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Date: 31 Aug, 2009
Source: By Prof. Avinash D. Persaud

I have a repetitive nightmare. I am sure some of you have the same nightmare too. It is a vision of what could all too easily happen to our beloved Caribbean if we blithely saunter down the low road; if we expect others to deliver our future; if we let drugs take control; if we squander our natural resources and if we turn the asset of our racial and cultural diversities into a liability.There are, though, other paths the region could take.

To find the high road, we need to envision what success looks like. If we don’t know what success looks like, we will not know whether we are headed towards it or away from it. To help us envision success, I would like to invite you to step into my Time Machine.

115 years ago, Heinnman published a novella called “The Time Machine” by H. G. Wells. Youngsters in the audience have no doubt seen the film. The protagonist travels forward 800,000 years. We do not have to travel that far into the future to find a time when the GDP per capital of our islands, for want of a better indicator, could be amongst the highest in tkhe world. What would that future look like when we step off the Time Machine?

Will we see that our children’s children have become wealthy by….growing bananas? Will we see that they have become wealthy by making automobiles?  Did they get rich weaving baskets? Did they get rich from donors? External consultants? Remittances? You know the answers to these questions.

There are not many credible paths to success of small islands like ours. Equally, there is not one path, and there is a role for hydroponics, specialty rums and sugars, bespoke furniture and clothing. But the main avenue of success, is one where our childrens’ children arrive at the top table by virtue of world-class education and skills, by exporting knowledge and creative services to the world, and doing so from a place that in its natural, built and social environment is the envy of the rest of the world.

Let me repeat that in a different way.

Accepting more qualifications, with less quality; paying high wages for low productivity; resisting trade in high-wage service industries so that we can favour trade in low wage sectors and; hoping that our natural environment will magically look after itself, is walking away from success not towards it.

Our long-term economic future lies with exporting expensive, weightless products, that have a small environmental footprint, not products where export success depends on our manual labour being cheaper than elsewhere. When we are a developed Caribbean nation our workforce will be finally transformed, from physical toil under the hot sun, to knowledge and creative work, carried out in inspiring locations.

Around the world, with the advent of advances in ICT, knowledge workers are increasingly choosing to locate their work for lifestyle reasons. US Fund management has moved from downtown Manhattan to Denver, Colorado for the skiing; to New Port Beach, California, for the surfing; to Fort Lauderdale, for the golf; and to Greenwich Connecticut for the schools. If you could chose to locate your work anywhere in the world without it causing any restraint to your business, why would you not be in the Caribbean?

Our future success is to be found by exploiting our comparative advantage in the knowledge and creative industries, selling, across cyber space and physical space such things as: design services, creative services, research services, diagnostic services; out-patient services; legal services; accounting services, financial services, educational services, editorial services and much more. Industries that in large part we do not really have today.

Which is the essential political economy problem of trade negotiations. Those who lose from liberalization are those with the most entrenched interests and loudest voices; many of those who gain are not even born yet; or they have not yet started their businesses or their business associations have not yet been formed.

Which is why I thank the CRNM, Ambassador Bernal and those who worked tirelessly for an EPA with the EU that is not an echo of our economic past; but a gateway to our economic future. EPA as gateway is a good analogy, because while the CRNM has opened the gate, they cannot push us through. That is the next major task of governments around the region.

Having envisioned a future, how do we get there from here.

Pamela Coke-Hamilton reminded me the other day of the Caribbean’s very poor degree of domestic legal implementation of international trade deals. Work in this area clearly needs to start today, but I am less concerned with this aspect because despite our best efforts to snatch defeats from the jaws of hard fought victories, legal implementation is deep within the realms of the knowable and doable.

I am more concerned about the region’s lethargy towards putting in place policies that facilitate the growth of industries that do not yet exist. This is not about picking winners – though there may be value in doing so in micro-states – it is about seeding the key ingredients and creating an actively enabling environment.

If a Caribbean professional were to decide to bring home a successful international business, the cost and time of establishing residence, setting up a business, employing the right staff and the cost and service quality of ICT would be high obstacles. I know, I have been there myself.

One of the World Bank’s many excellent reports is its survey on the cost and time of Doing Business in different countries. There is much to learn from this report, but it seems to me that here is something that is well within the remit of government to change, with strong benefits.

But of course, in many of these areas what governments lack is not know-how, but political capital and courage. We know what we need to do improve the efficiency of government licensing regimes such as setting up a business on-line. We do not do it. Not because we don’t know how to do it, but because we fear the political consequences of doing it, of making the public sector leaner and meaner.

To export knowledge serves we need to improve our ICT. The challenges here today are not technological, but political with a small p and how we manage the relationship with the large carriers

Professional closed shops, which use educational or residency qualifications not to establish high standards, but keep down competition need to be challenged and broken down. When the day comes that there are a disproportionate number of lawyers or UWI Professors on welfare, we may need to think again, but that is not this day.

Having some of the highest educational standards in the world across a wide range of different disciplines will not be easy. Let us not kid ourselves, we have a good base, but we are not there yet and more importantly this goal cannot be achieved by a single provider of tertiary education, or even just by local educational institutions.

People lament that to do the things we want to do in education, public health, public transport and other public goods, we need more money than we have. However, while there is always need for more money I think this constraint may be over-emphasised.

Managing the liberalization of our education markets will require more political capital than it requires financial capital.

We can better allocate the existing public spend in education.

There is more social value in teaching primary school students literacy and numeracy than subsidizing them to pursue qualifications that will enable them to earn more than their teaches in a few years.

There are opportunities to use the development of educational tourism to widen education options for locals without cost to the public purse.

Clearly this is a vital area of public policy that requires deep thinking and cannot be addressed glibly, but there is much more we need to do before education becomes not just a general development instrument, but a specific instrument for growth and development.

In this and other areas orienting our economies to greater openness comes with substantial challenges and anxieties. People do not normally like change. They may have voted for it in America, but that was only after 8 years of George Bush – not four. (And for while they weren’t even sure between the wisest President American has ever had or Sarah Palin.)

Phasing change therefore has benefits and in this regard if the CSME had not been there, it would have had to be created.

The CSME is not an alternative to the international opening of our economies, it is an essential point along the way. It provides an important, yet contained, opportunity for our countries to sharpen their competitiveness. A single market in the Caribbean is a necessary step for our economies to succeed internationally, but clearly not a sufficient step because the Caribbean itself is small relative to the world markets.

In that regard, I hope and expect the EPA to move the CSME process along.

Let me now turn my attention to the current financial crisis and the role of financial services in the Caribbean.

It makes good economic sense that small states should be in off-shore finance. It is an industry in which you can scale up without land and labour and a combination of large finance and small state means tax rates can be low. Small states have a comparative advantage in off-shore finance and it would appear from the recent turmoil that large states have a comparative disadvantage. The Caribbean has become the fourth largest banking sector in the world, led primarily by Bermuda, Cayman, Bahamas and the BVI. But even in the case of Barbados some 60% of corporate tax receipts comes from the international business sector and many jurisdictions in the region aspire to something similar. So, it should be of grave concern that the dogs of war have been let loose on Caribbean off-shore centres. Gordon Brown joined the fray recently, but already there are President Obama, President Sarkozy and Chancellor Merkle. The real story comes down to a little local politics. The financial crisis that has enveloped us and should be attracting all the attention was a failure of domestic regulation in Europe and the US. It would have occurred if there were no off-shore financial centres.

One of the first institutions to fail in this crisis was Northern Rock, a very British institution where supervisors overlooked the fact that funding long-term mortgages of 120% of the value of homes in a mature boom, with short-term deposits, was running substantial risks. A German savings institution, IKB, was next.

Bear Sterns, Merrill Lynch, Citigroup, Wells Fargo, Fortis, HBOS and the list goes on, were not brought down by shady dealings in off-shore financial centres out of the sight of regulators, but by an over-optimism that accompanies all booms and leads banks to lend too much.

Growth of bank assets and an increasing reliance on short-term deposits or market finance was there for all to see in broad terms if not in specifics. These excesses are both systemic and commonplace and it is why we have financial regulators to regulate banks over and above standard corporate laws.

The problem with focusing on domestic regulation is that it suggests that those in power were out to lunch as the largest financial crash was brewing. Instead, it is far nicer to blame shady sounding foreigners. Let us be clear. We all know that the largest centres of lightly taxed and lightly regulated international finance are not actually “foreign” to Europe, they are in London, Luxembourg, Switzerland and the Channel Islands – which are parts of the United Kingdom. But no, the focus isn’t on them, it is on small states who are not part of the global fora that will determine which off-shore financial centres are good and which are bad.

This is faintly ridiculous – that those jurisdictions where regulation failed should threaten to close down those centres who do not follow their standards – and patently unfair. But no one said that life was fair. At the same time off-shore financial centres should be doing far more to defend their position. The world needs off-shore financial centres.

Imagine a car company that has its head office in Japan, but builds and sells cars in the USA and is owned by Chinese shareholders. The company makes a profit from selling cars in the USA and pays US corporation tax on its profits, it brings the proceeds into Japan and pays Japanese corporate taxes and then it sends the Chinese shareholder a dividend from which he pays Chinese income taxes. The same proceeds have been taxed three times. Double taxation agreements stop it being four times.

Alternatively, the Japanese car company sets up an off-shore company. When that off-shore company remits income back to the head-office it pays Japanese taxes, but when it takes US earnings and pays non-Japanese shareholders, it pays US taxes and the shareholder pays Chinese taxes. The off-shore centre acts as a “way station”. There are no taxes in the “way station” but that is because the capital is in transit. Taxes are paid at the beginning and at the end of the journey, but not along the way.

The potential for abuse is not that the way-station is tax-free, it is whether the way station becomes a hiding spot for the origin of money, either to reduce taxes at the end of its journey, or to launder criminal money. The real problem is bank secrecy laws in off-shore financial centres, such as those that exist in Lichtenstein and Switzerland. The solution is tax information treaties that allow tax authorities who have grounds for suspicion to share information. Interestingly enough, most responsible off-shore financial centres like Barbados have these. The ones that do not are primarily European or British protectorates.

What should happen is that the Europeans and British quietly tidy up their own house, they sign tax information treaties, they should not mind global finance – with all its potential to destabilize their economies – being shunted to responsible financial centres, and they should focus on real efforts to strengthen domestic regulation. Instead they are loudly blaming others for a crisis of their own creation and are distracting themselves from doing what needs to be done domestically.

This is politics, but we must be far more prepared for it by the time of the Summit of the Americas than we currently are.

Ladies and Gentlemen, I talked earlier about the path we need to follow to get rich, and of course that sounds crude and unsophisticated for our intellectual tastes. I can hear some of you say that we can be developed without being rich. But it is important to remember that getting rich is about eliminating poverty, it is about ensuring that people live a fulfilling life, about empowering people to discover their true abilities, it is about being in a position to help others. It is about being able to say no to the knighthood and affording true independence.

Forty odd years ago, we thought that independence would secure us economic development. On the heels of Stanford and countless challenges before, it must now be clear to all that it is economic development that delivers true independence.

Along this journey we have arrived at a plateau, looking up at a mountainous climb ahead. We have been given the route map, the gate has swung open and now the heavy lifting begins.