In small open economies, with the advent of a recession, a drop in foreign exchange earnings, it is impossible immediately to export new goods/services or replace imports by local production – diversify. Still, diversification of an economy in the short to medium term will not depend in general on new innovations, exploitation of intellectual property or R&D, for global competitiveness.
We in Trinidad and Tobago are indeed exporting from on-shore some manufactured goods mainly to CARICOM, a protected market. We know that these manufacturers should enlarge their market extra regionally. This depends on trade agreements and improving local manufacturing via the new and advanced technologies, enlarging distribution trains, and ensuring that the labour force understands the commitment to produce reliably as required by the global market. We cannot afford to say, let them take their market and go!
Another string to our short term diversification thrust is to use our comparative advantages. For example, many of the large economies find it more economical to outsource certain services; call centres, financial services, back office operations (BHP has just brought its accounting to Trinidad and Tobago), data centres, off shore medical, for which the skills required are now traditional. The outsourcing is simply because skills in the out-sourcing countries can be better rewarded doing other things at which we are not as efficient or competitive.
Competition among the purveyors of comparative advantage then will not be based on high skills or innovation, but on incentives given by the country looking for such investments and with cheaper labour costs. In Trinidad and Tobago there have been moves in this direction for many years by, say, the provision of the Tamana Park, Tobago’s Cove, the Free Zone and the attempts to encourage foreign players to enter our international financial centre – even by visits to China.
We are also addressing the other aspects of doing business in Trinidad and Tobago; trade agreements, the time to establish a business locally, telecommunications, improving productivity and in particular the reduction of crime.
The export thrust in the diversification drive is simply to earn the foreign exchange required to import the things which we need and jobs. Hence diversification can indeed include the local manufacture/ production of the things we import.
However, being a small open economy it is also important that we be globally competitive in their production since the opportunity also exists to import them. Our competitiveness re import substitution can be enhanced by tariff barriers, import taxes, sales taxes (regional sugar producers are asking for this protection of the regional market as the EU quotas come to an end) and even devaluation of the currency.
One area which immediately springs to mind is food – we import some TT$4-5 billion /year. Though we may not become self-sufficient in food, given our current tastes, we can become competitive enough to export certain food products. The technologies required exist, even the new flexible manufacturing technologies. Hence some support has to be provided to the budding entrepreneurs in designing and equipping their production plants as they up-scale to provide for both the local and export markets.
As other countries have done, it will be necessary to establish a manufacturing centre of excellence to provide this support, to bring the small production systems into world class facilities. Another area is the export of Trinidad and Tobago’s unique indigenous products – steel pan, PHI, music and derivatives of our fine cocoa.
In the short term then, the key to diversifying the economy is incentives, both to the local and foreign investor: Even public/private partnerships as was done in Chile to establish the highly successful salmon farms. Many of the existing local activities are small scale; hence government’s involvement could in the first instance be about upscaling. However, care must be taken to avoid private sector capture of rents from government with little impact on diversification.
One must acknowledge that many of these short term opportunities described in the above have been on the table in Trinidad and Tobago for many years, one political regime after another. However these thrusts have taken a back seat to the continued success of the main export staple, oil and gas, despite its boom-bust cycles. However today with the depletion in sight of these resources, the other options may now be taken seriously.
Mary K King