Gurunomics

Midway through its first fiscal year since taking office on May 24th 2010, the People’s Partnership Government seems to be still in search of a cogent and coherent strategy to move the economy forward. It is in times like these that societies look towards centers of higher learning—Universities, Business Schools, and Think tanks—to bring new insights to the debate and help forge a way forward. In that sense, many viewed the recent Distinguished Leadership and Innovation Conference (DLIC) hosted by the Arthur Lok Jack Graduate School of Business (GSB), as a timely intervention.

Expectations were high that Professor Michael Porter, the internationally renowned guru of Strategy and Competitiveness, would point the way not only for the country but also for firms and budding entrepreneurs. Did Porter deliver? Did the GSB give us confidence that it was engaged in something more than a pure marketing stunt?

Economic conditions in T&T are perhaps better than anticipated at the start of the fiscal year last October. Once again, fortuitous circumstances in major commodity markets have contributed to a general increase in export earnings, stabilized Government’s fiscal position and created the fiscal space to engage the work required for economic transformation.

The available data indicate that crude oil prices (T&T mix) for the first half of fiscal 2010-11 averaged an estimated US$77./bbl; some 18 per cent above budget. The price increase may have been sufficient to offset the eleven (11%) decline in oil production, a matter that should be of grave concern. On the gas side, the last six months has witnessed divergent trends in gas prices in US and European markets. In the wake of the mounting US gas surplus, Oil and Gas Journal ( OGJ) estimates the average LNG netback to Trinidad at $US3.07 /MMbtu, less than 50% of the netback from European terminals which averaged US$6.50 /MMbtu. Given the ongoing diversion of LNG cargoes from the US to lucrative European and South American markets, it is expected that the average realized well-head gas price for LNG sales would be well above the budgeted figure of US$2.75/MMbtu. Export prices of petrochemicals—ammonia and methanol- have also been strong, averaging in excess of US$400 and US$350/ tonne , respectively, over the last six months. All this means is that the Government’s fiscal position today is better than envisaged at the start of the fiscal year.

The foreign exchange situation should also improve and with it some measure of confidence should return to the private sector. The non-energy sector, which has remained sluggish during the first half, can be expected to respond with a lag in the second half of the fiscal year. Now that its fiscal position is more stable in the short term, the Government can be expected to proceed with greater assurance to implement the planned infrastructure projects expected to provide a temporary boost to the non-energy sector. However, while the short term outlook has improved , it does not obviate the need for long term transformation. A fact that did not escape the attention of Prof Porter.
One of Porter’s main messages on the day was that “sustainable national prosperity is created not inherited”. Porter reiterated that inherited prosperity based on natural resource wealth is limited while created prosperity based on innovation is unlimited. It is a view over which there is already a national consensus. At least four other aspects of Porter’s views are in sync with our thinking at the Lloyd Best Institute.
First—the island economies of the Caribbean are far better off as an integrated market than as single island economies. However, a properly functioning Caricom and CSME continue to be an elusive regional goal and the last vestiges of West Indian unity—the University of the West Indies and the West Indies cricket team are disintegrating.

Secondly—successful countries exhibit consistency and stability in national macro-economic development policy over time. This is a problem that has plagued member countries of Caricom in the post-independence era. A change of Government usually is characterized by changes in institutions, strategies and people, most of which are merely cosmetic. A case in point is the current Government’s apparent abandonment of the Vision 2020 Plan, developed by hundreds of patriotic national professionals and subsequently hijacked by Mr. Manning as his blueprint.
Thirdly—the economic and social infrastructure and political institutions must be supportive of the business environment. There are usually low hanging fruits in these areas that can be addressed to remove some of the bottlenecks and impediments to business growth.

Finally—Sustainable national productivity arises from micro-level competitiveness, meaning that small firms play a critical role in the process of economic development. On several occasions we have highlighted the importance of a special type of small firm—maroon firms—which are home grown, use largely local inputs, make unique products and could potentially be net foreign exchange earners.

Porter’s prescriptions for national competitiveness and prosperity are based on his model —Diamond of National Advantage—the four essential elements of which are factor conditions, demand conditions; related and supporting industries, firm strategy and rivalry. Unfortunately, a critical assessment of Porter’s core model exposes its limited applicability in the Caribbean context.

For example, demand conditions speak to the size of home market demand for the industry’s product or service. Invariably the small size of our domestic market and the propensity to import are major constraints to effective home demand as a driver of output and productivity. The role of related and supporting industries is also limited because of the historic dominance of multinationals in the main sectors and weak positions of the successive Governments on local content policy. In these economies, there is still very limited inter-sector flows between the onshore and offshore sectors. Multinationals operating in the offshore sector seek their goods and services primarily from home country suppliers or local agents, thereby stunting the growth of local business. For example although T&T’s petrochemical industry has expanded to become the world’s leading exporter of ammonia and methanol, a cluster of supporting and related industries, as envisaged by Porter, is yet to be developed.

The limited applicability of Porter’s model to the economic context of the Caribbean stems from the assumptions and empirical research on which the model was developed. Porter’s seminal work- The Competitive Advantage of Nations- was based on research conducted on ten countries: Denmark, Germany, Italy, Japan, Korea, Singapore, Sweden, Switzerland, the United Kingdom and the United States of America. In terms of economic development history, macroeconomic structure and demography, these countries are significantly different from our small open economies in the Caribbean, in general, and the resource-based T&T economy, in particular.

Moreover, this study was conducted in the 1980’s when these economies were already at an advanced stage of development. In 1985, the ten countries in the study accounted for 50 per cent of total global exports. It is not surprising, therefore, that the Porter model appears to have so many gaps. Its wholesale application to the economic context of Trinidad and Tobago is at best questionable.

Perhaps the most important lesson from the Michael Porter experience is that the quest for a new economic development paradigm must be rooted in the Caribbean experience. It requires the region’s policy makers and the intellectual community to take the lead in compiling the type of studies that would, or could, inform economic development policies from a regional perspective. The GSB is well-placed to play a major role in this effort. However, GSB seemssteeped in the very worrying view that foreign is better. In its five year history, for example, the Distinguished Leadership and Innovation Conference has featured only foreign gurus. Isn’t there at least one Caricom national who has done the research on Caribbean experience and can offer some fresh insights into our problems?

Ultimately, the greatest barrier to unleashing the entrepreneurial spirit of the Caribbean in promoting development has been our historical legacy of self-contempt which so cripples our self-confidence.
Surely this is a point on which Mr Porter, guru that he is, might also see eye to eye with us.

By GREGORY McGUIRE

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