In economics, there are two terms that are of vital importance to the economic and social health of a nation: economic growth and economic development. The two terms have different meanings but work in parallel. This parallelism depends to a great deal on the abilities of the authorities to establish public and economic policies that benefit their constituencies and fulfill the population’s expectations.

Economic growth is a sustained increase in macroeconomic variables, whether an increase in real gross domestic product, in employment levels or in effective investment plans that increase the nation’s physical capital. The magnitude of the growth is closely tied to the productivity of the economy, which in turn depends on four basic factors: human capital, physical capital, natural resources and technology.

Economic development, on the other hand, is shown by the ability to bring about a sustained increase in the population’s standard of living and quality of life. This is tied to economic growth because in the measure that a nation experiences economic growth, it should also experience an increase in levels of education, health, literacy, etc. In the end, it is the responsibility of the state, the governmental entities charged with establishing public policy, to guarantee a higher standard of living and quality of life by distributing the income that results from the growth.

To understand how these issues have unfolded in the Caribbean region, we must consider certain historical, social and economic characteristics. The Caribbean region as a whole has experienced, at some point in its history, a colonial relationship (in many cases, the colonial political relationship no longer exists, but the economic dependence persists).

The nations of the Caribbean, since their colonization, have suffered from exploitation — unchecked extraction of natural resources and the establishment of slavery — and dependence on their colonizers. This is important because it establishes economic behavior for the region in terms of growth.

First, the wealth of these nations was sent exclusively to the colonizers, preventing the locals from accumulating wealth. Second, another consequence was the importation of the majority of consumer goods, which mostly came from the colonizing country. Third, this kept the residents of the region in poverty for a long time. Fourth, given the above and the lack of capital, investment in physical capital by the locals for future production was limited. This largely prevented economic growth.

Although many Caribbean nations have changed their economic outlook today, there still persists a marked sensitivity to the economic cycles of the developed countries. When a recession occurs, such as in the past decade, there is an obvious wave of unemployment in the Caribbean, in large part due to the decrease in foreign and local investment. This situation leads to a significant increase in public spending to stabilize the financial situation, which unleashes greater debt. Many of the Caribbean countries have foreign debts and many of their constituents live below the poverty line. Clearly, the debt and poverty levels do not allow for the increased savings rate that is needed for future investment (investment in physical capital for production). Additionally, for many of these countries, tourism is the main economic sector and during a recession it always experiences decreased demand for services.

Another important characteristic of the economy of the region is the outflow of human capital. This flow of human capital negatively affects local economic planning. It represents an additional blow to the possibilities for growth due to the sensitivity to economic cycles, given the reduction in remittances sent home by emigrants in times of recession.

Undoubtedly, the region must improve its capacity for local investment, whether public or private, and sustain it through an increase in savings rates, thus achieving greater economic growth.

Economic development, meanwhile, depends on the redistributive ability of the countries through their governmental policies to guarantee greater equality and to improve social programs. Clearly, public finances, which are vital for establishing development programs, must be kept under control.


Author: José Ramón Rey
Published: March 14, 2012.

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