Dear Editor,
In the past weeks there has been a renaissance in terms of discussions on economic growth involving prominent personalities at the highest levels of office in the region. The round table discussions by the Economic Commis-sion for Latin America and the Caribbean (ECLAC) at the National Conference Centre and most importantly, the World Bank, the Inter-American Development Bank (IDB) and the Caribbean Development Bank (CDB) at the recently concluded CDB’s Governors Meeting in the Cayman Islands, agreed on a continuous forum to discuss economic growth in the region. This is not the first time this burning issue has become the top priority on the region’s agenda, but hopefully we can move beyond it being a talk shop with the identification of the appropriate levers which will not only ignite but sustain long periods of economic growth.
The World Bank is the global institution that was set up to address post-war reconstruction initially. In a knowledge-building exercise a high level Growth Commission in 2008 produced ‘Growth Report: Strategies for Sus-tained and Inclusive Devel-opment’ – a very insightful document. It took 1400 years for the Western world to double its income by the 18th century. This same process took 70 years in the 19th century and only 35 years in the 20th century. This intriguing trend, the report pointed out, has led us to recognize that continuous structural change prompted by industrialization, technological innovation, industrial upgrading and diversification is an essential feature of rapid and sustained growth and a high standard of living. Unfortunately, for most countries in the Caribbean, long periods of sustained growth have remained an elusive quest.
Most income increases in the Caribbean came from windfalls in tourism or commodity exports, whose fortunes fluctuate according to the vagaries of the global environment. The undiversified nature of the economies followed by low productivity and high cost factors are today reaping the terrible dividend of low growth and high external debt. What is most ironic is that this region boasts economists who had in the past excelled on developmental issues. Arthur Lewis, a 1979 Nobel Laureate in growth theory for his seminal work ‘Economic Develop-ment with Unlimited Supplies of Labour’ (1954) is one such individual. Lewis’s theoretical model was applied in its fullest version in Taiwan, under a series of development plans and strategies that helped transform an agrarian underdeveloped economy to one of the most dynamic newly industrialised economies in the world. Empiricists continue to utilize Lewis’s theoretical construct in research, the most recent being ‘Growing like China’ by Songetal in the 2011 American Economic Review. While not a proponent of the illusionary best practices, however, there are important lessons for policy-makers from these case studies. Caricom is among the earliest of the integration movements and had set itself an ambitious time-frame for the realizing of the Single Market and Economy by 2015. However, it was unable to find a proper place in the global supply chain. Today, Asia, a late-comer in the integration process, is challenging NAFTA and Europe as a reliable top-class competitor. Today technological advances have led to declines in transportation and communication costs that have allowed fragmentation of the production process. This stretches across a number of countries that specialize in a particular stage of production with goods in process crossing borders several times before reaching the final destination. True, the lack of land borders is a constraint to Caricom trade, but innovative methods such as clusters and industrial parks have been tried successfully elsewhere to circumvent infrastructural deficiencies and geography. A cluster’s boundaries are defined by linkages and complementaries across industries and institutions that are most important to production (Porter 1998). Today’s economic map of the world is dominated by clusters.
Further, the fusion of computer technology with telecommunication makes it possible for firms to relocate an ever widening range of operations and functions to cost competitive labour, assets and infrastructure zones. Geography and borders are no longer big obstacles. Guyana’s link to Brazil can never be underestimated in terms of future economic prospects.
Small size and small industries were a major disadvantage under comparative advantage theory. However, Paul Krugman’s Imperfect Competition and Integrated Market-Trade model showed that a larger market allows for special and differential products since no one company or country can satisfy a global market.
There is economic space for the small but efficient. Chile next door to two large agricultural giants in Latin America bears adequate testimony to this fact. An intriguing case study on the rise of the Chile grape and wine industry by Jose Miguel Benevento (2002) showed how a small sector adopted the right technology which is constantly being upgraded, and is now producing grapes and wines at the highest end of the value chain. Most notably Chilean wines out-classed the long established Californian, French and Italian wines on the shelves of the supermarkets in metropolitan cities; technological innovation and the communication of knowledge have been the fundamentals in the development of the Chilean wine and grape industry.
Economic growth has undergone a most rigorous theoretical empirical analysis since Nobel Laureate Robert Solow’s seminal work A contribution to the theory of Economic Growth in 1956. Romer’s endogenous growth model represented an important departure for technological progress by introducing the search for new ideas in the Research and Development (R&D) process, increasing the stock of knowledge which will accelerate per capita income growth. Barro and Lee showed how every level of education raised the return on the investment by a return to a broad class of physical and human capital which was non-diminishing in character. This represented a move away from the straitjacket of perfect competition and introduced imperfect competition and R&D in the new growth model.
Finally it is heartening to see the World Bank move away from its past slogan ‘The private sector as the engine of growth,’ and that a broader set of economic actors in the development process have been encompassed. Guyanese need not be convinced and do not need any proof of private sector performance as that engine. The inability of the private sector to find one participant to attend the ‘Break Point’ Olympics in London next month is just one example. The 13 successful economies that were able to grow at over 7% in the last 25 years were harnessed by a combination of state activism, and private sector and non-government (trade union, etc) initiatives with good governance. Service is now the fastest growing export sector, especially in some developing countries.
The WTO estimated cross-border trade in services at US$3.3 trillion in 2007 is expected to double in less than a decade, with developing countries taking the lead. The Caribbean’s share is anybody‘s guess.
In conclusion, this note is not about the replication of models or the application of best practices, but the need for appropriate instruments and policies which will loosen the binding constraints to high levels of growth. Countries that grew the fastest are not those that depended on factor endowment or rich natural resources, but those which found a niche in the global supply chain.
Yours faithfully,
Rajendra Rampersaud
