WTO Members of the Organization of Eastern Caribbean States — OECS: June 2001
The WTO secretariat report, along with the policy statements of the Governments of these countries, will serve as a basis for the first trade policy review of the OECS-WTO Members by the Trade Policy Review Body of the WTO on 5 and 7 of June 2001.
Organization of Eastern Caribbean States benefit from intensive participation in international trade despite the constraints of small size
Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines (WTO Members of the Organization of Eastern Caribbean States — OECS) have achieved, as a group, an average per capita income of about US$4,800. This is linked to their intensive participation in international trade, which, despite shortcomings in their trade regimes, has allowed services exports to grow and imports to meet most of their domestic needs. However, according to a WTO report on the trade policies and practices of the WTO members of the OECS, there are wide disparities in and among these countries, and their low populations result in a high per capita cost of social and economic infrastructure.
The report says that OECS-WTO Members are successfully moving away from reliance on agriculture to tertiary activities, notably tourism and offshore services. Nevertheless, they remain vulnerable to external shocks; this vulnerability is in part due to local production patterns sometimes reflecting long-standing unilateral preferences granted by a few trading partners. Moreover, their small size exposes them to diseconomies of scale, both in the production of goods and the provision of government and other services. OECS-WTO Members are also faced with high labour and transportation costs, and with the effects of hurricanes. Exports suffer from these factors and take place almost exclusively under preferential conditions, mostly to the European Union, the United States, and other CARICOM members; the main import sources are the United States, the United Kingdom, and CARICOM.
OECS-WTO Members determine and implement trade policy within a multi-layered structure in which domestic, OECS, CARICOM and multilateral considerations strive for harmony. The entry into force of the WTO brought in new rules that are yet to be fully incorporated into the domestic statutes of all the OECS Members; most of them have also lagged in meeting their notification obligations. A more active participation of these countries in the WTO would be to the benefit of all, not least to the OECS-WTO Members themselves, whose national interests are best protected within the context of a strong multilateral system.
The report notes that although trade policy is in principle coordinated at the OECS/CARICOM level, in practice policy differences exist between countries. All OECS-WTO Members apply CARICOM's Common External Tariff (CET) to imports from third countries at rates of up to 35% for industrial products, and 40% for agricultural goods. However, import duties (tariffs plus customs taxes) vary considerably across Members, reflecting the many allowances CARICOM makes for tariff suspensions and reductions, and national exceptions to the CET. Although a schedule of reductions of the CET in four phases, to end in 1998, was established in 1991, few members have complied fully. Antigua and Barbuda, and St. Kitts and Nevis have not reached Phase IV due to fiscal problems; Dominica is expected to do so on 1 July 2001. The reduction of the CET has caused some implementation problems in Grenada, where import duties exceed WTO bound rates for some products.
Some non-price trade measures remain in effect, notably non-automatic import licensing, local-content requirements and import quotas: OECS-WTO Members apply quantitative restrictions on a number of products, in general to protect infant industries. These restrictions, which are expected to be tariffied by end 2005, affect a number of products, including beer and aerated beverages, curry, and pasta. Among OECS-WTO Members, only Dominica has, since 1998, replaced most quantitative restrictions with import duties. None of the OECS-WTO Members grants direct export subsidies but tax concessions are awarded on a case-by-case basis through investment incentives that carry potentially large benefits to recipients and costs to taxpayers.
OECS-WTO Members have service-oriented economies. They made commitments under the GATS in hotel construction and management, subject to number-of-room limitations, as well as in recreational and sporting services; all except St. Kitts and Nevis made commitments in reinsurance. Commitments in other areas vary according to the country and are, in general, limited. Commercial presence is in general open to foreign investment in most service areas, but restrictions still exist for specific activities, either reserved for nationals or subject to additional requirements for foreigners.
Tourism is the most important economic activity, followed by offshore financial and other services, which, combined, provide more than half of the foreign exchange earnings of these countries. Tourism is expected to remain the main driving force of growth, particularly through its effect on investment; incentives are used in this industry to promote the construction and renovation of hotels. Tax exemptions are granted to the offshore service industry, whose legislation has been amended following recent international pressure; the stated goal of some OECS-WTO Members is to phase out the distinction between on-shore and offshore activities. A phased-out, coordinated liberalization of the telecommunications industry is being undertaken by these countries except Antigua and Barbuda; in the latter, the market is controlled by two operators, with plans in place to partly privatize one.
Agriculture has been in decline but is still significant and likely to recover somewhat. Following quality problems and an erosion of preferences, the Windward Islands' (Dominica, Grenada, St. Lucia, and St. Vincent and the Grenadines), traditional dependence on bananas for export earnings has been declining in recent years, although they remain the main crop in Dominica, St. Lucia, and St. Vincent and the Grenadines. In Grenada, where nutmeg is the main crop, banana production has been phased down drastically. In St. Kitts and Nevis, the sugar industry's future is under consideration given the high costs of production. Manufacturing activities play a small albeit gradually growing role in the economies of the OECS countries.
Note to Editors
Trade Policy Reviews are an exercise, mandated in the WTO agreements, in which member countries’ trade and related policies are examined and evaluated at regular intervals. Significant developments which may have an impact on the global trading system are also monitored. For each review, two documents are prepared: a policy statement by the government of the member under review, and a detailed report written independently by the WTO Secretariat. These two documents are then discussed by the WTO’s full membership in the Trade Policy Review Body (TPRB). These documents and the proceedings of the TPRB’s meetings are published shortly afterwards. Since 1995, when the WTO came into force, services and trade-related aspects of intellectual property rights have also been covered.
For this review, the WTO’s Secretariat report, together with policy statements prepared by the Governments of the OECS-WTO Members will be discussed by the Trade Policy Review Body on 5 and 7 of June 2001. The Secretariat report covers the development of all aspects of the six OECS-WTO Members trade policies, including domestic laws and regulations, the institutional framework, trade policies by measure and by sector.
Attached to this press release is a summary of the observations in the Secretariat report and parts of the common Government policy statement. The full Secretariat report and all the governments' policy statements are available for the press in the newsroom of the WTO internet site (www.wto.org). These documents and the minutes of the TPRB’s discussion and the Chairman’s summing up, will be published in hardback in due course and will be available from the Secretariat, Centre William Rappard, 154 rue de Lausanne, 1211 Geneva 21.
Since December 1989, the following reports have been completed: Argentina (1992 and 1999), Australia (1989, 1994 and 1998), Austria (1992), Bahrain (2000) Bangladesh (1992 and 2000), Benin (1997), Bolivia (1993 and 1999), Botswana (1998), Brazil (1992, 1996 and 2000), Brunei Darussalam (2001), Burkina Faso (1998), Cameroon (1995), Canada (1990, 1992, 1994, 1996, 1998 and 2000), Chile (1991 and 1997), Colombia (1990 and 1996), Costa Rica (1995 and 2001), Côte d’Ivoire (1995), Cyprus (1997), the Czech Republic (1996), the Dominican Republic (1996), Egypt (1992 and 1999), El Salvador (1996), the European Communities (1991, 1993, 1995, 1997 and 2000), Fiji (1997), Finland (1992), Ghana (1992 and 2001), Guinea (1999), Hong Kong (1990, 1994 and 1998), Hungary (1991 and 1998), Iceland (1994 and 2000), India (1993 and 1998), Indonesia (1991, 1994 and 1998), Israel (1994 and 1999), Jamaica (1998), Japan (1990, 1992, 1995,1998 and 2000), Kenya (1993 and 2000), Korea, Rep. of (1992, 1996 and 2000), Lesotho (1998), Macau (1994 and 2001), Madagascar (2001), Malaysia (1993 and 1997), Mali (1998), Mauritius (1995), Mexico (1993 and 1997), Morocco (1989 and 1996), Mozambique (2001), New Zealand (1990 and 1996), Namibia (1998), Nicaragua (1999), Nigeria (1991 and 1998), Norway (1991, 1996 and 2000), OECS-WTO Members (2001), Pakistan (1995), Papua New Guinea (1999), Paraguay (1997), Peru (1994 and 2000), the Philippines (1993 and 1999), Poland (1993 and 2000), Romania (1992 and 1999), Senegal (1994), Singapore (1992, 1996 and 2000), Slovak Republic (1995), the Solomon Islands (1998), South Africa (1993 and 1998), Sri Lanka(1995), Swaziland (1998), Sweden (1990 and 1994), Switzerland (1991, 1996 and 2000 (jointly with Liechtenstein), Tanzania (2000), Thailand (1991, 1995 and 1999), Togo (1999), Trinidad and Tobago (1998), Tunisia (1994), Turkey (1994 and 1998), the United States (1989, 1992, 1994, 1996 and 1999), Uganda (1995), Uruguay (1992 and 1998), Venezuela (1996), Zambia (1996) and Zimbabwe (1994).
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POLICY REVIEW BODY: OECS-WTO MEMBERS
Report by the Secretariat Summary Observations
Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines (OECS-WTO Members) are small, independent island States with close links to each other in trade; they are all members of the Organization of Eastern Caribbean States (OECS). As a group, they are among the better-off developing-country Members of the WTO, with an average per capita income of about US$6,500. This is linked to their intensive participation in international trade, which, despite shortcomings in their trade regimes, has allowed services exports to grow and imports to meet most of their domestic needs.
OECS-WTO Members are successfully moving away from reliance on agriculture to tertiary activities, notably tourism and offshore services. Nevertheless, they remain vulnerable to external shocks; this vulnerability is in part due to local production patterns sometimes reflecting long-standing unilateral preferences granted by a few trading partners. Some distortions have also been introduced through a number of domestic measures to favour certain activities at the cost of others. Over time, long-term international competitiveness has been reduced and "high cost" economies have emerged.
The six Members under review apply CARICOM's Common Customs Tariff; in practice, although import duties (tariffs plus customs taxes) have been lowered in recent years, they remain relatively high and vary across countries. This reflects their relatively fragile individual fiscal positions, and pressure from domestic groups seeking benefits through increased tariff protection or concessions. Moreover, some non-price trade measures remain in effect, notably non-automatic licensing, local-content requirements and import quotas. None of the OECS-WTO Members grants direct export subsidies but tax concessions are awarded on a case by case basis through investment incentives that carry potentially large benefits to recipients and costs to taxpayers.
OECS-WTO Members determine and implement trade policy within a multi-layered structure in which domestic, OECS, CARICOM and multilateral considerations strive for harmony. The entry into force of the WTO has brought new rules that are yet to be fully incorporated into the domestic statutes of all the OECS Members; most of them have also lagged in meeting their notification obligations. A more active participation of these countries in the WTO would be to the benefit of all, not least to the OECS-WTO Members themselves, whose national interests are best protected within the context of a strong multilateral system. The administrative costs of such participation and the limited resources that these Members could deploy suggests, perhaps, the delegation of greater responsibilities to regional structures, building on their experience within the OECS on trade issues and the Eastern Caribbean Central Bank on monetary policy.
Economic and Institutional Framework
The economies of the OECS-WTO Members are characterized by a recurrent shortage of savings over investment; they require substantial capital inflows to finance deficits in their external current account, which range to 20-30% of GDP. Growth has varied considerably in the last decade: given the small size of the economies a natural disaster can lead to a recession, and subsequent reconstruction to a boom. Although growth rates differ considerably across these countries, on average they have been in the 3-4% a year range. Inflation has in general been low in recent years, at levels reflecting international inflation.
The OECS-WTO Members participate in the Eastern Caribbean Currency Union (ECCU). Since 1976, the Eastern Caribbean Central Bank (ECCB), based in St. Kitts, responsible for monetary and foreign exchange policy for the OECS, keeping the EC dollar pegged to the U.S. dollar at a rate of EC$2.70 per US$. Each country's fiscal policy has generally been geared at obtaining an operational (current account) surplus. The overall fiscal balances of the OECS countries are in deficit, largely due to substantial capital expenditure linked to public projects.
The small size of OECS-WTO Members makes them vulnerable to diseconomies of scale, both in the production of goods and the provision of government and other services. Participation in the integrated regional market being created by CARICOM seeks to address this problem. OECS-WTO Members are also faced with high labour and transportation costs, and are exposed to the effects of hurricanes. Exports suffer from these high costs and take place almost exclusively under preferential conditions, mostly to the European Union, the United States, and other CARICOM members; the main import sources are the United States, the United Kingdom, and CARICOM.
Most OECS-WTO Members have experienced difficulties meeting their WTO notification requirements, as well as in amending their national legislation to conform to the WTO Agreements. The main reason seems to be the lack of human resources and adequate infrastructure. Since the beginning of this Review, however, some OECS-WTO Members, in particular Dominica and St. Lucia, have made a serious effort to meet WTO notification requirements. Although most OECS-WTO Members have made efforts to amend national legislation, further amendments are still necessary to reflect WTO commitments, especially because WTO Agreements may not be invoked directly in domestic courts.
The review of the domestic implementation of WTO Agreements reveals areas where support from the international community would be of particular assistance in achieving a fuller degree of integration of OECS-WTO Members into the multilateral trading system and the global economy, namely: customs valuation; import licensing; contingency measures; subsidies; technical barriers to trade; sanitary and phytosanitary measures; TRIPS; agriculture; and services. Support could be provided through institutional arrangements already in place with bilateral partners; at the regional level, including the OECS and CARICOM Secretariats; and the Inter-American Development Bank (IADB). Indeed, although OECS countries are not members of the latter, the IADB provided considerable financial support in the preparation of this Review. Such collaboration demonstrated the advantages of linking WTO technical cooperation with existing arrangements to avoid duplication and make activities more efficient.
Market Access for Goods
Although trade policy is in principle coordinated at the OECS/CARICOM level, in practice policy differences exist between countries. All OECS-WTO Members apply CARICOM's Common External Tariff (CET) to imports from third countries at rates of up to 35% for industrial products, and 40% for agricultural goods. However, import duties vary considerably across Members, reflecting the many allowances CARICOM makes for tariff suspensions and reductions, and national exceptions to the CET. Although a schedule of reductions of the CET in four phases, to end in 1998, was established in 1991, few members have complied fully. Antigua and Barbuda, and St. Kitts and Nevis have not reached Phase IV due to fiscal problems; Dominica is expected to do so on 1 July 2001. The reduction of the CET has caused some implementation problems in Grenada, where import duties exceed WTO bound rates for some products.
In general, OECS-WTO Members are gradually moving away from an import-substitution model, towards a more open and liberal trade regime. However, the OECS-WTO Members' fiscal dependence on customs duties and other charges on imports has tended at times to slow down the pace of liberalization. In this respect, as tariffs have been lowered in recent years, other duties and charges, such as the customs service charge, the consumption tax, and environmental taxes have been increased; this has countered the market-access improvements from the lower tariffs since, in a number of cases, Governments have attempted to make tariff reductions revenue-neutral. Moreover, in some cases the customs service charge is as high as 5%, and acts more as a tariff surcharge than as a charge reflecting the cost of processing imports. With the exception of St. Kitts and Nevis, OECS-WTO Members have not recorded the customs service charge in their WTO Tariff Schedules.
Under Article 56 of the CARICOM Treaty, OECS-WTO Members apply quantitative restrictions on a number of products, in general to protect infant industries. These restrictions, which are expected to be tariffied by end 2005, affect a number of products, including beer and aerated beverages, curry, and pasta, which are included in Annex I of the WTO Agreement on Agriculture. Among OECS-WTO Members, only Dominica has, since 1998, replaced most quantitative restrictions with import duties. Import licensing is widely used by all six countries for their trade with third countries. A number of safeguard measures are also applied under Article 29 of the CARICOM Treaty; these measures have not yet been notified to the WTO.
Despite strained fiscal situations, all OECS countries apply various wide-ranging incentives programmes that result in tax holidays, and the waiver of tariffs and other charges on imports. These programmes target mainly manufacturing and service activities. The duration of benefits is, in some cases, related to local value added. Although the incentives provided are generally for all production and for a specific number of years, some fiscal advantages are also granted to export earnings in manufacturing, after the tax holiday period.
In customs valuation, while progress has been made in some OECS countries towards the use of the transaction value, others continue to use minimum import or reference prices, reportedly due to widespread under-invoicing. Standards bodies have been established in each of the OECS-WTO Members; these bodies act independently and their degree of development varies. Most OECS-WTO have adopted, or are in the process of adopting, new laws in the areas covered by the TRIPS Agreement, but some still apply legislation pre-dating the WTO.
OECS-WTO Members have service-oriented economies. Tourism is the most important economic activity, followed by offshore financial and other services, which, combined, provide more than half of the foreign exchange earnings of these countries. Recent international pressure has resulted in amendments to the legislation governing the offshore service industry. The stated goal of some OECS-WTO Members is to phase out the distinction between on-shore and offshore activities, by having a uniform set of regulations. Incentives are used in tourism, to promote the construction and renovation of hotels, and tax exemptions are granted to providers of offshore services. A phased-out liberalization of the telecommunications industry, to be concluded in late 2002, has been put in place recently, and a specialized agency, the Eastern Caribbean Telecommunications Authority (ECTEL) has been created to regulate the telecommunications industries of Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines, in coordination with the respective national regulatory agencies. In Antigua and Barbuda the market is controlled by two operators, and there are plans to partly privatize one of them.
Agriculture is in decline but still significant. Following quality problems and an erosion of preferences, the Windward Islands' (Dominica, Grenada, St. Lucia, and St. Vincent and the Grenadines), traditional dependence on bananas for export earnings has been declining in recent years, although they remain the main crop in Dominica, St. Lucia, and St. Vincent and the Grenadines. In Grenada, where nutmeg is the main crop, banana production has been phased down drastically. In St. Kitts and Nevis, the sugar industry's future is under consideration given the high costs of production. Manufacturing activities play a small albeit gradually growing role in the economies of the OECS countries.
All OECS-WTO Members have made commitments under the GATS in hotel construction and management, subject to number-of-room limitations, as well as in recreational and sporting services; all except St. Kitts and Nevis made commitments in reinsurance. Commitment in other areas vary according to the country and are, in general, relatively limited. Commercial presence is in general open to foreign investment in most service areas, but restrictions still exist for specific activities, either reserved for nationals or subject to additional requirements for foreigners.
In the OECS-WTO Members, tourism is expected to remain the main driving force of growth, particularly through its effect on investment. GDP is estimated to expand by some 4% a year in 2001-03. Although agriculture is likely to recover, the economies of the OECS countries should continue shifting towards tertiary activities. Policy initiatives in areas such as tariff reductions will continue to be constrained by the fragile fiscal position; despite this, there seem to be no plans to rationalize the use of investment incentives. The external current account is likely to remain under pressure as imports expand faster than exports.
OECS Members are expected to continue to implement of the CET reductions in the near future. In countries where this process has been completed, however, no further tariff reductions are envisaged. By end 2005, OECS Members are scheduled to dismantle all quantitative restrictions and replace them with tariffs. With respect to WTO implementation, OECS Members intend to carry on required legal and institutional changes where they lag behind, and consolidate and make operational those already introduced.
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POLICY REVIEW BODY: OECS-WTO MEMBERS
Report by the OECS-WTO Members Parts I and II
A. Main Economic Developments
The independent Members States of the Organisation of Eastern Caribbean States (Antigua and Barbuda, The Commonwealth of Dominica, Grenada, St. Kitts and Nevis, St. Lucia and St. Vincent and the Grenadines) welcome this Trade Policy Review conducted by the World Trade Organization (WTO). We see it as an exercise in inventory taking of our trade policy regulations which would lay the basis for transparency in our dealings with international economic agents. The exercise could not have come at a more opportune moment since the Eastern Caribbean states are in the process of articulating a comprehensive economic development strategy. We have learnt a great deal from the exercise so far.
The independent members of the OECS are small island economies. Their combined population is approximately 425,000 people. In 1999 their combined GDP amounted to US$2,169.34m. In 1999, the economies’ share of world exports was approximately 0.0061%. Bananas, the largest merchandise exported by the economies account for a mere 0.86 percent of world exports of that commodity. Exports as a percentage of GDP was 15.4 percent, while imports as a percentage of GDP amounted to 68.4 percent. Meanwhile, the combined merchandise trade deficit totalled 52.9 percent of GDP in 1999. All the economies have a high import content in their production and consumption patterns making it pointless to use the exchange rate as a policy instrument aimed at favourably altering their international competitiveness.
2. Structure of the economies
The economies of the Eastern Caribbean are small, dependent, vulnerable and open. Historically, the economies of the Eastern Caribbean have been inserted into the global economy on terms which were not of their own making. Part of that historical insertion into the global economy has been the development of a mono-crop production system (with the resulting limited export mix and inflexible economic structures) and preferential treatment for the resulting product going to the metropolitan countries. This character of integration into the world economy has had far reaching implications for, and diverse impact on, these economies.
To a large extent most of the economies are attempting to focus on the services sector as the engine of growth while at the same time attempting to modernise and diversify their agricultural sector. Nonetheless, the economies still remain primarily single sectored thereby prolonging and reinforcing their vulnerable character. Besides, the fundamental feature of smallness is one which cannot be ignored and one which the economies can do little about. They are small, period.
Given the small physical space of all of the economies, production possibilities are limited and most operations are of a very small scale. This small scale has also been conditioned by the narrowness of the domestic markets. Although there is a larger regional market, the transportation pattern has, in part, not allowed for any meaningful development of enterprise and joint production possibilities have remained largely unattainable. Again the historical pattern of insertion into the world economy shows itself in the lack of a proper intra-regional transportation network for goods in the Eastern Caribbean. Another dimension of the smallness of the economies is the fact that most are topographically mountainous which further reduces the available physical economic space which could be used for sustainable material production.
3. Macroeconomic developments
While by conventional measures and standards the economies have posted a relatively good macroeconomic performance during the last two decades of the twentieth century, the total picture is not always evident from those macroeconomic indicators. The economies still continue to suffer from income volatility primarily as a result of natural disasters and adverse movements in international prices, including exchange rate. Five devastating hurricanes in five years underlines the region’s vulnerability to natural disasters. An adverse movement in the value of the pound sterling and the price of bananas on the European market have severe consequences for the economies of the Eastern Caribbean. The same is true with respect to travel advisories issued by some developed countries against the economies of the Eastern Caribbean.
Despite the apparent fair macroeconomic performances, unemployment continues to be a chronic problem for all of the economies as the rate reportedly averages an estimated 20.0 percent. The attendant problem of poverty also continues to cry out for alleviation, if not eradication. At the same time there continues to be rising expectations on the part of the people of the Eastern Caribbean; expectations which in the main are difficult to realise. In turn, there has been a growing threat to long held social values, a noticeable increase in disenchantment and discernable impatience with the international economic order as characterised by globalisation. It is against this background that the macroeconomic performance of all the economies of the Eastern Caribbean must be viewed.
4. Fiscal policy
As a result of prudent fiscal management most of the economies of the OECS have been posting current account surpluses. However, the relatively small current account surplus was achieved under tremendous constraints as expenditure on some critical services had to be curbed. The outcome on the current account should also be viewed in the context of fiscal policy instruments being the only levers available to the governments to influence the course of economic activity. This means that there is little scope for the governments to pursue expansionary fiscal policy, especially since deficit financing through the central bank is constrained.
For all of the governments fiscal policy is primarily directed at raising revenue to finance both current and capital expenditure. In the main, most of the revenue goes to satisfying current expenditure, while capital expenditure is financed primarily from loans and grants made available from external savings. In recent times external sources of funds for financing capital expenditure have been difficult to identify and access as the geo-political importance of the Caribbean, in general, has been downgraded.
The process of trade liberalisation in the form of tariff reduction poses great difficulties for the Eastern Caribbean. Because of the narrow production base of the economies and the uneven distribution of income in the economies most of government revenue is derived from taxes on international trade and transactions. The process of tariff reduction, therefore, poses an acute public policy dilemma for all of the Eastern Caribbean. Invariably, reductions in tariffs are accompanied by a compensatory revenue enhancing measure as a first, albeit second best, preliminary approach to resolving this public policy dilemma. This policy course was, and still is, necessary so as to allow the governments of the Eastern Caribbean to continue performing some of the vital economic functions they are expected to perform. These include the provision of some essential social services, public investment, and the provision of counterpart financing of projects funded by international donors. Recognising the fundamental policy dilemma posed by the liberalisation of trade the economies have implemented some measures as part of a comprehensive fiscal reform programme. More recently the Heads of Government have called for a review of their fiscal regime and an examination of the feasibility of implementing a value added tax.
The governments of the Eastern Caribbean have also pursued a policy of providing fiscal incentives to investors by way of tax holidays and import duty concessions. This policy approach also poses a economic dilemma for all of the governments. While it is necessary to encourage investment to alleviate the unemployment condition, the only means for luring investors to the OECS has considerable fiscal implications in terms of revenue foregone.
5. Monetary policy
Monetary policy in the Eastern Caribbean is centralised under the Eastern Caribbean Central Bank. The focus of monetary policy is to maintain a strong Eastern Caribbean dollar so as to provide a degree of certainty to the economic policy environment. This policy stance means that the governments have had to set strict limits on the extent of debt monetisation. The economies have never used the central bank to finance government debt beyond statutory limits and economic adjustment has always been on the fiscal side in the form of contractionary policy. The external value of the Eastern Caribbean dollar has consequently remained at the same level for more than two decades.
The strong dollar policy of the central bank has provided a significant degree of policy predictability in the face of an unpredictable environment. This has influenced the flow of foreign direct investment to the economies. Equally significant, the strong dollar policy has contributed to a relatively low inflation rate in the region and hence the curbing of further demands for wage increase. From the standpoint of the governments, the stability of the value of the dollar has meant that there was, and still is, a certain degree of certainty with respect to the amortisation of external debt contracted in United States dollars. This has played a significant role in assisting the prudential management of government finances.
At the broader financial systemic level, there is the planned establishment of a regional stock exchange for the economies of the Eastern Caribbean. The hope is to deepen the financial system so as to foster greater intermediation of regional financial resources that would facilitate further mobilisation and allocation across the economies in a market driven manner. With the passage of time the expectation is to open up the exchange to global transactions thereby almost completing the process of integrating the economies into the global financial system. Relatedly, a regional market for government papers will be operational in the very near future.
6. Balance of payments
The persistent merchandise trade deficit, and indeed current account deficit, experienced by the economies of the OECS speaks to a structural characteristic of the economies. All the economies are high net importers of food and capital goods, while exporting primary agricultural products. On the services side the economies are heavily dependent on tourism, with efforts currently being made to develop a vibrant financial services sector and an information technology sector.
Given the current trends in foreign direct investment and the general directional movement of global capital it is not certain that financing of the structural current account deficit on the balance of payments would be sustainable in the long-run. This is particularly so in a context where, in order to attract the little foreign direct investment the economies of the OECS have to make sizable fiscal concessions and when that is done there is the added complication of blacklisting from some developed countries. The economies of the OECS would therefore be placed under greater pressure to close the savings - investment gap through the use of foreign savings.
B. Developments in Trade and Investments
Notwithstanding the difficulties faced by the economies, there is a commitment to pursuing economic policy aimed at liberalising trade, market penetration, building more nimble economic structures and more efficient business facilitation. At the same time, we advocate appropriate accommodation for their special circumstances. All of the economies have embarked on a phased reduction of external tariffs, curtailing their reliance on quantitative restrictions and are taking steps to make their legislation consistent with their WTO commitments. In a very practical way the economies of the Eastern Caribbean have taken the bold step of de-monopolising the telecommunications sector and set in motion a process of liberalisation almost unheard of in the Eastern Caribbean. This has led to a practical coordination of sector policy and the establishment of a coherent regional regulatory framework for the sector. Policy expectations are that this process of liberalisation of the telecommunications sector will be followed by similar processes with respect to the other utilities in the economies. With the passage of time, we would expect to embark on a deeper process of liberalisation of the economies in a co-ordinated manner and in conformity with our commitments made under the Marrakesh Agreement.
As part of opening up the economies there have been efforts aimed at implementing measures that would allow for the free movement of labour and capital in the Eastern Caribbean. The process of free movement of labour and capital also extends to the wider Caribbean region. Included in that process would be provisions for the right of establishment. Complimentary policy measures were adopted to liberalise current and capital account transactions and all the economies, operating under a common central bank, have long attained Article VIII status.
The governments of the Eastern Caribbean will continue policies aimed at attracting foreign direct investment in order to stimulate economic growth and employment, and close the savings-investment gap in the economies. Particular attention will be given to the services sector in general, and in particular, the tourism industry. The aim will be to create an environment that is conducive to investment with the granting of some concessions to participating foreign investors.
Over the medium term, the economies of the Eastern Caribbean are expected to post moderate growth spurred on by tourism, information technology, financial services, construction and to a lesser extent agriculture. The construction sector is likely to be influenced by public sector projects as well as projects associated with the tourism industry as hotels seek to expand their capacity and new hotels are constructed. While there would be a continuing role for agriculture, the future of that sector is less certain, especially in the context of the general move to fully liberalise the banana trade on the European market following the ruling of the WTO Dispute Settlement Body. Nonetheless, expectations are that developments in the other realm of the agricultural sector would be more favourable than in the case of bananas.
Both fiscal and monetary policies are expected to be in line with the immediate past trend. The governments of the Eastern Caribbean will continue their prudent fiscal management in order to generate surpluses so as to facilitate public sector investment in the economies. Monetary policy will continue to be directed at maintaining a strong dollar so as to provide a predictable environment for investment and economic activity in general. General macroeconomic policy would have to be guided by policies which recognise the close relationship between productivity and employment in order to better manage aggregate demand in the system, while stemming pressure on the balance of payments.
II. Trade policy regime
Contrary to some views, tariffs have not been used in the Eastern Caribbean as a mechanism for protecting domestic industries. Indeed, for there to be adequate protection of domestic industries tariffs would have to be extremely high. Whatever protection accorded to domestic industries can only be meaningfully done through the use of quantitative restrictions. Despite the singular importance of quantitative restrictions to the economies of the OECS, a process tariffication has begun and the hope is to ultimately place less reliance on quantitative restrictions as a trade policy instrument. However, the process of tariffication has been tempered by fiscal revenue considerations as well as tariff binding considerations and the economies now have to approach the tariffication exercise with more caution than anticipated.
B. Policy Objectives and International Relations
In all our international negotiations and in all our efforts at making the transition to new global requirements we have sought to place the fundamental economic mitigating factor of vulnerability on the agenda. Recognising the vulnerability faced by our economies, we have been painstakingly arguing for special and differential treatment in regional, hemispheric and global economic negotiations. Up to more recent times these arguments have in the main fallen on unreceptive ears. But the logical economic corollary to vulnerability is the recognition that there is need for special and differential treatment. We wish to place the issues of vulnerability and the need for special and differential treatment on the global agenda again.
From all objective appraisals, the success of any future policy requires the economies of the Eastern Caribbean to be accorded special and differential treatment in the global economic environment. The mitigating factors of vulnerability and lack of capacity are sufficient to suggest that if these economies are treated equally in the international economic arena, without due consideration to their peculiarities, then their chances of survival in the global economy would be fraught with greater difficulties. Even if the playing field is levelled, there is the equally critical factor of unequal participants in the game. The economies of the Eastern Caribbean can never be economically equal in that sense.
This special and differential treatment may take the form of longer periods for compliance with specific regulations and easier market access to our major trading partners, exemption from certain obligations and lower levels of commitments. Short of these, the economies of the Eastern Caribbean would be disproportionately affected by the resulting character of insertion into the global economy. This could have untold implications for the peoples of the region. While some may argue that it is time for the economies to operate on a level playing field and that all should be treated equally, we must be reminded that while this may be so, the players in the game of global economic relations are far from being equal. It is an irony that equal conditions and requirements, when applied without regard to the relative position of the players could generate the most unequal set of results. Factor endowments of the economies are radically different making it more easy, with minimal socio-economic dislocation, for those with a stronger factor endowment to take advantage of equally applied rules and regulations.
We should also be reminded of the interdependent nature of the global economy and the ultimate objective of the rules and requirements; that is, the economic advancement of all peoples. We should never lose sight of this objective in the construction of rules and in the application of the requirements of the global economic system. If it is the case that the construction of the rules and the stringent application of the requirements of the global economy would lead to more disadvantaged countries and more impoverished peoples of the world then we should pause and reflect on the fundamental objective of global economic integration. This is not to say that there would not be some greater gainers from global economic integration. However, there should not be greater losers, certainly when contrasted with their initial position before entering the global economic arena in this new type of conditions. Indeed, it would be useful to recall what the Protocol 5 of the EC- ACP Lomé Convention asserted in respect of the banana industry of the ACP Member States. According to that Protocol, with respect to access and advantage on the European market no ACP states should be placed "in a less favourable situation than in the past or at present", i.e, they should be made "no worse off". This is particularly relevant if as a result of globalisation some economies turn out to be disproportionately worse off from their initial conditions relative to other countries. The economies of the Eastern Caribbean are forever mindful of this basic objective and potentially desirable result of global economic integration. We hope not to be made worse off.
1. World Trade Organization
In recent times the economies have followed traditional economic wisdom and have adopted an outward-looking economic posture. The economies have gradually reduced their external tariffs over a number of years, while attempting to penetrate external markets. As a further attempt at following conventional economic views, the economies have all joined the World Trade Organisation. The hopes were that a rules based international trading system would be more beneficial than harmful to the economies of the Eastern Caribbean, and that there would be a recognition of the peculiar economic position in which the economies find themselves.
While the attempts at inserting the economies into the global system are incomplete, the hopes of the economies are far from being realised given the conflict over the European banana regime and the unfavourable rulings of the Dispute Settlement Body against the preferential treatment accorded to ACP bananas on the European market, as well as the concurrent erosion of preferential arrangements for sugar. The economies have been caught in the middle of a conflict between two economic powers over issues which had little to do with bananas or sugar. The economies suffered, and are still suffering collateral damage as a result of that conflict. That was particularly worrying to the economies of the Eastern Caribbean as it compounds the difficulties of economic adjustment and complicates the process of global engagement. Similarly, further efforts at diversifying the economies of the Eastern Caribbean in the form of the development of the financial services sector have met with challenges from the larger economies. The system of rules which the Eastern Caribbean economies had hoped would be of some assistance apparently has been turned against those policies the economies have followed based on the prevailing economic consensus on outwardness, global engagement, and economic diversification. In this regard, it may be necessary to give greater prominence to the issue of financial services on the agenda of the new round of multilateral trade negotiations.
Because of resource constraints, coupled with minimal manpower, the OECS countries find it difficult to participate in the deliberations of the WTO in a consistent manner. Attempts have been made to establish a physical presence in Geneva, but the cost of operating such a presence has so far proven to be prohibitive. The cost of operating from Geneva plus the cost of implementing the agreement, when contrasted with the benefits derived from participation in the process, have led to renewed thinking on the possible net benefit of participating in the WTO.
There is also the perennial problem of the lack of capacity. This is probably one of the most daunting structural institutional problems facing the economies of the Eastern Caribbean. The engagement of the economies in the WTO has more forcefully brought to light the acute nature of the capacity shortfalls of the economies. In some cases we have been unable to establish the requisite contact point in each country. We have been unable to address the issue of notification to the fullest. We have not even been able to take maximum advantage of some offers, especially in the area of training, made to us because of a lack of capacity. Worst of all, when the dispute over the European banana regime was litigated we found ourselves in a legally disadvantaged position in terms of representation. Even the process of data gathering for the conduct of this very Trade Policy Review was in many instances hampered by a lack of capacity. Basic data which most economies are presumed to have readily at their disposal were not that accessible to the economies of the Eastern Caribbean and unusual searches had to be conducted to facilitate this Trade Policy Review. Meaningful participation in the work of the WTO is impossible for the economies of the Eastern Caribbean without assistance from the developed countries.
2. Regional Agreements
As a regional grouping the members of the OECS have sought to promote free trade among its members. As it currently stands there are few restrictions on trade within the OECS and steps are taken to foster the free movement of labour and capital within the grouping. The barriers to free movement of labour and capital are under constant examination with a view to removing them. The overall policy objective is to create a single economic space in the economies of the Eastern Caribbean so as to maximise all possible economies of scales. The single economic space envisages a more efficient and effective payment system, greater mobility of labour and capital and a deeper level of policy co-ordination and harmonisation, especially in the field of international trade.
A critical element in the OECS grouping is the fact that a number of activities are conducted under common arrangements. The basic idea behind this functional cooperation is to achieve economies of scale in the provision of some services to the people of the region. The small size of the economies is such that not much economies of scale can be derived in the provision of a number of services. The per capita cost of providing some services are simply prohibitive, but in some cases, given the nature of the service, the economies have to absorb the loss associated with the dis-economies of scale and make individual arrangements for the provision of some vital services.
The membership of the OECS in the CARICOM regional integration movement is aimed at fostering stronger economic ties with the rest of the Caribbean. It is also directed at attempting to overcome some of the difficulties associated with smallness. This means an expanded market for products of the OECS economies and common approaches to some activities which could be better done at a regional level as opposed to a national level.
Recognising the small size of the economies of the OECS, the larger member states of the CASRICOM integration movement have accorded special and differential treatment to these economies. Despite the application of some trade restrictions within the ambit of the special and differential treatment afforded to OECS countries exports from the rest of CARICOM to the OECS countries continues to post strong growth over the years. It is indeed a clear case of using special and differential treatment in such a way that trade flows within the members of the regional grouping are not unduly hampered.
Bilateral trade agreements between CARICOM and countries of the hemisphere have all allowed for non-reciprocal trade between those countries and the small economies of the OECS. Despite the fact that non-reciprocal status has been given to the OECS in those other trading arrangements, the economies have not been able to effectively use the agreements to the fullest. This is primarily due to the fact that the smallness of the economies does not allow for large-scale production possibilities, and where some more than small production possibilities exist there is the problem of severe supply response constraint. Again, we see the constraining factor of smallness affecting the economies of the OECS in effectively participating in hemispheric arrangements. The problem is even greater at the global level.
C. The OECS Members, the WTO, and Technical Cooperation
The economies of the Eastern Caribbean are attempting to build capacity in the field of trade policy. To that end there is currently in place a trade policy project (funded by the Canadian government) whose objectives are, among others, the development and maintenance of an OECS international trade strategy and strengthening of OECS capacity to meet obligations under regional and international agreements. Attempts are also being made to rationalise the coordination of inter-agency relations in the area of international trade. To that end some of the economies have integrated their Ministries of Foreign Affairs with their Ministries of International Trade. Greater efforts are currently being made to structure the relationship among the different agencies dealing with matters related to trade, for example, the Ministry of Health, the Ministry of Agriculture, Customs Department, and the Ministry of Legal Affairs. In some economies steps have been taken to have a lawyer specialised in trade law who would operate in the Ministry of Trade. Meanwhile, the training of trade officials is an ongoing exercise with the assistance of various regional and international organisations, including the WTO. And, a series of legislative reforms is underway to ensure conformity with obligations under the WTO.
In the light of the difficulties faced there is a critical need for technical and financial assistance to the economies of the Eastern Caribbean. Those who were involved in the formulation of this Trade Policy Review would need no more to convince them of such a need. Technical and financial assistance would be needed in the general areas of economic policy formulation and implementation, and particularly trade policy formulation and implementation. For the economies of the Eastern Caribbean there is a need for technical and financial assistance in capacity building aimed at transforming the institutional environment of policy making, implementation, management, and administration. Important areas needing attention include: customs operations, statistical gathering and compilation to assist in policy decision making, legislative drafting, standards, and modern business operations for the private sector. Our experiences have shown that resources would have to be allocated for at least the medium term. Our collective experiences have also made it clear that it is impossible to build capacity, transform institutions, and adjust economic agents and markets in the short term. Nevertheless, the economies of the Eastern Caribbean are committed to those policy directions.
The economies of the Eastern Caribbean are also committed to the multilateral trading system. As was noted before, the economies are currently in the process of deeper trade liberalisation and some economic restructuring. Those are not easy tasks to accomplish in the midst of rising expectations and growing concerns over the unevenness of globalisation. The economies would need all of the assistance they can get from this international body. Further, whatever international trading rules are agreed upon in the future, greater efforts would have to be made to take into account, the special characteristics of these small island economies. Once these are properly taken into account the survival and success of the economies of the Eastern Caribbean within the global economic environment would be made less uncertain than has been the case in the past and is the case at present. Special and differential treatment must be securely anchored in all policy regimes which seek to ensure that the Eastern Caribbean participates in the process of globalisation. Effective participation of the economies in the global economy could be meaningful to us only in a context of special and differential treatment.
The WTO Members are: Antigua and Barbuda, Dominica, Grenada, Saint Kitts and Nevis, Saint Lucia, and Saint Vincent and the Grenadines.