It is hard to imagine any discussion on the Caribbean economy taking place without, at some point, it focusing on how best to encourage diversification, enhance competitiveness or attract investment in new industries.
Whether in the past the issue has been about identifying alternative options for agriculture as preferential arrangements for bananas or sugar came to an end; more recently about how best to reduce the region’s vast and unnecessary import bill for food; and on a continuing basis the challenge provided by the region’s alleged over reliance on tourism and financial services, the challenge has always been to identify a sustainable economic activity from which the Caribbean might prosper.
Unfortunately, this has not been easy as in most nations, domestic markets do not offer great enough economies of scale and few have governments or an entrepreneurial class that think creatively. Moreover, labour rates remain too high and levels of productivity relatively low to enable the anglophone part of the region to compete successfully against neighbours in Latin America, let alone globally.
Only it seems in areas where the region has an unique selling point, natural advantage, or in sectors where intellectual capital matters more than market size, has the Caribbean been able to truly succeed.
That is to say in tourism, given the region’s natural environment and geographical location; in creative industries, when individual talent can be nurtured and retained locally; in oil, gas and extractive industries in those nations lucky enough to have deposits or reserves; and in financial services, where an early start and creative approach to new offerings for companies and wealthy individuals have, until recently, kept the region ahead of international competition.
Even then, some nations have been unable to develop and sustain across successive governments a national strategy that ensures much needed new investment, or the long term growth of such industries or the evolution of existing ones. This is especially challenging in very small islands like the region’s overseas territories which sustain their economies for the most part through tourism, financial services and associated fees. There the recently received message from European capitals is about the need for diversification and to increase the emphasis on encouraging new forms of investment.
This is because their financial services offerings may be less valuable than in the past as a result of the G8 and G20’s announced intention to use the aggressive reporting requirements of the United States FATCA to provide the momentum internationally for the establishment of multilateral agreements on tax exchange and beneficial ownership, in order to widen their global tax net.
What diversification is often assumed to mean is the need to undertake some form of economic activity that is completely new to a country. However, as The Bahamas Minister of Financial Services Ryan Pinder, made clear in an interesting recent speech to the Nassau Conference, this may not necessarily be the best option. Speaking specifically about financial services, he suggested that what was required is closer attention being paid to positioning a jurisdiction for active business.
By this he meant finding ways to tie the financial management needs of a financial services client to encouraging them to bring a part of their business or commercial activity to the location in which they are making use of the jurisdiction’s tax benefits.
In practical terms, Mr Pinder suggested, this could mean that The Bahamas might, for example, as a part of its approach, bring together a facility such as its free trade zone, the tax advantage the country was able to offer, and its location as a well-positioned logistics hub, to attract not only the client from a wealth management perspective, but also components of his or her business operations.
What he seemed to be suggesting is that there was now a reason to find a natural connection between the business of the client, the financial management they required and ultimately the residence of the client. This could, he suggested, enable countries to better build on what they already have.
“We have high net worth individuals who began utilizing the Bahamas as a jurisdiction for banking, or for use of our products. Their involvement with the jurisdiction evolved from use of the jurisdiction, to being a part of the jurisdiction. Many high net worth individuals have decided to take up residency here in the Bahamas, and have decided to establish physical presence operations here in the Bahamas connected to their respective services businesses,” Mr Pinder said.
The suggestion is an interesting one, especially for any Caribbean nation within easy reach of the United States that can provide quality residential accommodation, local amenities that would attract international executives, security and the geographical and logistical advantage that the physical location some nations offer for certain types of business.
What is suggested may not be to everyone’s taste for political or social reasons, and in some respects is not dissimilar to the growing regional trend towards selling citizenship for investment. However, the fundamental difference in the approach Mr Pinder suggests is that not only should the client be encouraged to consider residence for themselves, but also locate either the services element of their business or at best a physical part of their operations if involved in manufacturing or transhipment, into a regional location offering geographic advantage. This could, he implied, enable countries to singly or jointly better build on what they already have.
His comments are also interesting as they challenge the direction that some governments and countries in the region are going. Rather than accept globalisation and the smallness of the region and its economies, their desire is to manage a small and protected national space in ways that encourage, and then seek to control investment, without finding ways to more broadly facilitate the investor.
These are not easy issues to resolve as they touch on history, national identity, sovereignty, and cultural independence, but increasingly, as many countries across the world are coming to realise, they offer a way to achieve economic diversification and, if well managed, an alternative way to spur a country’s development.
Previous columns can be found at www.caribbean-council.org
