FTAA
3.0 The Vulnerability of Caribbean States                                                    16
  3.1 Measuring Vulnerability                                                                20
  3.2 Recent Initiatives and Developments in the Area of Vulnerability of Small Developing   23
      States
4.0 Preparedness for Globalisation                                                           25
  4.1 Linking vulnerability reduction and preparedness for globalisation                     32
5.0. Special and differential treatment available to Caribbean States to                     35
     facilitate preparedness for Globalisation
5.1 The Support Matrix: A Representation of Support Available to                             37
     Developing Countries from International Institutions in Facing the
     Challenges of Changes in Global Trading Arrangements

APPENDIX                                                                                     43
Table 1: Vulnerability and other Socio-economic Variables of ACS Member States               44
Table 2: Vulnerability of Caribbean States and Per Capita GDP                                45
Table 3: Cost of Hurricanes to the Greater Caribbean                                         46
Table 4: Trends in Imports to GDP Ratios for the Greater Caribbean 1980-1997                 47
Bibliography                                                                                 48




                                                                                                    1
Executive Summary and Recommendations

This paper examines the position of the countries of the Greater Caribbean with respect to
their status in international trade negotiations, their vulnerability and their preparedness
for globalisation. Their status with respect to international trade negotiations, especially
as it relates to special and differential (S&D) treatment, is a critical issue if smaller
economies are expected to participate effectively in the new trading environment. The
WTO has outlined the S&D treatment that will be available to developing countries on
the one hand and least developed countries (LDCs) on the other. The issue is still under
negotiation in the FTAA.

The reasons why many States of the Greater Caribbean are economically vulnerable,
especially the microstates of the Eastern Caribbean, are explained in the paper.
Vulnerability is related to economic consequences of being small and high susceptibility
to natural disasters. Although many of the larger countries face similar challenges, such
as natural disasters, their size and greater resource base renders them more resilient and
therefore less vulnerable. Small states have to date been unsuccessful in having
vulnerability accepted as a basis for S&D treatment in international trade negotiations.

On the subject of globalisation, this represents a major threat to all the countries of the
Greater Caribbean, with the possible exception of Mexico. Mexico has taken major steps
in preparing for globalisation by liberalising its economy; it now enjoys the benefits of
free trade with the USA and Canada.1 The growth of Mexican trade and the economy
indicates that globalisation also provides significant opportunities if the proper political
and economic reforms are put in place. Nevertheless, some larger States of the Greater
Caribbean have to be aware of the reality that although they are less vulnerable, their per
capita income levels are very low and they face large pockets of poverty. This is the case
for countries such as Cuba, Haiti, Guatemala, Nicaragua and Honduras, which all have
populations of close to 5 million or more but per capita incomes of less than US$2,000.2
The situation for these countries can further deteriorate if they are not prepared for
globalisation.

Some of the smaller states have been successful in achieving relatively high levels of per
capita income,3 and are outperforming their larger counterparts in terms of indicators of
preparedness for globalisation, such as main telephone lines per thousand and adult
literacy rates. Though there is a long way to go for these smaller states, these are positive
indicators and will also play a role in reducing the potential effects of vulnerability. The
reality, though, is that a serious natural disaster or a significant deterioration in the terms
of trade of their main export product could reduce a microstate’s economic performance
dramatically over night – that, in essence is vulnerability. Furthermore, the impending

1
  Mexico is now the United States second largest trading partner having surpassed Japan and is now just
behind Canada. Since NAFTA came into effect in 1994, Mexican trade with the United States has nearly
tripled. In addition Mexico has bilateral agreements with Europe and several Latin American countries.
See “Globalization and the Opening of Mexico”, Economic Reform Today Prospering the Global
Economy, No.1, 2000. Center for International Private Enterprise.
2
  See Table 1 of the Appendix
3
  See Table 1 of the Appendix


                                                                                                          2
loss of preferential access to the EU market for bananas, sugar and rice, could have far-
reaching negative impacts on Caribbean ACP States. Fortunately, apart from S&D
treatment under the WTO, under the Cotonou Agreement between the EU and ACP
States, there are European Development Fund (EDF) resources to cushion the effects of
economic transition.

This paper outlines vulnerability in the context of the Greater Caribbean and links it with
preparedness for globalisation by clearly showing how measures taken to prepare for
globalisation will simultaneously reduce vulnerability. The important multilateral trade
agreements that are part of the globalisation process are outlined and their main
implications discussed. It is recommended that a Globalisation Preparedness Index be
developed to guide and assist States of the Greater Caribbean in tracking their
preparedness for globalisation. This index will accompany the vulnerability indices that
have already been developed. S&D treatment and assistance available to States of the
Greater Caribbean are seen as important catalysts to increasing preparedness for
globalisation and reducing vulnerability, so with the support of regional institutions
effective pursuit and use of these benefits should be maximized. The paper argues that the
worst position for a country to find itself in is to be both vulnerable and unprepared for
globalisation. If there is a safe position, it is being low in vulnerability and high in terms
of preparedness.


Recommendations

Regional Initiatives and Assistance from Regional Institutions

In order to deal with international trade negotiations, the dynamics of globalisation and to
effectively articulate the vulnerability argument, States of the Greater Caribbean need to
ensure that they have strong negotiating capacity so that their positions can be better and
more forcefully represented at international forums. Stronger negotiating capacity is
achievable through pooling resources at the regional level.4 This will reduce the
possibility of marginalization and the introduction of rules that are not in the best interest
of region. Small states must ensure that their vulnerabilities and disadvantages in the
global marketplace are amplified in all relevant forums.

Studies should be conducted to estimate the costs associated with implementing each
component of international trade agreements, such as those for intellectual property rights
(TRIPS), services (GATS) and standards. Such studies will better prepare countries in
negotiations for S&D treatment.

Efforts should be intensified to promote trade between states or trade blocs within the
Greater Caribbean. Increased opportunities should be found for smaller economies to
penetrate the markets of larger economies such as Mexico, Colombia, Venezuela,
Guatemala and Dominican Republic. Existing trade agreements within the Greater
Caribbean should be examined and adjusted, if necessary, to promote increased trade.

4 The Regional Negotiating Machinery (RNM) is intended to play this role for CARICOM states.


                                                                                               3
Alliances with Haiti should be pursued to identify mutual advantages that can be gained
as a result of its LDC status. For example, Haiti’s access to the EU under the Everything
But Arms (EBA) Agreement might benefit Haiti and its regional partners without
violating rules of origin criteria set out in the Agreement.

Given that global free movement of persons is not likely to be accepted by developed
countries as part of the globalisation process, States of the Greater Caribbean should look
at opportunities for regional free movement of persons and services. For example,
CARICOM should actively pursue the implementation of the Protocols dealing with the
free movement of persons and services. This could provide a “release valve” by
facilitating a more efficient reallocation of labour and other resources in the region as the
globalisation process deepens.

The ACS, ECLAC, CARICOM, the CDB and other regional institutions should intensify
their work with smaller States of the Greater Caribbean to diversify into other economic
activities. Business development in such areas as information technology, entertainment
services, homeopathic health products, indigenous cosmetics, and other high value-added
products and services is required to reduce the vulnerability of small states.
Diversification opportunities within the tourism industry should also be examined
carefully.

Support should be provided in the procedures for accessing special and differential
(S&D) treatment from sources such as the WTO, EDF resources from the EU, World
Bank resources and other concessionary assistance available to States of the Greater
Caribbean (and which are often under-utilised).5 The assistance could be given directly
by providing resources to put together proposals or indirectly by funding consultants to
assist. Given the short time period remaining before protection has to be reduced to meet
the WTO and FTAA requirements and for preferential treatment under the ACP-EU to be
available, access to such resources could act as a catalyst in helping smaller economies
make the necessary transition. In providing support, it should be clearly pointed out that
access to S&D treatment and concessionary funds requires a state to also meet certain
non-economic criteria such as those relating to human rights standards, governance,
corruption, and the participation of civil society in decision-making.

Regional institutions should continue to assist smaller economies to lobby for maximum
special & differential treatment for vulnerable states, especially for the microstates,
whose exposure is self-evident. Even if the maximum benefits provided to LDC’s cannot
be obtained, requests could be made to have LDC treatment granted for a reasonable
period should a vulnerable state be affected by a natural disaster or suffer a significant
adverse movement in its terms of trade.

Information could be sought and provided on initiatives that countries outside of the
region have taken to increase their preparedness for globalisation as well as reduce their
vulnerability. In addition, countries such as Mexico, that have been successful in dealing

5
    There is a 10 billion Euro accumulated balance remaining in the EDF under the ACP-EU Agreements.


                                                                                                       4
with liberalisation of trade and have negotiated major agreements with metropolitan
countries, should be asked to share information and provide technical assistance to their
Greater Caribbean partners.

Co-ordination of activities to pool resources should be intensified at the regional level.
For example, a regional pool of lawyers should be put together to assist in drafting
legislation in countries that are deficient in such competencies.6 A regional roster of
trade consultants could be assembled to assist with matters including the preparations for
negotiations, proposals for funding and calculation of the impacts of changes in
international trade arrangements. For example, pooling resources for marketing and
scheduling of regional tourism and musical events could also maximize returns each State
of the Greater Caribbean.

Assistance should be given to countries in developing the small and micro enterprise
sectors. Microentrepreneurs often pursue simple trading activities because they see few
other opportunities that they understand or consider worth pursuing. Profiles of many
other business activities should be developed showing the rate of return, set up costs,
operating costs and marketing requirements. These profiles could be promoted across the
Greater Caribbean so that micro and small entrepreneurs can identify opportunities to
diversify their activities based on their skills, knowledge and locations. Microfinance
programmes could be established to provide loans for this sector. Successful models
used in the Andean Community, Dominican Republic or in Jamaica, where loan officers
use laptops to facilitate the process and are paid based on incentive systems, could be
benchmarked.

On the social front, increased efforts and capacity building solutions need to be worked
out to reduce the risks of the AIDS pandemic, illicit drug trading, money laundering and
other threats across the Greater Caribbean.

Assistance should be provided in the development of a Globalisation Preparedness Index
to be used by States of the Greater Caribbean in tracking their performance in preparing
for globalisation. Support should also be continued for the development of a more
comprehensive vulnerability index that takes into account economic, social/political and
environmental factors.7

Country Level Initiatives

States of the Greater Caribbean must develop a clear understanding of all aspects of the
WTO, the FTAA, the ACP-EU and other Agreements that affect their trading
relationships. Preparation should be made in terms of a) making sure the correct
economic policies and programmes are in place, and b) ensuring that legal and other
requirements are compliant with the rules of the Agreements. Opportunities (such as

6
  Research by the CARICOM Secretariat reveals that in some of the Eastern Caribbean States there is only
one legal draftsperson in the office of the Chief Parliamentary Counsel. See “Removal of Restrictions
under Protocol II”, CARICOM Secretariat (April 2001) (Draft).
7
  UN ECLAC is in the process of developing a methodology for doing this.


                                                                                                           5
S&D treatment and funding) and threats (such as the removal of preferences, changes in
standards, intellectual property violations) should be carefully noted. This information
should be effectively communicated to the business community, customs officials,
important players in the local market, and the general public.

Governments and interest groups should not procrastinate and wait until 2004 before
starting preparations for the FTAA. Certain preparatory steps, such as amendments to
legislation as well as addressing public resistance in sensitive areas, could take much
longer than expected.

States that are members of the ACP should avoid waiting until 2007, when preferential
access to the EU market expires, to make necessary adjustments. The use of the 5.5 years
transitional period and the available European Development Fund (EDF) resources must
be optimized. Farmers and other producers must be continually reminded that they need
to start planning how and when to make transitional moves.

Preparation for globalisation must be prioritized. Priorities should include computer
training in schools, appropriate training for public and private sector workers,
development of the telecommunications and information technology industries, and
public awareness programmes.

Efforts should be made to make trade delegates more efficient and productive by having
them adequately trained and equipped with state of the art computer and
telecommunications equipment such as laptops, Internet connections, cellular phones that
can send and receive text messages and other personal digital assistants (PDAs). This
would enable them to retrieve and transmit information to and from their offices (and
other locations) readily and rapidly. In smaller states, it is not unusual for the trade desk
to be occupied by one or two persons who have to travel from meeting to meeting and
provide reports while dealing with day to day requests. These travelling officers need to
be trained and supplied with tools to become “virtual officers” preparing reports
wherever they are (even on airplanes), taking notes and retrieving messages during
meetings.

Countries that face relatively high transportation costs when trading should try to develop
industries where transportation costs are irrelevant or minimal relative to the value of
goods being traded e.g. information technology, knowledge based activities and
processing of primary products.

Countries with fragile eco-systems should ensure that properly conducted impact
assessments are carried out prior to the approval of large tourism developments.

Appropriate policies and programmes should be implemented locally to deal with social
challenges such as the HIV/AIDS and drug use and trafficking.




                                                                                            6
1.0 Introduction
The countries of the Greater Caribbean8 are quite heterogeneous, they vary in terms of a
number of features such as economic size, level of development, orientation of trade,
range of goods & services produced and traded, main language, and culture. They all
have in common the fact that they expect to be part of the FTAA by the end of 2004. As
developing countries, all countries of the Greater Caribbean have been accorded some
level of special and differential (S&D) treatment under the WTO. Without S&D
treatment, some smaller and less developed countries will be unable to implement some
of the agreements necessary for them to effectively participate in the new global trading
environment. To date, nothing concrete has been determined in the FTAA negotiations
where, no conclusion has yet been reached as to which countries will be classified as
“smaller economies” and what special and differential (S&D) treatment should be
accorded to those thus classified.

On a similar note, from the 1970’s to now, many small economies, especially small-
island developing states (SIDS), have been identified as vulnerable due to their smallness.
The special challenges that combine to create vulnerability are well documented9 and
supported by empirical analysis10. However, despite acknowledging these special
challenges, the main international organisations such as the WTO, the World Bank and
the IMF are not yet prepared to introduce a special category of “vulnerable” countries
that would be entitled to similar special and differential (S&D) treatment as is accorded
LDC’s.

Vulnerability is a reality in many small non-LDC economies, as is poverty in LDC’s.
However, vulnerable countries cannot afford to wait around hoping for similar treatment
as LDC’s, as it may never materialize in light of the fact that the path of global trading
arrangements, set by the WTO and the developed countries, is not moving in that
direction. This is not to say that efforts to negotiate the same treatment as LDC’s must be
discontinued, but the major objectives should be to reduce vulnerability, prepare for
globalisation and take advantage of whatever S&D treatment is currently available.
Vulnerable countries will be worse off if they eventually access maximum S&D
treatment because globalisation reduces them to LDC status, than if they make all efforts
to survive in a globalised environment but never access the S&D treatment available to
LDC’s.


8
  In this paper the countries of the Greater Caribbean refers mainly to the members of the Association of
Caribbean States (ACS), these are outlined in Table 1 of the Appendix.
9
  See Bishnodat Persaud “Small States: Economic Problems and Prospects” Bulletin of Eastern Caribbean
Affairs Vol. 12, No. 5, Nov-Dec. 1986.
See UNCTAD Secretariat, Problems of Island Developing Countries and proposals for concrete action,
Issues for Consideration, New York, 25 June 1990.
See Commonwealth Secretariat/World Bank Joint Task Force on Small States, 2000. “Small States:
Meeting Challenges in the Global Economy”.
See T.N. Srinivasan – “The Costs and Benefits of Being a Small, Remote, Island, Landlocked, or Ministate
Economy”, Research Observer 1, No. 2 (July 1986)
10
   See Briguglio, L. 1995. Small Island States and their Economic Vulnerabilities. World Development.
23:1615-1632.
Easter, C. “Small States Development: A commonwealth Vulnerability Index”, The Round Table 1999.


                                                                                                        7
The four-quadrant matrix below shows the options for countries given 1) level of
vulnerability11 and 2) preparedness for globalisation. The globalisation process has
developed momentum and is moving along inevitably. Unfortunately, globalisation does
not have a built in mechanism for protecting the vulnerable and the unprepared so
countries of the Greater Caribbean have to take matters in their own hands, utilise
whatever support there is and try to shape their own destiny. Whilst a country can
negotiate with a trading partner, it will not be able to negotiate with globalisation but, it
will have to negotiate all the challenges brought on by globalisation.

Table 1: Vulnerability and Preparedness for Globalisation
                Prepared for Globalisation          Not Prepared for Globalisation
High            Quadrant 1                          Quadrant 4
Vulnerability   Best position for vulnerable states Worst position for any state
Low             Quadrant 2                          Quadrant 3
vulnerability   Best position for any State         Worst position for non-vulnerable
                                                    States

Table 1 above indicates that the worst position that a country can find itself in is
Quadrant 4, where it is vulnerable and unprepared for globalisation. Given that size and
vulnerability are inversely correlated, the best position for a small economy in the short
run is likely to be Quadrant 1 but all efforts must be made to be less vulnerable. The
analysis will show that for some countries as they become more prepared for
globalisation they will become less vulnerable. A country should therefore be able to
reduce its vulnerability and better prepare itself for globalisation by tapping into the
S&D’s currently available. Therefore a link exists between vulnerability, preparedness
for globalisation and the effective use of S&D’s. The more S&D’s that are forthcoming
under the FTAA, the better will be the opportunity for smaller economies to be prepared
for globalisation.

It is worth noting that a country can be low in terms of vulnerability but very unprepared
for globalisation because its low vulnerability is due to factors not important to being
prepared for globalisation. For example, such a country may not be susceptible to natural
disasters and not highly dependent on international trade but may be characterised by
poor telecommunications infrastructure, minimal application of information technology,
and relatively low levels of training and manpower development. Such a combination
would put a country in Quadrant 3 above.12

On the other hand, a small country can introduce measures to simultaneously increase its
preparedness for globalisation and reduce its level of vulnerability. Such measures could
include putting in place a) state of the art telecommunications and information
technology; b) a relatively diversified economic base; and c) well trained and skilled
human resources able to engage in higher level economic activities. A small country

11
   There are several measures of vulnerability discussed in this paper, later the Commonwealth Secretariat
Index will be used to compare all ACS countries.
12
   In fact, if one broadened the definition of vulnerability one could argue that such a country is also
vulnerable


                                                                                                             8
taking these actions could move somewhere between Quadrants 1 and 2. Effective use of
available S&D’s could act as a catalyst to strengthen the position of small economies.

Structure of report
This remainder of this report will initially focus on the issue of small economies of the
Greater Caribbean and their status in international trade negotiations, especially as it
relates to special and differential (S&D) treatment. The issue of vulnerability will be
addressed, with close attention paid to the relative position of micro economies (such as
those in the OECS) versus economies of greater size.13 The report will then define and
discuss preparedness for globalisation, paying attention to the WTO, the FTAA and ACP-
EU agreements. The next step will be to look at the S&D’s that are currently available to
States of the Greater Caribbean.




13
 The 25 full members of the ACS will be examined in the analysis (see Appendix 1 for listing of all
member countries).


                                                                                                      9
2.    Small Economies and International Trade Negotiations - the WTO and FTAA

In international trade negotiations, there have been persistent calls for special and
differential treatment (S&D) for smaller countries and those with lower levels of
economic development. These countries feel it is necessary for them to receive S&D
treatment if they are expected to participate effectively in the global trading environment.
The way to deal with the differences in size and development of countries has been the
subject of wide-ranging debate both within the World Trade Organisation (WTO) and in
the process leading up to the creation of the Free Trade Area of the Americas (FTAA).

In the WTO framework, two basic categories of countries are recognised as candidates
for S&D treatment. One category is that of “Developing Countries”, while the other is
“Least Developed Countries” (LDCs), which are countries with a per capita income of
less than US$1,000. It must be noted that all the member-countries of the Association of
Caribbean States (ACS) are Developing Countries, with only Haiti, Guyana, Nicaragua
and Honduras having per capita incomes less than US$1,000.

The WTO provisions for S&D treatment fall under the following categories:14
1. Provisions aimed at increasing trade opportunities
2. Provisions that require WTO Members to safeguard the interests of developing
   country Members
3. Flexibility of commitments
4. Longer transitional time periods
5. Provisions for technical assistance

The S&D provisions are typically more liberal for LDCs relative to developing countries.

Under the first provision listed above falls the so-called “Enabling Clause” which
specifies that countries may “grant differential and preferential treatment to developing
countries without necessarily extending it to other countries. This resolved the conflict of
S&D treatment with the application of the Most Favoured Nation Clause (Article 1 of the
General Agreement)”.

The “Enabling Clause” had four main elements:
 preferences granted by developed countries to the developing countries in customs-
   related matters i.e. lower tariff rates.
 more favourable treatment in multilateral negotiations of non-tariff measures
 preferences arising from regional or general agreements concluded between
   developing countries in the framework of reciprocal trade
 special treatment of the Least Developed Countries within the context of any general or
   specific measure in favour of developing countries.

The Enabling Clause recognises that the developed countries do not expect reciprocity in
exchange for the commitments obtained in trade negotiations (reduction of tariffs and

14
 Under the FTAA, smaller economies are likely to expect S&D treatment beyond that available under the
WTO (i.e. WTO plus).


                                                                                                   10
barriers to trade) or that the developing countries will make contributions incompatible with
their development, financial or trade needs, i.e. they are not required to make concessions
that would affect them adversely.

The Enabling Clause has served to protect preferential agreements granted by developed
countries to developing countries. These include the implementation of the Generalised
System of Preferences (GSP), the Caribbean Basin Initiative (CBI), NAFTA Parity, the co-
operation agreements and trade preferences of the Lomé Conventions, and the recent
Cotonou Agreement. The Cotonou Agreement will enable the European Union to grant a
super GSP to the “Least Developed” African, Caribbean and Pacific States (ACP) under the
“Everything But Arms” Initiative whereby all exports from these countries will be granted
duty-free entry to the European market from 2008.

Technical and financial assistance is very important for many developing countries because
of their limited human and financial resources. To implement some of the agreements, such
as those dealing with intellectual property (TRIPS), services (GATS), and standards require,
amongst other things, substantial legal and financial resources. Without assistance some
smaller countries will not be able to implement these agreements on time or at all, which
will limit their ability to participate effectively in the global trading arena. The longer
transitional periods and other accommodations mentioned above will help, but technical and
financial resources will be critical. These factors help to point out the importance of S&D
treatment for smaller countries and why the outcome of negotiations under the FTAA are
considered important to so many countries of the hemisphere.

The situation concerning S&D treatment in the Free Trade Area of the Americas has not yet
been ironed out as in the case of the WTO. The FTAA Ministerial Declaration at the 6th
meeting of Trade Ministers in Buenos Aires in April 2001 expressed the following:
      We reaffirm our commitment embodied in previous Ministerial Declarations to take into
      account, in designing the FTAA, the differences in the levels of development and size of
      the economies in our Hemisphere to create opportunities for the full participation of the
      smaller economies and to increase their level of development. We recognise the broad
      differences in the levels of development and size of the economies in our Hemisphere, and
      will remain cognizant of these differences in our negotiations so as to ensure that they
      receive the treatment they require to ensure the full participation of all members in the
      construction and benefits of the FTAA.

The FTAA discussions tend to refer to “Smaller Economies” rather than “Small
Economies”. “Smaller Economies” is a relative concept based on countries’ resource bases
and levels of development. “Small Economies”, which presents serious assessment
difficulties, is a more absolute rather than relative concept. No acceptable definitions have
been determined to date and the outcome is likely to be a political one.

In 1998, the countries negotiating the FTAA agreed to create a Consultative Group on
Smaller Economies whose functions would be to ensure follow-up to the negotiations,
conduct evaluations and make recommendations to the Trade Negotiations Committee
(TNC) on issues of concern to Smaller Economies.



                                                                                                  11
To date, the Consultative Group has had little real impact and has come up against
problems including the divergence in the criteria used to define “Small Economies” or
“Smaller Economies”, which renders the concept somewhat dysfunctional. In some cases,
it has been stated that the only difference that exists in the hemisphere is between the
United States and Canada on one hand, and the remaining countries on the other.

Heterogeneity amongst the countries leads to definitional problems where some countries
are view themselves as “Small Developing States”, others are “Least Developed
Countries”, while yet others are “Small Economies” or “Smaller Economies”. Moreover,
the objectives within the group of small countries are diverse and not always clear. In
addition there is variation in the relative status of small economies in terms of the various
trade disciplines. As long as S&D treatment is at stake it is likely that most countries will
be seeking an opportunity to define themselves so as to qualify. Arriving at a consensus
is rendered improbable when all the players in the upcoming negotiations (big and small
economies) sit at the same table to decide what should be the treatment for the small
economies.

Since the Declaration by Trade Ministers of the FTAA in Buenos Aires in April 2001,
and the Declaration of the Heads of State at the 3rd Summit of the Americas held in
Quebec in 2001, the issue of Smaller Economies has gained greater prominence. Yet, the
grey areas still remain and must be resolved. The question is how should the issue be
approached? Two approaches that could be considered are a) applying a quantitative
definition of “small economy” and b) deriving a definition from political consensus.

Quantitative definition
A possible option is to consider a definition of “small economies” based on a series of
quantitative indicators, the following classifications could be examined:
        a) Small States or Small Island Developing States (SIDS).
        b) Least developed Countries (GDP per capita less than US$1,000 per year)
        c) A combination of a and b above
        d) Definition based on a series of indicators – such as population, GDP, physical
            size, proximity to major markets - with which to form a compound index for
            establishing country categories.


Option a) would be limit “small economies” to a very small group of countries
comprising the less developed countries in CARICOM15. There is a natural break in
terms of population and GDP between this group and the next group in the spectrum,
which includes Suriname, Barbados, Trinidad & Tobago, Jamaica, Bahamas, and
Panama. There is then a natural break before the next group, which includes Dominican
Republic, Cuba, Guatemala, Costa Rica, and El Salvador. There is then a massive gap
before the next group, which includes Venezuela, Colombia, and Mexico.


15[1]
    Antigua & Barbuda, St. Lucia, St. Vincent & the Grenadines, St. Kitts & Nevis, Dominica, Grenada
and Belize. Belize’s population is not much less than that of Barbados but its level of development and
GDP are much lower.


                                                                                                          12
Option b), which includes only countries with per capita income less than US$1,000
would also be limited because only four (4) countries - Haiti, Guyana, Honduras and
Nicaragua - would qualify for inclusion in the “small economy” category.

Option c) would be a combination of “ Small States” and “Least developed Countries”, in
which case eleven (11) of the FTAA member-countries would fall into that category.

Option d) would be the complex, requiring the selection of the indicators to form an
index. It is likely that one or more countries would be dissatisfied with a classification,
especially if they are omitted.

Towards a negotiated definition
The above discussion reveals that the “smaller economies” of the hemisphere fall along a
continuum in terms of size and development. It is unlikely that a consensus would be
reached on which should be considered “small economies” because there is no clear cut
quantitative criterion that can be used to draw the line of demarcation – the process could
therefore be derailed. Consequently, the only way to succeed in classifying the countries
according to size and levels of development will be through negotiation in which an
empirical reference will be a useful but insufficient tool.

In terms of all the FTAA countries, it will be easy to identify the extremes, on one hand
the United States and Canada and, on the other, the Small States and the relatively less
developed countries. Various groups would have to be formed from the remaining
countries based on the perspective of “Smaller Economies”.

This type of perspective would entail joint negotiations with temporary differential
arrangements to be granted product by product, sector by sector and according to
disciplines, thus facilitating different adjustment conditions and timeframes among the
countries. Small states and Least Developed Countries would benefit from permanent
differential treatment.

The second task would be to establish what would comprise the special and differential
treatment in terms of issues and disciplines, and what type of support it would provide for
the countries to ensure better integration into the global economy. This would require a
number of working methods:

   a) Identify the elements considered lacking in the current agreements and which
      could contribute to the better integration of the “smaller” countries in the
      multilateral trade systems.

   b) Examine each chapter and article in detail in an effort to locate those areas in
      which special treatment could be obtained and in which there would be room to
      manoeuvre in the application of the article.

   c) Establish reasonable limits for the temporary reciprocal and differential treatment
      to avoid affecting the creation of the FTAA.



                                                                                              13
   d) Decide, in addition to the contents of the agreements, what other actions could be
      carried out to help the countries with fewer resources to become successfully
      integrated into the process. These will include providing technical and financial
      assistance, and support to improve institutional capacities, bearing in mind that
      this is merely a free trade agreement and not a more in-depth integration
      agreement.

Some recommendations have already been made in this area by “smaller economies”.
For example, CARICOM, Guatemala, El Salvador, Honduras, Nicaragua, Dominican
Republic, Panama and the Andean Community have recommended to the TNC (through
the Negotiating Group on Market Access) certain deadlines, which would allow “smaller
economies” additional time to facilitate the adequate treatment of issues of levels of
development and size. Amongst other things, the group proposed that July 1, 2002 be set
as the deadline for negotiation of the framework and general principles on FTAA Rules
of Origin, ensuring special and differential treatment, taking into account differences in
the levels of development and the size of economies. The entire group and subsets of the
group have made proposals to the TNC through the Negotiating Group on Competition
Policy, the Negotiating Group on Agriculture, as well as other Negotiating Groups.

Such initiatives show that issues relating to S&D treatment are being considered and by
country groupings that see themselves as naturally fitting into the category of “smaller
economies”.

Classifying the countries of the FTAA into groups that fit well together is quite a task;
however, two possible scenarios based on size and development are presented below.

Classification Scenario 1
   1) A group of “Small States” in accordance with the World Bank and
        Commonwealth definition (population of 1.5 million or less) together with the
        UN and WTO’s concept of Least Developed Countries (per capita income of less
        than US$1,000). These countries (about 11 could qualify for this category) could
        benefit from permanent, reciprocal, differential treatment, especially those
        considered small states (approximately 600 thousand inhabitants and seven
        countries). The main problem with this group of countries is that both Honduras
        and Nicaragua have already concluded an agreement with Mexico for temporary
        differential reciprocity.

   2) A second group could include the Central American countries, the more
      developed countries of CARICOM, the Dominican Republic, and perhaps a
      country from South America, possibly from among those that receive special
      treatment in the framework of ALADI. With regard to Uruguay and Paraguay, it
      will depend on the type of negotiations that they have held with MERCOSUR.

   3) A third group could comprise Colombia, Venezuela and Peru.




                                                                                            14
       4) A fourth group could include Mexico, Brazil, Argentina and Chile.

       5) Finally, there would be a group comprising the United States and Canada.

Classification Scenario 2

1) A first, integrated group called “Small Economies”, which would include the
   member-countries of CARICOM and SIECA16, together with Uruguay, Paraguay,
   Panama and the Dominican Republic. However, consideration must be given to the
   possibility that Uruguay and Paraguay might be incorporated into the MERCOSUR
   framework, in which case they would not be considered part of this group.

2) A second group of countries called “Least Developed Countries” consisting of Haiti,
   Guyana, Nicaragua and Honduras.

3) A third grouping called “Developing Countries” which would feature the countries of
   the Andean Community. The classification of Bolivia and Ecuador depends on the
   decision by the rest of the Andean Community since they are seeking differential
   treatment as established by the Montevideo Agreement of 1980.

4) A fourth group that would comprise Mexico, Brazil and Chile.

5) Lastly, a group comprising the United States and Canada.

The above scenarios could be examined and used as a starting point for classifying
countries of the Hemisphere in regard to FTAA negotiations.




16
     This includes Guatemala, El Salvador, Honduras, Nicaragua, and Costa Rica


                                                                                     15
3.0         The Vulnerability of Caribbean States

All the countries of the Greater Caribbean are to some extent vulnerable, Caribbean SIDS
can indicate their vulnerability by referring to the impact of Hurricanes Marilyn or Lenny
while Central American counterparts refer to the impact of Hurricane Mitch. Venezuela
can refer to the impact of the recent 1999 floods and Mexico can refer to various natural
disasters that it has experienced. Members of the OECS can express their vulnerability in
terms of the impact of the OECD rulings on their offshore banking sector while Mexico
can do so in terms of its peso crisis. In absolute dollar terms the damage is often greater
in larger countries of the Greater Caribbean than their smaller counterparts, however
relative to size and economic power of the country, the damage is typically much greater
in smaller countries. Although we are all vulnerable to some extent, there is a strong case
for arguing that in relative terms the small countries are more vulnerable.17

Over the last three decades, the special disadvantages of small states and particularly
small island developing states (SIDS) have been on the agenda of small states themselves
and of international organisations such as the UN and the Commonwealth Secretariat.
The body of literature on the subject is quite extensive but most works conclude that
small states tend to be more vulnerable. Most work in this area has focused mainly on
economic vulnerability or the economics of vulnerability. However, there is a growing
recognition of the fact that vulnerability is broader than pure economics and should be
viewed in a more multidisciplinary way with more focus on social,18 environmental and
even political implications.


Determinants of Vulnerability

There has been consistency in the literature on the main determinants of economic
vulnerability in small states; the main factors examined across studies are discussed
below.

Limited capacity and inability to exploit economies of scale
The small size of many states means they cannot exploit economies of scale in
production, exports, provision of public services and infrastructure. Related to this is the
fact that they have to deal with indivisibilities in the provision of public goods and
services, which lead to higher unit costs and lower international competitiveness. In the
presence of a small human resource pool and emigration of skilled resources the outcome
is higher cost of skilled labour and shortages of labour. This shortage of skilled human
and other resources combined with lack of bargaining power prevents these states from
effectively presenting and defending themselves in international finance and trade
negotiations




17
     See Table 3 of the Appendix for more details.
18
     ECLAC is currently developing the methodology to incorporate social vulnerability in an index.


                                                                                                      16
Openness
Vulnerable economies are open economies depending on trade and are more vulnerable
to changes in international trade rules and terms of trade. Related to this is their high
dependence on external sources for food and energy, which is a strong indicator of
vulnerability in that anything that interrupts the flow of trade could render a nation unable
to feed itself.

Table 4 of the Appendix uses the imports to GDP ratio as a measure of openness and
compares the countries of the Greater Caribbean. It is shown that the members of
CARICOM are more vulnerable than their larger counterparts. However, while smaller
countries have tended to become less open, the opposite has been the trend for larger
countries. This reflects to some extent more rapid growth and economic diversification
efforts in smaller countries as well as increased trade liberalisation in larger countries.

Lack of a diversified economic base
Vulnerable countries are less diversified and rely heavily on a limited range of exported
goods (such as bananas, sugar, tourism) to generate foreign exchange, these goods are
often primary goods with minimal or no value added. Trade liberalisation poses a threat
because of the phasing out of special trade protocols, such as those with the EU on
bananas and sugar, which were critical for development in these states.

Many countries of the Greater Caribbean have made efforts to diversify their economies.
The smaller states have tended to move from dependence on primary products to a mix
including tourism and financial services.

Declining aid flows
Vulnerable countries have experienced a decline in external aid flows (on which they
were highly dependent) in recent years resulting in the need to depend on domestic
savings and external private investment to foster development. Not only does aid play a
role directly in assisting development but it also improves the perception of private
investors in terms of a state’s credit worthiness.

ODA flows have declined because of factors including a) the change in geo-political
focus by donor countries to Eastern Europe, b) the per capita income of most Greater
Caribbean States has increased to levels that graduate them from eligibility to such flows,
and c) the more liberalised macroeconomic policies pursued since the 1980’s have
induced greater flows of FDI, which have substituted for ODA in some development
projects.

With the decline in external assistance and the increased liberalisation under the WTO
and FTAA, the concerns of smaller economies have increased rather than decreased. The
fact is that while other factors are changing, their small size (and associated
disadvantages) remains a constant reality.




                                                                                              17
Higher transportation costs due to being more isolated
The location of vulnerable countries typically results in high transport costs which when
factored in result in less competitive exports and more expensive vital imports.

Greater susceptibility to natural disasters
Vulnerable countries have a greater susceptibility to natural disasters, which can generate
costs greater than a country’s GDP in terms of lost production and exports, infrastructure
damage, loss of income and development opportunities. In addition, they face other
environmental challenges including freshwater management, sea-level rise, waste
management and marine pollution.

The United Nations and Vulnerability
Discussions on the special case of small island states has been on the UN agenda since
the early1970s when UNCTAD focused on disadvantages associated with insularity and
remoteness. UNCTAD developed these issues in the 1980’s and in1990 it organised a
special meeting of experts from small island states and from donor countries to focus on
the problems of small island states.19 The problems outlined included: shortage of
resources, susceptibility to natural disasters, environmental fragility, transport and
communications, security and related risks, human resource constraints and institutional
weaknesses.

The Alliance of Small States (AOSIS) was formed in 1990 during a UNCED Conference
on Climate Change with the objective of being able to lobby more effectively on the
consequences of climate change for small island developing states (SIDS). At the 1992
UNCED Conference in Rio, it was agreed that a separate international conference would
be held to deal with the specific circumstances of SIDS. The Conference was held in
Barbados in 1994, and a Programme of Action for the Sustainable Development of Small
Island Developing States (SIDS-PoA) was adopted. The SIDS-PoA identified fourteen
(14) priority areas requiring action in the short, medium and long term to ensure the
sustainable development of SIDS.20 As the Secretariat, with CARICOM, for the SIDS-
PoA, ECLAC plays a leading role in monitoring and providing support for countries in
the implementation of the SIDSPoA in the Caribbean.

The SIDS-PoA also identified the need to develop vulnerability indices to reflect the
status of the SIDS and which should integrate their economic and ecological
vulnerability. Such indices could supplement other measures used by international
organisations and donors to determine the value and nature of assistance to these
countries and other small states.



19
   UNCTAD Secretariat, Problems of Island Developing Countries and proposals for concrete action, Issues
for Consideration, New York, 25 June 1990.
20
   The priority areas are: 1) climate change and sea-level rise; 2) natural and environmental disasters; 3)
management of waste; 4) coastal and marine resources; 5) freshwater resources; 6) land resources; 7)
tourism; 8) biodiversity resources; 9) national institutions and administrative capacity; 10) regional
institutions and technical co-operation; 11) transport and communication; 12) science and technology; 13)
human resource development and implementation, and 14) monitoring and review.


                                                                                                        18
The Commonwealth Secretariat and Vulnerability

The issue of vulnerability of small states has been an important item on the agenda of the
Commonwealth Secretariat since the mid-1980s.21 Initially it was more focussed on
issues of military and political security in light of the Cold War and in the wake of the
Grenada invasion. At that time small states were loosely defined as those with
populations of one million or less. The debate still continues as to what constitutes a
small state. In more recent work carried out by the Commonwealth Secretariat/World
Bank Joint Task Force on Small States, a population of 1.5 million or less has been used
to delineate small states.22 This includes microstates like Montserrat, with a population of
4,500 as well as countries of the size of Trinidad & Tobago.

From as early as 1986, the Commonwealth Secretariat addressed the issue of small states
and their vulnerability and observed that:23

“Small states do not stand out as being in any unfavourable position among developing countries in per
capita income. However, even with relatively high levels of per capita income, small states tend to remain
weak in terms of total economic size as well as bargaining power. Moreover, being relatively open, they
are particularly vulnerable to external shocks and cyclical fluctuations in the world economy…….. thus
even with higher per capita incomes small economies may continue to be characterised by economic
instability and vulnerability. For these states, therefore, per capita income is not an adequate indicator of
level of development.”

This summary of the status of small states is basically the same view held by the
Commonwealth Secretariat today as well as others that champion this cause – the view
has really not changed significantly over the years.



Alternative perspectives on vulnerability of small states

Vulnerability arguments made by (and in favour of) small states have not yet been
adopted and used as criteria for determining assistance by the UN, the WTO and other
international organisations. This reflects, amongst other things,24 the fact that there are
other perspectives on the issue. There is the view that smallness is neither a necessary
nor a sufficient condition for slow economic development.25 It is argued that in most
cases the challenges are not peculiar to small economies or they can be addressed through
suitable policy measures. For example, with respect to natural disasters, it is argued that
even the smallest countries could take steps to protect themselves. Options include

21
   “Vulnerability: Small States in the Global Society” – Commonwealth Consultative Group 1985.
22
   Commonwealth Secretariat/World Bank Joint Task Force on Small States, 2000. “Small States: Meeting
Challenges in the Global Economy”.
23
   See Bishnodat Persaud “Small States: Economic Problems and Prospects” Bulletin of Eastern Caribbean
Affairs Vol. 12, No. 5, Nov-Dec. 1986. Persaud was Director, Economic Affairs division, Commonwealth
Secretariat.
24
   Another major reason is that the measurement of vulnerability has not yet been fully agreed upon.
25
   T.N. Srinivasan – “The Costs and Benefits of Being a Small, Remote, Island, Landlocked, or Ministate
Economy”, Research Observer 1, No. 2 (July 1986)


                                                                                                           19
building up stocks of food after good harvests to cushion the impact of droughts or
building up stocks of foreign exchange to buy imports if production is hit by a natural
disaster. It is also argued that many small economies have a significant proportion of
their labour force working abroad, which helps to provide a stable source of foreign
exchange.

With respect to openness small states, such as Hong Kong and Singapore, are cited as
cases that have developed the entrepreneurship and skills to diversify widely. Concerning
higher transportation costs, Switzerland, which has exported products of high value and
low weight such as watches and instruments, is cited as an example of how to circumvent
this problem.

The proponents of the “vulnerability of small states” would not disagree entirely with
these alternative views but would explain that the determinants of vulnerability are more
prevalent and more pronounced in small states than larger states, which is the real issue.


3.1. Measuring Vulnerability

Over the last decade, several efforts have been made to construct vulnerability indices
and estimate them using data from over a sample of small and large developing countries.
The results from four such studies are presented in this paper.26 Table 9 below shows the
ranking of the 15 countries with highest rankings indices for Briguglio, Crowards, the
Vulnerability Impact Index and the Commonwealth Vulnerability Index.

Criticisms of the Vulnerability indices
Vulnerability indices have been criticized because a certain amount of subjectivity is
involved in selecting the variables and the weights27 to be used in the index. There are
also measurement problems associated with trying to quantify qualitative factors such as
economic exposure, which can lead to incorrect conclusions. Apart from the CVI none of
the others include a variable reflecting a countries resilience or ability to recover from
external shocks.




See Briguglio, L. 1995. Small Island States and their Economic Vulnerabilities. World Development.
23:1615-1632.
See Crowards, C. and Coulter, W. “Measuring the Comparative Economic Vulnerability of the Eastern
Caribbean”. Journal of Eastern Caribbean Studies September 1999, Vol.24, No.3:41-80.
See Commonwealth Secretariat. 1999 “Small States: A Composite Vulnerability Index.” Presented at the
Conference on Small States, St. Lucia, February 17-19, 1999. The paper was prepared by Jonathan Atkins
and Sonia Mazzi.
Easter, C. “Small States Development: A commonwealth Vulnerability Index”, The Round Table 1999.
27
     This criticism applies to the Briguglio and Crowards studies.


                                                                                                    20
The omission of other environmental28 as well as social variables is a major deficiency of
the indices in light of the fact that environmental concerns are considered amongst the
most important issues related to the sustainable development of SIDS and other Greater
Caribbean States. 29 Some of the social issues such as HIV/AIDS, the illicit drug trade
and labour migration, still need to be captured in a comprehensive composite index of
vulnerability. The four indices mentioned in this paper essentially deal with economic
vulnerability.

     Table 2: Comparing the Highest 15 Ranked Countries Using Three Vulnerability
                                       Indices30

Rank UNCTAD/                        Crowards               Vulnerability             Commonwealth
     Briguglio                      Index                  Impact Index31            Vulnerability
                                                                                     Index
  1      Antigua & Barbuda          Anguilla               Vanuatu                   Sao Tome
  2      Tonga                      BVIs                   Antigua & Barbuda         Vanuatu
  3      Seychelles                 Cayman Islands         Tonga                     Tonga
  4      Vanuatu                    St. Kitts & Nevis      Bahamas                   Kiribati
  5      St. Kitts & Nevis          Vanuatu                Botswana                  Samoa
  6      St. Lucia                  Sierra Leone           Swaziland                 Dominica
  7      Chad                       St. Lucia              Gambia                    Antigua & Barbuda
  8      Singapore                  Antigua & Barbuda      Fiji                      Solomon Islands
  9      St. Vincent & Grenadines   Guyana                 Maldives                  Maldives
  10     Grenada                    Rwanda                 Singapore                 Equatorial Guinea
  11     Bahamas                    Seychelles             Solomon Islands           Gambia
  12     Jamaica                    Bahamas                Dominica                  Grenada
  13     Kiribati                   Maldives               Guyana                    St. Kitts & Nevis
  14     Mauritius                  Haiti                  Djibouti                  St. Vincent
  15     Belize                     Jamaica                Grenada                   Djibouti
    No.                 8                   10                      5                           5
 Caribbean
 Countries




Applications of the Vulnerability Indices

Despite the criticisms of the vulnerability indices, they can be applied in practical ways
such as the following:

28
   An Environmental Vulnerability Index has been developed. See Kaly, U., Briguglio, L., McLeod, H.;
Schmall, S., Pratt, C., and Pal, R. “Environmental Vulnerability Index (EVI) to summarize national
environmental vulnerability profiles” SOPAC, 1999.
29
   There is also the concept of Political vulnerability that is discussed by Downs and Mamingi “The
Measurement of size and Implications for the Survival of Small States in the Global Economy” 2000. 5th
Annual ECCB Conference on Development. Political vulnerability relates to the (lack of) influence that
small states have in the political/diplomatic arena compared to the more powerful larger states.
30
   Countries highlighted in bold underlined writing are those appearing in the top 15 in all three indices.
Those shown in large italicized writing are considered large states.
31
   Originally referred to as the Composite Vulnerability Index.


                                                                                                              21
    Countries can use the vulnerability indices as tools to assist in the development of
     appropriate domestic policies and the implementation of effective development
     programmes. An assessment of the elements of the vulnerability index on a case by
     case basis can identify the specific areas of vulnerability that need to be addressed
     and policies developed accordingly as well as the appropriate assistance sought.
    Countries can use them as an additional criterion in cases where the multilateral or
     hemispheric development community is making decisions about their treatment.
     Such as the graduation from LDC status (relevant to Haiti), access to concessional
     funding from International Financial Institutions, or eligibility for S&D treatment.

 Categorization of States of the Greater Caribbean in terms of Vulnerability – Application
of the Commonwealth Vulnerability Index

Despite not being perfect, the Commonwealth Vulnerability Index throws light on the
challenges faced by many developing countries, especially in terms of economic
vulnerability. The Index has been refined as more thinking is applied and does
incorporate resilience, which is very important in assessing vulnerability. The following
analysis focuses on full member States of the ACS and compares vulnerability measured
by the CVI with several socioeconomic variables. This provides a more comprehensive
view of the characteristics of vulnerable states. The analysis is based on a set of tables
contained in the Appendix.

Vulnerability and other socioeconomic factors
1. Table 1 of the appendix classifies ACS members in terms of vulnerability32 and
   several other socio-economic factors such as: geographic size, population,
   GDP/capita, GDP, physical type of state (in terms of small island, large island or
   mainland), UNDP Human Development Index, trade blocs, language.
2. In Table 2 of the Appendix, vulnerability is crosstabulated with per capita GDP
   (1998). The Table illustrates that vulnerability is not to be confused with poverty.
   This is indicated by the fact that Haiti, with low per capita GDP, is in the medium
   vulnerability category while Bahamas with a per capita GDP nearly 30 times greater
   is in the high vulnerability category. This comparison clearly indicates the fact that
   vulnerable countries may have high per capita incomes but could be highly exposed
   to exogenous shocks over which they have little or no control, and relatively low
   resilience to withstand and recover from these shocks.

Other interesting findings were
 Caribbean States with the smallest population are typically the most vulnerable and
   shows clearly that the SIDS are amongst the most vulnerable.
 States that ranked the lowest on the UNDP Human Development Index were not in
   the high vulnerability categories. This helps to show that the omission of social
   variables in constructing the CVI is a deficiency of the index.



32
  The Commonwealth Secretariat used the Vulnerability Index to categorize the 111 countries studied into
low, medium and high vulnerability. Estimates were made for all ACS Member States, apart from Cuba.


                                                                                                      22
To get a clearer perspective of which components of vulnerability dominate for each
country it is necessary to analyze the components of the CVI for each member. The main
components of vulnerability used to construct the CVI were:
1. The lack of diversification (measured by UNCTAD’s Diversification Index)
2. Export dependence (proportion of exports in GDP)
3. Impact of natural disasters (proportion of the population affected)
4. Resilience (measured by average GDP)

Diversification
18 of the 25 countries were low in terms of diversification. Mexico stood out as the most
diversified Member of the ACS.

Export Dependence
11 of the 25 States showed high export dependence. Apart from Trinidad & Tobago,
Suriname and Haiti, all CARICOM Members fell into this category.

Susceptibility to Natural Disasters
11 ACS Member States fell into the category of high susceptibility to natural disasters.
These were all the OECS countries, except St. Kitts & Nevis, Jamaica, Dominican
Republic, El Salvador, and Haiti. It should be noted that the CVI was calculated using
data up to 1996 so the effects of Hurricane Mitch and more recent disasters would not
have been captured.

Resilience
14 ACS Member States display low resilience, which means they are limited in their
ability to respond to the impact of external shocks. All CARICOM countries, except for
Jamaica and Trinidad & Tobago showed tendencies towards low resilience. The limited
capacity and limited access to external capital (as well as the lower average size of GDP)
of countries can be a major factor that determines their ability to recover quickly.



3.2. Recent Initiatives and Developments in the Area of Vulnerability of Small
     Developing States

The issue of vulnerability of small states has not left the agenda of certain international
and regional agencies and groupings; some recent initiatives include:

    Commonwealth Ministerial Mission on Small States (July 1998)33 - set up with the
     aims of raising the awareness about the vulnerabilities of small states and to advocate
     the need for greater flow of resources and the special and differential treatment of




33
  The Mission was chaired by the Prime Minister of Barbados and included Deputy Prime Ministers from
Lesotho and Mauritius and Minister of Foreign Affairs from Fiji and New Zealand.


                                                                                                   23
     these countries in the international system. 34 The Mission was quite successful and
     was able to have the World Bank agree to establish a Joint Task Force with the
     Commonwealth Secretariat35. UNCTAD and the IMF agreed to support the work of
     the Task Force with UNCTAD playing an active role in looking at graduation issues.
     The WTO accepted the challenges of vulnerable small states despite not being able to
     recognize them as a special category. The EU was also favourably disposed to most
     of the recommendations and recognised the need for longer transition periods for
     smaller states in successor arrangements to Lomé.

    Seminar on Small Island Developing States, Vulnerability, Programme of Action for
     Sustainable Development (1998) - convened at the ACP Secretariat in Brussels in
     September 1998. The conference noted that since the Cold War ended, the
     vulnerability of small states had increased as the geopolitical concerns of small states
     have been replaced by economic and environmental concerns as a consequence of
     globalisation.

    Report by UN ECLAC on the Vulnerability of Small Island Developing States of the
     Caribbean (March 2000) - focused on the Caribbean SIDS and looked at the
     vulnerability and the issue of sustainable development in the context of globalisation
     focusing on the EU, the FTAA, and the WTO.

    Report of the Commonwealth Secretariat/World Bank Joint Task Force on Small
     States (April 2000) - looked at the (external) support that small states needed to
     transition to the changing global trading regime and examined new challenges and
     opportunities from globalisation.

    UN Call for Action (2000) - the paper36 restates the problems of Eastern Caribbean
     states emphasizing issues like the increased pockets of poverty throughout the region;
     and the negative impact that liberalisation has had on economic growth, the labour
     market, and the quality of social services.

    Eastern Caribbean Central Bank 5th Annual Conference on Development (October,
     2000) - the theme of the conference was “Facing up to challenges and opportunities
     of our smallness.” Issues relating to the size and vulnerability of small states were
     discussed. An important consensus reached was that Caribbean people had to take
     responsibility for solving their own problems by using their inventiveness37 and their
     minds.38



34
   See Jackson Karunasekera, “Statement on the Outcome of the Commonwealth Ministerial Mission on
Small States” (8-15 July 1998), at ACP Seminar on Small Island Developing States, Vulnerability,
Programme for Action for Sustainable Development and Opportunities post-Lomé
35
   The Joint Task Force was formed and the report is discussed below.
36
   “A UN call for Action:” Reducing Vulnerability in the Micro-States of the Eastern Caribbean”,
produced by the Office of the UN Resident Coordinator, Barbados and the OECS, Barbados, June 2000.
37
   James, V. “Human Development Indicators in Small Developing States” 2000.
38
   Witter, M. “Consensus Building and the Development of Small States” 2000


                                                                                                     24
4.0 Preparedness for Globalisation

This section of this paper outlines some of the important steps that the states of the
Greater Caribbean need to take in order to prepare for globalisation, all of these steps
should help to reduce their vulnerability. The final section of the paper will outline the
S&D treatment available that can be used to reduce vulnerability and prepare for
globalisation.

The definition of globalisation is still the subject of debate. There is the distinction
between the process of globalisation and its ideological usage of the term in the 1990s.39
There are discussions on the distinction between globalisation and liberalisation or
globalisation and interdependence. For the purpose of this report, globalisation will be
defined as “the increased integration of trade, production and finance across national
boundaries”.40

Indicators of the pace of globalisation
Apart from the multilateral arrangements outlined above, the pace of globalisation is
indicated by numerous developments in recent years. These include:

    The rapid increases in the growth of international trade and capital flows– the year
    2000 witnessed not only outstandingly high global trade and output growth of 12%
    and 4%, respectively, but also an exceptionally large excess of trade growth over
    output growth.41
 International Agreements that have trade liberalisation as their main tenet
 Increased regional integration and the number of regional trading blocs in 1990s.
 Proliferation of international mergers and acquisitions and the expansion of
    multinational corporations into new territories.
 Proliferation to Cable T.V. and the consequent increase in local awareness and
    consumption of international brands.
 The prolific growth in access to the Internet and the expansion of e-Business.
 The erosion of preferential trade regimes, such as the LOME Convention and the
    Caribbean Basin Initiative.

There is no indication that the above trends are going to cease until the World becomes a
single market. Some of the important features that have to be put in place by States of
the Greater Caribbean to be prepared for globalisation are:
 Preparedness and compliance with multilateral trading arrangements;
 State of the art telecommunications and information technology;
 Highly trained and appropriately skilled human capital resources;
 Adequate negotiating capacity; continued diversification of the economic base;

39 See Girvan, N. “Globalization and Counter-Globalization: The Caribbean in the Context of the South”,
in Globalization: A Calculus of Inequality, Edited by Denis Benn and Kenneth Hall, 2000.
40 Taken from Benn, D. “Globalization and the North-South Divide: Power Asymmetries in Contemporary
International Economic Relations”, in Globalization: A Calculus of Inequality, Edited by Denis Benn and
Kenneth Hall, 2000.
41
     WTO Secretariat, Annual Report 2001


                                                                                                     25
   Increased efforts in public education and awareness;
   Appropriate macroeconomic, social and legal environment; and
   Awareness and effective use of available S&D treatment and other assistance.

These features are discussed below. It is recommended that further research be
conducted, using some of these features as well as others, to design a Globalisation
Preparedness Index (or a Globalisation Compliant Index) for States of the Greater
Caribbean. Such an index would require extensive empirical research, but could be
computerised and updated continuously to enable States to keep track of their
preparedness for or compliance with agreements and other aspects of globalisation.

Globalisation and multilateral trading arrangements
The globalisation process has been given impetus by new global trade arrangements,
which, fundamentally, are all aimed at global trade liberalization. The main
arrangements affecting the Greater Caribbean are those falling under the WTO, the
FTAA and the ACP-EU Cotonou Agreement. Preparedness for globalisation means that
States of the Greater Caribbean must be ready on two fronts. Firstly, economic policies
and programmes must be appropriate to meet the more liberalised and competitive
environment – states have some choice here to determine their policy mix. Secondly, the
legal and other steps required to comply with the rules of the system must be in place –
states have little choice here and have to abide by the rules. It is critical to be prepared
and compliant to participate effectively in the system, deficiencies in policies will lead to
economic marginalisation in the globalised environment while deficiencies in compliance
may lead to political and economic marginalisation.

The WTO
The WTO, which succeeded the GATT in 1995, is at the pinnacle of new multilateral
trading arrangements. The GATT only dealt with trade in goods but was augmented in
the Uruguay Rounds to include trade in services, intellectual property rights and dispute
settlement – this gave birth to the WTO. The WTO defines the guidelines and rules
governing liberalized world trade and outlines special and differential treatment to
developing countries, these were discussed earlier.

The FTAA
States of the Greater Caribbean also face the Free Trade Area of the Americas (FTAA),
which is due to come into force at the start of 2004. The FTAA adopts most of the
principles of the WTO. In the FTAA’s guiding principles, it is stated that special
attention will be given to the needs of the smaller economies. Furthermore, the FTAA
has established a Consultative Group on Smaller Economies, which follows the progress
in the negotiations with regard to the concerns and interest of smaller economies. The
FTAA was also discussed earlier.

The Cotonou Agreement
 In their dealings with the European Union (EU), some Caribbean States also face a
   new Agreement. The Cotonou Agreement was signed in June 2000 and replaces the
   series of Lomé Conventions that were in place from 1975. The new agreement aims


                                                                                           26
     to assist countries in the process of regional integration with their insertion into the
     world economy and to increase production and the competitiveness of their products
     and to attract inward investment. The liberalisation of trade is at the foundation of
     this twenty-year Agreement, which has a clause allowing for revision every five years
     and a financial protocol for each five-year period. However, the Agreement also
     includes:
    A political dimension dealing with the respect for human rights, democratic principles
     and the rule of law, and good governance.
    A dimension involving civil society, the private sector and other non-State players to
     foster more information sharing, capacity building and involvement in the
     implementation of programmes and projects.
    A poverty reduction dimension, which is confirmed as a key objective and consistent
     with the United Nations objectives; the focus will be on economic development;
     social development; and regional integration and co-operation.

One of the greatest opportunities or threats to some States of the Greater Caribbean from
trade liberalisation is the removal of preferential access to larger metropolitan markets,
especially the EU. It has been argued that preferential access to the EU for ACP
countries has helped some countries but has not helped the ACP countries overall
because their share in EU imports has fallen from 6.7% in 1976 to 2.8% in 1999.42 An
explanation of this trend is that ACP countries have developed a dependency on trade
preferences and have consequently not diversified away from primary products to which
such preferential access was granted. In the meanwhile, global imports to the EU have
shifted away from primary products to manufactured and knowledge based products. It
should be recognised that the decline in the share of ACP exports to the EU market has
much to do with the rapid increase of total EU imports, which have increased from
US$417 billion in 1976 to US$2,121 billion in 1999.43 Nevertheless, a declining share
for ACP countries is an indication of marginalization.

The expectation is that the removal of preferential access will force ACP countries to
swim or sink, a lifeline will be thrown to them in the form of access to 23.5 billion Euros
of EDF resources.44 Under the Cotonou Agreement, support through the EDF will be
available for the following activities: debt and structural adjustment support; fluctuations
in export earnings; sectoral policies; microprojects and decentralised co-operation;
humanitarian and emergency assistance; and investment and private sector development
support. If Caribbean ACP countries wish to continue focussing on primary agricultural
products, they must strive for efficiency and competitiveness on the global market – they
should be able to tap EDF resources for this purpose.

Some economists argue that preferential access to the EU market is likely to have
diverted resources into the production and trading of goods receiving preferential access
and away from other activities, resulting in inefficiency and dependency. The big

42
   See Moreau, Francois. “The Cotonou Agreement – New Orientations”, ACP-EU Partnership Agreement,
Supplement to Courier, September 2000.
43
   See IFS Yearbook, IMF, 2000
44
   13.5 billion Euros from the 9th EDF, plus 10 billion Euros in remaining balances from previous EDFs.


                                                                                                     27
challenge between now and the end of 2007 is to persuade those in the production of
preferred goods to diversify and seek new opportunities, while the preferential access is
still in place. The period between now and December 2007 provides a window of
opportunity for Caribbean ACP States. Even if resources are not shifted from the
preferred goods until 2007, there must be a plan for the optimal utilisation of these
resources from January 2008 onwards. It is crucial that the EDF resources and the time
between now and December 2007 are used to prepare for January 2008 and/or to test and
develop new activities.

There is an irony that exists about the use of EDF funds by ACP countries over the years
in that a balance of 10 billion Euros have accumulated in EDFs. So while the ACP
Secretariat is arguing that the resources of 13.5 billion Euros in the 9th EDF is insufficient
to meet the poverty eradication and insertion into the world economy objectives for
member states, history shows that the available funds have not been utilised. This
provides a great opportunity for Caribbean ACP members. The ACP Secretariat
identifies inadequate institutional capacity and human resource deficiencies as the root
causes of this ironic situation. Caribbean ACP States may need to secure the support of
regional institutions and agencies to assist them either directly or indirectly in tapping
available resources to the maximum.

State of the art telecommunications and information technology
To be prepared for globalisation requires a country to have in place a state of the art
telecommunications infrastructure and a strong information technology base to facilitate
the use of the Internet and other electronic means of global trade and communication.
Increased trade and information flows take place by this mode daily so in order to take
advantage of these benefits all countries need to included. Furthermore, use of this mode
circumvents locational, cultural and other disadvantages often faced by small developing
states. The use of telecommunications and IT increases the productivity of a country’s
workforce.

More highly trained and appropriately skilled human capital resources
This is critical for preparedness for globalisation because technical skills, literacy skills
and numeracy skills are required to interface effectively with the “hi-tech” environment.
In addition, developing countries, particularly small states with fewer human resources,
would be well advised to aim at higher level activities and not concentrate on the bottom
end of the IT scale or garment sector. Smaller states need to look for more opportunities
in the design and development stage of activities, which will yield higher returns while
making the country less vulnerable to “foot loose” investors.

Stronger negotiating capacity
In order to deal with the dynamics of globalisation, States of the Greater Caribbean need
to ensure that they have stronger negotiating capacity so that their positions can be better
and more forcefully represented at international forums. Stronger negotiating capacity is
achievable through pooling resources with other countries where possible.45 This will
reduce the possibility of marginalization and the introduction of rules that are not in their

45 The Regional Negotiating Machinery plays this role for CARICOM states.


                                                                                            28
best interest. Small states must ensure that their vulnerabilities and disadvantages in the
global marketplace are brought to light in all relevant forums.

Continued diversification of the economic base
It is also important that smaller States of the Greater Caribbean continue to look for
opportunities to diversify their economic bases, especially of products for the export
market. Diversification can be pursued within sectors (e.g. offering eco-tourism as well
as traditional tourism) or across sectors (e.g. offering holistic health services and high
level IT services).

Public education and awareness
The leaders of the Greater Caribbean must accept the fact that globalisation is a process
that they are unlikely to halt, so rather than devoting too many scarce resources to
resisting, it might be more beneficial to citizens to prepare for globalisation by seeking as
many opportunities as possible. Furthermore, efforts should be made at all levels of the
society, to make citizens aware of the opportunities and threats associated with
globalisation and how they should individually prepare themselves to deal with it.
Migration is not necessarily an option because the developed countries, though talking of
globalisation, have not yet included the free movement of persons as a component.

Appropriate macroeconomic, social and legal environment
It is important that States pursue the appropriate macroeconomic policies in order to
attract foreign and local investment and generate growth. Low inflation and a stable
exchange rate are important ingredients of such policies. Incentives and business ideas to
micro and small businesses should be put in place. In addition, policies to reduce crime
and diseases and establish appropriate health care facilities are vital to attract investment.
Having a reasonably well developed company law as well as adequate legal systems to
protect investors are also very important ingredients of being prepared for globalization.

Awareness and effective use of available S&D treatment and other assistance
While preparing for globalisation, it makes sense for States of the Greater Caribbean to
make effective use of all technical assistance, concessionary loans and special treatment
available to developing countries under the UN, the World Bank, the WTO and other
international institutions. Some of these are laid out in the Support Matrix later in this
report. Support should be sought at the regional level where necessary.

The above discussion outlines critical factors that need to be put in place in order to be
prepared for globalisation, what is positive about the discussion is that measures taken to
prepare for globalisation simultaneously reduce vulnerability. The table below attempts
to show the preparedness of the Greater Caribbean in terms of some basic indicators,
namely, main telephone lines per thousand, televisions per thousand, personal computers
per thousand, internet hosts per thousand and adult literacy rates. The higher the value of
each of these indicators the more prepared a country is likely to be. Figures for the USA
and Singapore for 1998 and 1990 are included for comparison purposes.




                                                                                            29
Indicators of Preparedness for Globalisation in States of the Greater Caribbean
Table 3 below examines five possible indicators of preparedness for globalisation. These
are the number of main telephone lines, televisions, personal computers and Internet
Hosts per thousand, and the adult literacy rate. Comparisons are made with the USA and
Singapore using the most recent figures as well as 1990 figures, to get an idea of how
well Caribbean States match up with countries often cited as major success cases.

The data below show that compared to the USA and Singapore, Greater Caribbean States
are well behind in terms of some indicators of preparedness (based on the 1996-98 data
used). The main findings were:
1. In terms of telephone lines per thousand, all Greater Caribbean countries were well
    behind Singapore and the USA. In fact most States of the Greater Caribbean in 1996-
    98, were behind Singapore in 1990 and all were behind the USA in 1990.
2. In terms of personal computers per thousand and Internet hosts per thousand, where
    data were available for the Greater Caribbean it can be seen that they were far behind
    Singapore and the USA.
3. A positive sign for the Greater Caribbean is that the adult literacy rate for several
    countries is as high or higher than that of Singapore, especially in the Eastern
    Caribbean.

Though States of the Greater Caribbean are generally behind the USA and Singapore, it
is encouraging to see that some of the smaller States are performing reasonably well in
terms of literacy and telephone lines per thousand. These are very important indicators of
preparedness for globalisation and given the greater levels of vulnerability of the smaller
states, it is critical that these indicators improve even further. The data also reveal that
some of the larger countries of the Caribbean, though less vulnerable, need to increase
their preparedness for globalisation and cannot be complacent simply because their
resource base is greater. As mentioned earlier, a Globalisation Preparedness Index (GPI)
or a Globalisation Compliance Index (GCI) should be prepared for all States of the
Greater Caribbean to guide and track their progress with respect to preparedness for
globalisation.




                                                                                         30
Table 3: Indicators of Preparedness for Globalisation based on 1996-98 Data46
Country                        Main Telephone Lines Televisions per 1000 Personal Computers Internet Hosts Per Adult literacy
                                per 1000 persons          persons         per 1000 persons    1000 persons      rate 1998
Antigua & Barbuda                      468                  452                 N/A                 2.41            95.0
Bahamas                                352                  896                 N/A                 1.63            95.5
Barbados                               424                  283                  75                 0.16            97.0
Belize                                 138                  180                 N/A                  1.1            92.7
Colombia                               173                  217                  28                 0.44            91.2
Costa Rica                             172                  387                 N/A                 0.85            95.3
Cuba                                    35                  239                 N/A                 0.01            96.4
Dominica                               252                  175                 N/A                 1.95            94.0
Dominican Republic                      93                   84                 N/A                 0.59            82.8
El Salvador                             80                  250                 N/A                 0.14            77.8
Grenada                                263                  325                 N/A                 0.03            96.0
Guatemala                               41                  126                 N/A                 0.08            67.3
Guyana                                  70                   59                 N/A                 0.08            98.3
Haiti                                   8                    5                  N/A                   0             47.8
Honduras                                38                   90                 N/A                 0.02            73.4
Jamaica                                166                  323                   5                 0.13            86.0
Mexico                                 104                  261                  47                 1.18            90.8
Nicaragua                               31                  190                 N/A                 0.16            67.9
Panama                                 134                  187                 N/A                 0.27            91.4
St. Kitts & Nevis                      418                  244                 122                 0.12            90.0
St. Lucia                              268                  211                 136                 0.16            82.0
St. Vincent & the Grenadines           188                  162                 N/A                   0             82.0
Suriname                               152                  217                 N/A                 N/A             93.0
Trinidad & Tobago                      206                  331                  47                 1.52            93.4
Venezuela                              117                  185                  43                 0.34            92.0
Singapore                         562                       348                  458                21.2            91.8
Singapore (1990)                  390                       379                  74                 N/A             N/A
USA                               661                       847                  459               112.77           99.0
USA (1990)                        545                       772                  217                N/A             99.0
All developing countries           58                       162                  N/A                 .26            72.7
Source: UNDP Human Development Report 2000




Consequences of not being prepared for globalisation

The consequences of not being prepared for globalisation could be quite severe, as
countries could find their exports no longer competitive. At the end of the day, if exports
cannot be disposed of at reasonable prices, earnings will decline and producers will be
forced to cut back or close down operations. This will result in unemployment, balance
of payments problems, a reduction in investment, reduced GDP growth, loss of fiscal
revenues, and increased poverty.

The lack of competitiveness could extend beyond export products to non-traded products
and lead to imports replacing traditionally non-traded products. Globalisation is likely to
cause the decline of certain industries that operate inefficiently or have been heavily
46
     The table shows the most recent year between 1996 and 1998 for which the data were available.


                                                                                                                           31
protected. However, the private and public sectors of countries should be able to look at
their economies and predict which industries will be adversely affected and take early
actions to minimize the impact. These actions could include retooling or diversifying
into more profitable activities.

The ultimate consequence of not being prepared for globalisation is economic and social
decline. It is possible that per capita incomes of the unprepared could decline to levels
that qualify for LDC status. At that stage S&D treatment available to LDCs may not
even help a country return to where it might have been had it prepared for globalisation in
the first place. This is likely because its productive capacity might have been severely
damaged during the decline phase (emigration of skilled people, damage to unused
buildings and infrastructure).

If a country is currently at a stage where it does not know how to prepare for
globalisation or sees no opportunities, then this is where regional or extra-regional
collaboration could be of great assistance in exchanging knowledge. ECLAC, the ACS,
the CDB, and the CARICOM Secretariat could be called upon to assist in preparations,
rather than reparations later on. In addition, there is assistance available from
international organisations that could be called upon for this purpose (see the Support
Matrix in the final section).


4.1 Linking vulnerability reduction and preparedness for globalisation

The earlier discussion on vulnerability noted that it is caused by factors that are largely
exogenous to a country. However, the effects of most of these factors can be cushioned
by certain actions under the control of a state. The below table looks at the components
of vulnerability and identifies measures that can be taken to reduce the impact. It also
reveals that most of these actions are consistent with those required for globalisation
preparedness.

Table 11: Relationship between Preparedness for Globalisation and Vulnerability
                   Measures to address vulnerability                              Consistency of
                                                                                  measures with
                                                                                  preparedness for
                                                                                  globalisation
Limited capacity   Appropriate use of computer technology and training can        It can be seen that these
                   be used to compensate for the shortage of human resources      measures to reduce
                   and other capacity deficiencies. Computers and other hi-       capacity constraints are
                   tech equipment can be used to automate processes, store        also amongst those
                   and retrieve information and release human resources for       listed as necessary to
                   other activities. Training will help upgrade more people       prepare for
                   and enhance the capacity of existing people to tackle tasks.   globalisation.
Openness           Openness is usually measured by the ratio of imports to        Appropriate policies
                   GDP or the sum of exports plus imports to GDP.                 that strengthen the
                   Initiatives that increase GDP relative to imports and          economic base of a
                   exports will reduce openness. Appropriate policies that        country are conducive
                   stimulate the production and consumption of local goods        to preparedness for



                                                                                                         32
                     and services could reduce openness. For example,                globalisation.
                     developing tourism for locals (as well as foreigners) so
                     that local people can be tourists at home and not always
                     feel they need to travel to the USA or Europe. These
                     initiatives will a) encourage new (small scale)
                     developments that cater to the local and foreign markets,
                     b) reduce the amount of leakages due to locals travelling
                     overseas, and c) attract more overseas tourists.

                     Openness should not be seen as a bad thing per se because
                     it is a feature of globalisation and can create opportunities
                     and benefits from trade. However, policies that stimulate
                     more production for the local market can have positive
                     economic effects. This is not a strategy of import
                     substitution but a strategy to enhance local production and
                     consumption options. It is worth noting that the USA’s
                     import to GDP ratio was only 10.8% in 1997.
Limited              This issue is somewhat similar to that of openness              Economic
diversification      discussed above. Limited diversification can be reduced         diversification was
                     by moving some productive resources into hi-tech                listed earlier as an
                     activities or into new areas such as eco-tourism, financial     important elements in
                     services and tropical health products. Appropriate              being prepared for
                     economic and social policies must be devised to address         globalisation
                     this issue, such as tax and other incentives.
Relative isolation   This cannot be changed directly. However, information           The use of hi-tech
                     technology can be used to develop and trade services over       approaches to service
                     the Internet, which render location irrelevant. Other than      production and
                     that countries can investigate opportunities to process         delivery and
                     primary products and ship higher valued goods that are          diversification of the
                     often lighter and smaller. These activities would also help     economic base are
                     to diversify the economic base. Benchmarking countries          consistent with
                     like Switzerland, Hong Kong and Singapore could provide         preparedness for
                     valuable insights.                                              globalisation.
Susceptibility to    As with location, this is completely out of the control any     These measures are
natural disasters    country. Many countries, rich and poor, encounter natural       more specific to
                     disasters. However, measures can be put in place to             dealing with natural
                     cushion their impact such as adequate insurance, stock          disasters and of
                     piling of critical reserves, provision of adequate shelters     themselves will not
                     and training of citizens in how to prepare and respond.         help to prepare a
                                                                                     country for
                                                                                     globalisation.
Lack of access to    This deficiency can be reduced if the appropriate               Appropriate
capital              macroeconomic policies are pursued. Some States of the          macroeconomic
                     Greater Caribbean, like Jamaica, have been able to attract      policies were identified
                     capital on the international market as a result of confidence   as key to the
                     in the economic policies being pursued. If the                  preparedness for
                     international capital market perceives that the economic        globalisation process.
                     fundamentals are correct they will be prepared to provide
                     capital to some states. However, microstates will have
                     greater problems, as the size of the loans they require may
                     not attract players in the international capital market. Yet,
                     even in these cases, a stable economic environment will
                     encourage FDI; most Eastern Caribbean States have
                     continued attracting FDI over the last decade.47
47
     See ECLAC LC/G.2042-P, P42, 1998


                                                                                                             33
The table above explains that even though vulnerability cannot be eliminated for small
states, the impacts can be reduced by appropriate policies. It is interesting to note that
most of the initiatives to increase preparedness for globalisation will simultaneously
reduce vulnerability (and vice-versa). This brings us back to the four-quadrant model
discussed in Table 1 in the introduction. The worst position for any country to find itself
in is to be unprepared for globalisation and highly vulnerable (quadrant 4). Vulnerability
cannot be eliminated because it is mainly determined by factors related to being small,
but the level of exposure can be reduced if a State is prepared for globalisation. If one
repeats the analysis for larger states facing poverty, one will find that preparedness for
globalisation should also help to alleviate poverty. All States of the Greater Caribbean
should now focus their efforts on being prepared for globalisation.

The final section of this paper looks at the provisions made under the WTO, the FTAA,
and the ACP-EU Agreement to assist Caribbean countries prepare for globalisation and
reduce vulnerability and poverty. Other available assistance will also be outlined. It is
worth noting that LDC status gives a country like Haiti maximum access to S&D
treatment under the WTO, special access to the EU market under the Everything But
Arms (EBA) Agreement, and access to the World Bank’s IDA funds.




                                                                                            34
5.0. Special and differential treatment available to Caribbean States to facilitate
preparedness for Globalisation

WTO Provisions for Special and Differential Treatment48

Special and differential treatment under the WTO covers the following issues:
1. Regional Trade Agreements among Developing Countries
2. Antidumping
3. Agriculture
4. Sanitary and Phytosanitary Measures
5. Subsidies and Countervailing Measures
6. Technical Barriers to Trade (TBTs)
7. Textiles
8. Investments
9. Services
10. Intellectual Property
11. Balance of Payments
12. Customs Valuation
13. Dispute Settlement
14. Import Licenses
15. Preshipment Inspection
16. Rules of Origin
17. Safeguards

These WTO provisions fall under the categories of:

 Provisions aimed at increasing trade opportunities
These measures fall under a) the “Enabling Clause” such as allowing regional agreements
among developing countries and special preferences for developing countries, and b)
waivers, which allow more advanced developing countries to extend duty-free
preferences on a non-reciprocal basis to LDCs

 Provisions to safeguard the interests of developing countries
These measures take account of special interests of developing countries in Agreements,
such as Anti-dumping, Subsidies and Safeguards Agreements

 Flexibility of commitments
Allows for lower levels of WTO commitments by developing countries, such as in tariff
bindings or agricultural export subsidies

 Transitional time periods
Allows greater flexibility in time periods for implementation of WTO Agreements by
developing countries.

48
  See WTO website and UNCTAD, Training Tools for Multilateral Trade Negotiation: Special &
Differential Treatment, Commercial Diplomacy Programme, September 2000.


                                                                                             35
 Provisions for technical assistance
Provides the overall framework for technical assistance by the WTO and its Members to
developing countries for capacity building.

 Accession
Provision of assistance to LDCs to facilitate accession to the WTO.

 Dispute Settlement
The cost of dispute settlement is a problem for many developing countries. The Advisory
Centre on WTO Law has been set up to provide (free or discounted) legal advice to
developing countries in transition.

 Minimum Contribution
Minimum contribution has been reduced to 0.015% of world trade in goods and services
of developing country members.

Cotonou Agreement
The Cotonou Agreement was discussed earlier. It was noted that existing preferential
trade protocols between the ACP and EU will remain in place only until December 2007.
For Caribbean ACP countries, the preferential access for banana, sugar and rice exports
to the EU has been very important to the economic well being of several countries, such
as the Windward Islands.

Access to World Bank/IDA funds
The IDA lends to developing countries whose per capita GNP is below US$1,305, but in
practice IDA loans go to countries with per capita incomes of US$865 or less. IDA loans
are interest free with a maturity of 35 or 40 years.49 Developing countries with per capita
incomes in excess of $1,305 can borrow from the World Bank but on much less
favourable terms – slightly above the market rate received by the Bank and usually for
12-15 year terms.

Based on per capita income, Haiti, Honduras, Guyana and Nicaragua are States of the
Greater Caribbean that should qualify for IDA loans.50

The Support Matrix discussed below, attempts to provide information to States of the
Greater Caribbean concerning which international institutions provide S&D treatment
and other assistance based on the different components of vulnerability. For example, if
a country is susceptible to natural disasters and is looking for assistance options, it can
use the Support Matrix to identify institutions that provide assistance. The Support
Matrix is still a work in progress to be updated as more information comes to the fore, but
does provide some insights as to where international assistance can be sought.51


49
   See World Bank Website
50
   See Table 1 of Appendix
51
   This paper does not address Regional assistance but there are numerous sources including CARICOM
and the CDB. However, ECLAC is included under UN Agencies.


                                                                                                      36
                                   5.1 The Support Matrix
      A Representation of Support Available to Developing Countries from International
      Institutions in Facing the Challenges of Changes in Global Trading Arrangements

     Special             Type of support         UN       World   IMF    EU      WTO   OECD   C’wealth   IDB
                                               Agencies   Bank
  Development               available             52

   Challenges
 Lack of access        Provision of loan
                                                           Yes    Yes                                    Yes
   to external          finance                                                                          53

   capital
 Lack of access        Provision of
   to external          support for the
                                                 Yes
   capital              development of                                                          Yes      Yes
                        regional capital,
                        stock and
                        commodity
                        markets
 Lack of access        Reducing
  to external           transactions costs
                                                           Yes
  capital               for small states by
 Limited               actively promoting
  capacity              better donor co-
                        ordination
 Lack of access        Provision of
  to external           venture capital-
                                                                                                Yes
  capital               type funds for
 Limited               small states
  diversification
 Lack of access        Provision of
  to external           financial assistance
                                                                  Yes
  capital               for the correction
 Openness              of balance of
                        payments problems
 Limited               Support for small
  capacity              states in preparing
                                                 Yes
                        project submissions
                        to donors
 Limited               Support to
  capacity              Caribbean SIDS
                        through the              Yes
                        preparation of
                        project profiles and
                        the implementation
                        of national
                        strategies for
                        sustainable
                        development




52
     Includes work carried out by ECLAC
53
     Provision of loans for social, economic and environmental infrastructure.


                                                                                                          37
     Special           Type of support        UN       World   IMF    EU     WTO     OECD    C’wealth   IDB
                                            Agencies   Bank
  Development             available
   Challenges
 Limited            Support for
   capacity          regional initiatives
                                              Yes       Yes    Yes
                     as a way to deal
                     with diseconomies
                     of scale in public
                     and private sectors
 Limited            Support to
  capacity           strengthen
                                              Yes                                                       Yes
                     negotiating
                     capacity of
                     Caribbean
                     countries
 Limited            Support for the
  capacity           participation of
                                              Yes                                                       Yes
                     Caribbean member
                     countries in the
                     FTAA
 Limited            Strengthening of
  capacity           institutions in
                                                                      Yes                       Yes
                     Geneva to facilitate
                     relations with the
                     WTO and
                     UNCTAD
 Limited            Advisory Centre on                                      Yes54
  capacity           WTO Law
 Limited            Provision of
                                              Yes                                               Yes
  capacity           advocacy to small
                     states
 Limited            Provision of
  capacity           support for
                     capacity building        Yes                     Yes                       Yes
                     in regional
                     organisations that
                     deal with small
                     states
 Limited            Support for private
                                                        Yes           Yes                               Yes
  capacity           sector development                                55                                56

 Limited
  diversification




54
   The Advisory Centre has actually been set up by a group of WTO members independent of the WTO
Secretariat to complement the training and technical assistance made available by the WTO. This Centre
provides legal assistance for developing countries, which the WTO could not as it is required to be neutral
on issues.
55
   Through the creation of a new investment facility under the New 2000 Partnership ACP-EU Agreement.
The European Investment Bank will manage the fund.
56
   The Multilateral Investment Fund has been established to support private sector activity.


                                                                                                         38
     Special          Type of support          UN       World   IMF   EU    WTO   OECD   C’wealth    IDB
                                             Agencies   Bank
  Development            available
   Challenges
 Limited            Provision of policy
   capacity          advice, technical
                                               Yes              Yes         Yes            Yes       Yes
 Limited            assistance and
   diversification   promotion of trade-
                     related investment
                     to help small states
                     to benefit from
                     globalisation
 Limited            Lengthier transition
                                                                            Yes
  capacity           periods for
 Openness           developing
                     countries
 Limited            Discussions on tax
                                               Yes                                Yes
  Diversification    competition issues
                     (especially as it
                     relates to offshore
                     banking)
 Limited            Support for small
  diversification    states to deal with
                                                                      Yes
 Openness           instability of export
                     earnings through
                     the provision of
                     grant aid to assist
                     long term
                     development57
 Openness           Provisions
                     requiring WTO
                                                                            Yes
                     members to
                     safeguard the
                     interests of
                     developing country
                     members
 Openness           Assistance in
                     developing new tax
                                                                Yes
                     structures to deal
                     with fiscal impact
                     of lower tariffs
 Openness           Differential
 Lack of access     treatment and aid
                                                                      Yes
  to external        allocations for
  capital            certain
                     commodities from
                     ACP countries
 Openness           Provisions aimed at
                                               Yes                          Yes
 Limited            increasing trade
  capacity           opportunities




57
  This support replaces the traditional STABEX and SYSMIN that were operated to compensate for the
instability of agricultural and mining exports.


                                                                                                      39
     Special         Type of support         UN       World   IMF   EU    WTO   OECD   C’wealth   IDB
                                           Agencies   Bank
  Development           available
   Challenges
 Openness          Provision of
 Limited           support in dealing
                                                              Yes                        Yes
   capacity         with the EU on
                    successor
                    agreements to
                    Lomé IV
 Openness          Market access and
 Limited           special treatment to
                                                                    Yes   Yes
  diversification   products from
                    developing
                    countries
 Openness          Support for small
 Limited           Caribbean banana-
                                                                    Yes
  diversification   dependent
                    countries given the
                    WTO’s ruling
                    against the EU
                    banana regime
 Openness          Provision of
 Limited           platforms for
  diversification   information sharing      Yes      Yes     Yes
 Limited           and dissemination
  capacity
 Poverty
 Lack of access
  to external
  capital
 Remoteness
 Susceptibility
  to natural
  disasters and
  environmental
  change
 Openness          Flexibility of
 Limited           commitments
  diversification
 Limited                                                                 Yes
  capacity
 Poverty
 Lack of access
  to external
  capital
 Remoteness
 Susceptibility
  to natural
  disasters and
  environmental
  change




                                                                                                   40
        Special          Type of support         UN       World   IMF   EU    WTO   OECD    C’wealth   IDB
                                               Agencies   Bank
     Development            available
      Challenges
     Openness          Grant aid for sound
     Limited           macroeconomic
      diversification   reforms in small
     Limited           states through the                              Yes
      capacity          National and
     Poverty           regional Indicative
     Lack of access    Programmes
      to external
      capital
     Remoteness
     Susceptibility
      to natural
      disasters and
      environmental
      change
     Openness          Support for on-
     Limited           going activities
      diversification   connected to the         Yes                    Yes
     Susceptibility    Barbados
      to natural        Programme of
      disasters and     Action for SIDS
      environmental     and issues of
      change            sustainable
                        development in
                        SIDS
 Openness              Support for the
 Limited               vulnerability factor
                                                Yes58     Yes           Yes                   Yes
  diversification       and commitment to
 Susceptibility        special treatment
  to natural            for LDCs and
  disasters and         vulnerable small
  environmental         states
  change
 Poverty               A flexible
 Openness              approach to
 Limited               graduation policy                 Yes
  diversification       taking into account
                        circumstances of
                        small economies
                        and ensuring that
                        none graduate
                        prematurely




58
  The UN’s Committee for Development Policy (CDP) is responsible for making recommendations and
determining the appropriate criteria for designating countries as LDCs. The CDP is examining approaches
to including vulnerability as a criterion in determining LDCs. UNCTAD is also undertaking initiatives that
deal with the competitive handicaps and vulnerability of small states.


                                                                                                        41
    Special           Type of support         UN       World   IMF    EU    WTO     OECD    C’wealth   IDB
                                            Agencies   Bank
  Development            available
   Challenges
 Poverty            Provision of
                                                       Yes59
                     financial assistance
                     to deal with
                     poverty reduction.
 Susceptibility     Support for
  to natural         initiatives aimed at
                                              Yes                    Yes                               Yes
  disasters and      the management of
  environmental      the environment
  change             and natural
                     resources60
 Susceptibility     Provision of
                                              Yes      Yes61   Yes   Yes                               Yes
  to natural         assistance to                              62    63

  disasters and      prevent, reduce the
  environmental      cost and mitigate
  change             the effects of
                     natural disasters




59
   The Poverty Reduction and Growth Facility (PRGF) is available to small states that have low per capita
income.
60
   Support mainly in the form of reports
61
   Including new approaches to disaster mitigation and insurance in the Caribbean
62
   Facilities include a) emergency assistance for natural disasters and b) the Compensatory Financing
Facility
63
   The European Community Humanitarian Office (ECHO) created a Disaster Prevention, Mitigation and
Preparedness Program for Caribbean states vulnerable to natural catastrophes


                                                                                                        42
APPENDIX




           43
Table 1: Vulnerability and other Socio-economic Variables of ACS Member States
                    Vulnerability64     Geographic     Population66    UNDP     GDP/capita       GDP     Island/
                                      size (sq.km)65         000's HDI 199967       US$68    (US$M)69   mainland

Antigua &                    High               440            67       High         9,231       619      Island
Barbuda
Bahamas                      High            13,864           296       High        15,404      4,560   Medium
                                                                                                         Island
Barbados            Higher-medium               431           268       High         9,291      2,490    Island
Belize                       High            22,966           239    Medium          2,825       674    Mainland
Colombia                      Low        1,141,748         40,800    Medium          2,464    100,539   Mainland
Costa Rica          Lower-medium             51,000         3,841       High         3,959     15,205   Mainland
Cuba                          N/A          114,525         11,000    Medium          1,113     12,200     Large
                                                                                                          Island
Dominica                     High               751            76    Medium          2,932       223      Island
Dominican           Lower-medium             48,308         8,232    Medium          2,113     17,398      Large
Republic                                                                                                  Island
El Salvador         Lower-medium             21,040         6,032        Low         2,052     12,378   Mainland
Grenada                      High               344           100    Medium          3,066       309      Island
Guatemala                     Low          108,889         10,801        Low         1,762     19,030   Mainland
Guyana                       High          216,000            850        Low          798        678    Mainland
Haiti               Higher-medium            27,750         7,952        Low          532       4,234      Large
                                                                                                          Island
Honduras            Higher-medium          112,492          6,200        Low          869       5,387   Mainland
Jamaica             Higher-medium            11,424         2,538    Medium          2,791      7,083      Large
                                                                                                          Island
Mexico                        Low        1,967,183         95,831    Medium          5,046    483,555   Mainland
Nicaragua           Higher-medium          130,700          4,807        Low          472       2,268   Mainland
Panama              Lower-medium             75,517         2,767    Medium          3,461      9,576   Mainland
St. Kitts & Nevis            High               269            42    Medium          4,642       195      Island
St. Lucia                    High               616           152    Medium          4,388       667      Island
St. Vincent &                High               389           114    Medium          2,421       276      Island
Grenadines
Suriname                     High          163,820            414    Medium          2,144       888    Mainland
Trinidad & Tobago   Lower-medium              5,128         1,286    Medium          5,090      6,546     Island
Venezuela                     Low          916,445         23,242    Medium          4,084     95,023   Mainland
Aruba                         N/A               193            95        N/A          N/A        N/A      Island
French Antilles               N/A            93,765           982        N/A          N/A        N/A     Mixture
Netherlands                   N/A               783           207        N/A          N/A        N/A      Island
Antilles




64
   Source: “Small States Development: A Commonwealth Vulnerability Index” in The Round Table 1999
by Christopher Easter
65
   “Zone of Cooperation” – Association of Caribbean States, 2000
66
   “Zone of Cooperation” – Association of Caribbean States, 2000
67
   UNDP Human Development Report, 2000
68
   “Zone of Cooperation” – Association of Caribbean States, 2000
69
   “Zone of Cooperation” – Association of Caribbean States, 2000


                                                                                                                   44
Table 2: Vulnerability of Caribbean States and Per Capita GDP

                    Low                     Medium vulnerability          High vulnerability Total
                    vulnerability70
Low per             Guatemala               Honduras                      Guyana
capita71                                    Haiti72                                                  6
income                                      Nicaragua
                                            Cuba (estimated)73
Medium per          Venezuela               Costa Rica                    St. Kitts & Nevis
capita income       Colombia                Panama                        St. Lucia
                                            Jamaica                       St. Vincent &
                                            Dominican Republic            Grenadines                14
                                            El Salvador                   Grenada
                                                                          Dominica
                                                                          Belize
                                                                          Suriname
High per            Mexico                  Barbados                      Bahamas                    5
capita income                               Trinidad & Tobago             Antigua & Barbuda
TOTAL                         4                      11                            10               25




70
   High, medium and low vulnerability are as estimated by the Commonwealth Vulnerability Index scores
71
   High per capita income is >US$5,000
Medium per capita income is US$2,000-5000
Low per capita income is <US$2,000
72
   Haiti is the only LDC amongst all the ACS countries
73
   No vulnerability was estimated for Cuba by the Commonwealth study but based on its characteristics the
author had defined it as medium vulnerability


                                                                                                         45
                   Table 3: Cost of Hurricanes in the Greater Caribbean

Cost of damage to the five countries most seriously affected by Hurricanes Luis and
                   Marilyn in 1995, in relation to GDP (EC$M)
Country                  Storm Damages          GDP for previous year         Damage/GDP
Anguilla                       245                      166.4                    147%
Antigua &Barbuda               810                     1143.9                     71%
Montserrat                      8                       147.3                    5.4%
Dominica                       262                      494.1                     53%
St. Kitts & Nevis              532                      505.6                    105%
St. Martin                    1764                                                N/A
Source: “The Vulnerability of Small Island States of the Caribbean, UNECLAC, 2000

 Cost of damage to the four countries most seriously affected by Hurricane Mitch in
                          1998, in relation to GDP (US$M)
                                     El Salvador    Guatemala       Honduras        Nicaragua
Cost of damage (US$)                       398.1        747.8        3,793.6            987.7
Cost as % of 1997 GDP                         3.6          4.2          81.6             48.8
GDP (US$M)                                11,058       17,805          4,649            2,024
Population (millions)                       6.03         10.8           6.15             4.81
Source: ECLAC – Central America: Assessment of the Damage Caused by Hurricane Mitch, 1998



Costs of other natural disasters

Venezuelan floods in December 1999 – Est. damage: US$2 billion - 2% of GDP.
Colombia earthquake in January 1999 – Est.damage: US$1.86 billion - 2.2% of GDP. 74




74
     Assessment conducted by ECLAC


                                                                                                46
Table 4: Trends in Import to GDP ratios for the Greater Caribbean 1980-1997

                                    1980         1986            1990    1997    Openness
Antigua & Barbuda                   79%          84%             65%     63%     Less open
Barbados                            61%          45%             41%     46%     Less open
Belize                              88%          62%             52%     46%     Less open
Dominica                            81%          50%             71%     51%     Less open
Grenada                             67%          58%             48%     52%     Less open
Guyana                              66%          46%             78%     85%     More open
Jamaica                             44%          38%             46%     50%     More open
St. Kitts & Nevis                   93%          67%             69%     61%     Less open
St. Lucia                           91%          57%             65%     57%     Less open
St. Vincent & Grenadines            97%          68%             69%     62%     Less open
Suriname                            57%          33%              28%     99%    More open
Trinidad & Tobago                   51%          28%              22%     51%    More open
Mexico                                           20%              17%     28%    More open
Venezuela                          20.0%        15.3%            15.3%   16.5%
Guatemala                          20.3%        15.1%            24.1%   22.1%
Honduras                           39.3%        23.0%            39.9%   45.8%   More open
El Salvador                                     23.7%            27.8%   26.7%
Costa Rica                         31.9%        27.4%            39.4%   53.2%   More open
Panama                             38.0%        21.9%            29.0%   36.8%   More open
Haiti                              25.6%        16.1%            11.1%   20.9%   More open
Dominican Republic                 21.5%        21.6%            33.7%   28.0%
Colombia                           15.3%        21.9%            15.7%   16.3%
USA                                9.2%          8.6%             8.9%   10.8%

Average OECS                        85%          64%             64%     58%     Less open
Source: International Financial Statistics Yearbook, IMF. 2000




                                                                                             47
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