Innovation needed to avoid economic stagnation

Barbados and other regional economies must become innovation driven to escape economic stagnation and to become more competitive.

To do this, said Pro Vice Chancellor of the Board of Undergraduate Studies at the University of the West Indies (UWI) Professor Justin Robinson, there must be a broadening of the economic base; improvement in the doing business climate; sustained investment in human capital, research and innovation and supporting infrastructure; and greater facilitation of innovative and sophisticated firms that are capable of building and sustaining competitive advantages in global value chains.

“Escaping the middle income trap, expanding the economic pie, requires that economies transition to being innovation driven,” said Robinson.

He was speaking during the opening of the 23rd annual Sir Arthur Lewis Institute of Social and Economic Studies (SALISES) Conference on Tuesday, which was held under the theme Caribbean Lives, Disruptions, Resilience and the Way Forward.

Indicating that the UWI and SALISES had a critical role to play in helping Barbados and other regional economies come out of their economic “middle income trap”, Robinson said the change also required fiscal discipline.

He argued that, too often, countries engage in “austerity responses” whenever there is a crisis because they do not have foreign exchange buffers which created the need for pro-cyclical fiscal policies that often make the situation worse.

“I would suggest that there is an urgent need to institutionalise fiscal discipline, build buffers and reduce the need for pro-cyclical fiscal policy,” Professor Robertson said, while suggesting that Barbados and other countries put fiscal responsibility laws in place to keep tabs on the size of the fiscal deficit and debt the country would be allowed to incur.

He argued that the years of underperformance often occurred when there was external shock including global recessions, oil crises and most recently, the COVID-19 pandemic.

In addition to high vulnerability to external shocks, Robinson explained that the less than ideal growth conditions also related to the islands’ small open economies, the absence of adequate foreign exchange buffers, limited access to low interest financing, a narrow economic base, inequality, vulnerability to natural disasters, as well as geopolitical uncertainties.

“So, one of my arguments is that for a variety of reasons – small size [and] our economic structure – Caribbean economies are uniquely vulnerable to external shocks. Our unique vulnerability to external shocks then creates that potential to undermine several years of economic growth,” he said.

Stating that the economic performance over the last 40 years was a case of taking one step forward and two steps backward, Robinson told the audience that regional economies were merely “bouncing around” within the category of being middle income countries.

He explained that regional governments were forced to engage in fiscal and monetary policies that resulted in a contraction of the economy, making the impact of economic decline worse and recovery a lot slower.

“So my argument here is that these shocks happen. When a shock happens you go into recession. In many ways, all economies are vulnerable to those shocks but because Caribbean economies, particularly in CARICOM, don’t have adequate reserves or buffers or foreign exchange and access to financing we then find ourselves then having to respond to those crises with what economists call pro-cyclical policies,” he explained.

Speaking on the topic Escaping the Middle Income Trap and Growing the Economic Pie, Robinson presented his economic research, which showed that cumulative growth in the Caribbean from 1981 to 2020 has been “quite flat”, despite most countries in the region being classified as middle income.

“The performance of most of our economies over the last 40 years has been quite flat, which is what we mean by that middle income trap, in the sense that you get to a level of income but your capacity to move beyond that or even sometimes to remain within that category is constantly threatened,” he explained.

Professor Robinson pointed to 15 years in which the Barbados economy declined and registered cumulative growth of only about 12.84 per cent but a cumulative decline of about 37.5 per cent during a 40-year period. (MM)