Diversification via the global value chain

Whenever the topic of diversification arises, the concept of innovation, the production of novel goods and services, surfaces as ineluctably bound to this transformation. So much so that UWI’s Professor Anthony Clayton tells us that incremental innovation in what we do at present is insufficient if we wish to become globally competitive – we have to be disruptive, i.e. our innovations have to make a fundamental impact on current industries or create new ones.

However, innovation and more so disruptive innovation involves the precursor phase of R&D and invention and the subsequent branding/marketing/sales which can demand a time frame of the order of ten years in the making. However, as a small open economy we cannot produce locally all that we need to live, to survive, and have to import, have to export to earn the foreign exchange required to import.

At present the energy sector provides 80 to 90 percent of our foreign exchange earnings in Trinidad, a sector that is depleting and is part of the worldwide industry that is the main culprit of climate change, global warming, sea level rise etc. Hence a diversification strategy based on innovation in the above timeframe may indeed see a significant period of economic collapse.

The question then arises; is it possible to aim towards an innovative and diversified economy but approach it in a way that averts an economic collapse as we await some major disruptive global intervention by a new private sector? What have the experiences of others, the emerging economies demonstrated in their rise to economic strength in the global economy – Taiwan, Poland, S. Korea, China?

Edward Steinfeld in his book, “Playing our Game; Why China does not threaten the West”, tells us that China’s restructuring of its economy on the road to becoming the manufacturing centre of the world, was made possible by its participation in the modularisation trend in the global production value chain.

These chains allowed the knowledge, innovation, experiences and design information of the developed economies, which were previously tacit and transmitted face to face, now to be coded, digitised and transmitted at low cost to anywhere in the world, to China.

The result was that the formal production steps done in one firm could now be spread across multiple firms and nations in search of economic efficiency; all benefitting from the comparative advantages of each other.

This modularisation of the production value chain offered economic development opportunities to some developing countries. Richard Baldwin in his book, “The Great Convergence”, tells us that it is unlikely that the innovation required by the emerging economies to catapult them into the global economy will be completely homegrown.

He says, in the light of the new globalisation (as described by Steinfeld), instead of building the whole production value chain domestically (the nineteenth and twentieth century way), developing countries can now join international production arrangements to become competitive and then industrialise by getting more good jobs inside the international chains.

The developed economies export the lower skilled jobs and the advanced technological knowledge (some imbedded in the machines) required to build and operate the outsourced plants.

A recent article by Kent of Reuters questioned whether the high water mark of globalisation may have passed as trade and investment barriers are rising, rather than falling. He says that left wing politicians of the developed nations and the trade unions blame this trade liberalisation for the loss of jobs, stagnating wages and incomes in the advanced economies.

Right wing politicians and security hawks fear that liberalisation, investment and technology transfer are strengthening adversaries. Hence trade sanctions are becoming the weapons of financial regulators, intelligence agencies and foreign policy specialists, making the traditional mechanisms of GATT/WTO unworkable in resolving trade and investment disputes.

We see President Trump engaging in what could evolve into a trade war with China as the president seeks to bring back the jobs home to the US. However Thomas Picketty, on the other hand, sees the financial elite tending to support right wing governments and the better educated, highly skilled, workers supporting left wing governments. Both of these voter sets benefit from global out sourcing.

The conclusion one arrives at is that the local fore-sighting exercise should pick a few industries/technologies, which can allow us to benefit immediately from the global outsourcing and then towards invention, innovation over the longer time scale as we morph into disruptive interventions possibly in these industries.

It is thereby understood that our initial entry into the global production chain could be at the lower reward end, factory operation, but our aim must be in the longer term to progress to the upper ends of the value chain reward curve, towards R&D, innovation and design, and even branding, marketing and retailing.

Hence the first step in this aspect of the fore-sighting exercise is to identify the local comparative advantages that we can exploit to attract the owners of the product trains bearing in mind that not all developing nations have been able to become part of these global chains.

It is not enough to build Tamana-like parks and/or give tax breaks, though the possession of cheap natural gas was a decisive comparative advantage resulting in Pt Lisas. Our error though was in not supporting this thrust by our domestic R&D, inventions and innovations.

However, a very intriguing thought is that indeed our plantation economy has engendered a private sector that is skilled in importing, distributing, franchising and sales, albeit inward to the domestic market. These skills point to a higher reward place in the value chain. The challenge, of course, is how do we also exploit this advantage globally in earning foreign exchange?

Mary K King
St Augustine

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