Responding to globalization: A decent work agenda for the Caribbean in the context of regional integration

Summary of working paper entitled: Foreign direct investment and employment in the English- and Dutch-speaking Caribbean1 by Dr. Roland Craigwell

Foreign direct investment (FDI) in the Caribbean: Some stylized facts In the Caribbean, foreign investment accounts for a substantial proportion of total investment since domestic savings are generally insufficient to meet local financing needs. A review of trends in FDI revealed the following: y Total FDI to the region rose from US$419M in 1970 to US$22B in 2003. The bulk of this, however, was channelled to the Cayman Islands and Bermuda, countries which have vibrant international business and financial sectors. In the recent 2000-2003 period, these two countries alone attracted US$11 billion in FDI or 82% of the total inflows to the region.

Resource-rich countries such as Jamaica (bauxite) and Trinidad and Tobago (oil and natural gas) received just over US$1 billion or 10% of total FDI. The OECS attracted US$378 million or 3% of the total, which was absorbed mainly by the tourism and tourism- related industries. y The relative significance of FDI varied throughout the region. FDI to the Cayman Islands and Bermuda was twice as large as their GDP. The average for the remainder of the region was significantly lower: 11% of GDP. However, three OECS countries had much higher proportions: Anguilla (32%), Saint Kitts and Nevis (25%) and Grenada (17%). In Jamaica and Trinidad and Tobago, the ratios of FDI to GDP were 7% and 9% respectively. y A large proportion of FDI was in the form of inter-company loans (75%), originated in the USA (50%) and was export-oriented (over 50%). y Productivity in foreign firms was markedly higher than in domestic firms. Average growth in output per person was 22% for the former and 2% for the latter. Most domestic firms are small- and medium-sized businesses.

1 Includes 13 countries and 8 territories: Anguilla, Antigua and Barbuda, Aruba, Bahamas, Barbados, Belize, Bermuda, British Virgin Islands, Cayman Islands, Dominica, Grenada, Guyana, Jamaica, Montserrat, Nether- lands Antilles, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Suriname, Trinidad and Tobago, and Turks and Caicos Islands.

1 Does increased FDI generate higher levels of employment? Since FDI is expected to create more jobs in the economy, the relationship between these two variables was examined. The results of the investigation, which was derived using panel data methods, are shown in Box 1.

Box 1:

FDI and Jobs in the Caribbean: Key Findings

• There is a positive relationship between FDI and employment in all Caribbean countries, with the exception of St. Kitts and Nevis and Suriname. • A 1% increase in FDI should lead to a 1% rise in employment. • The maximum influence of FDI on employment appears to occur within the first year of the initial inflow and gradually declines thereafter. • More liberal trade policies, greater domestic absorption and financial development might increase the employment benefits of FDI.

The success of government policies to attract FDI In the past, Caribbean Governments have used a variety of policies to attract FDI: investment incentives, domestic infrastructure and local skills, investment promotion agencies, international investment treaties and a regulatory environment. Although there are few studies on the success of these policies, some recent findings on the effectiveness of these policies are summarized below.

Findings of recent studies y 2006: An IMF investigation of tax incentives in the Eastern Caribbean Currency Union concluded that such incentives may represent a misallocation of resources. Major incentives included tax holidays to the tourism and other industries.

y 2005: A World Bank study of investment promotion agencies in 58 countries that included Guyana, Jamaica, Trinidad and Tobago and Saint Lucia found that greater investment promotion is associated with higher cross-country FDI flows. However, no detailed analyses of these agencies were undertaken.

y 2005: An academic study of bilateral investment treaties concluded that a large number of such treaties were important in increasing FDI flows. The study included eleven Caribbean countries.

Results of a Caribbean survey on the regulatory environment In 2005, a survey of employers’ organizations was undertaken that covered three basic areas: conditions of employment in FDI enterprises, the participation of FDI enterprises in the domestic economy and their industrial relations practices. The survey responses, which are summarized in three indices, reveal the following: y Conditions of employment among domestic and FDI enterprises are generally quite similar across the region.

y FDI enterprises participate effectively in the Caribbean, with their main contributions in the generation of income, employment and foreign exchange.

y Some FDI enterprises experience problems with labour market regulations, including retrenchment policy, union recognition and contract employment.

2 Table 1: Index of Employment Conditions in FDI Enterprises Conditions of Participation in the Industrial Relations FDI as a % Employment Domestic Economy Practices of GDP Antigua & Barbuda 75 100 100 17 Barbados 75 100 0 1 Bermuda 75 100 0 200 Dominica 100 100 50 6 Saint Lucia 75 100 0 10 Suriname 100 67 50 -7 Trinidad and Tobago 75 100 0 9 St. Vincent amd the 11 Grenadines 75 100 0 Jamaica 100 67 0 7

Note: The higher the value of the index: y the more restrictive are labour standards (Col. 1); y the greater the participation of FDI enterprises (Col. 2); and y the greater the difference in industrial relations practices of FDI enterprises (Col. 3).

Areas for future research

Although Caribbean Governments have adopted many different policies to attract FDI to the region, the effectiveness of these policies has generally not been assessed. In view of this, further research should be undertaken in the following areas: y the impact of trade agreements, intellectual property rights and labour standards y the distributional impacts of FDI y the improvement in skills and technology associated with FDI y the impact of investment promotion policies

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