About this issue

This is the second edition of our monthly business supplement edited by William Walker. The articles are written by Mr Walker unless otherwise stated.

We will be inviting selected business leaders to make their comments in each issue on a subject of their choice. That series starts today below with a piece by Mr Clifford Reis, the Executive Chairman of Banks DIH Limited.

We welcome comments or letters from readers on the contents and ideas for topics for future issues.

The U.S. Caribbean Basin Trade Partnership

One more step on the way to a Free Trade Area of the Americas.

The U.S.-Caribbean Ba-sin Trade Partnership Act signed in October 2000 was a reaction to the effects the 1994 North American Free Trade Agreement (NAFTA) has had on both US and Caribbean garment manufacturers.

With many US manufacturers setting up factories in Mexico and taking advantage of cheap labour and duty free exports, those producers left in the United States were soon decimated. Imports from Mexico increased by 611 % in the four years after 1994. Meanwhile, for the Caribbean, NAFTA was catastrophic. The number of jobs lost in the apparel sector in the years after NAFTA was estimated to be around 123,000 with 150 plants shut down. The Caribbean's share of apparel imports to the U.S. had declined to only 23.8% by 1998 after years of solid growth put in place by the original Caribbean Basin Economic Recovery Act of 1983 (CBERA). Jamaica was particularly hard hit.

Ostensibly the trigger for the Clinton Administration to formulate the eight year CBTPA was the devastation caused by Hurricane Mitch and Georges in1998. More long term goals reflected the realisation that more employment in the Caribbean would mean increased U.S. exports to the Caribbean Basin countries. This amounted to over $19 billion in 1998, more than to France, Brazil or China and the U.S. still maintains a trade surplus with the CBI region of around $2 billion. A more prosperous region would also help discourage the flow of economic immigrants and illegal drugs northwards. But the main impetus for enhanced trade arrangements came as usual closer to home; namely US textile manufacturers worried about a flood of cheap imports from the Far East in particular China, until recently the No1 garment importer to the US. This threatened the very fabric, literally, of the US textile industry and the situation would only get worse with the Agreement on Textiles and Clothing requiring quotas on imports of textiles and apparel from countries that are members of the World Trade Organization (WTO) to be phased out by 2005. U.S. textile manufacturers therefore wanted to establish alliances with Caribbean Basin companies which would combine US efficiencies in producing cotton and textiles and expertise in design and marketing with low cost assembly operations in the Caribbean region.

The CBTPA addresses the Asian threat by giving duty free access to an expanded list of apparel imports from the Caribbean as long as the fabric and thread are made in the United States. The same arrangement also applies to a number of countries in Africa under the Africa Growth and Opportunity Act of 2000. Originally the regulation had required the garments to be assembled from pre cut pieces, but cutting of material is now permissible.

The categories include: items assembled from U.S.-made and cut fabric, manufactured from U.S. yarn that are entered under provisions which allow for certain processes such as embroidery and stone washing; "items cut and assembled from U.S. fabric made with U.S. Yarn, sewn in CBPTA countries with U.S. formed thread; knit to shape (other than certain socks) from U.S. yarns, and knit apparel cut and wholly assembled from fabric formed in one or more beneficiary countries or in the U.S., from U.S. yarns, with the following caps: 250 million square meters equivalent for the first year ,to be increased by 16% for each succeeding year through September 30 2004.

T shirts and underwear made from fabric formed in one or more beneficiary countries from US yarns subject to the following caps 4.2million dozen for the first year to increase by 16% every year up to 2004 .

Brassieres cut and sewn in a beneficiary country starting in second year September 2001.

There are also provisions for handloomed, handmade or folklore articles so certified by CBTPA government authorities.

The bill also includes a special allowance for products containing nylon filament yarn from Canada, Mexico and Israel. In general up to 7 percent by weight of foreign fibres or yarns is allowable.

The caps are supposed to be distributed to individual countries by mutual agreement amongst themselves. At present a first come first served system is being instituted until a proposal is submitted to the US and without any agreement this system will remain in place.

Also included is an allowance on imports of rum from CBI member states as long as it is first imported into Canada and the liqour or spirituous beverage produced there with its rum content to be at least 90% by volume.

"Section 211 of the legislation also extends NAFTA equivalent treatment to certain footwear, prepared or preserved tuna, petroleum or petroleum products certain watches watch parts, and certain handbags, luggage, flat goods, work gloves and leather wearing apparel. These products had been excluded from CBI duty-free treatment."

The duty which had prevailed on some textile items under the preceding acts was therefore scrapped as of October 1st 2000 and this essentially puts Caribbean garment makers at parity with those in Mexico. While the 20% tariff which only applied to the assembly cost of a garment estimated at 40% of the total price, might have seemed insignificant, the margins on apparel are very slim and the Caribbean still remains at a disadvantage in terms of transportation costs compared to Mexico. Meanwhile the American Textile Manu-facturers Institute concluded that the new law will lead to 121,400 new jobs in the U.S. and $8.8 billion in new U.S. exports.

A number of restrictions and guidelines do apply including the effective monitoring of transshipments. Transshipments are when clothing from a non-CBI country enters a CBI member state and is then re-exported under the preferential arrangement. The penalties for companies caught in such practices are severe including a ban of 2 years. The offending countries also face severe restrictions on apparel imports if they do not take steps to stop the transshipments.

With the mirroring of NAFTA agreements the new CBTPA is one more step on the road to the creation of the Free Trade Agreement of the Americas set to come into effect optimistically by 2005 for all 34 countries in the hemisphere. In fact beneficiaries of the new agreement are expected to comply with a number of conditions which further their membership in the FTAA. In addition countries are required to uphold intellectual property right laws as prescribed by the WTO and to adhere to international labour practices. These include the right to organize and bargain collectively; a prohibition on the use of any form of forced or compulsory labor; a minimum age for the employment of children; and acceptable conditions of work with respect to minimum wages, hours or work. The country is also evaluated on whether it has "met the counter-narcotics certification criteria set forth in section 490 of the Foreign Assistance Act of 1961 (22 U.S.C. 2291j) for eligibility for United States assistance; has taken steps to become a party to and implement the Inter-American Convention Against Corruption; applies transparent, nondiscriminatory, and competitive procedures in government procurement equivalent to those contained in the Agreement in Government Procurement described in section 101(d)(17) of the Uruguay Round Agreements Act; and contributes to efforts in international fora to develop and implement international rules in transparency in government procurement."

In light of these requirements it is noticeable the emphasis the Guyanese authorities have recently been placing on all these issues if not exactly making much progress in their implementation.

The countries eligible under the CBTPA are: Antigua, Dominican Re-public, Montserrat, Aruba, El Salvador, Netherlands Antilles, The Bahamas, Gre-nada, Nicaragua, Bar-bados, Guatemala, Panama, Belize, Guyana, St. Kitts and Nevis, British Virgin Islands, Haiti. St Lucia, Costa Rica, Hon-duras, St. Vincent & the Grenadines, Dominica, Jam-aica and Trinidad & Tobago. (Back to top)

Terrorists can't stop Guyanese travellers

American based airlines servicing Guyana have benefited tremendously from the US$15b bailout by the federal government under the Air Transportation Safe-ty and System Stabilization Act. North American Air-lines received a direct payment to date of US$1.013m. Amerijet which runs a weekly cargo service out of Guyana also received a stipend of US$588,787.

Meanwhile Guyanese travellers seem quite un-fazed by the events of September 11 with their on-ly apprehension being in visiting New York given the continuing scares over an-thrax. Even in the immediate aftermath of the terrorist attacks Guyanese were still determined to reach their destination, with only 10% cancellations on North American's September 11 Tuesday night flight which did not take off until Friday. In fact business is probably better for the airline on its Guyana route than last year given the absence of GA 2000 and the opportunity to pass on higher fares. Last year NA was offering a two for the price of one special. Now fares are a healthy US$540 for a 14 day return. Traffic in and out of the country was largely undisturbed by the terrorist at-tacks because of the strong reasons most Guyanese have to fly. There is not a large market for American tourists who would be more inclined to cancel their holidays.

Regionally the Caribbean continues to be affected by the attacks although not to the extent some might have imagined. BWIA traffic is said to be off 20% but this might be more to do with the global economic downturn than any fears amongst the flying public. In fact in the long term the Caribbean might benefit as a destination of last resort so to speak given its reputation for relative safety.

Egypt suddenly looks less attractive to a American tourist. US Airways is still going ahead with four weekly flights to Barbados and Condor a German charter company is opening routes to Barbados and Trinidad. Barbados receives 122,000 travellers from the United States every year but with the downturn this has drop-ped by 22%. Even Air Jamaica with its country's political troubles has seen passenger traffic drop by only 18%. It has cut 60 of its 340 flights and the management is asking for voluntary staff reductions to get through these turbulent times along with short term financing to meet a revenue shortfall of US$35m. (Back to top)

GPL's rates really are low

Everyone from ministers to talk show hosts like to complain about GPL. The reality is that electricity rates in Guyana, even with the recent increases, remain significantly lower than many other countries in the region. Even for commercial and industrial services GPL's charges are in line with most power companies in the Caribbean. The socialist era of tariffs being set at levels to accommodate the consumer's pocket has long past. Now all that's left to do is to give discounts rates to manufacturers instead of having them subsidise residential tariffs. Trinidad's industrial rates are over a third less than GPL's giving Guyanese industry a distinct disadvantage.

If rates appear high it is because Guyanese are paying 23% of their official per capita income ($790) on a year's worth of 100kwh bills. Antiguans on the other hand despite having rates double those of Guyana pay only 3.5% of their income ($9410) for a comparable amount. (Back to top)

Understanding Inflation:(Part 2)

Effects of Inflation
By Claude V. Chang

As discussed earlier, inflation can either becost-push or demand- pull. While both have the effect of increasing prices, their impact on the economy and population will vary in character and in-tensity depending on their nature and causes. Ex-amined here, then, are some of the economic and social implications broadly along the general distinction bet-ween cost-push and demand -pull inflation. However, it should be borne in mind that, irrespective of whether inflation is cost-push or de-mand-pull, the attendant social disruption impacts the entire population.

Social disruption is de-fined here to include uneployment arising from chan-ges in production processes or restructuring in consequence of lost markets; loss of cohesion- community and family; increase in poverty, crime, and corruption; and changes in the nature and demand of government provisions. As re-gards the latter, it is important to remember that the role of government is likely to change from facilitator to provider where the disruption is severe. Indeed, in the recovery process, government in-tervention often takes on an economic self-interest pers-pective with little regard to conventions arrived at in times of prosperity. Hence, protectionism, subsidization, and government-funded programs characterize the process, especially at the developed country level.

Because cost-push inflation reflects rising cost at the input level - material, labor and investment - it matters that the source of it be identified. Of these, materials and labor are generally considered to be the most important although the high cost of capital is often a significant factor, especially in developing countries.

Rising Materials Costs

Rising materials costs, especially energy, beginning with the first oil crisis of 1973, is a major cause of inflation. In a global economy in which competition is fiercest, survival depends on being competitive. Unless a country has control of its sources of raw materials, it is vulnerable to price increases at the commodity level. Energy-based econ-Jomies such as the U.S. are vulnerable to social disruption from a sudden increase in the price of oil. Hence, it was not a slip of the tongue that President George Bush (Sr.) in declaring war against Iraq in 1991 proclaimed it to be "about jobs...about our way of life." It is equally not out of kinship or social bonding that cordial international relations with Saudi Arabia or Kuwait are maintained. As the saying goes: "it is about the economy, stupid."

Developing economies are equally vulnerable to increases in the price of commodities that are inputs to their production processes, and being export dependent for their finished product, can find themselves in double jeopardy. With res-pect to the first, non-oil producing economies suffered the most from the second oil shock of 1979-80. The ma-jority of developing countries saw their economies crumble in very short order in consequence of high oil prices; many have still not recovered to pre-1980s levels and many still are debt -ridden with high poverty ratios in consequence, de-spite debt write-offs under Paris Club and HIPC arrang-ements. For the latter group, they have become impoverished, aid-dependent, and operate at sub-standard levels aggravated by high taxation and a constant outflow of skilled workers seeking better opportunities for themselves and their families.

With respect to being ex-port dependent, falling primary commodity prices in the early 1980s exacerbated the social disruption in those countries that were dependent on export of commodities. For sugar producers in the Caribbean, the U.S. Sweetener Policy of 1982 that imposed restrictions on Caribbean sugar exports to the U.S. was ill timed from the perspective of recovery from a heavy external debt burden and high interest rates. The majority of the CBI countries saw their exports to the U.S. decline by over 80 percent.

In the case of Guyana, with a severely diminished GDP (GDP declined to less than US$300.0 million at the end of 1990) its external debt of US$2.1 billion at the end of 1992, was about 25 percent oil related. As such, not only was Guyana's economic development stymied by the surge in oil prices, but also the social disruption that resulted was exacerbated by the decline in export earnings, rising interest rates, a depreciating local exchange rate, and a deteriorating infrastructure. The parallel economy that developed in consequence was therefore inevitable.

Rising Labor Costs: Cost-push or Demand-pull?

As stated earlier, rising wages is often a major contributor to the inflationary process and, therefore, needs to be examined in terms of its macroeconomic effects. Re-ferring to the boom created by the North Sea gas finds on Holland, the demand for labor in oil/gas production caused labor to migrate from other industries. The effect was an increase in labor cost to those industries that sought to retain their workers. In other words, wage rates were determined by the highest bidder, in this case the oil and gas producers. As a result, industries that were operating at the margin or those that were heavily dependant on labor declined or in the absence of productivity increases had to be subsidized by the government to survive. The downstream effect - externalities - on industries developed in support of non-oil production and on affected communities was also one of economic and social disruption.

The experience of Holland is by no means unique, however. The development of the petrochemical industry in Trinidad and Tobago has had a similar effect on the structure of that economy, requiring government intervention in the early 1990s as an aspect of its recovery and its now diversified structure. Indeed, in this case, it meant a reversal of early policy options that favored the petrochemical industry for its quick contribution to GDP and government revenues.

The Impact of Tourism

An interesting phenomenon of an island or small economy that has transitioned to become a tourism-oriented economy is that it is mainly derived from the demand pattern and expenditure of its visitors. Indeed, such an economy should be viewed more as a dichotomous economy with a given number of foreigners as part of its demographics. In such an economy, foreign visitors become an integral component of the economic and social make-up of the society and, as such, demand services and infrastructure to satisfy their needs. In such an economy, the demand for goods and services can thus be separated along the consumption pattern of local residents on the one hand, and on the consumption pattern of the number of visitors on the other, based on their respective income levels. In such an economy, local residents benefit residually from social services and infrastructure geared to satisfying the needs of the visitors.

In a dichotomous economy as described above, income per capita is likely to be overstated if only because an important segment of the population, foreign visitors, albeit transient but none-the-less ever present, are left out of the national income equation. Also, notwithstanding that local residents benefit from the income flows derived from tourism, such flows have the effect of creating a form of hidden inflation for the poorer segment of the population, that is, only the local residents suffer the effects of high prices resulting from the demand of the visitors. To compensate, wages of local residents in general will tend to reflect the higher wages paid to hospitality industry workers but such wages are sustainable only so long as the flow of visitors continues or a diversified technologically- efficient economic base is established. The island ec-onomy of Barbados is a case in point.

Before Barbados was discovered as an island recreational resort as it now is, it was essentially an agricultural economy, with sugar being its primary export. With the development of tourism and attendant increase in foreign exchange earnings, workers began to migrate from agriculture to the hospitality industry. The impact was a shortage of sugar workers who prefer the less strenuous work and benefits of the hospitality industry to the toil in the cane fields. Those who remained demanded equivalent wage rates. Cost of sugar production increased dramatically and many sugar plantations were closed in consequence. With the aid of foreign sugar workers, the industry is attempting a come back, having lost a good proportion of its allotted quota under the ACP Sugar Protocol in the ensuing years. Additionally, through sound economic management the country has broadened its economic base, to the point where tourism now accounts for about 15 percent of Net Domestic Product.

The Effects of Monetizing Government Deficit

Monetizing the fiscal budget deficit is a conscious policy decision on the part of the government and usually is resorted to as a means of stimulating the economy. In the wrong hands, it is potentially the most dangerous source of inflation as the South American experience with hyper-inflation evidenced. The outcomes of hyper-inflation are more dramatic and are therefore easily recognized; the image of a wheel barrow of German bank notes is a case in point. So too, to a lesser extent, are the paper bags full of Guyana dollars before the introduction of the five hundred and one thousand dollar notes.

Beyond the immediate economic impact of devaluation of paper assets, is the untold psychological damage attendant on hyper-inflation. Not only is there a loss of confidence in the domestic currency, but also a loss of credibility of the issuing authority. Changing the currency does very little to stem the process that has been put in train. The rush to convert paper assets to hard assets or foreign currencies triggers a downward spiral much like a firestorm fueling itself. Capital flight remains a concern long after the hyper -inflation has been brought under control. What is more, flight-capital may only trickle back if ever, again, as evidenced by the South American, African and Guyana experience. Risk-averse domestic investors may elect to stand on the sideline by keeping their investments in more stable economies. Foreign direct investment also becomes difficult to attract, especially in small less developed economies. The net effect is the almost impossible task of regaining prior economic and social status, as recovery from the reverberation attendant on this kind of inflation is all consuming.