The View from Europe
By David Jessop

A week or so ago I was talking to a friend at my son’s
cricket club.  This UK based senior executive spends
much time travelling. His company is a major player
internationally in the financial services sector. His
role is to control the sourcing of his organisation’s
specialised software and information technology needs.


Some years back his company had decided that these
were best met overseas through a joint venture. This
had led his board to agree to develop their
information technology needs in India.

Despite India’s size, competitive labour rates and
advanced skills in software design, he was worried.
India and Pakistan, or so it seemed then, might be on
the edge of war. Even though his company’s investments
and operations were located far to the south of
Kashmir, his company was concerned that if pushed too
far, Pakistan, a nation militarily weak in comparison
to India, might pre-emptively use nuclear weapons to
strike an economic target. This might be, his company
thought, near to the area in which his company and
many of India’s advanced IT industries are located.

His reason for mentioning this was because his
organisation was thinking urgently about seeking
alternative and more stable locations that would
ensure their needs were fulfilled. He asked me about
the Caribbean, whether this might offer a secure
alternative to India, about the region’s capabilities,
its telecommunications facilities and costs. He
enquired about levels of bureaucracy, corruption among
officials and national security. He wanted to know who
else was located there. Only as an afterthought did he
mention labour rates. He had, he said, already
determined that the only potentially viable location
in the independent Caribbean for his company might be
Barbados. He wanted advice. This I gave him gladly.

My reason for noting this is that it coincided with a
growing international debate about what it is that
attracts foreign direct investment into developing
economies. It also coincided with reports and papers
raising doubts about the widely held view that the
removal of trade barriers will have a positive effect
on existing and new investment in a region like the
Caribbean.

For example a report from the Commonwealth Secretariat
now in circulation suggests that more focus is needed
on the effects of trade liberalisation on investment.

The authors argue that international investors expect
an investment in a less developed country or small
vulnerable economy to achieve a 50 to 100 per cent
greater return on their investment than they would in
a more developed or less vulnerable economy. This they
do, as they perceive the risks to be higher.

The authors of the report argue that major investors
seek a positive investment climate while less orthodox
smaller eternal investors are less concerned about
issues such as the smallness or vulnerability. They
suggest that for the larger investors the present
schemes to encourage direct investment provided by the
European Union offer little incentive as financing is
at near to commercial terms within structures that
limit access through bureaucratic procedures and
criteria that exclude most companies. They conclude
that investment preferences need to be introduced for
poorer economies as the decline of the present
preferential access for Caribbean products to Europe
and North America will result in instabilities that
will cause most companies to invest elsewhere.

Another more recent report from two academics at the
University of Minnesota challenges the prevailing
belief amongst virtually all developed nations about
the role of foreign direct investment in creating
growth. This study to some extent contradicts
established wisdom, arguing that external capital
flows do not independently of other factors effect to
any great extent economic growth.

For this reason the authors urge caution about the
factors normally assumed to make any country a viable
market for investment. High levels of education, a
developed capital market, high levels of economic
openness or advanced levels of development alone they
suggest will not spell success. While foreign direct
investment goes hand in hand with economic success,
investments alone do not guarantee growth and economic
success.

Even more tellingly a study recently published in the
Journal of Economic Geography looking at the transfer
of technology suggests that attracting foreign direct
investment is increasingly related to countries that
have created clusters of industries that can provide
competence and know how that compliments that of the
investing company. In other words a successful
software sector attracts similar and allied
industries.

While these are all snapshots from complex papers,
they tend to contradict European and North American
insistence that trade liberalisation will enhance
competitiveness, encourage investment and create
growth. They all suggest that there are real and
perceptual prerequisites required before any nation is
taken seriously by a larger investor.

These are matters of great importance. In the
Caribbean, countries with little to attract any
investor, domestic or international, are being drawn
into trade negotiations first in the Americas, then
through the WTO and finally with Europe. These will
require nations with few resources to accept that the
same economic dynamics that apply to say the State of
Louisiana, the Netherlands or even India to prevail
for them as well.

As this year goes on, the region as a whole will have
to accept or reject the approach to trade
liberalisation that is being proposed in Free Trade
Area of the Americas process. It will know then
whether there will be a special place for
disadvantaged nations liked Dominica, or whether there
will be a one size fits all approach.

So far only the European process has considered the
need to establish parallel programmes to encourage
investment and the development of trade and services
through what are described as flanking measures. Even
then Europe is doing so with some reluctance and with
the probability that resources to provide support will
be limited.

What this seems to suggest is that not only must
Caribbean nations have the infrastructure needed to
succeed and be competitive, stable and honest, but
they must also be perceived to be a success. How small
and largely vulnerable nations without resources
achieve this goal in years rather than decades has yet
to be explained.

David Jessop is the Executive Director of the
Caribbean Council. He can be contacted at
[log in to unmask]
June 14th, 2002


__________________________________________________
Do You Yahoo!?
Everything you'll ever need on one web page
from News and Sport to Email and Music Charts
http://uk.my.yahoo.com