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Report No. 2510-CRB

Economic Survey RETURN TOLA. & C.of the INFORMATION CENTEREast Caribbean Common Market CountriesMay 7, 1979 FILE COPYLatin America and the Caribbean Regional Office

FOR OFFICIAL USE ONLY

Document of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may nototherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit: East Caribbean Dollar

Since its creation in 1965, the East Caribbean dollar was tied tosterling at the rate E 1.00 = EC$4.8. In July 1976 the link withsterling was broken and the East Caribbean dollar was aligned withthe US dollar at the rate US$1.00 = EC$2.70.

Since July 1976:

EC$1.00 = US$0.370 orUS$1.00 = EC$2.700

FOR OFFICIAL USE ONLY

This report, prepared by Ms. Dawn Elvis(Consultant/Economist-IBRD), is based onthe work of Bank economic missions to theECCM countries.

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

ECONOMIC SURVEY OF EAST CARIBBEAN COMMON MARKET COUNTRIES

TABLE OF CONTENTS

Page No.

MAP

SUMMARY AND CONCLUSIONS ..... ...................... i- iv

I, GENERAL CtARACTERISTICS ................ ...........

II. AGRICULTITRE ....................................... 4

III. INDUSTRY .......................................... 11

IV. TOURISM ......... .................................. 18

V. TRANSPORTATION .................................... 26

VI. ECONOMIC PROSPECTS AND CAPITAL REQUIREMENTS 33

VII. REGIOMAL COOPERATION ...... ........................ 36

STATISTICAL APPENDIX

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I OJ THE CARIBBEAN

____5__PT I EASTERN CARIBBEAN COMMON MARKET COUNTRIES

SUMMARY AND CONCLUSIONS

i. A common characteristic of the economic condition of the ECCMislands is their heavy dependence upon external financial support. Withpractically all the islands becoming independent countries the need toameliorate this situation is compelling. Governments have expressed anintention to see their countries achieve financial viability, and are dili-gently seeking appropriate strategies to attain this objective. However,severe spatial and resource constraints render these islands an especiallyintractable case of economic development. What is required are developmentstrategies which identify unusual, if not unique, approaches in order todiversify the economic base, increase absorptive capacity, augment publicsector savings, and stimulate private sector activity. Creating economies ofscale through joint action, offers the best prospect for efficiently under-taking many requisite developmental activities.

ii. In agriculture, there is urgent need for rehabilitation and recon-struction. Institutional and other support services are weak, and agricul-tural policy is generally deficient. As a consequence, much arable land isunutilized or underutilized, yields and output are significantly below theirlevels of a decade or two ago, and in general agriculture fails to make itspotential contribution to the development process and employment opportunities.Possibilities exist through joint action in the provision of needed supportservices, and with technical assistance, to institute land use and land tenurepolicies that provide incentives for farm development, to increase bananayields, to exploit the potential for cotton production, and to increase theproduction of and regional self-sufficiency in food crops.

iii. Industrial development is particularly limited by the size andresource constraints of these small countries. Small market size, limitedsupplies of most agricultural raw materials, and lack of entrepreneurial andmanagement skills, problems in developing labor skills, and inadequacies inthe transport systems, all militate against efficient import substitution andalso against a wide range of industrial exports. With accelerated andeffective promotion both overseas and at home, prospects appear good forenclave-type operations such as clothing, and electrical and electronicsassembly in all the countries, and also for agricultural processing.Given the market-orientei and entrepreneurial character of the type ofindustry with strongest potential, governments' main role would be to createthe right conditions for the private sector to flourish. Most important is afavorable investment climate conditioned principally by political, social andeconomic stability, as well as helpful, business-like, and equitable dealingswith the private sector. Other key factors include good external communica-tions, reliable public utilities, stable fiscal environment including invest-ment incentives, and support for the local private sector in the form ofcredit and training in management skills.

iv. Although the tourism sectors of the islands are relatively small,in most instances they make a significant contribution to the economicdevelopment of the individual economies, and market conditions forecast

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an optimistic growth potential for the region. Development strategies forthe sector, however, require to be upgraded. Sectoral planning must beadopted and more effective tourism administration is required. A moreaggressive tourism promotion and marketing is also required with emphasis onthe European market, in addition to the North American market, -- not only atthe national but also at the ECCM regional level. Technical assistance isrequired for all this and to improve the tourism product by introducingvarious amenities, and by improving the quality of handicrafts. All theseaspects lend themselves to regional cooperation. Further, in order to assistthe smaller territories whose tourism is relatively undeveloped, investmentfinance is required to enable Governments to underwrite the risk element byfinancing hotel investment themselves, thereby seeding tourism development.The hotels, however, should be operated on management contracts, preferablyby operators with international marketing connections.

v. While internal transportation facilities in each island are ingeneral adequate, poor maintenance over extended periods of time has severelydeteriorated and capital stock of some of them. The highest priority of thetransport sector as a whole is therefore improved maintenance. A second andrelated priority is to strengthen local institutions and professional capa-bilities. This is especially urgent in the areas of financial and operationalmanagement. Delays in project preparation and implementation could bereduced by raising local managerial/engineering capabilities, to the pointwhere project proposals could be fully researched, and feasibility andengineering studies completed for presentation for external financing. Inthe financing and implementing of transport projects a number of policyissues deserve consideration. They include, the priority for improvedaviation services at thiS juncture, compared with further major airportdevelopment; the need to improve accounting procedures with respect to roadworks by the PWDs so as to reflect accurately the true cost of road construc-tion or maintenance; and the need to streamline certifications and disburse-ments with a view to ensuring proper equipment and access to spare partsthroughout the life of the project.

vi. The next five years offer a unique opportunity for the governmentsof the ECCM countries to place their economies on the path to viability. Theinternational community has indicated its interest within the context of theCaribbean Group to assist by making available additional amounts of financialand technical assistance, and prospects of growth range from a moderate 3% toa promising 5% in the individual economies. To achieve the projected growthperformance will require increasing levels of public sector capital expendi-ture, and a greater emphasis on directly productive projects rather than oninfrastructural investments. The public sector investment programs for theperiod 1979-1983 require that:

(a) public sector capital expenditures increase to an average forthe five years of over 50% above the 1977 level in real terms;

(b) public sector savings play an increasingly important role so thatby 1983 they cover almost one-third of public sector capitalexpenditures; and

(c) official external capital inflows grow rapidly in 1979 to a levelover double that of 1977, and increase slowly thereafter through1983.

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vii. With this program and recommended policy efforts, it would appearthat financial viability could be achieved relatively soon by St. Lucia, andwithin a five-year period by Antigua, and St. Kitts-Nevis. The remainingfour countries--Dominica, Grenada, Montserrat and St. Vincent--if theysuccessfully carry out their programs, would also have made substantialprogress in strengthening their economies. They would no longer have to relyon budgetary assistance, and their public finances would potentially be on aviable footing. Nevertheless, they would continue to need external capitalassistance on concessional terms, and would require an additional period oftime to reach viability without reducing living standards.

viii. It is recommended that common services be established with prioritygiven to those services that will directly lead to productive investment andother development expenditures. If accepted in their essentials, and ifimplemented in an efficient and timely manner, they could be expected toenhance the countries' prospects of attaining their independence and viabilitygoals. The common action services proposed include (a) agricultural extension;(b) agricultural research and marketing; (c) industrial and export promotion;(d) tourism promotion; and (e) pool of experts. Additionally, efforts shouldbe started in the immediate future for the establishment of common servicesin fields such as statistics and tax administration.

ix. The ECCM Secretariat, with the support of the external community,should be primarily responsible for the organization and implementation ofthese common services. If and when the Caribbean Common Services Institute(CCSI) is established, the ECCM Secretariat and the CCSI would have tocoordinate closely their activities, particularly in those fields in whichthe proposed common services--and others that ought to be started in thefuture--would also include othier non-ECCI, Caribbean countries.

x. If the ECCIi counitries undertake, as expected, to implement thecommon services herein proposed, the external community should providesubstantial financial and technical support for this purpose. In thleinitial stage, most of the cost of such services would have to be financedexternally, with the ECC4 countries' contribution mainly limited to thedetachment of local officials to serve as counterparts to the foreignexperts that would be required for a proper functioning of the proposedservices. After such initial stage--for example, by 1982--the ECCM countriesshould be able to start contributing financial resources for the proposedservices, with a view to reaching, by the mid-1980s, a situation in whichexternal support would be required only in the way technical assistance is"normally" provided elsewhere by bilateral and multilateral donors.

xi. It is also proposed that the external community provide otherspecial support to regional ECGI cooperation schemes in the developmentof the region's productive sectors. In particular, the proposed food-aidprogram, linked to the implementation of agriculture projects, and thepossible establishment of a revolving regional ECCM fund to finance importsof fertilizers, pesticides, spare parts and other agricultural inputs,should receive special attention. Likewise, the external support required

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for the proposed regional programs in fields such as tourism and industrialand export promotion, is likely to include not only the common servi(esreferred to above, but also substantial financial resources for investmentprojects in these fields. And continuing external support of investments ineconomic and social infrastructure--and, over the short run, for developmentalcurrent expenditures--will also be required.

1. GENERAL CHARACTERISTICS

1. A common characteristic of the economic condition of the seven smallislands 1/ designated as CARICOM LDCs, is their heavy dependence on externalfinancial support. The magnitude of the dependence is most clearly evidentin the pattern of resource use of these island economies. Almost withoutexception consumption absorbs close to or in excess of 100% of GDP, withinvestment financed entirely from foreign resources. Altogether, it isestimated that over 80% of public sector investment in 1978 was financed fromofficial external sources in the for.n of grants or highly concessional loans.The factors underlying this level of dependence are relatively inefficient useof resources, low productivity, and consequently low output and low nationalsavings. In particular, the generally low capability for efficient nuhlicsector economic management, and the concomitant poor public sector savingsperformance have inhibited private sector confidence in the economies andresulted in a low private sector dynamism. Accelerating world inflation inrecent years has only exacerbated these conditions, and the public finances ofthese countries have been continually strained.

2. With practically all the islands becoming independent countries,the need to reduce theLt- ecoiomic dependence is compelling. Governlaents 'iaveexpressed an intention to see their countries achieve not only politicalindependence, but also economic viability, and are diligently seeking appro-priate strategies to attain their objectives. These small islands, however,present an especially intractable case of economic development. They occupyLlail areas ranging from 100 square kilometers to 750 square kilometers; theirpopulations carnge Erom 12,000 to 114,000--in general, small by any geographicor economic measure. This factor of size effectively limits their developmentoptions. The resource base is of necessity very narrow and, aside from thewealth of beautiful beaches which occur in some cases, none of the islands isnmdowed with a single high value natural resource such as petroleum or bauxite

which could form the basis of a development thrust. While historically theyhave subsisted as suppliers of raw materials to the metropolitan countrLes 3changing economic and political conditions, such as demand shifts which havecontrtibited to neglect of their agriculture, and the inidividually undertakenpolitical independence movements which have essentially set them adriftpolitically and economically, have made obsolete this pattern of development,and dictate that new approaches be found.

3. The search, however, encounters obstacles all along the way. Sincethle 1960's some of the islands have been discovered as tourist destinations;111i this has provided a good source of income. But tourism is often subjectto unexpected vicissitudes, and where the economy has come to depend upon it,Governments are vigorously seeking ways of diversifying the economic structurein order to reduce this dependence. Consequently, all of the islands are pro-pounding industrialization as the road to economic development. However, effortsalong these lines are seriously constrained by scale considerations. A domesticmarket of 50,000 to 100,000 consumers hardly meets the scale requirements for

1/ Antigua, Dominica, Grenada, Montserrat, St. Lucia, St. Kitts-Nevis-

Anguilla and St. Vincent.

most, even small manufacturing, and therefore precludes an industrializationstrategy based on efficient import substitution. In terms of market size, somelimited efficient import substitution on a sub-regional or regional scale isconceivable. It will have to be based, however, on a level of cooperationamong the territories which has in the past been difficult to achieve. Itwould also mean overcoming by competitive production, the disadvantages ofhigh transportation costs between the islands. Industrialization for exportmust be based on availability of raw material supplies, preferably domesticsupplies, and the narrow range of these available severely limits this option.Hence, it would appear that limitations operating on the supply side as well,in the form of resource constraints, dwindle the industrialization optionsopen to the individual countries.

4. The issue of small size intrudes as an inhibiting factor in a numberof other areas in the development process. Promotional activities for bothmanufacturing and tourism are most cost-effective if geared to a large scaleof operations, whereas their costs can be prohibitive for the scale of oper-ations required for many of the small islands individually. Hence, somecountries are severely constrained even in acquisition of the information andthe means necessary to attract industry to their shores. By the same tokenthe accustomed standards of public services cannot be supported at affordablecosts. The quantity and quality of public infrastructure provided in earliertimes with external budgetary assistance has in many cases been allowed todeteriorate, in part because of exorbitant costs per head of population tomaintain those services. Moreover, the historical openness of these societ-i-;,and constant contacts with the wealthier couintries of Europe and North America,including proximity to the North American continent, have created a conditionof rising expectations which can be denied today only at the risk of socialand political unrest.

5. In transforming themselves from dependent into self-sustainingeconomies, an imperative for the snall islands is to shift the pattern ofresource use from the customary heavy concentration on consumption moretowards investment. This condition sets up the fundamental requirement for anincrease in savings performance of both the private sector and the publicsector. Achievement of this goal will depend on sound development stratevyand will, of course, require time. But even where external resources havebeen available to brt(dge this gap, their effectiveness has been severelylimited by the low absorptive capacity of these small economies. An inadequatecapacity to prepare and execute projects on a timely basis stemming chieflyfrom the paucity of trained personnel, has rendered largely ineffective therelatively substantial amounts oF external capital flowing into or availableto these countries, frustrating conventional efforts to aid development.

6. If the condition of small size and narrow resource base, with itsconcomitant scenario of circular causation, is to be turned to advantage,development strategies must be sought which optimize the use of the verylimited resources of these countries through diversification of the economicbase. Moreover, the development strategy will have to identify unusual, ifnot unique, mechanisms in order to expand the developmental potential ofexisting resources. Innovative approaches will have to be found to provide

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inceative for full utilization of available land in the most productive uses.The labor force, which for the very reason of minimal resources and few oppor-tunities at home, is persuaded to migrate in large numbers in search of self-realization and economic betterment, must be encouraged to contribute theirskills to the development tasks at home. In parttcttlar, measures are requiredto stimulate private sector activity. Quite often, the dynamism of the privatesector is found to be in direct correspondence to the confidence it has ingovernmnent's capability for sound economic and fiscal management, includingthe ability to generate public sector savings. Hence, public institutionsmust be strengthened.

7. The evidence on the developmental problems of these small countries

suggests quite strongly the importance of creating economies of scale so thatthe many requisite developmental activities can be undertaken efficiently.The challenge of providing employment for the large numbers of unemployed, andthe new entrants to the labor force remains great. Only by expanding theopportunities can the level of frustration be kept under control, and this canonly come by bridging the distances among these small islands, and betweenthem and other countries in the region. The importance of facilitating commu-nication between the islands through significant improvements in the trans-portation system cannot be overemphasized. Easy contact will induce a keenerperception of the commonality of goals and of problems, and common approachesmight more readily be conceived, and more successfully implemented.

8. The idea of creating economies of scale through joint action is notnew to the ECCM countries. They already benefit from some common services suchas the University of the West Indies, WISCO, LIAT, Caribbean MeteorologicalServices and the Caribbean Examinations Council at the CARICOM level; and theJudiciary, East Caribbean Currency Authority, and Directorate of Civil Aviation,at the ECCM level. In recognition of the prospective benefits from furthersuch services, they have had under consideration for some time now, under theaegis of the East Caribbean Common Market Secretariat, a proposal--which hasbeen recently approved in principle by these countries--for the establishmentof new common services just for ECCM members. It is now generally recognizedamong the countries that the administrative areas proposed for such servicesnamely, Statistics, Audit, Tax Administration, etc., can bear strengthening,and that the manpower and financial resources involved are probably prohibitivefor any of them to provide individually. In addition to these areas whereeffective common services can be expected significantly to improve economicmanagement, opportunities for common action on the part of the countries, andfor subregional approaches in the provision of bilateral and multilateralexternal assistance, exist--and should be considered on a high prioritybasis--in areas more directly related to productive activity at the sectorallevel.

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II. AGRICULTURE

9. In view of the past importance of agriculture in the El; M countries,and given the relatively few available productive options, the currentdepressed condition of the sector is cause for concern. From on ,Ž being themainstay of the economy, agriculture has lost its vibrancy. In :some islandsits role in income and employment generation has declined. Where it retainsits dominance, sector performance is, nevertheless, substantially belowpotential. In all islands these problems reflect drastic declines in acreageand/or yields from their levels of a decade or two ago. These changes bear aheavy responsibility for the widespread unemployment and underemployment, forrural-poverty, and for rural-urban migration, and agriculture is now in urgentneed of rehabilitation and reconstruction.

10. To a large extent the current situation stems from an inadequateadjustment from the estate system to smallholder production. Small farmershaving earlier experience with traditional crops and also subsistence farming,subsequently undertook growing vegetables and other food crops for marketwithout any previous preparation for cultivating such crops on a commercialscale. The changeover was not accompanied by technical and other supporLservices on the scale required. Neither was it accompanied by a sound agricul-tural policy, with the result that the institutional framework for agriculturaldevelopment has been relatively weak. Moreover, it brought fragmentation ofland holdings which gave rise to uneconomic farm units. And these small-farmoperators have not been given, in most cases, assurances of permanence in theland, either by ownership of it or by long-term lease arrangements. Thesedeficiencies have reduced farm productivity, lowered farm incomes, and renderedfarming an unattractive pursuit.

11. The problem calls for urgent and effective measures if the potentialof the sector is to be fully exploited, and underemployment and unemploymentreduced to manageable proportions. It is estimated that scope exists to morethan triple the production and marketing of food crops and vegetables in someof the islands, and to increase significantly production of some export cropssuch as bananas, and in certain instances cotton, over the next five years.Prospects also exist, through intensification and expansion of production, todevelop the agricultural raw materials base required for some manufacturingindustries.

Support Services

12. The most glaring lack is in adequate support services. Here a dis-tinction must be made between traditional export agriculture and other agricul-ture. Traditional export crops such as bananas, and sugar where it has sur-vived, continue to get organized support through growers' associations andGovernments. While there is no doubt room for improvement in the organizationand delivery of services to these sub-sectors, the need is greatest for supportservices to other agriculture, principally production of vegetables, fruits andother foodcrops, but also coconuts, where there is less of a tradition ofscientific farming. Deficiencies affect the whole range of services, fromavailability and delivery of inputs such as seeds, fertilizer and pesticides,through extension services, credit availability, and marketing. In a number

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of cases governments' attempt to provide requisite services by centralizingthem in marketing corporations or other governmental agencies, is frustratedeither by the inefficient operation of these agencies, or simply by budgetconstraints--services are not made available on a timely basis, with theresult that output is lower, and export and earning opportunities are lost.

13. In all the countries agricultural extension was found to be deficient.The problem seems to devolve chiefly on an inadequate standard of training,but also there is a strong need for a better organized service. Cases wereencountered where extension services were either understaffed or non-existent.Yet the contribution that can be made to agricultural development by a goodextension service is well known. In the case of these islands where thefarming activities of greatest concern are the non-traditional crops, technicalinformation about varieties, preferred planting times, and rotation, is ofparamount importance. In addition, a well functioning extension service canbe useful in coordinating the delivery of agricultural inputs; it can alsoserve as a liaison and as an information source in respect of supply organiza-tion and marketing outlets.

14. A principal drawback in providing adequate extension services in anumber of the islands is the small scale of operations. While in each countryscientific crop production requires specialized technical staff, it would beuneconomic and financially burdensome for each Ministry of Agriculture to befully staffed with the necessary agricultural expertise--entomologists, cottonspecialists, soil scientists, plant pathologists, animal husbandry specialists,etc. It is clear that if each island is to be provided with the level andquality of extension service required to make substantial difference to agri-cultural productivity and output, some common solutions would be required.

15. Deficiencies also exist in the institutional arrangements for creditand marketing. It has been found that often farmers are not aware of theavailability or terms of credit. (Here a properly functioning extensionservice could be of assistance by bringing this information to the attentionof the farmer.) Hence despite the availability of funds on reasonable termsthrough three different CDB agricultural credit schemes, the level of agricul-tural credit operations of the local DFCs is relatively low.

16. This situation is attributable also in part to the poor capabilityof the local DFCs. All the specialized credit institutions recently set up inthe islands essentially to act as "windows" for CDB credit schemes have beenfound to be grossly inefficient in their operations. Not only are most ofthem under-capitalized, but their staffing requirements are very inadequatelymet. These shortcomings, combined with the small scale of operations handled,have resulted in almost all the DFCs incurring annual losses, while failing atthe same time to satisfy the credit needs of the sector.

17. The problem is serious, and it is also significant for the lessonthat it holds. The fact is that external finance channeled through theseinstitutions is extremely slow in disbursing and is not achieving its objec-tive. In an extreme case, St. Kitts-Nevis, the DFC has suspended operationssince August 1977, pending reorganization. In other words, this system for

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channeling CDB funds to small-scale agricultural enterprises has not worked,and an alternative approach is required. Finding a solution is complicatedwhen it is noted that a differential exists in the local availability ofcredit as between small agricultural enterprises and small manufacturing enter-prises. In general, commercial banks have been more inclined to providecredit to small-scale manufacturing enterprise, and they could therefore beconsidered a real alternative to the DFC for this purpose. The same is nottrue for small-scale agriculture, which presents greater risks, and where byconvention banking expertise is scarcer. If the local DFCs are to performthe credit function effectively, their operational capability must bestrengthened.

18. Marketing arrangements have been found to be the weakest link inthe agricultural sector of many of the islands. Governmental marketing corpora-tions have in many instances proved to be misguided in concept and poorlymanaged. Only the St. Vincent Marketing Corporation has demonstrated in itsoperation and management the capability to perform an adequate marketin,gservice, and at the same time avoid accumulating losses. One aspect olf itsoperation which is doubtless significant for its financial success is Lilat ithas shied away from handling perishable crops. Other marketing corpor.Lionshave faltered on poorly managed and unrealistic price support systems, whichhave generated occasional gluts in specific produce, and losses for thLmarketing agencies committed to take off these excess supplies at above-marketprices.

19. This is an unnecessary state of affairs. Many of the countr,es havea tradition of effective private sector marketing of agricultural prodiLue bothdomestically, and for export, carried out by the class of traders knowi as"hucksters." None of them can afford the financial cost to the budget- ofsubsidizing marketing agencies that make little difference to the marki-tingfunction--the Dominica Marketing Board handles only 3% of the business--whenan effective alternative exists in the private sector. To improve the imarket-ing system and reduce the burden on the budget, governments' role should bere-oriented to be more of a support service to the private sector. Thisfunction, it is believed, can best be accomplished by enabling the Ministriesof Agriculture, through special Marketing Service Divisions established! withinthe Ministries, to assume leadership in improving the operation and effective-ness of the private sector in marketing. These Divisions would provid-.guidance and marshall requisite resources, including training resources, onbehalf of various segments of the private sector marketing structure, includinghucksters or other wholesalers, dealers, retailers, hotel and restaura:t foodprocurement personnel, etc.

Agricultural Policy

20. Agricultural development requires appropriate agricultural p.licy.Such policy would be so designed as to realize the sector's potential to con-tribute to the development process. Agriculture has the ability to gellerateexport earnings, save import payments, and provide a domestic raw materialsbase for industrialization. Appropriately organized, and scientificallyfarmed, it can also yield satisfactory farm incomes and help reduce rural-urbanmigration. Sound policy would also be so designed as to communicate thispotential to the society in ways that include an appropriate orientation ofthe education system.

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21. A critical area of deficiency in agricultural policymaking in theECCM countries is in respect of land use and land tenure. With the demise ofthe plantation system of agrculture, large tracts of land have passed togovernment ownership, and in a number of the islands, 60%-90% of the land isso owned. With the sole exception of St. Kitts, the bulk of such land haseither lain idle or has been put to inappropriate use. In St. Vincent, forexample, approximately 6,000 acres of cultivable land are idle or severelyunderutilized. Antigua has 10,000 acres of former sugarlands of which only2,000-3,000 have been brought back into production (under corn). In Montserrat,only 20% to 25% of lands deemed suitable for field and tree crops are underappropriate cultivation. This kind of story is repeated in all the islands.

22. Absence of a well-articulated land use plan, in many cases hasparalyzed the government itself in planning for agricultural development,since Government is unclear what is the best utilization for given tracts ofland. By the same token, Government is in no position to provide guidanceto the private sector as to land use, and decision-making for agriculturalprogress is blocked by a sea of uncertainty.

23. Where the government does dispose of the land in its jurisdiction,this is done either by ad hoc or antiquated methods, reflecting inappropriatepolicies of land tenure, and creating a morass of land tenure deficiencies.The prevailing system of short-term leases provides no incentive for thefarmer to invest in farm improvement or to engage in proper land managementpractices. The result is that much arable land in these countries suffersfrom neglect and misuse. On the other hand, the land tenure system of St.Lucia, based as it is on the antiquated Napoleonic code, results in inefficientfragmentation of holdings, and the multiple inheritance feature of the systemeffectively restricts the use of land as collateral for farm credit.

24. These land issues will have to be addressed promptly by Governmentsif agricultural productivity and output are to be increased, unemploymentreduced, and living standards of the rural poor improved. Outright landownership, or long-term 99-year leasehold arrangements should be consideredin place of short-term leases. Land should be made available in economic-size units to small farmers with demonstrated farm management ability. Atthe same time where, as in Grenada, land ownership is a key issue in theagricultural development of the country, tenure terms such as rental purchaseor controlled free-hold should be adopted, whereby small farmers of limitedfinancial means would have access to land, yet on terms that provide incentivefor long-term farm improvements and investments.

25. The requirements discussed above for improved support services andagricultural policymaking apply equally to livestock development and fisheriesdevelopment. Livestock farming, in particular, can benefit from improvedextension services, since inadequacies of pastures and poor animal nutritionhave been identified as areas of greatest deficiency in livestock development.Full exploitation of the fisheries potential requires finance, guidance andorganization. Major fisheries projects, under consideration by CDB forAntigua, and a proposed project for St. Kitts-Nevis, indicate the potential.A regional approach to this subsector--in activities such as marketing, pro-curement and maintenance, and other possible regional cooperation areas--should provide substantial benefits to these and other ECCM countries.

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Subsector Considerations

26. Bananas. Bananas are the dominant crop in all the Windward Islandsaccounting for an average 44% of merchandise exports. The market for bananashas been strong in recent years and prospects are good for continued strongprice performance--particularly taking into account these countries' preferen-tial access to the European Common Market. It is important, therefore, thatthe sector's potential to produce be fully exploited. In all the islandsimproved husbandry is required to increase yields and upgrade the quality ofthe product. A major step in this direction is the UK-financed BananaDevelopment Program currently being implemented by Windward Islands BananaGrowers Association (WINBAN) to provide pesticide and fertilizer inputs froma revolving fund financed by an export cess and a UK subsidy. Because ofescalating input prices, however, the fund requires replenishment if fertilizerapplications are to be maintained at adequate levels.

27. A real threat to the industry in some of the islands is the steadybreak-up of the banana estates. Vigilance and effective measures are requiredon the part of Governments to ensure that this change in the structure ofproduction is not permitted to reduce output. Appropriate land distributionschemes along lines similar to those discussed above would forestall thisdanger.

28. Cotton. Chiefly in the Leeward Islands, but also in Grenada, thesea-island cotton industry has survived, a mere remnant compared with theindustry of two decades or so ago. The cotton is marketed under regionalarrangements through the West Indian Sea Island Cotton Association (WISICA).In the last two years, an attractive market has opened up in Japan for theindustry's output, and is guaranteed for the next five years at a minimumprice of US$1.30 per pound, with prospects of negotiating above that level ifthe market price should be higher. This opportunity provides justificationfor reviving the industry. While there may be no foreseeable prospect ofrestoring it to the scale of its earlier operation, scope exists for consider-ably improving yields through disease control and improved cultural practices.It is estimated that with appropriate practices, Antigua could double itsacreage in cotton over the next five years, Montserrat could triple, and Neviscould quadruple its acreage.

29. Much is required by way of specialized technical expertise for thisindustry, however, and considerations of scale would make it advisabe toprovide this by means of technical assistance on a sub-regional scale. It isrecommended specifically in the case of the Leeward Islands that the prospectsfor cotton development should be examined as a joint technical assistanceproject.

30. Irrigation. The need for irrigation has been identified in manyof the islands either in order to supplement rainfall in some parts of theislands where rainfall is inadequate, or in order to lengthen growing seasonsespecially for field crops where marked dry seasons result in systematic alter-nations of glut and scarcity of specific foodcrops and vegetables. It isurgent that investigations and pilot schemes be executed expeditiously so thatthe potential for irrigation would be known, and favorable results applied as

broadly as possible for maximum benefit. Both the United Kingdom and CIDA arecurrently involved in such explorations in some of the countries--the UnitedKingdom in a number of small irrigation projects, and CIDA in the investiga-tion of ground water resources in connection with general water developmentprojects in some islands. It is estimated that potential exists for improvingyields and output of field crops as well as of fruits and vegetables by meansof irrigation.

31. Agro-industry. In recent years, most of the countries have propoundedindustrialization as a strategy for economic development and for labor absorp-tion. Agro-industry is an obvious first phase for countries with agriculturalpotential. This condition sets up a strong case for vigorous agriculturaldevelopment.

32. Good prospects exist for ongoing processing activities based oncoconuts and cotton, if these industries could be upgraded and expanded.Coconuts constitute a "sick" subsector in all the islands where grown, exceptin Dominica. Rehabilitation and fertilizer applications are required toincrease output. Expansion of cotton would require technical inputs as recom-mended above.

33. As a newer possibility, well-organized cottage industry producingfruit and vegetable preserves, such as jams and jellies, could provide worth-while industrial linkages with the tourism sectors of some countries, savingimports and providing employment. For this, however, as for the ongoingagro-based industries, availability of raw materials supplies on a reliablebasis is of utmost importance for success. There is a vital role to be playedin this process by activities already discussed above--irrigation to lengthencropping seasons, and appropriate organization of production and marketing.

Opportunities for Common Action

34. Agricultural Extension. It is contended above that the full comple-ment of specialist technical expertise required by each country cannot bejustified for each country alone. However, a joint service could be estab-lished whereby specialist personnel are made available to individual countriesto supplement or strengthen existing extension staff whenever and whereverneeded.

35. The joint service would probably function best if it were agreedupon and established by decision of the heads of existing extension services.It would consist of a set of specialist extension personnel encompassingspecializations likely to be most frequently needed. This staff would becalled upon to provide services as needed for requisite periods of time,either from within its own ranks or from outside sources if necessary. Staffso assigned will be required to work not in an adviser role, but as an integralpart of the local extension staff, under supervision of that extension service.It is important to emphasize that the purpose of such a regional agriculturalextension pool is not to displace, but to supplement a country's extensionpersonnel. It is recommended that donors give serious consideration tofunding a joint service of this type.

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36. Agricultural Research. For similar reasons as above, agriculturalresearch appropriate to the islands should be provided on a joint or regionalbasis. Existing regional institutions such as CARDATS and CARDI in theoryare available to meet these needs. In practice, however, the specializedresearch needs, for example for cotton, and for other field crops go largelyunmet. In part, this could be because the current organization and function-ing of the relevant subsectors does not appropriately identify the researchneeds. Measures would have to be taken to ensure that existing regionalresearch units make their skills and facilities available to the ECCM countriesin an appropriate and timely fashion if the utility of those institutions tothe islands is not to be completely written off. It is recommended that theproposed agricultural research study approved by the Technical AssistanceSteering Committee (TASC) address this issue directly.

37. Marketing. The ECCM countries as a group could benefit from a capa-bility to promote and identify external markets for tropical fruits and otheragricultural products produced by them. Some markets already exist amongCaribbean emigrants in North America and Western Europe. The market couldprobably be expanded to other temperate zone consumers. The technical assis-tance proposal adopted by TASC for a Trade Information System for ECCM isdesigned to address this need. In the meantime a marketing specialist shouldbe included among the proposed pool of experts for ECCM (see para 137 below)to perform this function.

External Assistance

38. The regional cooperation schemes proposed above should justifysubstantial support from the donor community, mainly in the form of technicalassistance grants--which, in part, could be provided within the framework ofthe Caribbean Development Facility (CDF). Likewise, regional cooperationamong the ECCM countries should make it possible to implement the expandedfood-aid program, and the regional fund for financing imports of agriculturalinputs proposed in paras 139 - 143.

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III. INDUSTRY

Industrial Development - Problems and Potential

39. Throughout the area industry is still on a limited scale, typicallyemploying between 1,500 and 2,500 people in each country, out of labor forcesof about 25,000 to 40,000. Most enterprises are very small, and in eachcountry there are only a handful employing more than about 25 people. Overthe last few years, trends in industrial output and employment have beengenerally hesitant with growth in "enclave"-type industries, often offset byclosures in others. The most common problems have stemmed from inadequaciesin management, particularly in marketing and accounting procedures, and frominsufficient farm output to meet the needs of agro-processing industries.

40. However, there are signs of more hopeful trends emerging. Unviableagro-processing industries have been largely shaken out, there are a few pro-spects for new ones, and there is gradual progress in establishing small import-substitution activities. Interest among foreign investors in establishing"enclave"-type operations is increasing. St. Lucia has been most successfulin this respect, primarily because investors consider it a secure island, thatis, free from risks of political unrest or nationalization. St. Kitts-Nevis,too, has attracted a reasonable number of offshore assembly indutries, andthere are signs of mounting interest in St. Vincent.

41. The area's industrial potential remains severely constrained bysmall market size, limited supplies of most agricultural raw materials, a lackof entrepreneurial and management skills, problems in developing labor skillsand inadequacies in transport systems. Moreover, the potential of somecountries is handicapped by reputations, justified or not, of having poorinvestment "climates."

42. Despite these problems, a number of new industries have been estab-lished in places which, in economic terms, appear suboptimal or even impro-bable, and this process is likely to continue. It is noteworthy that severalnew industries have arisen from factors such as tourist visits to the specificisland, or the experience gained by local individuals while working in parti-cular industries abroad.

43. Governments as well as private sectors are generally lacking inskills needed to establish and effectively run industrial operations except ona limited scale. There are few people with formal skills in, for instance,accountancy, marketing and production engineering. There are even fewerwith practical experience in the management of fair-sized industrial opera-tions. This implies that all such enterprises will for some years to comehave to be largely run, even if they are not owned, by foreigners.

44. Wage rates throughout the area are low, typically about US$2.00 perday for unskilled workers (trainees) and US$3.75 per day for semi-skilledoperators. Though wages in some other Caribbean islands are lower still(e.g., Haiti), these are certainly competitive rates. But the labor force

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is almost entirely untrained, and when hired on has few manual skills. It isoften difficult for workers to adjust to year-round patterns of industrialwork, in contrast to the seasonal or irregular nature of many other jobs inthese countries. The discipline and tedium of factory work is also a commonproblem. Labor turnover in consequence is generally high, particularly duringtraining periods--usually six months or more. But, almost all employers foundthat once a worker has been with them for a year, he or she is likely to stay.It is also very evident that those managements able to motivate workers byworking closely with them, showing them how to perform individually anddemonstrating a general willingness to get their own hands dirty, get goodstandards of productivity; in some cases, productivity is claimed to equalNorth American standards. It is, of course, far easier to do this in a smalloperation than in a large one, and a number of foreign entrepreneurs commentedto the recent Bank missions on the difficulty of getting those local workerswho are technically capable to perform adequately in a supervisory/trainingrole.

45. The most serious general transport problem is the inadequate capacityof LIAT to handle air cargo expeditiously at most times of the year, or totake business travelers at short notice during the peak season. This affectsprimarily Dominica, Grenada, Montserrat and St. Vincent (although the twolatter are planning-to establish their own air freight operations). Shippingservices are generally good in all islands where the banana boats call;adequate container handling facilities are still lacking, though planned, onSt. Vincent.

46. The prospects for "enclave"-type operations in the area are critic-ally affected by how foreign firms perceive the investment "climate" on eachisland. These views may often be ill-informed and tend to be shaped by dis-cussions with businessmen, local and foreign, on each island and by eventswhich may have taken place some years ago. These factors have as much weight,however, as the investment promotion efforts of the islands and the Government'sstatements about its policies and attitudes. Building up a sound reputationis a fairly long-term process, although one which good promotion can acceler-ate. Given such reputations, prospects for "enclave"-type operations suchas clothing, and electrical and electronics assembly are reasonable in allcountries, with St. Lucia and Antigua having a slight edge due to transportfactors.

47. The potential for import-substitution industries is constrained dueto the very small size of local markets. This limits economic possibilitieslargely to products which are expensive or difficult to transport relative tocost (e.g., soft drinks, beer, bread, concrete blocks, tire retreading), andto production for the local market of products which could also be exported,notably garments. The very few exceptions, such as flour milling and box-making, already exist in some countries. Indeed, there are duplicationand frustrating attempts at regional allocation. Generally, even if therewere exports to other ECCM markets, they would still be too small to supportminimally viable production units for most products. The region's import-substitution potential is reaching saturation, but within these industriesthere is still scope for innovation to increase market shares, and for expan-sion in line with gradually rising demand.

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48. Considerations of scale also limit the potential for new agro-processing industries and for build-up of those which already exist. Thereis often some potential for very small-scale processing aimed at local and,to a lesser degree, regional markets (e.g., jams and pasta products). Largeroperations are generally limited by the inadequacy of existing or even poten-tial supplies needed to support viable processing units. It is often notappreciated that to support, say, a fruit cannery capable of competing onworld markets, the supply of fruit needed must be far larger than anythingwhich would be realistic to expect any one of the islands to produce. Nordo transport arrangements render a regional operation a viable project.Indeed, the attempt to allocate industry on a regional level appears to havefailed and, in some cases, the problems are essentially agricultural. Forexample, supplies must be of a consistently high quality and remain availablethrough a long season--which may imply the need for a multi-crop input.Similar prerequisites apply to most other possible agricultural and fisheriesprocessing industries. However, there appear to be promising possibilitiesfor producing a wider range of coconut products on certain islands.

49. Dominica has major potential in its timber industry (cutting, sawing,and possibly secondary processing into plywood, veneers and furniture forexport). The operation is presently at the pilot stage, and there are someimportant technical problems to be solved. The project, if realized, couldprovide a considerable boost to the economy.

50. In all the countries, a range of handicrafts are produced on alimited scale and often to low quality standards. These are sold for localuse or to tourists locally and for export mainly to other Caribbean islands.The countries share with handicrafts producers elsewhere in the world theproblems of organizing production to attain a consistent quality output insufficient volume to facilitate and organize marketing, including sales over-seas. There is an additional constraint in that the people do not have thesame tradition of manual skills which underlie similar industries in, parti-cularly, South Asia and the Middle East. Progress can be made in this throughextension services for handicrafts producers linked to cooperative marketingefforts, for example. However, the process is a slow one. An alternative isfor individual entrepreneurs to set up handicraft operations which are, ineffect, "factories" and to market the output themselves. A recently estab-lished rug-making operation on Dominica and sea-island cotton products onMontserrat are examples of this approach.

Issues and Policies

51. The public sector lacks the management skills and entrepreneurialtalents successfully to establish and operate industrial enterprises. As itis, the Ministries responsible for industry and the DFCs are generally inade-quately staffed. To try and establish operations directly would only spreadresources more thinly. In addition, the types of industry which have mostpotential (enclave, small import-substitution and agricultural processing) arenot well-suited to be public sector industries. They are market-oriented andof an entrepreneurial character; attempts elsewhere in the world to createpublic enterprises in these sectors have almost invariably failed. A forestry-based industry in Dominica could become a significant exception.

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52. Consequently, the main role in establishing industry throughout theregion should necessarily be played by the private sector; Government can onlycreate the right conditions for the private sector to flourish. It also hasto be recognized that as the local private sector is lacking in both managementskills and financing capacity, domestic industrial enterprises should onlybe able in the near future to establish small import-substitution and agricul-tural processing operations. Partnership potential for joint ventures, whilelimited in most of these countries over the short term, should be aggressivelypursued.

53. Key factors in creating the right conditions for private sectorindustry to flourish are:

(i) The Government must establish confidence in the country'spolitical, social and economic stability, both among thelocal business community and abroad.

(ii) Government dealings with the private sector should beconducted in a helpful, businesslike and equitable fashion.

(iii) Effective promotional programs should be mounted abroad andlinked to investor guidance efforts at home.

(iv) The necessary physical facilities for industry should be inplace, particularly sea and air transport links with abroad,serviced industrial estates (with factory shells being providedas appropriate), and reliable electricity and water supplies.

(v) Support should be given, both from Governments and from theexternal community, to help the local private sector developmanagement skills.

(vi) A stable fiscal environment including investment incentivesshould be provided, and finance on concessional terms wouldalso be helpful.

It may also be noted that this listing gives a very high priority to creatinga good general investment climate. All the elements are important, but itwould seem that there has been a general tendency in the area to create thenecessary tax incentive measures and then expect investors to come, with toolittle emphasis put on the first five points listed.

54. Alone among the countries, St. Lucia normally grants only partialincome tax relief (typically 75% waiver of tax due for a 10-year period).Given St. Lucia's overall positive performance in attracting foreign investors,it is worth questioning whether the tax incentives offered by most ECCM

countries may not in general be unnecessarily generous. Moreover, moreimportant than the precise incentives is the speed and efficiency with whichthe system is operated. In several countries, there is considerable room forimprovement in this respect.

55. The effective use of concessionary finance available through DFCs(primarily on-lending from CDB loans, although in some cases other cheaperforms of finance--e.g., from CIDA--are also available) varies widely from

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country to country. The variation does not reflect so much the opportunitiesfor industrial lending in each, as the priority given by individual DFCs toindustrial loans as against other activities, and the lending activities ofcommercial banks. In most of the region, commercial bank loans to industryfar exceed DFC lending to the sector. The main reason is that commercialbanks approve loans more rapidly than do DFCs and are more flexbible in theirrequirements as to security, for example. Nearly all loans for working capitalcome from commercial banks. For the types of industry established, and likelyto be established, in these countries, loans for working capital are often ofnear-equal importance to loans for fixed capital. Yet, DFCs are rarely ableto make such loans.

56. In spite of the higher interest rates usually charged, commercialbanks are the preferred lenders to industrial enterprises, and DFCs tend toget left with funding projects so marginal that no commercial bank will touchthem. This in turn leads to a high proportion of interest and repaymentarrears among DFC loan portfolios and of which eventually many have to bewritten off as bad debts. However, there is still room for improving collec-tion procedures which are slack in most of the DFCs.

57. However, if the DFCs' administration systems can be strengthened,there still may be some room for broadening the scope of their activities.This could be done by granting loans more rapidly and with greater flexbilityand by including loans for working capital. It is essential, though, thatthey keep a much closer check on the activities of borrowers than at present,besides instituting more vigorous debt collection procedures. For both, anincrease in staffing is required, and increased technical assistance wouldalso be needed.

58. To improve the speed with which loans are granted, it will benecessary to accelerate CDB procedures and appreciably strengthen DFCs. Theseissues appear as the main reasons behind investor preference for commercialbank loans, and for DFCs and the CDB being left with the least attractiveprojects. Slow procedures are a problem in factory shell construction,too, exacerbated on some islands by the Government itself becoming involved inauthorization procedures, along with the DFC and the CDB, thus causing furtherdelays in construction processes.

59. New industrial investment is more constrained by the lack of entre-preneurship than lack of funds. Nevertheless, there is a general need toinvolve local trading communities more closely in the industrialization process.Local businessmen are essentially commerce-oriented, and cautious in theirapproach to manufacturing activities. They have not contributed much to thesupply of venture capital. Commercial banks are sometimes prepared to backthe man who has an interesting concept and a businesslike approach, even ifthe project appears risky, but generally with loans rather than equity. Forreal risk capital in purely domestic enterprises, the CIC has been the onlyreadily accessible source in the area, although the CDB could contribute tolarger projects. CIC faces severe problems, due to a high proportion of

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failures among the enterprises it has backed. Part of the difficulty at leastis due to lengthy lag times before even successful projects begin to pay theirway; and a proportion of failures has to be expected. CIC's operations arelikely--justifiably--to be wound up by the shareholders. This would make itnecessary for CDB to step up its direct financial support to the ECCM countries'private industrial enterprises.

60. Government-sponsored factories can make a very real contribution toindustrialization, and experience has shown that always to have one advancefactory either under construction or completed can be a useful investmentfactor. However, the industrial estate programs encounter a number of diffi-culties. (i) CDB factory construction loans at present are often conditionalon having a tenant already signed up. (ii) Factory building programs oftenseem to require long lead times prior to starting construction of a shell.Lengthy procedures and sometimes the lack of government interest in thisactivity are important reasons. (iii) Even though rents, generally aboutUS$1 per sq. ft., are mostly subsidized (there seems no way around this ifrentals are to be competitive), rent collection tends to be lax in somecountries, impairing the financial viability of the factory programs.

Technical Assistance Requirements

61. Throughout the area, DFCs and Ministries responsible for industryneed strengthening if they are to perform their existing functions properly.Technical assistance is needed for this.

62. Technical assistance would also be needed to establish "extension"-type services to management in the industrial sector. Training and day-to-dayguidance is needed in accountancy, stock control, worker training, factorylayout, industrial engineering and marketing. Possibly the solution lies inestablishing a permanent industrial extension officer in each country (situatedperhaps within the DFC or its equivalent). Such persons would keep regularcontact with businesses and their problems. It is essential that they shouldbe located in the country on a long-term basis. Although they would have tobe generalists, they should be able to draw on the services of a pool ofspecialists centrally located.

Overseas Promotional Offices

63. Both St. Lucia and Antigua have overseas investment promotion offices(or officials); St. Lucia in New York (patterned after the Barbados operationin that city), and Antigua in New York, Toronto and London. In New York,industrial and tourism promotion occupy the same offices, thus resulting in abeneficial sharing of overhead costs. St. Vincent is interested in establish-ing a similar operation on the US mainland. However, it would be difficultto justify, on economic terms, new investments in separate promotional officesfor these countries and for St. Kitts, Montserrat, Dominica and Grenada.

64. This highlights the need to set up a regional promotional unit whichwould work closely with national industrial promotion services located in therespective states and with already existing promotion offices abroad. Such a

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regional common service has been suggested in the past, e.g., by the EconomistIntelligence Unit in its August 1972 report, as an entity which would supple-ment, on a regional basis, the activities of the several national DevelopmentCorporations. The entity would have resources and personnel beyond thecapacity of any single state in the region. Among its functions would be theidentification of industrial opportunities within the ECCM, and the designand implementation of a promotional effort aimed at identifying and contactingpotential investors, providing them with information and putting them intouch with local promotional units of the various Development Corporations(and Governments). This ECCM common service would further benefit from itsintegration within the broader, Caribean-wide, export promotion program,proposed by the Bank to the Second Caribbean Group meeting.

Local Promotional Units

65. It is not sufficient to have a promotional unit abroad or to have aregional entity soliciting interest on behalf of the several states. It isimperative that each state have a local unit, or individual, entrusted withthe responsibility of handling potential investors referred to the country orvisiting the country on their own initiative. This unit would also be respon-sible for the compilation of information about the state, and would partici-pate in negotiations between prospective investors and the Government. Inaddition, it should be able to assist investors in setting up operations onthe island. It would seem most appropriate for this function to be entrustedto Industrial Development Corporations, which exist on most islands. Moreover,local promotion units should be able to identify industry opportunities suit-able for local investors; they should seek out and contact potential entrepre-neurs and assist them with industrial sites, factory shells and managementadvice where necessary.

66. In terms of training for locally based promotion officers, theproposed regional unit might draw upon the resources of the recently estab-lished UNIDO Investment Promotion Service, which provides, in a four-weekorientation program, on-the-job training in the techniques and tools ofindustrial promotion.

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IV. TOURISM

Introduction

67. Tourism development in the ECCM resulted by and large from a somewhatlaissez faire approach having been adopted by the various governments. Anxiousto gain from the seemingly endless tourist boom of the 1960s and early 1970s,and encouraged by the experience of their larger neighbors, individual Govern-ments vied with each other for tourist development. Incentive legislation wasinitiated, aimed at attracting foreign hotel investment, with little apprecia-tion of the likely costs and benefits to their communities. The net resultwas an investment scramble virtually throughout the region, with hotels oftenbeing financed on totally inadequate bases. Both experienced and inexperiencedhotel operators proliferated.

68. In the aftermath of the energy crisis, with the resulting protractedrecessions in the economies of the principal tourism-generating countries,demand for tourism accommodation fell dramatically in the Caribbean, as else-where throughout the world. Many hotels, including some owned by multi-national groups, went into liquidation and, in some instances, to avoid wastingassets and increasing unemployment, Governments took over unprofitable invest-ments. Overall, this rapid expansion followed by severe contraction of theindustry in the area has given rise to both positive and negative impacts thatare still being felt today.

69. A level and quality of hotel capacity now exists that would bedifficult to duplicate in view of current construction costs. Adversely, how-ever, hotel investments are now seen by most financial institutions to be notonly high cost but, more importantly and particularly in the LDCs, high riskventures. At the same time, and possibly with even greater implications forthe future development of tourism in the region, is that the majority offoreign hotel groups are now unwilling to invest in their own hotel stock,except in those isolated instances where they can see a quick and relativelyassured return on their investment, preferring to engage in management con-tracts with little or no associated "front-end" risk.

70. The problem of the future expansion of the industry is of criticalimportance to the ECCM countries where, in most instances, despite long-termgovernment objectives aimed at economic diversification, international tourismis likely to continue to play a key role in their economic and social develop-ment. But what is the current position and what is its future potential?

Status and Potential of the Sector

71. Although tourism is an important economic sector in the ECCMcountries, it should be viewed in perspective. By comparison with the Caribbeanregion as a whole, which receives some 5 million tourists annually, or evenwith the MDCs on their own, the industry is still in an embryonic stage and ona relatively small scale with just over 200,000 stay-over visitors in 1977.It is estimated that the sector directly employs some 6,000 persons in the peak

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season and possibly an equal number indirectly in the manufacturing, retailingand service industries, particularly in such activities as handicrafts, trans-port and shops directly serving tourists. Overall, therefore, tourism gene-rates employment either directly or indirectly for an estimated 12,000 indivi-duals, or approximately 5-6 percent of the total work force. In view of therelatively high level of female labor associated with hotels and restaurants,tourism plays a significant role not only in supplementing family incomes butin some instances being the sole source of income.

72. In addition to employment generation, international tourism is aprime source of foreign exchange earnings, and directly contributed an esti-mated US$26.2 million to GDP in 1977 or some 9.4 percent of the total for theECCM countries. Addition of the tourism components included in other sectorsof the economy probably brings the overall contribution of the tourism sectorup to about 16-18 percent of the total. Despite its relatively small size,therefore, the industry plays a significant part in the economic developmentof the individual communities. The impact varies among the countries,being greatest in Grenada and St. Lucia, and lowest in Dominica and St.Kitts-Nevis.

73. With the recent economic recovery, especially in North America andEurope, the deregulation of air tariffs and the effect of oil revenues inVenezuela and Trinidad, international tourism to the Caribbean has been buoyantalmost everywhere, the ECCM countries benefitting from these developments.Notwithstanding the possible impact of the current oil issue on the NorthAmerican market, in the long term with increasing real disposable incomesand possibly longer holiday entitlements, international tourism is forecastto increase. The attractiveness of the Caribbean, therefore, along withits proximity to the North American, Venezuelan and Trinidadian markets, andthe increasing use of wide-bodied jet aircraft from Europe, give rise toan optimistic view of the growth potential for the region. The increasingimportance of the impact of tourism on the economies of the ECCM countries islikely to continue.

74. Questions arise, therefore, as to what measures should be taken bythe countries to develop their respective tourism sectors effectively andefficiently and, at the same time, how the donor nations can best assist themwith these objectives. It is difficult to make generalizations about the ECCMcountries since the scale and nature of their tourism assets, their stage ofdevelopment, and their ultimate potential differ. What emerges from ananalysis of the individual sectors, however, is that they all have the sameaspirations of future growth but, to a greater or lesser extent, suffer fromsimilar problems and constraints in achieving these aspirations.

Constraints and Policy Issues

Inadequate Planning

75. Fundamental to tourism development in the ECCM countries is the needfor adequate planning. With varying endowment of tourism assets such asbeaches, infrastructure and other facilities, their main attraction to touristsis their climate--tropical but equable--and on the whole their principal

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assets are that, by and large, they are unspoiled and are close to the principalgenerating market of North America, as well as to Venezuela and Trinidad.

76. Their very size is a limiting factor not only in terms of theultimate scale of tourism development possible, but also because by itsvery nature, development of any magnitude must affect environmental change.No attempt has been made either on physical, economic or sociological groundsto determine the absorptive capacity of the countries for tourism development.Too often in the past, so-called tourism master plans funded by donor nationshave been drawn up with development concepts that were far too grandiose bothin terms of the absorptive capacity of the countries themselves and in termsof market potential. Missing from these studies was the critical elementassociated with implementation policy.

77. It is an unfortunate situation that these countries do not possessexperienced personnel capable of reviewing development proposals. If donornations are to assist them to develop their tourism product, they must ensurethat development planning is properly carried out not only in relation tomarket requirements and environmental-economic-social impacts but also,specifically, with regard to implementation.

78. The countries are too small both geographically and economically topermit ad hoc tourism development. It is essential, therefore, for each ofthem to undertake practical and realistic tourism development planningas a prerequisite for sector growth. This is an area of competence thatis best suited to technical assistance, which should be provided at theregional level, as part of the ECCM Common Services scheme.

Investment Finance

79. In view of the somewhat undeveloped state of tourism in some of theECCM countries, it is unlikely that either foreign or local sources of privatesector finance could be found for hotels and other tourism-oriented facilities.The exception perhaps would be in St. Lucia and possibly in Antigua, wheretourism development would be much more easily encouraged. It may be necessary,therefore, in some of the countries for Governments to underwrite the riskelement by financing further hotel investment themselves, thereby "seeding"tourism development. The hotels subsequently should be operated on managementcontracts by international operators. This form of development would seemparticularly appropriate for the islands of Montserrat, St. Kitts-Nevis andDominica.

80. A major constraint to tourism development in all of the ECCM, how-ever, is the absence of long-term finance for future hotel or other tourism-related investment. The donor community might address themselves, therefore,to the issue of how tourism development in these countries can best be financed.Although assistance may be given to each one separately, an alternative approachcould be the establishment of a special financial program for tourism develop-ment throughout the Caribbean region, with substantial amounts earmarked forthe ECCM countries, including a portion for the establishment of a hotel creditscheme. Since hotels in general are characterized by lengthy pay-back periods,

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it is recommended that hotel finance should be made available for an extendedperiod. In this context the CDB may wish to review its current policy oflimiting finance to hotels of 50 rooms or less. Such cutoff level does notseem to be justified on economic or financial grounds.

Internal and External Accessibility

81. The major constraint to future development of the sector is that ofaccessibility. Of the ECCM countries, only St. Lucia and Antigua enjoy inter-national airports. In St. Kitts, the situation is rather unique. WhileGolden Rock Airport possesses a runway of appropriate length and strength toreceive jet aircraft, in view of the small market, international carriers donot make scheduled calls there. The other countries, that is to say, St.Vincent, Dominica, Grenada and Montserrat possess small airports capable ofreceiving only relatively small aircraft and with locations which are reputedlyimpossible to extend.

82. The growth of tourism in those countries that can be serviced bymodern aircraft is not seriously constrained by problems of external communi-cation, although improved facilitation of passengers and baggage would overcomesome of the frustration currently experienced by visitors. It may be arguedthat tourism prospers in those areas served by international carriers. Inpractice, however, high levels of tourism can also be based solely on asubstantial charter business. In the short term, it is this form of tourismto which St. Kitts should address itself.

83. In the other countries, the tourism sector is virtually totallydependent on feeder air services from the principal gateways of St. Lucia,Antigua and Barbados. This situation creates some problems. At the presenttime, the majority of inter-island passenger movements are serviced by LIATwhich has totally inadequate capacity to handle both peak period internationaltourist traffic and the increasing volume of inter-island traffic. In addi-tion, in view of LIAT's out-moded reservation system, overseas visitorsare not certain to obtain flights even if previously confirmed. In someinstances, therefore, hotels on the small islands have been forced to charterprivate aircraft in order to transfer visitors, and frequently visitors havefound it necessary to stop-over for a night in the gateway country either atthe beginning of a holiday or at its end. These difficulties are exacerbatedby the lack of effective night-landing facilities in some countries. As aresult, many tour-operating companies refuse to consider the smaller islandsas tourist destinations.

84. Tourism development on any scale to the smaller islands is seriouslylimited, therefore, until a solution is found to the overall transportationproblem. The answer is not one of providing international-sized airports toall countries but, rather, making significant improvements to the feederservice. Priority should be given to examining alternative solutions toincreasing the operational effectiveness of the regional carrier, LIAT.Although appropriate technical assistance would be necessary to examine theorganizational structure and the operational procedures of the airline, inthe last analysis, the airline requires expensive hardware--additionalairplanes and possibly a small computer for reservations.

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85. In conjunction with improved night landing facilities, one possiblesolution may be for each of the smaller islands to have use of a smallaircraft in the same way as planned for Montserrat. The governments ofSt. Vincent, Dominica, Montserrat and Grenada might also consider recommendingtourists to use such other gateways as Guadeloupe, Martinique and Trinidad asalternative points of entry to their countries.

86. In addition, the airport authorities in St. Lucia, Barbados andAntigua should be encouraged to revise their current practices in relationto intransit passengers. No good intransit passenger system exists at any ofthe gateway airports, with the result that the free transfer of passengersand baggage is often impeded.

87. The problem of inadequate accessibility is not limited to airtransport. Although distances in the ECCM countries are not large in terms ofmileages, roads are often in such a state of disrepair, or in some casesnon-existent, as to make internal transportation excessively difficult. Thissituation characterizes all of the countries, although possibly to a somewhatlesser extent Antigua, St. Kitts and St. Lucia, thereby inhibiting touristmobility and detracting from the overall tourism appeal of the islands.

88. The individual governments have taken initial steps at overcomingsome of these problems, and certain of the proposed transport projects areeither wholly or partially tourism related. Nevertheless, better integrationis required between various government departments, and future transportdevelopment programs should take due cognizance of tourism requirements.Particular attention should be given to improving accessibility to places ofinterest.

Tourism Product

89. An important element of future tourism development in the ECGG regionshould be the increased attractiveness of the overall tourism product. Althoughtourists visit them primarily for holidays in a Caribbean environment, thecountries could offer added appeal with a more attractive tourism product.Apart from beaches and comfortable hotels, most tourists require places ofinterest to visit, possibly good quality shopping, nightclubs, and almostcertainly good handicrafts. Much of the proposed technical assistance there-fore is aimed at identifying possible facilities that might be restored ordeveloped into tourist attractions of some significance. In all of thesecountries, both the range and the quality of handicrafts sold to visitorsare very limited. Every effort should be made to overcome these problems,as recommended above (para. 50).

Market Assessment

90. Tourism in the whole Caribbean as in many other resort destinationsis characterized by a marked seasonal imbalance in demand, with hotel occupancylevels that are high in winter and relatively low during summer. Broadly,a similar picture emerges in most ECCM countries. The possible exceptions areDominica in which hotel occupancies are low all year round and St. Lucia, inwhich the opposite is the case. To some extent this general pattern of demand

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is changing slowly, in response to a gradual expansion of summer tourism origin-ating from Europe, Venezuela and Trinidad. Without attempting to prejudge thefindings rf the proposed Caribbean Tourism Market Studies of the European andNorth American markets that are being sponsored by the Caribbean TourismResearch Center (CTRC) and financed by the EDF and the IDB, it is recommendedthat the ECCM countries promote their tourism product in the European marketwith particular emphasis on the summer and "shoulder months" trade.

91. In areas of the world where tourism development is well advancedand on a large scale, promotional activity is shared by the public sectorthrough the auspices of the National Tourist Offices and the private sectorthrough such organizations as hotels, hotel associations, airlines, touroperators and travel agents. This situation occurs to some extent in St. Luciaand Antigua where the proportion of foreign owned or managed hotels is rela-tively high, but this is not the case with the other countries. In the lessdeveloped ECCM countries, tourism promotion resides essentially with theTourist Offices with some additional independent activity by locally ownedhotels and hotel associations. In all of them the Tourist Offices operateon budgets that are far too low to permit their principal functions to beundertaken effectively. Staff levels and training are generally inadequatealthough, apart from St. Lucia where the post is vacant, the positions ofDirector are filled by persons well versed in the industry.

92. Promotion and marketing the tourism product of thes countriesrequire a significantly higher level of direct contact with the travel tradein each of the principal tourist markets than would be the case for moredeveloped destinations. Currently, these activities are undertaken by theEastern Caribbean Tourist Association (ECTA) for all countries except Grenadaand Dominica.

93. ECTA has offices in New York and London and is represented inToronto. In view of the importance of the tourism sector to these economies,the organizational strength and financing of ECTA are totally inadequate topermit it to perform its role effectively. The entire European market, forinstance, is represented by the London office which, not only is hidden fromthe view of the passing trade but is staffed by two relatively inexperiencedassistants. Day-to-day contact with the trade is on a passive basis, basicallyanswering direct enquiries by telephone or letter rather than actively promo-ting in the market place itself. At the same time, since ECTA does not engagein advertising, with the exception of St. Lucia and Antigua which benefit fromadvertising exposure in a few tour operators' brochures, the tourism productfor the smaller islands is not presented to the consumer and is virtuallyunknown.

94. Although an increasing potential for tourism to the Caribbean regionas a whole exists in Europe, particularly during the summer and "shouldermonths," it is unrealistic to expect any real growth in the number of touristswithout undertaking positive marketing action. Tour operators must be inducedto include the smaller islands in their holiday brochures and this can onlybe brought about by direct discussions and appropriately produced workshops inthe principal tourist generating countries. Promotion of the smaller islands

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in Europe, therefore, requires greater experience of the market and a higherlevel of financing.

95. An appropriate solution to the problem would be for ECTA to bedeveloped as an interface organization representing the tourism interestsof ECCM countries, but for the promotion and marketing activity to be under-taken by specialist firms of tourism representatives in the principal gener-ating countries. Foreign representation has been adopted, for example, byAnguilla, financed by the United Kingdom Government. It is recommended,therefore, that the donor nations consider financing the promotion of tourismfor the ECCM region through provision of appropriate technical assistance toimprove the effectiveness of ECTA, as well as directly in the market place.ECTA activities should be closely coordinated with the expanded functions ofthe CTRC suggested by the Bank at the Caribbean-wide level. Alternatively,ECTA could be merged into the expanded CTRC--a solution that would requireparticular CTRC attention to the special problems faced by the tourism sectorin the ECCM countries.

Information for Planning and Tourism Administration

96. Despite the effectiveness of the tourism sector in assisting Govern-ments achieve their economic and social objectives, there exists a fundamentallack of knowledge throughout the ECCM region concerning the industry. In eachof the countries responsibility for tourism at government level resides in aMinistry which more often than not shares this responsibility with at leastone, and in some instances, many sectors of the economy. Because of budgetrestrictions and shortage of trained personnel, governments' staff levels arerelatively low and, despite the overall importance of the sector, tourism isoften neglected. As a result, almost uniformly, the tourism data collected byGovernments are totally inadequate either for plaaning or for monitoring theeffectiveness of policy decisions. This situation should be rectified as amatter of priority and would be an appropriate area for technical assistance,possibly to individual countries or, more effectively, by strengthening theresearch capability of CTRC.

97. The objective of such assistance should be to identify the infor-mation requirements essential for planning and regulating the tourism sector,to review existing statistical definitions and procedures and, where neces-sary, formulate new data collection and analysis methodologies. A particu-larly important area, not only for understanding the current status of thesector but also for defining appropriate marketing strategies and developmentpolicies, is the determination of the economic and social costs related toeach market segment. To some extent, preliminary work in this direction hasbeen undertaken in some countries, sponsored by the OAS, and brief touristexpenditure surveys have been carried out. The underlying problem, however,is that no single organization has set down the data hierarchy and informationsystem that is essential for effective planning, and little thought has beengiven to developing relatively simple and unsophisticated procedures that canbe carried out periodically and inexpensively on a sample basis.

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98. To some extent ECCM countries could improve their own planninginformation not only in reviewing their existing tourism statistics and datacollection procedures, but more particularly in the sensitive but neverthelessimportant areas of utilization and profitability of tourist accommodations, aswell as staff levels and training. They should consider making it a sine quanon for the eligibility for investment incentives that tourist establishmentssubmit such information to the government on a regular but confidential basisfor the duration of the incentive.

99. The donor community might give consideration to providing funds topermit the training of local personnel. In this aspect, attention should bepaid not only to formalized training but, more importantly, to on-the-jobtraining programs, specifically through secondment to overseas TourismMinistries and National Tourist Offices.

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V. TRANSPORTATION

Common Aspects

100. Transport factors do not now constitute a serious impediment toeconomic growth although several areas need improvement. Costs of transportare not unreasonably high and, at this stage, only limited benefits wouldaccrue from additional major investments in new transport infrastructure.

101. Improved maintenance is the highest priority for the transportsector as a whole. A vast amount of sunken investment, in roads particularly,is currently threatened by inadequate maintenance. Failure to address thisserious problem in the immediate future will result in a significant loss ofcapital stock, and funds which could have been used to build up the productivesectors of agriculture, industry, and tourism will have to be diverted torebuilding the basic infrastructure.

102. A second and related priority is to strengthen local institutionsand professional capabilities. Raising the absorptive capacity of thetransport sector is often related more to correcting deficiencies in localpublic sector financial and operational management than to deficiencies incapital stock. In some cases, these deficiencies are the result of eitherinadequate legislation or adequate legislation which has not been put intoeffect. This is especially true in the area of separate financial accountingfor entities such as ports and airports, resulting in unnecessary operationallosses. Delays in project preparation and implementation could be reduced byraising local managerial/engineering capabilities, to the point where projectproposals could be fully researched and feasibility and engineering studiescompleted for presentation to donors by each borrower.

103. The major issue in the area of ports concerns the ability of theCaribbean countries to adjust economically and efficiently to containeriza-tion. Many countries have their own deepwater port and want to continue toenjoy direct service by major international steamship companies. Because thecost to these carriers is high with low volumes, they have recently beenreducing their total numbers of calls at Caribbean ports, relying instead ontug and barge or smaller vessel feeder services to transport containers.Further development of container facilities should await conclusions of theproposed "Container Load Center Port Study". Because of low tonnages, theeconomic cost of investments in small deepwater ports becomes very high perton, making the total economic cost of investment plus operational costshigher than that of continuation of lighterage, especially if one considersthe shadow cost of labor given high unemployment rates in the Caribbean.Similarly, the cost of a roll-on/roll-off ramp to handle the tug and bargecontainer distribution system currently in operation is significantly lessthan that of a deepwater container berth, yet will achieve essentially thesame goal.

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104. Capital investment in airport terminals and runways has beenrelatively large in recent years and in general should be adequate for mostof the countries. Further developments should await significant growth intourist demand. However, improvements in communications and safety equipmentas well as maintenance and operational procedures should be made. Methods offinancial accounting could also be revised to ensure the financial viabilityof the aviation subsector.

105. As stated above, the road networks in a number of the ECCM countrieshave seriously deteriorated from lack of proper maintenance and are in needof either construction or rehabilitation. Comprehensive road conditioninventories and traffic counts should be made and priorities set beforeembarking on major upgrading programs. It is important that funds be appro-priated and a regular long-term maintenance program be developed, to minimizecapital stock depreciation in the future. Donors should coordinate theiractivities to maximize value and reduce cost through joint use of equipmentand project consultants/managers on larger projects.

Project Prospects

106. ECOG countries continue to request significant amount of financialassistance for transport projects, although total amounts spent in the trans-port/infrastructure sector should decrease in favor of the productive economicsectors, in later stages of development. While some projects can be startedshortly, many more are subject to completion of feasibility and engineeringstudy results.

107. In the maritime subsector, two construction projects are proposedfor Grenada and St. Vincent. They involve expansion of existing facilities toimprove roll-on/roll-off container handling and storage capabilities and alsoto improve general cargo operations, much of which continues to be done bysmaller, inter-island vessels. Most countries are requesting cargo handlingequipment, tugboats, patrol boats or ferries, as well as minor repair orreconstruction works on jetties, timber piers, and sea/river defense walls.St. Lucia is also in the process of completing a cruise berth study and hopesfor eventual financing.

108. The aviation subsector is more actively requesting funds. Thelargest project is the Point Saline/Tourism Development proposal in Grenadawhich could cost over US$20 million. Lesser projects in other countriesinclude seven requests for improvements to runway surfacing, four requestsfor new taxiways or aprons, six requests for maintenance, safety, and com-munications equipment, and two requests for passenger or cargo terminalupgrading. Instead of pursuing its physical airport improvements plan,Montserrat opted to improve its service capability and with UK assistance,has ordered Britten Norman Islander Aircraft, to provide guaranteed same dayservice from gateway airports to Montserrat. St. Vincent is experimentingsimilarly with its own cargo aircraft.

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109. Since major capital investments in aviation and marine projectshave been made in the 1960's and 1970's, major investments must now beconcentrated on the road network, to reconstruct seriously deterioratedcapital stock and to maintain existing capital stock in good condition.There are, for the next five-year period, projects in Grenada and Dominicainvolving an immediate need for major reconstruction to the main road system;these should be based on a comprehensive road inventory, traffic analysis,and listing of priorities. Antigua's road network also requires such analysis,but the need is less immediate. Six other projects involve main or ring roadimprovements, six involve secondary road improvements and bridge reconstruc-tion, and every country places high prioritiy on further development of itsfeeder and village road system, in conjunction with increased emphasis on theagricultural sector. Most feeder road projects involve substantial mileagesand financing, thus the standards to which the roads should be built is animportant factor.

Technical Assistance Requirements

110. Each of the countries is in need of some form of technical assistance.Absorption of foreign capital has been seriously constrained by inadequateability to identify and prepare investment projects. Project implementationand future planning has also suffered from low administrative and executioncapability, due mainly to a shortage of local personnel with appropriatequalifications, resulting in high dependence upon foreign technical aid withlimited results. Substantial technical assistance has been included as acomponent of many of the projects proposed, and some are put forth on thebasis of their being turnkey construction projects.

111. A summary of the more important recommendations for technicalassistance in project preparation, execution, operation and maintenance foreach country is included below. Equally important, however, is the need toimprove the functioning of local development-oriented institutions and lawswhich are required for successful implementation of the public sector invest-ment program. External financing agencies in many cases will have to providefunds not only for project management but also for institutional management.

112. Antigua requires immediate technical assistance to reorganize thefinances of the port authority, establish new tariffs, determine equipmentneeds, and recommend resurfacing of the airport runway. By 1981, advice maybe needed on the installation of an ILS or MLS system, the need for a paralleltaxiway, and a phased main road improvement plan, with equipment purchases.St. Kitts requires technical assistance to identify the type and recommendoperational procedures for a new fast ferry to Nevis, and to implementefficiently the new port development. In St. Lucia, the public works depart-ment is in need of assistance due to a heavy administrative workload andscarcity of technical staff; economic and engineering studies are requiredprior to major investments in a Castries by-pass route, in upgrading aportion of the main ringroad, and in development of Cul-de-Sac Bay. St.Vincent's most pressing needs are for the continuation of a port managerposition and for road construction and maintenance overseers and supervisors,until the local staff can be trained.

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113. Dominica and Grenada are most in need of sustained technicalassistance. Dominica's need relates primarily to the road network, which hasdeteriorated severely and requires massive amounts of financial assistanceto survey, rehabilitate or reconstruct, and to train staff to preserve itscapital stock. Turnkey road projects are recommended. Grenada requirestechnical assistance in all three transport subsectors. In the area of roads,aid similar to that proposed for Dominica is recommended due to the severityof the situation. Substantial assistance will also be needed to definitivelystudy the tourist access problem in conjunction with a new internationalairport and then to implement the recommendations. Similarly, port develop-ment and operational expertise is required to manage the proposed expansionof marine facilities. In general, the need for continued technical assistanceand training of local personnel is great and must be considered an integralpart of any development project. Sending experts in a particular field for afew weeks or months is not very useful; in many cases, long term programsmust be prepared first to establish priorities of individual projects, andgreater direct involvement by donor countries and lending institutions isneeded.

Policy Considerations

114. Prior to approving a grant or loan for transport projects in thecountries under review, donors should consider several basic conditions orcircumstances. For example, further port and airport development decisionsshould fully consider the viability of the facility and the opportunity costof capital. Then, separate and accurate accounting systems should be set upto enable management realisitically to assess revenues and expenditures.Charges on tariffs should be set to cover, at least, operational costs anddebt service, and also to make a contribution to capital equipment purchase orrenewal. Similarly, commitment to local counterpart financing should berealistically assessed within the budget and then implemented on schedule.

115. Research is needed to determine the retained earnings which may beattributed to cruise vessel visitors because the net economic benefits ofaccommodating them quayside are frequently overrated. A less costly alter-native to a concrete wharf may be to utilize a finger pier with concreteplatform and dolphins. Strong tourist demand is needed before a separatefacility of any kind can usually be justified on these grounds.

116. Similarly, significant increased tourist demand, and the recommen-dations of a proposed Caribbean Civil Aviation Council (discussed below)should precede further major airport development. Even if every country inthe region had airports without restrictions, it is unlikely that they wouldall be used by the major carriers. Besides the fact that some islands areless attractive to tourists, airplane utilization factors are just as importantas load factors when determining routes. While it may be possible to attractsome large charter aircraft during a short season, the relatively small numberof aircraft movements could not justify the high cost of increasing airportcapacity. At present, congestion frequently occurs because of operationalinefficiencies at customs, baggage, etc., and improvements could more readilybe made in these areas.

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117. The ECCM countries may be better off by improved aviation services,particularly by the regional carriers in need of increased working capital.For example, as discussed in the preceeding Chapter, priority should be givento introducing an improved reservation system for LIAT, and to increasing thenumber of planes of this airline to enable more frequent and convenientservice. Schedules could be more closely attuned to meeting tourist flightsat gateway airports. However, it must be remembered that before greatlyincreased numbers of tourists could arrive it is necessary to ensure adequatehotel and restaurant accommodations as well as sufficient water, sewer andelectricity services.

118. In the next five years, volumes should be monitored and attentionshould be paid to the potential of air cargo, particularly from the islandswhich do not have scheduled international jet service. An all-freight regionalairline flying on a fixed schedule to gateway airports may be needed for somehigh value agricultural and industrial products, such as exotic fruits andvegetables and electronic equipment. Besides basic warehouse space at theairport, there may also be need for refrigerated storage facilities.

119. A sine qua non concerning road works by the PWD's should be toimprove cost accounting procedures to reflect accurately the true cost ofroad construction or maintenance. Currently, the cost of depreciation, parts,maintenance and operating equipment, as well as labor costs, are not properlyallocated to the work on which the equipment is used. This leads to thegenerally prevailing opinion that work by force account is less expensivethan work carried out under management contract, where all costs must beaccounted for, and there is a considerable residual value of equipment.Since, in general, the cost to construct highway infrastructure in the ECCMcountries is considerably higher than average, a review of the accountingprocedures of the PWD's is in order. Partial explanation may be the highmobilization cost for small road work, a lack of proper equipment, or in-efficient management.

120. Other considerations in the area of roadworks include the need toensure that traffic origin and destination and volume studies are done andthe heavily travelled route given first priority. Secondly, future develop-ment of roads, particularly feeder roads, must be fully complementary to otherdevelopment projects, in timing, in location, and in standards. Standardsare often not considered as fully as possible for the need, resulting inmuch higher maintenance costs in the long run or deferred maintenance in somecases. Studies of traffic volumes and vehicle types are essential in thisrespect. A clear decision should also be agreed as to whether force accountor contract will be used.

121. A final consideration is that financing countries and institutionsshould review their own project approval systems with the objectives ofstream-lining certifications and disbursements, ensuring proper equipmentand access to spare parts throughout the life of a project. Several countriesidentified these items as major bottlenecks to the flow of funds and toproject completion schedules. The donor community should also help prepareand identify an adequate and continuing source of funds for a regularlyscheduled maintenance program to achieve maximum benefits from any investment.

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Prospects for Common Action and Related Technical Assistance

122. Because most of the ECGM countries have relatively small popula-tions and economies and few trained managerial personnel, it is recommendedthat greater regional cooperation become a major goal to assist in thedevelopment process. For the immediate future, there are five areas in whichregional cooperation could begin. All five are expected to lead to greatereconomic benefits for every country than could be achieved by each individually.

123. Three studies are currently being considered. The first is aUN-sponsored study concerning what will be the most advantageous shippingpattern for the Caribbean region in the area of containerized cargo, entitled"Container Load-Center Port Study". This study was prompted by the need tohelp the Caribbean countries shift smoothly and economically to the contain-erized age, given that many steamship companies are reducing their containerservice to low-volume ports in favor of fewer calls to designated load-centerports due to the high operating costs of container vessels. The advantage ofroll-on/roll-off facilities will be particularly investigated and recommenda-tions for port investments for the 1980's will be made. Secondly, UNDP/CDCC 1/is currently studying the small inter-island vessel trade in the Caribbeanfor the purpose of assessing its future and determining any needed investmentsor incentives to this trade. Regional action could be taken in this area.

124. A third study concerns the need for and possible functions of aCaribbean Civil Aviation Council. A widespread belief exists that individualcountries are not properly equipped to deal individually with the largeinternational carriers with respect to improving service and rate structuresfrom tourist-originating cities in North America and Europe. It may bepossible to negotiate more favorable terms from a stronger position if oneentity represented all of the countries. Significant improvements alsoneed to be made to the regional airlines, LIAT in particular, and a Councilstaffed by professionals in the aviation field and directed by Ministersof Transport, may be better able to define and achieve regional goals for airservice. Two immediate issues are the need for a computer reservation systemand more planes for LIAT, and the need to achieve greater coordination ofregional airline feeder flights with international tourist flights. Upgradingof the Caribbean airport's fire and rescue equipment and communications/navaidequipment is also being studied by ICAO 1/ and may be a first issue with whichsuch a Council could deal. The CAB, CAA and ICAO should be requested toprovide technical assistance to such a body in its early stages.

125. A fourth problem facing donor countries and lending institutions inthe ECGI is the high cost of most construction projects. Cost overrunshave been rampant and consultant estimates for new projects are consistentlyvery high. A partial explanation for this could be the generally small sizeof the works, making for high overhead and mobilization cost of equipment.This would not apply to the same extent for larger civil works such as ports,

1/ CDCC - Caribbean Development Coordinating CommitteeCAB - Civil Aeronautics Board (US)CAA - Civil Aviation Authority (UK)ICAO - International Civil Aviation Organization

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yet in a few recent cases, bids almsot doubled estimates. The major questionis whether these costs are unreasonably high. Technical assistance isnecessary to analyze this cost phenomenon in greater depth and to find waysto remedy the situation if reasons are found. Such a study would be in theinterests of both donor/lenders and recipient countries.

126. A final recommendation is to investigate the feasibility of creat-ing a joint equipment pool and eventually a joint unit for the ECCI countries,with local branch offices. Such arrangement, sustained by a larger populationand funds, would justify a much higher level of career technicians andmanagers, and a pool of heavier equipment (including spare parts) and there-fore enable a larger number of projects to be done by force account. Forthose projects requiring construction by contract, the costs could be keptdown per unit by a regional unit's organizing larger projects to encompasswork in several countries concurrently or consecutively. Larger contractsshould lead to attracting more and larger contractors and therefore morecompetitive bidding. Better balanced fleets of equipment could also raiseefficiency and lower costs. 5!ore coordination and cooperation among Govern-ments for implementation of better-prepared, longer-term investment programsmay eventually help to reduce costs and improve quality. A technical assist-ance project is required first, however, to determine how such coordinationcould occur.

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VI. ECONOMIC PROSPECTS AND CAPITAL REQUIREIENTS

127. The next five years offer a unique opportunity for the governmentsof the ECCM to place their economies on the path to viability. Many of thecountries possess promising economic growth prospects and could increasetheir GDP by an average of about 5% annually. In other countries, becauseof constraints peculiar to their respective economices, GDP growth is notlikely to exceed moderate rates of about 3% - 3.5% annually. It needs to bestressed, however, that in the case of all the countries, these medium-termprospects hinge upon the adoption of appropriate policies to stimulate agri-cultural production, to foster industrial growth, and to fully utilize existingcapacities in the tourism sectors. In the process it will be necessary tosurmount absorptive capacity constraints which have until now hindered effec-tive implementation of a development program. Moreover, most of the countriesare faced with the challenge of putting their public finances on a soundbasis. This is an imperative for attaining sustained growth and economicviability, and will require strict budgetary controls and new revenue measures.This adjustment task however, should be greatly facilitated by the willingnessof the international community, in the context of the Caribbean Croup, toassist by making available more than normal amounts of financial and technicalassistance to prepare, appraise and implement development projects during theperiod of 1979-83.

128. To achieve the projected growth performance will require increasinglevels of public sector capital expenditure, and a greater emphasis ondirectly productive projects rather than on infrastructural investments. Thecountries' public sector investment programs 1/ for the period 1979-83,designed to attain the objectives stated above, will require in total that:

(i) public sector capital expenditures increase to an averagefor the five years of over 50% above the 1977 level inreal terms;

(ii) public sector savings play an increasingly importantrole so that by 1983 they cover approximately one-thirdof public sector capital expenditures; and

(iii) official external capital inflows grow rapidly in 1979to a level over double the 1977 level, and increaseslowly thereafter through 1983.

129. Total public sector capital expenditures are projected toincrease from EC$75.4 million (9.9% of GDP) in 1977 to EC$131.1 million(13.3% of GDP) in 1979 as a significant number of new projects commence.Thereafter, they are expected to grow by an average of about 1% perannum in real terms and reach EC$186.2 million (11.5% of GDP) by 1983.In most of the countries, this relatively high level of public sector

1/ See World Bank Economic Reports Nos. 2432-CRB, 2422-CRB, 2434-GRD,2451-MO, 2439-CRB, 2440-CRB, 2438-CRB.

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investment, which is accenited towards agriculture among the productivesectors, will assist in building up the productive base of the economiesand contribute towards a projected real GDP growth rate of about 5% perannum through 1983. Amortization payments in 1977 were only a minorburden at US$2.4 million, and, as a result of the expected continuingoverall high level of concessionality in external assistance, the burdenis not expected to increase. In 1983, external amortization requirementsare projected to increase to only some US$3.4 million, or less than 1% ofthe combined GDP.

130. Financing the investment programs will require substantialimprovement in public sector savings performance. In 1978, the perform-ance was adversely affected by implementation of large government wagesettlements in many of the countries; consequently, despite strongeconomic performances, and substantial UK budgetary assistance to Dominicaand St. Vincent, public sector savings was equivalent to only 0.2% ofcombined GDP in 1978, compared to 1.9% of GDP in 1977. Moreover, becausea number of the wage settlements would become effective only in 1979,even with new measures for fiscal restraint, public sector savings areprojected to reach only 1.5% of GDP in 1979. Thereafter, however, providingthat strong budgetary controls and new revenue measures are adopted, asteady improvement is attainable through 1983, by which time gross publicsector savings will have to reach EC$61.2 million (3.8% of GDP) and coversome 33% of public sector capital expenditures.

131. Domestic borrowing, especially from the commercial banks, wasused extensively in 1977 and 1978 to finance current account deficits anda limited amount of public sector capital expenditures. This source is nowessentially exhausted and cannot be relied upon over the next five years.Consequently, after having increased by over EC$30 million during 1977/78,domestic indebtedness is projected to decline by some EC$9.1 millionbetween 1979 and 1983.

132. External capital requirements from official sources are projectedto increase in 1979 commensurate with the increase in capital expendituresduring the year, given the projected decline in domestic borrowing inthat year. However, a high level of commitments of concessional externalassistance indicates that such a target is attainable. 1/ Official externalassistance is projected to reach EC$115.3 million (US$42.7 million) in1979, more than double the 1977 level of EC$54.6 million. The amount isexpected to increase slightly to EC$129.3 million (US$47.9 million) in 1983,as external official sources are projected to reduce their relative share infinancing public capital expenditures from 88% in 1979 to 69% in 1983. Othersources of external financing, both commercial and nonproject, are projectedto remain relatively minor.

1/ These commitments included L1O million of concessional project financingfrom the UK to both Dominica and St. Lucia on Independence. A similarcommitment to St. Vincent is anticipated.

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133. If the public sector investment programs and the policy recom-mendations are adopted and implemented in a timely fashion, economic per-formance would improve as projected, and it would appear to be possible toraise per capita private consumption moderately on the average. Even withthese efforts however, financial viability could most likely be achieved relativelysoon by St. Lucia, and within a five-year period by Antigua, and St. Kitts-Nevis. The remaining four countries -- Dominica, Grenada, Montserrat andSt. Vincent -- if they successfully carry out their programs, would alsohave made substantial progress in strengthening their economies. They wouldno longer have to rely on budgetary assistance and their public financeswould potentially be on a viable footing. Nevertheless, they would continueto need external capital assistance on concessional terms, and would requirean additional period of time to reach viability without reducing livingstandards.

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VII. REGIONAL COOPERATION

134. The recommendations for joint action in Sections II through IVplace emphasis on those services which would directly lead to productiveinvestment and other development expenditures. Provision of such servicesis essential if the institutional structure is to function effectively, ifthe public sector investment program is to be implemented, and if thepublic sector is to be able to provide a set of essential economic services.If the recommendations are accepted in their essentials, and if implementedin an efficient and timely manner, they could be expected to enhance thecountries' prospects of attaining their economic independence and financialviability goals. At the minimum, over the medium term they would improvethe implementing and economic management capability of Governments, layingthe groundwork for greater advances in the future.

135. To summarize, the common action services proposed above include:

i) agricultural extension services

ii) agricultural research and marketing

iii) industrial investment and export promotion

iv) tourism promotion

Also, the proposals for a sub-regional construction unit comprising anequipment pool, to undertake investment projects and for bulk-importing ofconstruction materials, deserve consideration and further study.

136. Other possible areas of cooperation not elaborated above, but whichreadily lend themselves to external support and are worthy of serious considera-tion by recipient countries and donor countries alike are:

A. Pool of Experts

137. Given the urgency with which the ECCM countries need to improvetheir absorptive capacity, it is recommended that initially the emphasis ofnew common services should be upon the establishment of a pool of expertsupon which all ECCM members could call as and when required, specifically forassistance directly related to development. The objectives of the pool wouldbe:

(i) to provide the operating skills needed in identifying, preparing,and executing development projects;

(ii) to provide management support services in such areas as generalbusiness advice, marketing, financial systems, specifically DFC's,and legal and institutional matters; and

(iii) to provide periodic advisory services in macroeconomic andsector planning.

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138. It is recommended that the general management of the pool becentralized as a unit within the ECCM Secretariat. Certain managementsupport functions could also be located along with central management anddeployed as required among sectors and islands. These might include a manage-ment advisory service (such as marketing and financial expertise) and aninstitutional advisory service (including expertise in legal, CARICOM, ECCMmatters and international procurement).

B. Inputs Revolving Fund for Export Promotion

139. To date, there have been a number of attempts to provide inputsto farmers. These include the UK scheme to provide fertilizer and otherinputs through the Windward Islands Banana Growers Association (WINBAN),and the Canadian Coconut Fertilizer Scheme in Dominica. Nevertheless, evenwith the existence of such schemes, the application of chemicals is stillinsufficient as is evident from the very low yields in most crops and therecent outbreak of banana leaf spot disease in Dominica.

140. It is proposed that a regional revolving fund be established for theECCM countries in order to finance the purchase of agricultural inputs, andto provide working capital for local export-oriented industries. The fundwould be based on an agricultural input scheme, established with an initialfertilizer grant to the sub-region. A cess on production would enable farmersto purchase the fertilizer, and the proceeds would constitute the fund.Access to the fund would be open to all growers' associations within theECCM and would consequently cover crops such as bananas, cotton, citrus,arrow root and spices. In addition, it is recommended that a technicalassistance package be attached to the revolving fund whereby growers' asso-ciations could obtain the service of experts to assist the sale of the inputsand the operation of a program to improve husbandry. It is expected that thesuccessful introduction of the fund would have a significant impact upon agri-cultural output and exports within the subregion and raise the incomes ofsmall farmers.

141. It is likewise proposed that the revolving fund be made availablefor utilization by local manufacturers for the financing of raw materialsfor processing for export, and for locally owned hotel operators who requireseasonal working capital. At the commencement of the scheme, it is expectedthat demand for the industrial and tourism financing will be less than thatfor agriculture. It is expected, however, that the demand would increase overtime.

142. It is estimated that a first tranche equivalent to US$5 million isrequired to establish the fund together with US$1 million equivalent of tech-nical assistance. Replenishments should be made when demand for funds sojustify. The fund should be established in and operated by the East CaribbeanCurrency Authority or the Caribbean Development Bank which should receive acommission for such services.

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C. Food Aid Program

143. It is proposed that the ECCM countries and the donor communityconsider the establishment of a special food aid program for the ECCM.A mechanism should be considered whereby the counterpart generated by thesale of food provided through the program would help finance local costs ofagricultural projects. It is proposed that the program be administered bythe ECCM Secretariat with the possible support of the Caribbean Food Corpora-tion. Food could be channeled through state trading corporations or marketingboards with the counterpart being deposited to the governments' accountseither in a commercial bank or with the National Development Banks. However,it is considered that at the time of agreement between the donor and thegovernment, it would be desirable only to define the type of project againstwhich the counterpart could be disbursed as, although the number of suitableagricultural projects is fairly large, their size, in most cases, is small.Disbursement of counterpart should only be effected on the agreement of theCaribbean Development Bank that the project was an integral part of thecountry's agricultural program. Such a scheme would minimize the administra-tive burden of donors and permit a fairly rapid disbursement of counterpartfunds. This proposed regional food aid program, together with the changes inagricultural policies suggested in paras 20 to 24, the regional inputsrevolving fund proposed in paras 139 to 142, and traditional forms ofagricultural project financing, would provide the main elements for an ECCMregional agricultural development program.

Strengthening of the East Caribbean Currenty Authority (ECCA)

144. The members of ECCA, with technical assistance from the Inter-national Monetary Fund, have been re-examining that institution's role inthe region with a view toward expanding the scope of its operations. Itis expected that this review will be finalized, and, where necessary, therequisite legislation enacted, during 1979. Depending upon the results ofsuch review, ECCA may well play an important technical and financial role--which should be supported by the international community--in further streng-thening the regional cooperation in economic matters among ECCM countries.

Common Services

145. The ECCM Secretariat, with the support of the external community,should be primarily responsible for the organization and implementation ofthese common services. If and when the Caribbean Common Services Institute(CCSI) is established, the ECCM Secretariat and the CCSI would have tocoordinate closely their activities, particularly in those fields in whichthe proposed common services--and others that ought to be started in thefuture--would also include other non-ECCM, Caribbean countries.

146. If the ECCM countries undertake, as expected, to implement thecommon services herein proposed, the external community should providesubstantial financial and technical support for this purpose. In theinitial stage, most of the cost of such services would have to be financedexternally, with the ECCM countries' contribution mainly limited to the

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detachment of local officials to serve as counterparts to the foreign expertsthat would be reqired for a proper functioning of the proposed services.After such initial stage--for example, by 1982--the ECCM countries shouldbe able to start contributing financial resources for the proposed services,with a view to reaching, by the mid-1980s, a situation in which externalsupport would be required only in the way technical assistance is "normally"provided elsewhere by bilateral and multilateral donors.

147. It is also proposed that the external community provide otherspecial support to regional ECCM cooperation schemes in the development ofthe region's productive sectors. In particular, the proposed food-aid program,linked to the implementation of agriculture projects, and the possibleestablishment of a revolving regional ECCM fund to finance imports offertilizers, pesticides, spare parts and other agricultural inputs, shouldreceive special attention. Likewise, the external support required forthe proposed regional programs in fields such as tourism and industrialand export promotion, is likely to include not only the common servicesreferred to above, but also substantial financial resources for investmentprojects in these fields. And continuing external support of investmentsin economic and social infrastructure--and, over the short run, for develop-mental current expenditures--will also be required.

Table 1: ECCM - BREAKDOWN OF PUBLIC SECTOR INVESTMENT

EC$ Million _ __%__

1979 1980 1981 1982 1983 1979-83 1979 1980 1981 1982 1983 1979-83

Productive Sectors 53.7 59.1 68.6 75.3 81.2 337.9 41.0 41.0 45.8 45.1 43.6 43.4

Agriculture 37.9 43.1 47.2 47.3 49.7 225.2 28.9 30.0 31.5 28.3 26.7 28.9

Industry 9.3 9.6 12.1 10.7 9.0 50.7 7.1 6.7 8.1 6.4 4.8 6.5

Tourism 6.5 6.4 9.3 17.3 22.5 62.0 5.0 4.4 6.2 10.4 12.1 8.0

Economic Infrastructure 51.7 53.0 46.0 40.6 42.2 233.5 39.4 36.8 30.7 24.3 22.7 30.0

Transportation 47.7 46.3 30.9 23.5 20.4 168.8 36.4 32.1 20.6 14.1 11.0 21.7

Power & Communications 4.0 6.7 15.1 17.1 21.8 64.7 3.1 4.6 10.1 10.2 11.7 8.3

Social 25.7 32.0 35.3 51.0 62.8 206.8 19.6 22.2 23.5 30.6 33.7 26.6

Health 2.6 3.7 4.9 8.2 14.0 33.4 2.0 2.6 3.3 4.9 7.5 4.3

Education 6.7 6.7 6.8 9.3 11.0 40.5 5.1 4.6 4.5 5.6 5.9 5.2

Water & Sewerage 4.6 6.8 6.5 7.2 12.1 37.2 3.5 4.7 4.3 4.3 6.5 4.8

Housing 3.3 4.5 5.8 10.4 12.3 36.3 2.5 3.1 3.9 6.2 6.6 4.7

Other (including 8.5 10.3 11.3 15.9 13.4 59.4 6.5 7.1 7.5 9.5 7.2 7.6non-projectized)

TOTAL 131.1 144.1 149.9 166.9 186.2 778.2 100.0 100.0 100.0 100.0 100.0 100.0

Source: IBRD Estimates.

afTable 2: ECCM - Actual & Projected Financing of Public Sector Investment, 1977-83-

(EC$ million)

Actual Estimated Projected1977 1978 1979 1980 1981 1982 1983

Uses 81.8 100.9 137.6 151.6 157.8 174.9 195.4

Public Sector Capital Expenditures 75.4 94.9 131.1 144.1 149.9 166.8 186.2Central GovernmentRest of Public Sector

External Amortization 6.4 6.0 6.5 7.5 7.9 8.1 9.2

Sources 81.8 100.9 137.6 151.6 157.8 174.9 195.4

Domestic Sources 31.8 17.5 17.5 27.7 37.4 50.0 61.7Public Sector Savings 14.4 1.9 15.0 25.2 39.4 46.3 61.2

Central GovernmentRest of Public Sector

Capital Revenue 0.7 1.5 1.3 3.3 3.2 3.4 5.1Net Domestic Borrowing 16.7 14.1 1.2 -0.8 -5.2 0.3 -4.6

External Sources 50.0 83.4 120.1 123.9 120.4 124.9 133.7Project-Related Official Financing 54.6 77.8 115.3 116.5 113.1 118.8 129.3

Ongoing ProjectsNew Projects

Other External Financing -4.6 5.6 4.8 7.4 7.3 6.1 4.4

Capital Expenditures as % of GDP 9.9 11.0 13.3 12.9 11.9 11.7 11.5

Public Sector Saving as % of 19.1 2.0 11.4 17.5 26.3 27.8 32.9Capital Expenditures

Public Sector Saving as % of GDP 1.9 0.2 1.5 2.3 3.1 3.2 3.8

a/ Fiscal Years

Source: IBRD Estimates.