The Multinational Monitor


T H E   M Y T H   O F   I N V E S T M E N T   I N C E N T I V E S


Where the Magic of the Marketplace Is Failing

by George Black

ROSEAU, DOMINICA When this exquisite eastern Caribbean island of 75,000 people became independent in November 1978, its leaders faced a problem. So obscure was the former British associated state, they felt, that people would confuse it with the Dominican Republic. They resolved the identity problem by calling their newly independent country the "Commonwealth of Dominica' - the phrase still stamped in visitors' passports.

For some, no doubt, the confusion lingers, but with President Reagan's Caribbean Basin Initiative (CBI) and the invasion of nearby Grenada in October 1983, Dominica no longer languishes in anonymity. Instead, it has become a proving ground for the Reagan administration's philosophy of stimulating economic growth in the Caribbean Basin through foreign private investment.

There are two ways for the tourist or prospective investor to reach the island by air. One is to arrive at Melville Hall airport, 36 miles away from the tiny capital of Roseau and a two hour switchback ride over the mountains. The other involves an alarming nosedive onto the 2000 foot Canefield airstrip, handy for Roseau and the government's new Canefield Industrial Park.

"We can't take jet aircraft. Our deepwater harbor has only one berth. You might say that we have a problem attracting investors," Prime Minister Eugenia Charles acknowledged wryly in a recent interview in her law office.

President Reagan has no more fervent admirer or loyal ally in the Caribbean than Ms. Charles. "She has a direct line to the White House," comments Rickey Singh, one of the region's most knowledgeable journalists. "The coordination is even closer than it is between Washington and Jamaica's Edward Seaga."

It was Seaga who urged Reagan in 1981 to develop a Caribbean economic aid package to shore up strategic alliances. The administration was more than happy to oblige. In the wake of revolutionary victories in Grenada and Nicaragua and guerrilla advances in El Salvador, Washington feared that the region's economic problems could lead to further upheaval and gains for the left. The CBI was designed to preempt this by stimulating private investment with a market-oriented package of one-way free trade and open door incentives.

Dominica is just the sort of friendly neighbor the CBI aimed to bolster. Its annual per capita income hovers under $500. In the whole hemisphere, only Haiti and St. Vincent have lower figures. Before Ms. Charles' conservative Dominica Freedom Party took office in 1980, the island was racked by political turmoil.

Dominica Labour Party leader Patrick John seemed to vie with Grenada's Eric Gairy for the title of the region's most corrupt and bizarre head of government, involving himself with arms dealers and U.S. mercenaries and devising elaborate scams to sell off sections of the island to foreign entrepreneurs. The Left enjoyed widespread support, and after the Grenadian revolution of March, 1979, many in Washington fearfully looked to Dominica as the next Caribbean domino, ripe for radical change.

When President Reagan presented the CBI in a speech to the Organization of American States three years ago, he promised that "the magic of the marketplace" would offer a panacea for the region's crippling economic ills. Reagan declared that the CBI offered "an integrated program that will create conditions under which creativity and private entrepreneurship and self-help can flourish."

The CBI's formula for growth was to rest exclusively on generating new private investment for export-oriented industries. "Our goal is the creation of wealth through the creation of employment," explained one U.S. official in the region. "And we hope to do that by creating employers."

From there on, the assumption was that the wealth would trickle down. But three years later, throughout the small islands of the Eastern Caribbean, the bold promises of the CBI remain unfulfilled.

Ready and Willing

Dominica was more than eager to welcome the new investors. Its industrial sector was, to say the least, underdeveloped. There is only one factory of any size on the island - the locally owned Dominica Coconut Products, which employs 150 people manufacturing soap. Even Ms. Charles does not flinch at a term like "economic basket case." Her government's figures for 1982 showed that manufacturing accounted for just 7.3% of the Gross Domestic Product and that local businessmen were responsible for more than 95% of all new investment capital from 1979-82, the most recent period for which accurate figures are available.

On paper at least, the island did everything that could have been expected. Dominica opened an Industrial Development Corporation, or IDC, styled after the model of nearby Barbados, which has attracted extensive foreign investment. The IDC, in turn, opened a New York office and printed up glossy brochures to coincide with the launching of the CBI, outlining the package of 10-15 year tax holidays and other benefits it hoped would attract American capital.

Prime Minister Eugenia Charles became a familiar face to investors, winning high visibility in Washington by sharing Reagan's presidential podium and making frequent appearances on network TV news as she spoke out in favor of the Grenada invasion.

Her government almost tripled Dominica's available factory space. By late spring this year, the Canefield Industrial Park will have 76,000 square feet available. Twenty thousand square feet - more than a quarter of the total - has been donated by the government of South Korea. A second industrial park is planned on the other side of the island near Melville Hall airport.

Yet despite it all, the investors, particularly the U.S. investors, remain elusive, and IDC officials interviewed in Roseau are unsure of how they are going to fill the factory shells.

Their predicament highlights the fallacy that lies at the heart of the CBI: that aggressively pro-U.S. orientation will be rewarded with a flood of private capital.

IDC officials list five labor-intensive export industries as their priority areas for foreign investment: garment assembly, leather goods, electronic assembly, sporting goods and toys. But they have managed to attract just 15 new foreign private investments since 1981 [see table]. None of them is in a priority category; only two of them are American-owned companies, and together those two have provided a mere 55 new jobs, most for unskilled and semi-skilled female workers.

The rest of the new investors are a motley assortment: a Guyanese tomato ketchup bottling plant; a French--Martiniquan mineral water supplier. One investment officer comments that, "When people first heard about the CBI they were excited, but now its just dead, nothing much has happened. I don't think Dominica has benefited at all." He ascribes only one of the 15 new investments to the incentives offered under the CBI.

Promises Unfulfilled

With only minor variations, Dominica's predicament mirrors that of its equally small, equally beautiful and equally dirt--poor neighbors such as Grenada and St. Vincent. And the Dominican official is not alone in his lament. A surprisingly wide range of Eastern Caribbean businessmen, government officials and opposition politicians agree that the CBI has had - and is likely to have - little or no impact, even in the more developed islands such as Barbados.

Errol Barrow, for many years Prime Minister of Barbados and the elder statesman of island politics speaks for many when he says, "nobody has been able to demonstrate what benefits will accrue to our economies as a result of the CBI. It must appear attractive to some businessmen who desire a quick dollar, but they have not risen to the bait. The CBI has done nothing more than the Generalized System of Preferences has done over the years. In vital areas like garment manufacturing, where we really can expand, the CBI has been of no benefit whatsoever. Those concessions are specifically excluded. The CBI was hastily contrived and not carefully thought out. No one here examined what was really in it for us."

Many critics go further than Barrow, and perceive a clear intent in the CBI to undermine local attempts at regional economic planning. As far as they are concerned, Washington's goal is to divide and rule these small and vulnerable island societies.

Atherton Martin is a former Dominican Minister of Agriculture who is now Managing Director of Farm to Market, a company seeking fresh marketing channels for the island's agricultural products. He condemns the Reagan administration for "attempting to create a totally U.S. market orientation," and notes that their task "is made easier by the ideological orientation of many of the region's current leaders, who have tunnel vision towards Washington."

Many in the region view the administration as seeking to build a series of bilateral relationships at the expense of long--needed regional integration. U.S. diplo-mats make no great effort to conceal that intention. One official acknowledged, "We don't think too much in terms of the CBI. We tend to think much more on an island by island basis."

The election of a string of conservative leaders in the English speaking islands after 1980 gave Washington an ideal opportunity to secure the desired links. The CBI offered itself as an ideological alternative to what Reagan called "the tightening grip of the totalitarian left."

But though the conception of the CBI was unabashedly geopolitical, it was sold to the region's governments with the promise of economic revival. Today, however, while the ideological alliances are firmly 4n place, nothing has happened to halt the economic slide.

The CBI's critics blame the administration's obsessive devotion to free-market principles at the expense of island economic realities and its refusal to consult local experts.

One obstacle they point to is the chronic absence of the basic infrastructure demanded by investors. But that is only part of the problem, and the response - such as the almost- completed AID project to pave Dominica's torturous airport highway-is only part of the solution.

Even assuming they overcame this first obstacle, many investors sniffing the Caribbean air for low wages are disconcerted by the solid labor unions they encounter in many of the former British colonies.

The American Institute for Free Labor Development (AIFLD) believes that many potential CBI investors have been deterred. Michael Donovan, who runs AIFLD's Caribbean programs from his office in Bridgetown, Barbados, told me that his advice to businessmen is, "If you're running away from the United States to escape labor unions, forget it."

Though there is a fair amount of loose talk about replicating the "Korean model" or the "Taiwan model" in the Caribbean islands, the reality is that only a country like Haiti offers such potential. Elsewhere, despite the rampant poverty, labor is too well-organized and - relatively speaking - too highly paid for that, factors which will continue to inhibit investors unless local governments are prepared to break with a long standing social contract and exercise repressive wage restraint.

In the final analysis, even if investors do decide to take the plunge, the incentives needed to attract them may be so great that few of the profits that result actually stay in the host country. Once their tax holidays have ended, businesses will characteristically pull out and relocate - a syndrome that has already plagued many Caribbean countries.

Before October 1985 Prime Minister Eugenia Charles will be obliged to call elections. If she wins it is less likely to be on her record than because of the continuing disarray and ineptitude of her opponents.

Like many of her conservative counterparts in the Caribbean, she has in effect mortgaged her political reputation to an economic philosophy that has shown few tangible results. Dominica's 15 new foreign investors have created fewer than 300 new jobs, not enough to outweigh the steady loss of jobs in the neglected farming sector that still produces most of the country's export earnings. Another 500 temporary jobs will be lost when the Melville Airport road is finished. Unemployment, by most estimates, stands at around 40% . As her Industrial Development Corporation becomes more desperate to show results, it has been reduced to scrabbling even for capital-intensive investment projects, defeating its own raison d'etre of creating new employment.

The Reagan administration claims bravely that its CBI is working, but it is only likely to be proved right in the region's relatively stable and developed economies such as Costa Rica or Barbados. There, investors will find up-to-the-minute jet airports, efficient international telecommunications links and income levels up to six times higher than Dominica's. In other words, the CBI will work best where it is needed least.

Radical Surgery?

Regional leaders like Eugenia Charles are now pinning fresh hopes on a recent offer by Puerto Rican governor Rafael Hernandez Colon to help underwrite the success of the CBI in the smaller Caribbean islands. In his inaugural address in January, Hernandez Colon offered to make available up to $700 million in funds held in Puerto Rico's Government Development Bank under Section 936 of the U.S. Internal Revenue Code. The Puerto Rican proposal would provide low--interest financing for twin-plant arrangements or production-sharing plans.

Forty years after launching its own investment incentive plan, the much heralded Operation Bootstrap, Puerto Rico is still mired in economic crisis. Unemployment hovers around 20%; perhaps another 20% are underemployed. Both figures understate the problem, as legions of jobseekers have migrated to the U.S. mainland. Though Bootstrap drew investors in droves, the first wave of laborintensive plants moved on as soon as wages climbed above the bread-and-water subsistence rates that beckoned in the Far East. The second wave of capital intensive installations proved profitable to their owners, but provided few jobs and only minimal reinvestment for the local population.

Nonetheless, compared to Dominica, Puerto Rico does have some economic cards to play. A spokesman for the Puerto Rican Economic Development Administration confirmed that Hernandez Colon is concerned by the sluggishness of the CBI in the Eastern Caribbean. But he acknowledged that the offer is no act of charity. "Puerto Rico is too poor to export capital whimsically," he said. "This proposal is a marriage of convenience between Puerto Rican interests and the goals of the CBI. Its a case of one hand washing the other."

Prime Minister Charles, in any case, says she wrote straight away to Hernandez Colon to tell him of Dominica's interest in the scheme. "For example," she explained to me, "we would do the initial processing here of what we can produce locally, and then send it on to Puerto Rico where they could put it in cans. There would be no point in putting in a canning factory in Dominica. It would just be too expensive."

But Ms. Charles is taking nothing for granted. "You're not just talking here about cooperation between two governments," she says. "You're also talking about working something out between two private sectors. And that gets complicated."

In the meantime, Ms. Charles seems to accept that riding on a wing and a prayer is a necessary condition of political life. "I do forsee more business, more trade relations with the United States," she says hopefully, but then adds with the flicker of a smile, "Of course that may be just wishful thinking on my part."

If her hopes are ill-founded, and free--market prescriptions continue to allow the poorest Caribbean nations to fall through the cracks, the Reagan administration may again confront precisely the challenge that the CBI claimed to be addressing in the first place: a chain of hopelessly impoverished and unstable societies that see no future in Washington's solutions to their economic ills and turn instead to more radical surgery.

George Black, Editor of Report on The Americas, a bimonthly magazine published by the North American Congress on Latin America recently returned from a trip to the Eastern Caribbean.

Public Investments in Dominica Since 1981

Company Ownershp Business Start-Up Capital* Year 1 Jobs Tax Holiday
Sedlemayer Brewery, Engineering and Holding Co. West German Brewery under consideration 15 5 years
Dominica Ssteelworks, Ltd. Guyanese Galvanized sheeting n/a 9 10 years
Natural Fiber Products % Perfumery Enterprises Indian Perfumes / Essential oils 80,000 15 10 years
Knitwear Products (Dominica) Trinidadian Garments n/a 30-40 10 years
Gloves (Dominca) Ltd. U.S.A. Disposable gloves 90,000 40 10 years
Clamingo Industries Guyanese Handbags, rugs, bathroom sets 80,000 30 10 years
Caricas, Ltd. Frence Garments, fabric printing 100,000 6-10 8 years
Carib Spring, Ltd. French/ Martiniqun Mineral water and juice bottling 1.5 million  (over 18 mo.) 10 10 years
Reigate Hall Hotel British Hotel renovation 450,000 10 10 years
Karibeah Enterprises Guyanese Ketchup and sauce bottling n/a 10-15 5 years
West Indies Aloes U.S.A. Aloe vera gel extraction 375,000 15 10 years
Dominica Electronics and Appliances, Ltd. Indian Home appliance assembly 134,000 40 10 years
Superior Timber Products, Ltd. French  Prefabricated furniture 900,000 25 10 years
Ogheden Industries Swedish Furniture 200,000 10 5 years
Carriage Trade Distilleries Canadian Rum and liquor refining under consideration 30-40 10 years

* In Eastern Caribbean dollars: $1.00 EC - $2.70 US

Source: Dominica Industrial Development Corporation

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