Can Caribbean education attract knowledge-based foreign direct investment?

Author:Griffith, Winston H.
Position:Caribbean education to determine, skilled workers and to make the region more attractive to foreign direct investment

Institutionalists have long recognized the importance of education to a country's development. Thorstein Veblen argued that the immaterial equipment of a nation might be the most significant category of its assets and that its embodiment in workers makes a nation's tangible assets useful. (1) The immaterial equipment expands through education, which increases the nation's "common stock of intangible, technological equipment," and the history of the growth and use of this stock constitutes "the history of the development of material civilization" ([1919] 1990, 328). Clarence Ayres ([1944] 1962, xxi) said "the most important factor in the economic life of any people is the educational level... of the community." And in his monumental study of Asia, Gunnar Myrdal (1972, 378) wrote, "[E]ducational policy must have the central purpose of directing and apportioning educational efforts so as to give a maximum impetus to national development." Institutionalists have also recognized that the content and function of education change as society evolves. Veblen said that "the knowledge acquired under the priestly teachers of the primitive community was a knowledge of ritual and ceremonial.... What was learned was how to make oneself indispensable to the powers [preternatural agents], and so to put oneself in a position to ask, or even to require, their intercession in the course of events or their abstention from interference in any given enterprise" ([1899] 1953, 236). This is the knowledge of those "whose habits of thought are not shaped by contact with modern industry" (237). As society develops, however, exoteric knowledge, "comprising chiefly knowledge of industrial processes and of natural phenomena which [are] habitually turned to account for the material purposes of life," assumes greater importance.

Education can perform a "technological" and a "ceremonial" function. An example of a "technological" function of education is when education helps to promote the industrial development of a country. Ayres ([1944] 1962, xxiii) pointed to the "technological" function of education when he argued that the Meiji revolution in Japan and the Bolshevik revolution in Russia not only transformed the power structures of those countries but, more importantly, they also effected an educational revolution that made industrialization in those countries possible. If it slows down a country's structural transformation, education performs a "ceremonial" function. Veblen, for example, vilipended the curricula at institutions of higher learning in his time that, he asserted, tended "to lower rather than heighten the industrial efficiency of the community" ([1899] 1953, 246-247). And, in a provocative study, Martin J. Wiener attributed Britain's industrial decline to "ceremonial" elements rooted in Victorian values, including Victorian values surrounding the educational system (1981). (2)

This article looks at Caribbean education to determine whether it is turning out an adequate pool of knowledge-skilled workers to make the region more attractive to foreign direct investment (FDI). It is said that Caribbean countries must have inflows of FDI to help reduce their relatively high levels of unemployment, but their educational systems are not producing in adequate quantities the kinds of human skills that have become the principal inputs in production processes. (3) The principal reason for the mismatch between the output of the educational system and the new knowledge-skill requirements of production processes is the "ceremonial" function of Caribbean education that tends to produce a relatively large number of students pursuing career paths to which society attaches much status but a small amount of knowledge skills for which foreign investors have a high demand. (4)

Although a large pool of knowledge skills is increasingly becoming important to countries trying to attract FDI, it is not being suggested that such a pool is a sufficient condition to attract FDI to the Caribbean. The Caribbean must have, in addition to other elements, the legal mechanisms to protect foreign capital, institutions that facilitate the repatriation of capital, and good transportation and communications systems. No single institution, or set of institutions for that matter, may therefore be considered a sufficient condition to ensure a sustained flow of FDI into the Caribbean. Since, however, knowledge capital has become the main resource in most production processes in the more developed countries and since Caribbean countries look to the more developed countries as their main sources of inflows of foreign direct manufacturing investment and high-technology services investment, the article argues that Caribbean countries should try to increase their pool of knowledge-skilled workers.

The Need for Foreign Direct Investment

One reason Caribbean governments say the region must attract FDI to provide employment opportunities for the region's surplus labor is that the level of savings in the region is low. Sir Arthur Lewis (1950, 38) said, "Foreign capital is needed [in the British Caribbean] because industrialization is ... quite beyond the resources of the islands," suggesting that regional saving was too low. Fifty years later, regional saving is still low. The Caribbean Community Secretariat (2000, 219) said that "the savings-investment gap for the Community [countries of the Caribbean Community] based on the actual rate of gross domestic savings and investment has been estimated at 9 percent of Gross Domestic Product (GDP). If the desired rate of gross domestic investment estimated at 35 percent of GDP is taken into account, this gap would be larger." Saving as a proportion of GDP is on average less than 20 percent in Caribbean countries (Caribbean Community Secretariat 2000, 309), well below the required level of investment expenditure.

Table 1 shows that saving as a proportion of GDP in most Caribbean countries declined on average during the 1990s. No Caribbean country had a gross domestic savings rate of GDP of 30 percent or higher in 1997. Guyana, whose GDP per capita has been one of the lowest in the Caribbean for some time, consistently had a higher saving rate than most countries during the period. For the region as a whole, the trend in the saving rate was downward.

Company savings are usually the largest component of total private savings, but, as the Commonwealth Caribbean Regional Secretariat (1972, 19) said, the saving rate of indigenous enterprises-primarily agro-commercial enterprises-as a percentage of national income is very small. The small proportion of indigenous company savings may be partly due to the region's colonial past, which has resulted in foreign-owned enterprises dominating directly or indirectly the most important sectors of the regional economy. Foreign-owned enterprises tend to repatriate dividends, interest payments, profits, and royalties to their home countries, thus reducing the amount of domestic savings available for domestic investment. In addition, regional capital markets, whose development was never promoted in colonial times, remain underdeveloped and are an insignificant source of capital for investment purposes. Furthermore, considering the low level of regional GDP, the saving of private individuals is low. Government is a potential saver, but its saving is low because workers' incomes are generally low. Moreover, since corporate tax rates on indigenous enterprises-most foreign-owned enterprises are usually exempt from income tax-are relatively high, there is not much room for governments to raise marginal tax rates. And even if they could increase their tax revenues, Caribbean governments might have a high propensity to spend out of increased tax revenues and would not effect much saving. As in colonial times, Caribbean countries continue to save significantly less than that required for domestic investment.

Countries can overcome the savings gap through inflows of international bank loans, portfolio investment, official development assistance (ODA), and FDI. International bank loans and portfolio investment usually avoid the Caribbean if for no other reason than that capital markets are small and underdeveloped. Official development assistance can help Caribbean countries to overcome the savings gap, and Caribbean countries have benefited from this source of capital. However, the end of the Cold War, the collapse of the Soviet Union, the emergence of a unipolar world, and the triumph of market economics and liberal democracy over most of the globe have seen a decline in official development assistance to less developed countries.

Table 2 shows that official development assistance per capita received by all less developed regions and as a percentage of their GDP fell between 1990 and 2001, with Sub-Saharan Africa and the Arab States experiencing some of the steepest declines (United Nations Development Programme 2003). Only two G-7 countries increased the amount of aid disbursed in 1999 compared with that disbursed in 1990, and only one increased the amount of aid as a percentage of its gross national product (GNP) in 1999 compared with 1990 (United Nations Development Programme 1992, 2001). Moreover, as they try to promote growth and development, less developed countries are being urged to rely more on trade than on aid. Therefore, despite the exhortations to the rich countries since September 11, 2001, to increase their foreign aid budgets, the most likely result will be the message that Michel Camdessus gave to African countries: "We won't be able to find in our pockets a big sum of money" (Hawkins and Lamont 2002). The end of the Cold War has enabled industrial countries to effect savings in their foreign aid budgets and they are not reallocating these savings to foreign aid for less developed countries.

Official development assistance does not come without costs to the recipient country. Aid...

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