Regional & Global

Business Environment

Economic Problems & Solutions

 Objectives
• Identify major economic problems in the Caribbean.
• Explain the concept of structural adjustment.
• Outline the objectives of structural adjustment.
• Outline possible solutions to economic problems in the
Caribbean.
 Economic Under/
Dualism unemploy-
ment

Economic
Problems
Import
Population
dependent
growth

Migration
 Economic Dualism
• ‘Dualism’ is the division of the economy into two distinct
and radically different sectors, one that is technologically
advanced and the other technologically retarded.

• Modern Sector (highly capital intensive)

o are found the petroleum, other mining, large-scale manufacturing
o tourism industries;
o large-scale mechanised plantations
o transport, finance, insurance, trading and other services associated with
these activities.

• Traditional Sector (highly labour intensive)

o Are found peasant agriculture, handicraft and cottage industries
o very small-scale manufacturing industries, and again the services related to
these activities.
 Under/Unemployment
• ‘Underemployment’ refers to the number of people working
less than a normal working week and seeking additional
work, and people doing a job which is below their ability
level.

• This also happens among peasant farmers who have

insufficient land.

• ‘Disguised unemployment’ is when someone is doing less

than a normal week’s work but is not seeking additional
work.
 Under/Unemployment
• Factors relating to unemployment:
o It is a reflection of the large proportion of the labour force in agriculture
and the situation of economic dualism.
o High rate of growth of labour force due to rapidly increasing population .
o The wage structure in the Caribbean economies (dualism), trade unions
tend to push for wage increases which further aggravates unemployment.
o Education: formal education has tended to place too much emphasis on
academic subjects and little or no emphasis on technical skills. Secondary
school leavers are therefore extremely particular about the salary which
they will accept, thus they may tend to remain unemployed rather than
accept one which is beneath their expectation.
 Population Growth
• Within the last 30 years there has been a new awareness of the
connection between population rates and economic rates as well
as social development.

• There have been measures by political and social leaders to

regulate pregnancies and so lower the birth rate.

• An increase in population may come about as a result of:

o Increases in birth rate
o Lowering of the death rate
o Net immigration (increases in the amount by which the number of people
coming to settle from abroad exceeds the numbers leaving)

• In the Caribbean the rapid increase in population rate is mainly

due to the reduction in the death rate than the birth rate.
 Population Growth
• The proportion of the population according to age and sex, is
also a problem; different age groups make different demands on
a country’s resources.

• It is estimated that more than 10% of the population is aged

between 15 and 21 and that 42% is aged less than 15 years.

• Problems caused by population increase:

o Territories in the region seeking to industrialise and to raise the standard of
living find that while they are exerting all their effort to increase output of
goods, they are barely able to provide enough to maintain the additional
numbers at the same standard of living.
o More pressure is placed on governments to provide social facilities, medical care
etc. Thus taxes may increase to raise revenue to fund these facilities.
o Finding employment for the school-leavers coming into the labour market.
 Migration
• One way of curtailing the increases in population is by
means of migration to foreign countries.

• Migration itself creates problems for Caribbean

industrialisation and development, as those who migrated
were better-educated and skilled people.

• ‘Urban drift’ is placing pressure on the authorities and

government to provide more housing space, better sewage
disposal and sanitation facilities and more school places,
within the cities.
 Industrialisation
• Through the development of industries, the countries of
the region hope to:
o Provide employment for their increasing labour forces
o Cut down on their massive import bills, by providing import substitutes
o Generate foreign reserves through exports of locally manufactured goods
o Own, control and direct the use of local resources
 Industrialisation: Obstacles
• Lack of indigenous capital and dependence on foreign capital and
investment.
• Caribbean industrial development involves isolated activities with little or
no linkage effects with the rest of the economy.
• Scarcity in entrepreneurial skills and low level of technology and
technically trained people.
• The calls for greater public control have turned away foreign private
investment.
• Most countries continue to use traditional approaches to industrial
development, however these no longer meet the needs of the present
situation.
• Marketing problems relating to meeting product standards of foreign
consumers, as well as market restrictions prevent countries from
penetrating international markets.
• Adverse balance of payments problems and large debts owed to foreign
countries.
 Vulnerability Problems
• Caribbean countries are vulnerable in a number of ways due
to their relative openness and their concentration on a
small range of products.

• Vulnerability can be classified as follows:

o Reliance upon limited exports
o Conversion of export destination
o Heavy reliance on imports
o Reliance on external sources of finance
o Proneness to natural disasters
 Structural Adjustment
• These focus on the use of macro-economic and sectoral
policies and programmes so as to facilitate the resumption
of economic growth and the reduction of the deficit on
current account in the BOP, to a sustainable level.

• There are TWO elements of structural adjustment:

o Stabalisation phase
aims to achieve internal and external balance of payments deficit.

o Structural reform phase

moves the economy towards structural transformation and economic
development.
 Structural Adjustment
• The following are objectives of structural adjustment:
o Arresting the present patterns of economic decline, and promotion of
efficient economic growth and high levels of employment.
o Developing new sources of foreign exchange earnings.
o Reducing large balance of payments and fiscal deficits to sustainable levels.
o Re-allocating resources from consumption to saving and investment.
o Taking measures to reduce some of the burden of adjustment on the
poorer groups in society.
o Setting the stage for long-term development and structural transformation
in the economy.
o Bringing about a greater degree of economic autonomy on a regional basis
in the long run.
 Possible Solutions
• Deepening financial markets and improving banking sector
efficiency, thus reducing the cost of financial
intermediation in the region.
• It may increase the level of local funds in circulation and
may even reduce the dependence upon external
borrowing.
• Linked with the need to have easy movement of capital
between international boundaries, and the liberalisation of
foreign exchange market.
• They will serve to induce foreign direct investment.
 Possible Solutions
• Diversify the structure of exports to lessen the impact of external
goods.
• This will require significant investments in the domestic private
sector.
• Local manufacturing must be encouraged, through either direct
funding or incentives.
• A key component is capital deepening, this is an increase in capital
per worker, which will lead to greater production and
productivity.
• Linked to this is capital widening, where capital is increased at the
same rate as the labour force. This will lead to increased national
output, but productivity will remain constant.
 Possible Solutions
• Improving external competitiveness to speed up growth
and reduce unemployment.
• This can be done by restricting production costs,
particularly by keeping wage increases in line with growth
in productivity.
• Governments can develop manufacturing by providing
incentives such as tax breaks, subsidies an venture capital
incentives.
• Competitiveness can also be enhanced by developing the
labour resources in the economy.
• As the level of skill and education increases, productivity
will rise, hence reducing the average cost of production.
 Possible Solutions
• Expanding trade liberalisation to increase the net benefits
to the region by further reducing the cost of inputs and
improving the allocation of resources.