Sir K Dwight Venner: The economics of nationhood - the political
economy of economic union in the Eastern Caribbean
Text of the 8th Patrick Emmanuel Memorial Lecture by Sir K Dwight Venner, Governor of the
Eastern Caribbean Central Bank, St Kitts, 21 November 2013.
* * *
I feel very fortunate to be invited to give this memorial lecture in honour of a friend and
colleague and patriot in the struggle for our national independence and regional unity. As I
reflected on Patrick's contribution to the creation of a viable polity and its associated
economy in the region, and particularly in the OECS, it struck me quite forcibly that I should
be asked to deliver this lecture at this time and in this place, and at a time when my
colleagues and I at the Eastern Caribbean Central Bank are grappling with the survival and
progress of our beloved islands.
Patrick's work on the political evolution of the region is outstanding. However, being an
economist as opposed to a political scientist, my admiration for him soared with his
monumental work in editing and compiling the work of Sir Arthur Lewis in the three-volume
publication, Sir Arthur Lewis Collected Papers 1941-1988. It was quite unfortunate that he
left us at that time because one can only imagine the kind of insights he would have been
able to give us from such an effort. Certainly the approach to the political economy of the
region would have benefitted. I make this point deliberately, as clearly, the combination of
these two social science disciplines, politics and economics, is critical to our policy making
efforts and approaches in the region.
Sir Arthur Lewis was, by inclination and philosophy a political economist as he saw applied
economics as one of the tools for promoting economic development. He operated during his
career, both in the field of academia and in the practical world of developing a regional
university, to address the socioeconomic needs of the region. He also established a regional
development bank to address the financial and developmental needs of the region, and in
particular, those of the OECS countries - the so called LDCs - the lesser developed
countries of the region. These countries have not been able to escape the word "lesser" as
they are also described geographically as the "Lesser Antilles" and colloquially by the bigger
islands as "small islands". Lewis by his academic work and his practical experience laid
significant claim to being a political economist. It is against this background that I speak on
the general topic, "The OECS in the present Caribbean moment: Challenges, Lessons, and
Future Prospects". I have however tweaked it somewhat to become, "The Economics of
Nationhood: The Political Economy of Economic Union in the Eastern Caribbean".
The islands of the OECS now find themselves at the crossroads of their economic history
and at an existential moment in time. In deciding on the way forward, our countries' recent
history, future scenarios which can be simulated, and the possible outcomes which could
result from the political and economic choices we make, need to be contemplated and
debated. The way forward, as we well know, is fraught with danger as forces outside and
within the region contemplate our future as viable entities, or predict our possible demise. For
instance, the rating agency Moody's seems to take every opportunity, supported by regional
elements outside of the OECS, to herald the demise of our currency and currency union,
proposing that we devalue or dollarize and dismantle the currency union, which has been
largely responsible for our stability since the attainment of our independence.
The evidence, on the contrary, seems to suggest that the stability of the currency and the
safety of deposits in the banking system have been the anchors on which the stability of our
economies and financial system have been built over the last three decades, in the face of
monumental challenges up to and including the current global crisis. This crisis and these
challenges give us a once in a lifetime opportunity to restructure our economies and polities
and to put forward our best efforts and determination to effect the socioeconomic
transformation of our countries beyond doubt. This would not only be to the benefit of our
citizens but would also send a salutary message to our detractors, both without and within the
region.
The title of the presentation then becomes self-explanatory. During the last days of the West
Indies Federation a pamphlet was produced in Trinidad and Tobago making the case for that
country's emergence as a separate nation state outside of the federation. In my view this is
the moment for the OECS countries to consolidate their independence, sovereignty, and
nationhood and to establish a more perfect union among themselves - a State Nation, if you
will. This can be defined as "a grouping of separate sovereign states who pool their
sovereignty and resources and coordinate their policies as an instrument for collective
decision making and collective action to achieve the goals of socioeconomic development".
This would give them the political, technical and administrative capacity to collectively
address the threats to their sovereignty and future prospects. It is time for the establishment
of the Union of Eastern Caribbean States.
The presentation will proceed in three segments as follows:
i. A brief historical overview from adult suffrage to the present time;
ii. An analysis of the integration process as the foremost instrument for achieving our
goals; and
iii. The model and means for achieving socioeconomic transformation.
To put the story in context we must formulate a conception of the challenges and possibilities
facing the OECS countries as they have presented themselves from adult suffrage to the
current period and going forward. This can be distilled from assessing:
a) three stages of the countries' economic history, two retrospective and one
prospective;
b) three possible scenarios; and
c) four possible outcomes based on the political and economic choices we make at this
time.
The three economic stages can be identified as:
1) The period from universal adult suffrage to independence;
2) The period from independence to the current global crisis;
3) The post global crisis, that is, where are we are heading.
The three scenarios which we contemplate as we seek to make the appropriate choices in
moving forward are that:
1) The global economy remains in its low growth, high unemployment mode,
particularly in our main trading partners, while the OECS countries continue with
their current policies.
2) The global economy does not return to its pre-crisis levels while the OECS makes
significant policy adjustments.
3) The global economy goes through substantial restructuring and rebalancing while
the OECS undergoes substantial socioeconomic transformation.
Four outcomes are possible for the OECS countries depending on their policy choices.
These are:
1) Failed or failing states;
2) Barebones Survival;
3) Moderate progress; or
4) Socioeconomic Transformation
The first historical period marks a seminal moment in our political history, that is, the
attainment of universal adult suffrage. This gave the people of the region for the first time the
right to elect their own representatives to the legislature. This inevitably led to the formation
of political parties and the ability to channel the demand for constitutional advancement and
self-government through organized political bodies. These changes were all a direct result of
the revolts in the 1930s which incidentally started on the Buckleys Estate in St Kitts and is
considered to be the event which heralded the birth of the modern West Indian democratic
state.
Since this is only a brief overview I will only cite a few critical events which are germane to
the theme of this presentation. Adult suffrage was granted to the OECS countries in 1952.
This created the environment for the advancement of the demand for dominion status which
revolved around the establishment of the West Indian Federation, as the islands were
considered too small to attain such status on an individual island basis. The islands were in
fact governed at this time as two federations, namely, the Leeward and Windward Island
Federations. These were dismantled and each island entered the federal arrangements as
separate entities. This, in fact, was the first act of disintegration in the federal saga.
The federation failed, one can say, for many reasons but three are important for this
narrative:
i. Jamaica's determination to protect its nascent industrial development;
ii. Trinidad and Tobago's resistance to freedom of movement of people; and
iii. The perception by both countries that the smaller islands would be a major
impediment to their economic progress.
Following the demise of the federation another attempt was made to link Barbados and the
smaller islands together in an arrangement referred to as the "little eight". This too failed as
Barbados would not proceed without assurances from the British on the financing of the new
entity. Barbados went on to its own independence in 1966 and the islands were virtually left
in constitutional limbo. They then began searching for a way out of the situation with
discussions on the nature of the relationships with the British and with each other.
In 1967, the West Indies Associate States was established with countries sharing some
common services which were meant to lower the cost of government and to foster closer
working relationships amongst themselves in preparation for independence. The British
posed two options to the islands, they could jointly declare their independence and write their
own constitutions, or they could negotiate bilaterally with Britain for single state
independence. They chose the latter and between 1974 and 1983 the islands achieved their
independence. In 1981 the Organisation of Eastern Caribbean States was established with
the signing of the Treaty of Basseterre and in 1983 the Eastern Caribbean Central Bank was
established by Agreement among the countries.
This led to the next stage of our history which presented tremendous challenges to the newly
independent states. The period was characterized by the continuing impact of the oil crises
of 1973 and 1979 as well as several disastrous hurricanes, recessions in our main trading
partners, the gradual removal of trade preferences by the British and the Europeans, and the
graduation of the countries from concessional borrowing from the International Development
Association (IDA).
The 1980s was the period of highest economic growth, averaging 6 per cent. However the
following decades were characterized by a secular decline in growth for a number of reasons
including a decline in factor productivity.
The global crisis exposed and exacerbated the structural deficiencies of our economies,
namely, extremely small size, extreme openness, and severe vulnerability. We are now at
the crossroads as we assess the impact of the global crisis on our economies, polities and
societies and reflect on the way forward and the outcomes which are possible depending on
our policy choices. These were outlined earlier as failing states, barebones survival,
moderate progress and socioeconomic development. The last is the obvious desired
outcome but getting there will not be easy and will require substantial changes in our political
and economic policies and cultures.
The necessary but not sufficient condition for socioeconomic transformation in the OECS has
always been integration. This has been very evident from the beginning because of the
countries extremely small size and status as micro states in the international community.
After the demise of the federation it was the OECS countries which found it the most difficult
to achieve constitutional independence. The larger states always had a sense of manifest
destiny based on the assumption that they could achieve their socioeconomic goals on their
own. History has proven otherwise to date, but suffice it to say, this has never been the case
in the OECS. Even though they opted for independence as single states, the OECS
countries have deliberately established a network of vital institutions such as the regional
court and the currency and central banking arrangements, which even preceded similar
institutions in the European Union, the oldest and most advanced integration arrangement in
the international system.
The Treaty of Basseterre, in which these institutions and others have been embedded,
provides the overarching framework for the functioning of the OECS arrangements. The
concept of shared sovereignty, as envisaged by the treaty, has proven to be a successful
formula for the stability and development of these countries in the past and, with the new
challenges, will be even more vital in the future. Indeed, this has prompted a significant
advancement of the treaty to provide for the establishment of an economic union in response
to the current crisis.
It would be useful to pause here in order to examine the various forms of integration which
are available to us. These could be considered to be formal or informal, functional or
dysfunctional depending on the position in which a country finds itself as the various choices
present themselves. As I noted earlier, there are a number of choices which the OECS
countries are now confronted with and which could result in one of the four outcomes: failing
states, barebones survival, moderate progress, and socioeconomic transformation.
Leaving aside for the moment the orthodox stages of integration which ascend from a free
trade area to a full blown political union, other forms of integration may present themselves if
our backs are to the wall. For example, a failing state or barebones survival scenario could
precipitate a particular form of integration. Small states could have close ties to a wealthy
individual, who by virtue of access to resources and the government's lack of fiscal space,
could assert some level of influence or dominance over critical areas of the economy or
financial system and, by extension, on the political system. Similarly, private sector
companies which have a dominant place in vital sectors of the economy, for instance,
mining, agriculture, tourism, and finance could extract substantial rents from incentive
legislation and other tax concessions.
Another choice could be absorption into neighboring countries which have substantial
resources and could fund our development if we were a part of their polity. Countries which
come to mind are Trinidad and Tobago, Venezuela, Canada and the United States of
America.
There is in fact some de facto integration into the Eastern Seaboard of North America, which
is our main trading partner, through the inflow of direct foreign investment, tourist arrivals,
migration and remittances, as well as the peg to the US dollar. These choices, and in the
case of the Eastern Seaboard, circumstances, do not seem to be compatible with our notion
of sovereignty and the goal of attaining socioeconomic transformation on our own terms.
The story of the Caribbean since independence some fifty years ago is that we have made
remarkable progress in the delivery of liberal democracy, the rule of law, the rights and
freedoms expected of a civilized society and meeting the United Nations Human
Development Indices. In addition, we have excelled in the sporting arena, in scholarship and
the arts and sciences, and in music and literature. However, in the economic sphere, we
have not reached anywhere close to our real potential. The orthodox approach to integration
has been the chosen path in the region as a whole and has been so recognized in our
treaties, domestic laws and institutions. The question then becomes why has it not delivered
on the economic front?
Integration is a necessary though not a sufficient condition for attaining our socioeconomic
objectives and the current integration model and process, as well as its implementation, must
in some way be flawed. In the region we have two integration arrangements operating side
by side with common membership. The CARICOM arrangement encompasses all countries
while the OECS is a subset of the wider arrangement. The OECS is however a much deeper
arrangement which has been upgraded in the new treaty to be an economic union.
The success of the OECS, in my opinion, is a necessary though not a sufficient condition for
the success of CARICOM on two counts. Firstly, if the OECS with its much closer and
deeper arrangements, which include a common currency, cannot succeed, then the chances
for CARICOM doing so are that much less. Secondly, a much more closely coordinated and
economically advanced OECS with substantially increased per capita incomes, removes the
stigma of being, so to speak, "poor relations" and provides more economic opportunities for
firms and citizens from the MDCs. Already, firms in Barbados and Trinidad and Tobago
benefit significantly from doing business in the Currency Union and this will enhance their
prospects. The progress of the OECS should usher in more reciprocal and beneficial
commercial relationships between the two polar elements of CARICOM.
How would the OECS achieve this new status? By implementing, as a matter of urgency, the
Treaty which was ratified on 21st January 2011. This treaty provides the political, economic
and administrative framework and architecture for executing the substantial adjustment
required to achieve the socioeconomic development of the economies of the member states.
The treaty explicitly sets out the framework of a state by identifying the essential elements of
such an entity, that is, an Executive, a Legislature and a Judiciary.
The real game changer is the Legislature, which is selected from the elected members of the
National Assemblies and, which in the first instance, acts as a filter for legislation in restricted
areas to be passed by the Executive. This institution secures the participation of two critical
actors in the integration process, namely opposition parties and the public. In short,
integration will now become an open subject at the national and regional levels and should
therefore gain more support.
The new arrangements will also establish in effect a dual system of government and
governance. At the regional level, there will be supranational and functional cooperation
structures while at the national level there will be the national government and local or
community arrangements. The key to these arrangements would be the creation of more
representative, but efficient and effective processes, which would lower the cost and
increase the productivity of the state.
One of the objectives of the economic union arrangements is to establish a state structure
across an entire geographic area which would become, as set out in the treaty and its
protocol, a single financial and economic space. An important achievement in this regard
would be to arrive at a balanced allocation of time spent on regional and national matters, as
this has been one of the main impediments to the advancement and success of integration in
the region. This will involve time management and agenda setting at both the national and
regional levels. One of the critical factors in creating the governance arrangements is that
there is effective political responsibility for regional matters and that there are political
incentives to ensure that the authorities are fully engaged.
Having established a single space, the combined goals of the space must be ascertained by
public discussion and consensus, hence the importance of the regional legislature. Within the
treaty, the goals of growth, competitiveness and socio economic transformation have been
outlined, which then allows for the application of policies across the space to achieve these
goals. At present monetary policy is a regional matter and the executing agency is the central
bank. This has been a major instrument in securing the stability of the financial sector and
has been defined in the new treaty as an "institution" of the OECS.
Fiscal policy has been a national policy tool but, at a special meeting of the Monetary Council
in Grenada this year, it was agreed that there should be effective coordination of this
instrument. Trade policy and international relations policy would be appropriately coordinated
at the national and regional levels. This process has to be vigorously driven by three
fundamental programmes, namely
• public sector modernization at the national and regional levels
• private sector development, and
• financial sector development
The integration model, as characterized by the original Treaty of Basseterre, has worked for
the OECS region but it is also fair to say that it has not been fully exploited. The new treaty,
which is at a higher level of the integration process, has great potential to deliver, but the
political economy of the OECS has to be carefully examined and understood to ensure its
successful implementation.
The economic union provides the political space and the economic environment to treat with
one of the fundamental structural issues that has dogged the OECS countries throughout
their economic history and marred their relations with the other countries of the region, that
is, critical mass. This has manifested itself in the high cost of government and the extremely
small size of domestic markets. These binding constraints on both the public and private
sectors have seriously affected the growth potential of each country. The contrast in possible
outcomes can be seen in two arrangements in both sectors. The banana industry in the
Windward Islands was established on the basis of the production capacity in all four islands
which made the shipping and marketing more cost effective. Also the sharing of central
banking arrangements has produced an effective instrument of monetary policy.
The economic union also gives the OECS considerably more leverage within CARICOM and
with external parties, particularly the International Financial Institutions and development
partners. It provides a basic platform for the successful integration into regional and
international markets. The questions which now confront us are: What are the political
tradeoffs which must be made to arrive at the form of integration implied by the new treaty and
which could lead to the successful socioeconomic development of the member countries?,
and What can the political traffic bear either now or in the not too distant future?
The current nationalism is built on a very narrow economic base and it is fairly clear, given
the structural features of these economies, that it will be a major struggle to achieve our
targets on our own. In fact, not even in the larger countries have these been achieved. The
issue which has to be put to the citizens of the OECS, and the wider Caribbean for that
matter is: Where would we be realistically on the scale of outcomes if we were on our own?
To repeat, failed or failing states, barebones survival, moderate progress, or socioeconomic
development. As we ponder this decision, the level of unemployment especially among the
youth increases and the outmigration of skilled workers proceeds apace. Someone in the
political firmament must step up to the plate and provide a political framework for taking us
through these very challenging times.
Since this is a lecture to honour an outstanding political scientist one can ask: How can
politics and political scientists make a contribution to this effort? In doing so it is enlightening
to take note of the contrasting views of the important questions that political scientists,
economists and political economists put forward in their concern with a choice involving
fundamental change. The economist is said to advance a strategy or policy to achieve a
desirable economic end, such as the maximum growth of national product and poses the
question: "What political arrangement is most conducive to achieving this objective?" or "How
can the political impediments to achieving this objective be removed or neutralized?"
The political scientist projects some desirable political end, such as the complete
independence from other nations and asks the question: "what level of economic productivity
or what type of ownership of the means of production will best achieve this objective?" or
"How can the economic impediments to achieving this objective be removed or neutralized?"
The political economist instead of trying to neutralize the politics or asking the standard
question in political science, reframes the questions to ask in the first instance. "Given the
resources at the disposal of the regime, now or potentially, what opportunities exist for
increasing the production of goods and services in the country?" And in the second instance
"Given the resources of the regime, now or potentially, what political choices are possible
and what might be their cumulative effects?" These arguments can be found in a delightful
book by Warren Ilchman and Norman Uphoff entitled "The Political Economy of Change"
which examines the efficacy of politics and political science in developing countries and
incorporates economic method into political science methodology in order to find solutions for
statesmen. The arguments also raise again the age old question: "What should be the
relationship of men of knowledge to men of power?"
One would posit as an observer that our efforts at integration have excluded politics almost in
a deliberate way as if this sanitization, so to speak, would facilitate success. Integration
however is not an apolitical subject and the further up the integration rung it gets, the more
the need for an appropriate political framework to guide the way and take vital decisions.
Administrative and technical personnel cannot take the lead in pushing forward integration. It
lies solely in the hands of the political elite.
The political elite in the OECS must now set its aim steadfastly on the goal of socioeconomic
development and craft the political and administrative institutions to facilitate the process.
Shaping a new state nation in the region will require dealing with the political and economic
impediments and addressing with urgency the modernization process in the OECS. An
effective, efficient and entrepreneurial state is a critical element in this process to be
complemented by an innovative and internationally competitive private sector.
Strategically there are four agencies which have very specific roles to play under the guiding
political inputs of the OECS Heads of Government and their ministerial colleagues:
i. The Ministries of Finance and Planning
ii. The Public Service Unions
iii. The private sector represented by an all-embracing, dynamic, innovative, and
regionalist-oriented Business Council; and
iv. A resilient, well capitalized and innovative national banking sector.
The socioeconomic transformation will require a rate of growth of between 5 and 7 percent
over a period of at least ten years to double per capita incomes in the OECS. This rate of
growth will be able to address the unemployment and poverty levels and maintain and
improve the human development indices.
Given the integration arrangements as well as the political choices and political management
of the process, the strategy involves a reduction in the cost and an increase in the efficiency
of government, allied with a significant increase in private sector output for export. There
must be a balance between consumption and production which would involve a pact
between the state, the private sector and the trade unions to maintain the balance and trade
- offs between wages, prices, employment and productivity. This pact has been successful in
Barbados and should be replicated throughout the region.
Another critical area to be tackled is the resources - expectation gap. This results from the
demonstration effect of being in this hemisphere, in close proximity to the land of mass
consumption, the United States, coupled with the impact of multi-party, competitive, elective
politics which escalates the demand for public services. Political parties must play a critical
role in the management of these expectations.
The consumption orientation of the economic system has however been underpinned by a
very sophisticated import machinery evident in both the real sector and the financial sector.
Structural changes to both sectors will be required. The banking system will have to be a
major target for restructuring, especially since it controls over 75 percent of the loanable
funds in the economy. A strong national banking system would be a prerequisite for
influencing the process, coupled with a deliberate effort, as is now taking place, to strengthen
money and capital market institutions.
The private sector will also have to reinvent itself to change its structure from being one-third
formal, two-thirds informal and 90 percent concentrated on wholesale, retail, real estate and
construction activities. The new balance should see a reversal of the formal/informal ratio
and at least a 60/40 arrangement of non-tradeables to tradeables.
In the government sector a cadre of technically and administratively competent professionals
should spearhead the restructuring of the state machinery to create a highly competent and
developmental state. The role of public sector unions is of critical importance, as it is
necessary that they buy into the creation of such a state. In short the modernization of the
state has to be one of the highest priorities of the political authorities.
The modernization of the state and the development of the real and financial sectors will be
the complement of a three-prong strategy and programme which can be outlined as follows:
i. An externally financed stimulus package synchronized with four critical safety net
programmes to address the structural vulnerabilities of the countries. These safety
nets would be:
• A financial sector safety net
• A fiscal safety net
• An environmental safety net
• A social safety net.
ii. An industrial policy that targets a lead transformational sector in which the region
has a comparative advantage that can be turned into a competitive advantage.
iii. A number of overarching and interlocking national and regional projects which will
facilitate the modernization process. Dubbed the great modernization projects, we
have identified seven of them, namely, transportation, energy, environment, ICT,
education and skills training, research and development and governance.
In conclusion one can only affirm that these are very challenging times. The international
economy can be characterized as being fraught with danger as there continues to be great
uncertainty and volatility. On the other hand these circumstances have presented us with a
once in a life time opportunity to restructure our economies, polities, and societies.
I end with a quotation which sums up my feelings on these matters "We believe it is a
necessity of our times to translate our beliefs, our hopes and ideals into concrete action".
Thank You