ment that the U.S. Government has made to this program over its first 2 years and the level of activity that has prevailed among the agencies that are represented here.

I would simply single out two of them, although a lot more of them have been very active and you will hear more about that this morning, but truly, the Commerce Department, through its commercial service activities, has done a great deal in the Basin over the last 2 years, and the Agency for International Development activities, coupled with State Department activities, has truly been outstanding.

There has been a magnificent commitment on the part of these agencies in that area of the world over the last couple of years and a great deal accomplished. They will delineate all that with much more specificity in their own testimony, but I must say that, coming in without having any biases from personal involvement, that I am truly impressed by what has transpired.

Now I would like to just mention a few of the specific programs directly, Mr. Chairman. One, of course, is the textile program that was announced by the President this last week in his trip to Grenada. That is as important a development, perhaps, as any that we have had in the region over the last 2 years.

I was personally involved in that decisionmaking process and can say that I am pleased with the program that was announced. Our opinion is that that will add substantially to the economic growth of that region in the next decade or two and should be considered a very major development in the CBI Program.

There was also an initiative announced by Vice President Bush when he was in Miami, along with me and others to meet with leaders of the Caribbean a couple of months ago.

This initiative gives those particular nations, the CBI nations, an opportunity to participate in Government procurement activities here in the United States without having to join the GATT government procurement code. That will certainly be of some help to them and that is encouraging.

Another development, of course, is the so-called 936 program in Puerto Rico, where some of the funding from that activity will be made available in investments throughout CBI. A substantial sum of money is involved in that program. That is, in my judgment, a major step forward and certainly ought to facilitate substantial growth in investment in the CBI in the near future.

Those are all new developments on the economic scene for which the dividends in economic growth will be received over the next few years. This is all prospective, rather than retrospective.

The President announced a significant scholarship program when he was in Grenada. That's important, too, because education is a key factor in the economic development anywhere, so I consider that important.

We also are appointing an ombudsman that will make it easier for the CBI countries to relate to programs here in the United States. That will be in the Commerce Department, and I think Under Secretary Smart may have more to say about that later.

The program on the improvement of the adminstration of justice in the Caribbean region, adding some stability to the region, is im

portant in terms of facilitating or improving the investment climate. So we think that will be a helpful program.

Our people, within USTR and elsewhere in the Government, have been working on bilateral investment treaties which would also facilitate American investment there. There have been a couple of them done now in Haiti and Panama, and we hope there will be more in the future.

There will be a Caribbean Basin business promotion council established very soon. That should be of some help in the region, to bring greater private sector coordination and involvement.

The convention business should improve somewhat by the benefits of tax information exchange agreements, where Treasury has had a lot of involvement. We have one of those that has been grandfathered in, in essence, from Jamaica and a new one in Barbados. We hope there will be more in the future, because we think tourism and conventions offer a lot of economic potential to the region, as Mr. Schulze indicated earlier, if they would just take advantage of those opportunities. And there has just been a lot of business and industry promotion activity led by Commerce and others in the region.

So I would say that there has been a swirl of very positive, productive activity over the last couple of years.

Now I would like to spend just a minute, Mr. Chairman, if I may, talking about a few things that they could do and a few things we could do to really sustain the momentum and, in fact, expand it. And I will do this very quickly.

One is simply for the CBI countries to take advantage of the opportunities that are available to them. They ought to be doing bilateral investment treaties with us, and they ought to be doing tax information exchange agreements with us. And we should continue to encourage that.

They have got to establish an investment climate that will attract dollars, capital, from here and elsewhere. If they do not, this program is not going to achieve the growth that is anticipated and intended. It is as simple as that.

They are going to have to do some things on their own, too, that in many instances they have not yet done. And I am talking now about basic economic policies in individual countries.

One does not attract a lot of investment interest if interest rates are in the 14- to 20-percent range, as they are in some of these countries. It does not help to have high inflation rates in these countries which stifle, and dissuade, and discourage investment. And it does not help to have high taxes.

They also have to have an improved infrastructure. AID and others are working on that, but clearly companies are not going to make major investments in the Caribbean if there are important shortcomings in infrastructure in that area.

They are also going to have to do some joining together, in a variety of ways, to achieve economies of scale. One of the disadvantages that many of these countries have is that they are relatively small, in terms of employment that is available to an investor, the domestic markets that are available to that investor in a particular country, and just the overall economic ambience that is available in terms of size and scale. And if there can be some joining togeth

er of some of these countries or companies in the Caribbean to remove part of that disadvantage, that would be helpful.

And that is something they can do on their own. They do not have to have the help of the U.S. Government to do that.

They have got to strengthen their private sectors, too. There is still a great deal of Government infringement in the economies in these nations and to the degree they can strengthen their own private sectors, that would be helpful.

There is also a great deal of bureaucratic inertia involved in this process in many of these nations, and a lot of red tape. And if some of that can be removed, that will be helpful as well.

Investment is a competitive business, internationally, and I believe I can speak from a lot of personal knowledge in that respect, having come from the Chicago area, which is a very, very large business community here in the United States, and having listened to investment pitches from Caribbean nations and Latin America. People do not have to put their money in the Caribbean Basin. They can put it in a lot of other places around the world, including the United States. And if investment capital is to be attracted to the Caribbean, the environment has to be there to entice it to come there, rather than go elsewhere.

What can we do? Mr. Chairman, we the United States, whether we are talking about American business or the Government—I would quickly enunciate three or four things and then you can embellish on those with me or with other witnesses this morning.

One, it seems to me, is to stabilize the benefits of the CBI Program. There are always threats, of course, to change this program and some changes may be appropriate. But the more stability we can provide in the program benefits, it seems to me, the better because those are apprehensive governments with which we are dealing in the CBI and to the degree that we can provide a sense of calm and a sense of security-in terms of what we are doing for them and with them-that would be helpful.

With respect to specific programs, clearly we have caused them substantial economic damage with our own sugar program. That is not likely to change overnight because the U.S. Congress just passed an extension of our sugar program in December, after a great deal of debate and consternation on the part of all of you in dealing with what is a very difficult issue. But suffice it to say that that program did not do any favors for the Caribbean.

And I must also say that we can be joined in that respect by the European Community's sugar programs, which have probably done even more damage to the Caribbean Basin than our own sugar programs have.

Beyond that, it seems to me Mr. Chairman, we have got to retain our enthusiasm for the CBI. And we have to hope that the countries within the CBI also retain their enthusiasm for it. One of the benefits of a hearing like this is that if there has been any drop off in that level of enthusiasm, perhaps we can restore some of it and keep our business community active and vigorous and keep the governmental sector-here and elsewhere also-activated and vigorous. So that is important.

And finally, it seems to me, we ought to keep it all in perspective and give it a long-term judgment. I thought one of the best articles

that I have seen recently, in that respect Mr. Chairman, was done by Dr. Jerry Harr, who is at Florida International University. And this appeared in Miami Today recently.

It is entitled, "The CBI Was Created as a Catalyst, Not a Panacea." It is just an extremely well done evaluation of the first 2 years of the CBI. And if you wish, Mr. Chairman, you might want to include that in the record of this hearing, because it is a superb piece of work.

Chairman PICKLE. We will include that in the record. [The information follows:]

THE CBI WAS Created as a Catalyst, Not A PANACEA

To assert that the Caribbean Basin Initiative (CBI) has fallen short in attracting US investors is to misunderstand both the CBI and foreign investment decisionmaking. Yet that is precisely what Hugh Hart, Jamaica's Minister of Mining, Energy and Tourism, does (Miami Today, January 30).

From the beginning, the CBI has suffered at the hands of both its proponents and opponents. The former, in their unbridled optimism and fervor to unleash the "Magic of the Marketplace" throughout the Caribbean Basin, clearly oversold the CBI. Many created the impression that the CBI would transform the Basin into a tropical Silicon Valley, with two BMWs in every driveway in St. Lucia. On the other hand, leftist opponents of the CBI saw the initiative as an imperialist scheme to tighten US economic and political hegemony over the region. Protectionist opponents regarded the CBI as a serious threat to US industry and labor.

The result has been increasing frustration and disillusionment on the part of CBI beneficiary countries. Minister Hart's remarks are typical in this regard.

An honest appraisal of the CBI must center on the act which created the initiative, Public Law 98-67 of August 5, 1983. The purpose is clearly stated in the preamble: "To promote economic revitalization and facilitate expansion of economic opportunities in the Caribbean Basin region." Note the words "promote" and "facilitate", not "achieve" and "create". The language is explicit: the CBI is a catalytic and complementary vehicle for economic renewal and growth. It was never intended as a Marshall Plan for the region.

The second misconception, that the CBI would attract significant foreign investment to the region, also needs to be dispelled. The hard, cold fact is that most US multinational corporations that do invest in the Third World prefer countries where the size of market, skills of the work force, quality and extent of infrastructure and level of political stability are all superior to those of the CBI countries. Moreover, regardless of the size firm or the type business, investment decision-making is determined principally by economic and financial factors-most importantly, projected rate of return on investment and discounted costs of financing.

Simply stated, the CBI is but one incentive-and by no means the most important one-for attracting foreign direct investment. Even in cases where it is among the most important incentives (e.g., agribusiness), it is not crucial. Investment decisions are made based upon a project's economic viability and profit potential: If it can't "fly" without CBI benefits, it most likely will be unable to do so even with them. A truly fair assessment of CBI accomplishments to date, medium-term achievements and long-term results must heavily consider the following factors:

The CBI is but one part of the regional development effort. The initial $350 million supplemental aid appropriation and trade benefit package have been followed by more than $3 billion in development assistance and economic support funds. Additionally, US contributions to the World Bank and its affiliates, the Inter-American Development Bank and the United National Development Program, to name but a few agencies, indicate a genuine commitment to development of the region. Other related programs such as production sharing (Tariff Schedules of the U.S. 806.30/ 807.00)—a highly successful initiative implemented long before the CBI-and the Lome III Convention, a large scale trade and aid program of the European Economic Community, have had major impacts as well.

Economic development, not the fortunes or misfortunes of the CBI, per se, should be the main concern of the public and private sectors. While it is lamentable that Congress excluded duty-free treatment of many principal exports of the Basin (e.g., textiles, apparel, footwear, handbags, petroleum and oil by-products), exemptions were extended to a myriad of products currently produced in the region (previously dutiable at 25 to 75 per cent). More importantly, however, the Basin countries are

increasing the volume, quality and productivity of many of their dutiable products, such as textiles and apparel. What difference does it make, then, if the CBI countries are gaining competitive advantage in labor-intensive and growing export industries where the tariffs may be high but the profits are higher than in other businesses? One must bear in mind, however, that much of the CBI development aid goes to projects and programs which assist the local private sector in the areas of marketing, productivity, financing, and general management while many public projects seek to improve the infrastructure necessary for the private sector to operate. Consequently, by helping all business sectors, the indirect benefits of CBI may well exceed the direct benefits.

It is highly unlikely that the US government will take significant new measures to support Caribbean Basin economies. Given the realities of the Gramm-RudmanHollings balanced budget amendment, a $150 billion trade deficit in 1985 and growing protectionist sentiment in Congress, it is foolish to think the Administration will ask for further trade concessions (e.g., petroleum by-products, sugar, apparel), more aid money, investment tax credits, or targeted tax sparing.

CBI beneficiary countries must take the greatest responsibility for the development of their economies. The United States is not responsible for the misguided and harmful fiscal, monetary, tax and regulatory policies which many of the region's countries have followed. The problems and consequences-waste, inefficiency, corruption, capital flight, emigration-cannot be remedied overnight. The fact remains, however, that if the backbone of indigenous economic growth, the local private sector, does not have faith in its own economy (and demonstrate it through reinvestment, not decapitalization), how can one expect foreign investors to come in? It is up to the CBI countries to create the most attractive investment environment they can for all investors, local (above all) as well as foreign. Minister Hart need look no further than his own nation, Jamaica, where Ault, Inc., a Minneapolis firm, began assembling electronic parts in 1982 but left for South Korea after parts, tools and supplies were consistently held at customs and bureaucratic red tape became too timeconsuming and costly to endure.

It is ludicrous to make any definitive judgement at this time as to the success or failure of the CBI. Anyone who possesses a basic understanding of investment cycles knows that it takes 3 to 5 years, minimum, for an investment project to be planned, approved, implemented and sustained long enough to have a chance to become profitable. The CBI was made a 12-year program for that very reason. Since final regulations for the CBI were not issued until December, 1984, the program is only a little more than a year old, at least as far as potential foreign direct investment is concerned.

The CBI, then, is a noble effort to help beneficiary countries help themselves. Even in its infancy, it has already led to 285 new investment projects worth $208 million and has created more than 36,000 jobs in the region. With all its shortcomings-specifically the exclusion of the key exports from duty-free treatment and the absence of tax incentives-the CBI has paved the way for entrepreneurs, mediumsized firms and imaginative business people to engage in investment, trade and licensing activities for literally hundreds of products.

From electronic assembly in the Bahamas, citrus concentrate processing in Belize to furniture manufacturing in Costa Rica, the CBI is facilitating a diversification of the region's economies. Critics point to the 16 per cent decline in U.S.-Caribbean trade during the first half of 1985 compared with the same period in 1984 as "proof" that the CBI is not working. Since virtually all the decline can be attributed to three traditional products (petroleum, bauxite and sugar), the trade picture merely confirms the need to widen the scope of economics activity. Furthermore, the same trade reporting data reveal significant gains in other exports, dutiable as well as duty-free: textiles, apparel, fresh fruits, chemicals, vegetables and furniture.

As for Minister Hart's notion of the essentiality of both the US investor and the US government, noted Jamaican economist Ransford Palmer concludes in a recent book on Caribbean economic development: “The ultimate success of the CBI must be judged by the extent to which it encourages the development of an indigenous engine of growth in the region, since it is ostensibly designed to promote self-reliance." In stimulating greater US-Caribbean trade, the CBI will also make the region's economies more open. "But becoming more open does not necessarily mean becoming more dependent on the US if, in the process of becoming more open, Caribbean economies diversify the structure of their exports and increase the share of their exports to countries other than the United States."

When the time comes to make a definitive evaluation of the CBI, both supporters and critics of the initiative should look beyond simple trade statistics and focus on the structural and long-term changes and adjustments to which Mr. Palmer refers