The role of investment in SVG’s growth agenda

“Competitive advantage no longer rests on a country’s natural endowments, but on its ability to create a business environment along with supporting institutions that allow the nation’s inputs to be used and upgraded in the most productive manner.”

The foregoing quotation from Michael Porter’s book, “Competitive Advantage of Nations”, published fifteen years ago, is very relevant today to St Vincent and The Grenadines which must exist in a global economy, where factor inputs are less important as sources of productivity for sustained growth. In a recently published World Bank study entitled “Towards a New Agenda for Growth (in the OECS)”, much emphasis is placed on the need to get the investment climate right, if we are to make any significant headway towards growth and development in our countries. The following analysis focuses on some of the issues pertinent to St Vincent and The Grenadines.{{more}}

A country’s investment climate can be defined simply as its policies, combined together with the institutional and behavioural environment that influences the returns and risks associated with an investment. This environment is generally seen as having three main components:

(i) Political and macroeconomic stability. This seems self-evident.

(ii) A sound regulatory framework and efficient supporting institutions to enforce relevant laws and regulations.

(iii) An adequate physical and social infrastructure eg the quality and quantity of electrical power reliable transport and communication systems, a qualified labour force and provision for social services.

Between 1990 and 2003 there was a rapid decline in private investment in the OECS accompanied by a rapid recovery in public investment. The latter was financed primarily by expensive commercial borrowing in Governments’ quest for improvement in their infrastructure. While as a percentage of GDP, the public debt stock of St Vincent and The Grenadines is not currently among the highest in the OECS, the country needs to proceed cautiously in its sourcing of finance for heavy infrastructural projects such as airport development, critical as this may be to its long term development.

High levels of public indebtedness of a country can adversely impact private investment. In the presence of high public debt and high fiscal deficits, firms tend to adjust their investment plans downwards in anticipation of increases in future taxation needed to repay the debt; or they may anticipate a reduction in tax concessions. Experience has shown that firms generally make their investment location decisions based first on fundamentals – the general investment climate and the availability and cost of key factors of production, labour infrastructure etc. It is only in the second stage that they would draw up a short-list of potential locations to match differences in tax obligations.

The World Bank report cited Costa Rica with a population of 3.5m as a fine example of how to attract investment, and St Vincent and The Grenadines can learn much from the approach taken by that country. Intel took a decision to invest US$300m to construct a semiconductor assembly in Costa Rica ahead of competing countries which included Mexico, Brazil, Indonesia and Thailand. Intel did have its concerns, but Costa Rica was able to respond satisfactorily.

Concern: 1. Not enough frequency of incoming flights and inadequate capacity of San Jose airport.

Response: More licences were granted to foreign carriers and plans were accelerated for a new cargo terminal.

Concern: 2. Energy – insufficient generating capacity.

Response: Costa Rica convinced Intel to provide land and funding for two new power plants, one dedicated to Intel and the other to a neighbouring industrial park.

Concern: 3. Inadequate supply of skilled labour.

Response: The country undertook rapid reform in its curriculum in technical schools and introduced training programmes to meet Intel’s needs.

These responses demonstrate that in negotiations of this nature, both sides could come out winners; but unless there is conviction in our approach we would run the risk of timidly submitting to the dictates of the investor.

Some selected indicators compiled by the World Bank, place St Vincent and The Grenadines in the lower ranks among the OECS states in respect of per capita GDP, poverty, unemployment and the human development index (HDI). Injection of private sector investment not necessarily on the scale of the Costa Rican experience, will undoubtedly have a positive impact on these indicators. The economy could certainly do with such a boost, but it would be necessary to attract the right type of investor, for in the past some investment projects have proven to be costly in fiscal terms without yielding sustainable economic gains. In this regard, the report recommends the reform of public procurement systems to achieve cost reductions for the public sector and improved competition in the private sector.

The ability of the economy of St Vincent and The Grenadines to attract demand for its exports and the investment to supply that demand will depend on its competitiveness. The OECS have not done well in terms of competitiveness in the CARICOM region. Its exports declined from 12.4 per cent in 1993 to 5.8 per cent in 2003. Over the same period exports from Trinidad and Tobago to the CARICOM market rose from 62 per cent to 82 per cent. Trinidad and Tobago has received praise in some quarters for its new enterprise culture and the willingness of its businessmen to innovate and bear risk and to do new things in new ways for new times. The OECS have some way to go but they have agreed on a Development Charter while in support of this initiative. St Vincent and The Grenadines should seek to develop its own strategic vision in order to chart its way forward during this new millennium.

• Errol Allen is the former Deputy Governor of the Eastern Caribbean Central Bank.