Diversification through Innovation:The Case for Small Island Developing

States

Commonwealth Secretariat conferenceSustaining Development In Small States In A Turbulent

Global EconomyLondon, July 2009Dr. Keith Nurse

DirectorShridath Ramphal Centre for International Trade Law, Policy & Services

University of the West Indies, Barbadoskeithnurse@mac.com

Outline of Presentation

Global Crises in Perspective The Economic & Diversification

Performance of SIDS Innovation Performance in SIDS Diversification and Innovation Options

How the Rich got Rich …and Whythe Poor stay Poor (Reinert 2007)

Poor countries specialize in activities that have one ormore of the following three characteristics:

(a) they are subject to diminishing rather than increasing returns,

(b) they are either devoid of learning potential; and/or

(c) the fruits of learning rather than producing local wealth arepassed on to their customers in the rich countries in the form oflower prices.

Prescription from Lewis in responseto global economic slowdown

Sell more non-traditional exports to the coreeconomies;

Become individually more self-sufficient, or; Sell more to each other (1978: 45).

“the long-run engine of growth is technologicalchange” and not trade “except in the initial periodof laying development foundations.” (1978, 245)

Global Crises, Cascading Fragilities andDeglobalization

Global financial meltdown Global economic crisis Peak oil Food prices Climate change policies Housing crisis International terrorism Global health pandemics

DEGLOBALIZATION

Goods Trade•Exports•Imports•Food & Energy

Migration•Remittances•Brain circulation•Diasporic exports•Diasporic tourism

Trade in Services•Tourism & travel•Financial•Creative & ICTs

External financing•FDI•Debt•ODA

Source:UNCTADHandbookofSta7s7cs2008

Source:WorldEconomic&SocialSurvey2008

Patent Registration in the US,1965 - 2006(source: USPTO 2008)

Import Replacement Invest in renewable energy alternatives (e.g. wind, solar,

geothermal, biofuels, etc.): Target renewables for fiscal support/incentives as well as

development assistance Liberalize imports in environmental goods & services

Reduce the food import bill and improve health security throughinvestments that generates new opportunities for agro-processing, pharmaceuticals, nutriceuticals, etc.

Value Accumulation The tourism economy through diversification of markets:

– regional and diasporic tourism) and products (e.g. heritageand festival tourism).

– Innovation in products and services (e.g. eTourism,destination management systems, IP Branding).

In the context of a global financial and economic crisis (e.g.declining FDI, ODA, etc.) SIDS need to deepen relations withdiasporic communities:– Diversify from Mode IV to Mode I - III– Diasporic investment, brain circulation, return migration,

diasporic exports, diasporic tourism

Policies for Economic Diversification(Rodrik 2005)

1. Provide incentives and subsidies only for “new” activities.2. Establish clear benchmarks and criteria for success and failure

of subsidized projects.3. Build in automatic sunset clause for subsidies.4. Target economic activities (technology transfer or adoption,

training, and so on), not industrial sectors.5. Subsidize only activities that have clear potential to provide

spillovers and demonstration effects.6. Vest the authority for carrying out industrial policies in agencies

with demonstrated competence.

Policies for Economic Diversification(Rodrik 2005)

7. Make sure agencies are monitored closely by a “principal” whohas a clear stake in the outcomes and has political authority atthe highest level.

8. Make sure implementing agencies maintain channels ofcommunication with the private sector.

9. Understand that even under “optimal” industrial policies “pickinglosers” will sometimes occur.

10. Endow promotion activities with the capacity to renewthemselves, so that the cycle of discovery can become anongoing one.