SUNDAY 9 JULY, 2017 – UWI TODAY
9
economy which are functions of the state variables and
finally, on disturbances or exogenous inputs, over which
the local economy has no control.
The IDB report discusses qualitatively the impact of
some of the characteristics of the on-shore model of the
economy, of some inputs on economic behaviour, the state
variables. The performance of the off-shore, the foreign
exchange earned, is seen as an exogenous input which has
a direct impact of the Dutch Disease.
An ECLAC system analysis attempts to quantitatively
define such an economic system by mathematically relating
the system dynamics to the state variables, the inputs, and
hence the impact on the economic outputs. The coefficients
of the equations can be estimated by regression analysis of
the recorded past performance of the economy in question.
This approach was used by St Cyr et al to develop such a
quantitative model for the T&T economy. Some of the state
variables used in the analysis included; GDP, aggregate
supply capacity, public sector debt, foreign debt, money
supply, national reserves. The inputs included private and
public investments, foreign exchange income, private sector
bank credit, current savings and internal Central Bank
credit. The system disturbances included price of export
commodities and natural resource production.
It was intended to use this model to force the economy
to a certain state, to behave a certain way, even drive
innovation, by choosing the inputs in specified ways.
The problem with this is twofold. First any meaningful
results would have to be for a very short term since the
model cannot account for any changes in its dynamics; e.g.
Schumpeter-like changes and the current dynamics of the
model represent all that has already been discussed, e.g.
lack of a qualified workforce and financing, no R&D, the
preponderance of non-tradable firms as opposed to those
that export and the incorrect assumption that any set of state
variables is reachable using the defined inputs.
Hence this regression model tells us nothing about
how we change the on-shore economic system to respond
to say, a drastic change in our natural resources or moreso
the identifiable changes or unpredictable ones in the global
economy.
The Reconstruction
The evidence and the analysis showed that the current
economic model, its dynamics, is/are not adaptive: little
R&D, a lack of higher risk finance are both indicators of
this. It is of interest to investigate what could have caused
such an economy to develop and how indeed can we craft
a model that can adapt to the fundamental changes in the
local and global environments?
Prof John Foster of Queen’s University, Australia, took
a more general look at economic systems and saw them
as complex adaptive systems. It is complex in that they
are not monolithic, but collections of many, many semi-
autonomous systems that interact with each other without
some overall control. For example each and every one of us is
part of an economic system, all with a certain independence
of economic choice and activity, but still interacting with
each other’s economic sub systems.They are adaptive in that
they can change their behaviour in response to changes –
slow or discontinuous – in the economic environment in
which they operate. However, the fundamental point that
Prof Foster makes is that this ability to adapt, to respond to
change, can atrophy, be destroyed, given the history of the
economy of the players.
In other words, if the history of the dynamics of the
economic system has not required the system to change
for a long time, then the ability to adapt to change in this
economic environment can be impaired. The model of our
present on-shore system, its dynamics, reflect the complete
history of the island in that certain commodities are
produced for the export market and the foreign exchange
income is used to import virtually everything that is needed
to survive. Many authors have discussed this model, the
plantation economy, so much so that this is the economy
that has produced the societies of the Caribbean islands.
What this model says is that the on-shore economy does
not need and has never needed technological innovation to
globally compete since it is merely in general about import-
markup-sell locally. Even the IDB report shows that existing
firms are stagnant or declining and the evidence points to
declining labour productivity. Further, the report says, that
though we need to look to the private sector to become
globally competitive in exports, the existing companies will
be unable to match up to the task, to adapt to the changing
local and global market circumstances.
The commodity sector has changed over the years from
agriculture to oil and now to natural gas. Another change is
that the commodity sector initially needed the lion’s share of
the available labour, today it only employs some 4% of the
workforce. One result of this is the need to provide on-shore
jobs with the demand for enhanced social services – make-
work provided by government resources.
The incapacity in our economic environment, and one
that has been expected for years, is the inability of the energy
sector to provide in the long term the foreign exchange to
satisfy the demands of the on-shore. In the past the boom-
bust nature of the global market for commodities shaped
the economic on-shore activities, since the few busts were
followed by a boom, which seems to be expected again.
However, the depletion of the natural resources and the
long-term outlook for low petroleum prices suggest that
the off-shore will be increasingly unable to deliver the
required foreign exchange. The fundamental failure of the
current on-shore economy is that it has traditionally little
use for innovation and hence the need to produce globally
competitive exports.
T&T’s economic system has to have this dual adaptive
ability – distributed and quickly responsive through semi-
independent agents, and the ability to plan centrally and
develop strategy. Hence the players either learn to adapt
– create adaptive systems – in the sure circumstance of
depleting energy resources and the uncertainty of the global
economy, or fail.
In today’s world where knowledge and R&D are
vehicles for doing new things, the establishment of centres
of excellence can help the adaptation process via the creation
of innovative commercial enterprises and spillovers, all the
while creating the knowledge and skills to respond quickly to
an opportunity. In this stage of economic unpredictability all
we can and need to do is develop the observational ability to
notice change very quickly and respond.We needmany ways
to respond instead of deciding a priori on what is optimum.
Hence the country’s innovation system has to possess
semi-autonomous redundant systems, various centres of
excellence and a cadre of researchers that can respond
to these signals, so developing a store of knowledge and
techniques for use and re-use. This adaptive system has to
establish interconnections and channels of communication
(marketing/market development) such that multi-faceted
challenges can be addressed using an integrally connected
agent network. The major lesson here is that it is useless
spending time to develop predictive models and optimising
routines in an unpredictable world, in an unpredictable
global market. But the bigger challenge ahead is how to
prepare and respond effectively via creating an abundance
of flexibility and skills that can be combined to meet the
challenges ahead – centres of excellence provide the training
environment – the Innovation Diamond4.
Though we are familiar with the Triple Helix of
Eztkowitz model of the triad of government, academia
and the private sector which can create an adaptive and
innovative economy, one of the partners of the T&T’s triad,
the current private sector has all but disqualified itself,
possibly because of its history. Other countries have found
themselves in this position and in particular the Chilean
Government opted to teach its private sector how to adapt
as it built its world class salmon farms. Hence the task facing
T&T is: should the current private sector be taught as Chile
did, or rebuild the private sector especially since financing
for the adaptation will be at a premium?
St. Clair King is an engineer, and Mary King, an economist.
This is an abridged version of what was presented by
Professor St. Clair King at the Innovation Conference at the
Teaching and Learning Complex.
“The incapacity in our economic
environment, and one that has been
expected for years,
is the inability of
the energy sector to provide in the
long term the foreign exchange to
satisfy the demands of the on-shore.”
