Advice from Washington

beach [freeimages]

 By Edwin Laurent

The upswing in the global economy will filter down to the Caribbean, but the region must now look to new economic interests as it repositions itself.
This was the message from Dr C. Fred Bergsten, director emeritus of the Peterson Institute, a Washington-based economics think tank, to last month’s first Caribbean Economic Forum, staged by the Central Bank of Barbados.
Much of what he said made good sense, but his prescriptions, though appealing, probably should be thought through a bit more carefully and considered in greater depth.
Of course, as the global economy recovers, it is also changing, so Caribbean countries need to adjust.
They must adapt the goods that they produce and the services that they provide in order to cater to changing international demand.
Cashing in
Therefore, seeking to cash in on new opportunities for doing business with major untapped markets such as China’s (not just in tourism) is clearly a no-brainer.
As Dr Bergsten said, “China is already the second largest spender in tourism in the world, over $100bn [a year],” so securing even a small share could be a boon for the Caribbean.
His recommendation of a regional approach also makes sense, since overcoming the marketing and logistical challenges might only be possible if the countries pool their limited capabilities and resources.
Fine so far, but a word of caution.
A claim that a “tsunami” of Chinese tourists could be waiting to head for the Caribbean any time soon can be credible only if it is backed up by proper market research.
Among the questions to be explored in that research would be: what are the Chinese looking for?
If it finds that the Caribbean product is not right for the Chinese market, the region won’t succeed in enticing the tourists unless it first adapts what it offers.
The Caribbean’s tourism product has been built mainly around the “sun, sea and sand” concept, for which there has been strong traditional demand from the North American and European markets.
Even if the Chinese also go for beach holidays, other issues would need to be explored, such as how to deal with competition from closer destinations, including Thailand, Bali and Sri Lanka.
Specialise in a few things
Yes, a Chinese tourism bonanza could well be a possibility, but before getting too excited, we need some more serious thought and research.
Dr Bergsten quite rightly calls for economic diversification.
He said, “I believe in the principle… that says do more of what you do best.
“Now if you are a huge, continental economy like China or the US and a few others, you can provide a wide variety of industries and services and some agriculture as well.”
He warned his listeners how difficult it can be to “do well in many ventures”.
In his view, “If you are a small economy, I think you really have to emphasise those few things that you do best and try to make sure you do them well, and really well means you do them on a competitive basis.”
Diversification challenge
This sounds like Catch-22, though.
Diversification of the economy is essential for the real development of any country - whether large or small.
However, small size restricts the possibilities of benefiting from economies of scale that are so essential for international competitiveness. 
Smallness therefore limits the scope for economic diversification.
One can accept the implicit reasoning behind his conclusion, since the small country, by definition, possesses both a very limited volume and range of resources and a small domestic market.
But to maximise its possibilities of being competitive internationally, it must produce at levels where it can benefit from economies of scale.
This requires utilising what could well be a large proportion of its resources for whichever enterprise it undertakes.
The extent of the productive activities that the small country can profitably engage in is therefore reduced.
To overcome this difficulty, Dr Bergsten recommends concentration on a few things and choosing niches wisely.
Which niche?
But who decides on the niches and how many should be chosen?
We are not in centrally planned and managed economies, so neither the expert nor the bureaucrat can identify what niches will be profitable.
In fact, no one can predict which specific ventures will be viable and will prosper.
Instead, after entrepreneurs have actually embarked on exploring and investing in the various ventures, it is the market and commercial considerations that will “pick the winners”.
The government can help, including with market and technological research.
But most importantly, it has to create a favourable policy framework and pro-business climate that encourages, and is supportive of, innovation and investment in new areas.
My concern with Dr Bergsten’s warning against trying to do too many things and therefore not being able to do any well is that it could be misleading in this context.
True, it appears to make good sense and we need to be internationally competitive in whatever production of goods or provision of services to which we switch.
But he highlights just one new activity - Chinese tourism.
Diversification model
Successful diversification, however, entails more than the replacement of one dominant activity by another.
Caribbean economic history, both during and since colonialism, is an unending pattern of switching from dependence on one or two activities to another: tobacco, cotton, sugar cane, bananas, tourism etc.
That was not diversification.
To successfully diversify, Caribbean countries must identify and pursue a variety of productive enterprises that spread risk and reduce exposure to the inevitable downturns that occur in any particular sector or market.
There are doubtlessly a large number of enterprises that can achieve international competitiveness, even with production on a small scale. The challenge for entrepreneurs in the Caribbean is to identify them.
Government and financial institutions have an essential role.
They must help create favourable conditions for business, investment and innovation that would encourage, facilitate and support these entrepreneurs - particularly the new ones.
The region can gain tremendously from the insights and advice of international experts on how to adapt effectively to changing global economic circumstances.
However, it should carefully scrutinise propositions and policy prescriptions, even if they are superficially attractive.
To be helpful, they must be sufficiently thought through and backed by a sound understanding of the region’s peculiar economic circumstances.
If policymakers are to be really assisted, the expert must do more than merely identify a wish-list. He or she needs to assess its feasibility and identify concrete steps and measures that would be needed for achievement. 
But it is the region itself, its own policymakers and experts and those with a fuller appreciation of its circumstances, that must take responsibility for the essential rigorous research needed to inform development policymaking.
Edwin Laurent has served as an Eastern Caribbean Ambassador to Europe and worked in London for the Commonwealth. He has recently been awarded the Cross of the Order of St Lucia for contributions to economic development.