Dr. Ronnie Yearwood & Alicia Nicholls
At a Covid-19 press conference held on February 15, 2020, it was mentioned in passing that the Government of Barbados (GOB) was exploring the creation of a free trade zone. We applaud the fact that this idea has finally taken root. Some years ago, in his regular newspaper column, Dr. Yearwood proposed the establishment of a free service or trade zone as a new element for Barbados’ economic development. He returned to the idea on several occasions, more recently in the Errol Barrow Memorial Lecture and a discussion on the Just Politics: Our Worldview podcast (JPOW podcast), where he advocated for a services zone based on arbitration and law. He also added a social development dimension to the concept.
In this SRC Trading Thoughts column, we build on the concept originally postulated by Dr. Yearwood. We briefly sketch some of the key elements a new services zone in Barbados should encompass. We further posit that the creation of such a zone should be done, not in an ad hoc manner, but form part of a wider strategy to promote and facilitate investment by domestic, foreign and diaspora investors in high value-added sectors. The ultimate aim is to foster sustainable, inclusive and resilient post-COVID-19 development that benefits all Barbadians.
Greater Private Capital Mobilisation Needed
When the COVID-19 pandemic hit, Barbados was already suffering from several pre-existing conditions which increased the chances of an adverse economic reaction. COVID-19 also found a country with an inordinate dependence on tourism for economic activity and employment, as well as rising unemployment and underemployment, particularly among the youth.
Kickstarting the Barbados economy will require large capital injections, which public revenues alone could never finance, especially now. The GOB faces a shrinking revenue base ravaged by job losses, business closures and a growing informal economy. Heavy borrowing is also unsustainable given the country’s already high debt-to-GDP ratio (144% of GDP), limited access to concessional financing due to our classification by the World Bank as a high-income (non-OECD) economy and the potential of saddling future generations of Barbadians with debt. Every dollar paid out in debt servicing is money that could be spent on social and capital works programmes for the benefit of our people.
Therefore, mobilizing private investment flows from both internal and external sources is critical not just for Barbados’ achievement of the 2030 Agenda for Development, but also for building resilient and inclusive post-COVID-19 economic recovery which benefits all Barbadians. One way in which Barbados could do this is through the establishment of a special services zone or zones to spur activity, and generate quality employment, foreign exchange and foster innovation. Although we focus in this piece on services zones, we do not rule out the creation of zones for the manufacturing of goods that match the development and space of Barbados.
A services zone for the 21st century
Special economic zones exist throughout the world, particularly in South East Asia and China. They are subject to more economically liberal laws and regulations. Governments establish these zones to generate export activity and to attract FDI with the aim of boosting employment and development.
The newer special economic zones of today go beyond the traditional low value-added, and often exploitative, free zone concept where low wage labour is used in factories to assemble products for export or in call centres. Today’s newer zones focus on high value-added industries. Cyberjaya, a high-tech city in Malaysia set in the Multimedia Super Corridor, has as its centre the technology-focused Multimedia University. The UK Chancellor of the Exchequer in his recent budget speech announced the intended creation of several free ports, as originally floated by Prime Minister Boris Johnson in 2019.
A Barbados special services zone should aim to attract domestic, foreign and diaspora investors in one or more high value-added sectors. These may include, but are not limited to, high technology manufacturing, medical cannabis, the creative industries, renewable energy, FinTech, software design, law and arbitration services.
Businesses in these special zones would benefit from what Michael Porter (1998) refers to as ‘clustering’ which is quite simply the ‘geographic concentration of interconnected businesses and institutions in a particular field’. Porter outlines three benefits of business clustering: first, increasing the productivity of the companies in the cluster, second, promoting innovation and third, helping to stimulate new businesses. He cites Silicon Valley, Hollywood and the California wine cluster as examples.
Any new projects or investments for Barbados’ development must economically enfranchise Barbadians and provide opportunities for wealth creation for all. They must also be rooted in an investment policy supported by sound industrial and trade policies and anchored to the country’s strategic development objectives. At the moment, the GOB seems to be throwing good ideas out there, hoping something sticks, which is not necessarily the same as having a clearly articulated and published policy.
The zone should be about using existing space with appropriate tax concessions for new talent, ideas and businesses. In considering the services zone, the overall benefit to Barbados has to be weighed. Below are some broad tests that could be considered to ensure that the zone and, it could equally be extended to all new projects and investments in Barbados, works for Barbadians. That is, projects and investments promote the economic enfranchisement of Barbadians and benefit Barbadians on an individual level for wealth creation and on a national level to make the country a better place for all of us to live.
The tests for a new services zone
Some of the tests for the new zone could include assessing the:
- Contribution to the socio-economic development of Barbados. For example, to underwrite the economic development, and specifically the provision of social services such as education and health.
- Contribution to infrastructural development of Barbados. For example, to ensure any surrounding housing, community centres, parks, schools, roads are upgraded.
- Provision for the economic enfranchisement of Barbadians. For example, it is not simply about providing jobs. Barbadians must have opportunities to create or grow existing businesses.
- Provision of wealth creation opportunities for Barbadians, through procurement of goods and services from small to medium sized businesses.
Policy Coherence, Monitoring and Evaluation
Of course, we must get our fundamentals right if our services zone is to be an attractive proposition to local, foreign and diaspora investors. The era of competing primarily on the basis of tax competitiveness has long passed not just because of changing international tax standards but also the importance investors place on things such as market potential, ease of doing business and access to finance when deciding where to invest. On that note, Barbados currently ranks 128th on the World Bank’s Doing Business Index of 2020. While several commendable reforms have been made, especially within the last year to digitize archaic paper-based processes in some government offices, more needs to be done if we are to become truly competitive in the Caribbean and the world.
To succeed, the services zone requires an “All-of-Government” and “All-of-Society” approach. So, for example, as we will be stepping up our use of commercial diplomacy, our diplomats should all be brand ambassadors capable of competently selling the Barbados brand. Our diaspora policy formulation should involve a diaspora mapping and skills audit. The diaspora can play several roles, inter alia, mentoring and/or providing venture capital to young entrepreneurs and start-ups seeking to be a part of the services zone, or themselves establishing businesses in the zone.
Our trade policy and strategy must support our drive for attracting sustainable FDI and promoting export diversification. Our education policy must create the human capital needed to support our development, emphasizing the teaching of skills that would empower our students and future citizens to be entrepreneurs or highly skilled workers. On this latter point, the late Prof. Rt. Hon Owen S. Arthur, former Barbados Prime Minister, had suggested the creation of a special high-technology economic zone with The University of the West Indies Cave Hill campus at its core. We must explore to what extent we can make The UWI Cave Hill our equivalent of Silicon Valley’s Stanford University or Cyberjaya’s Multimedia University.
Lastly, we need concrete yardsticks by which to objectively monitor and evaluate the economic and social impact of the services zone. We must be able to monitor the extent to which the concessions provided do not negatively outweigh the income generated from such businesses. It is only through evidence-based policy making that we can truly attempt to craft a post-COVID-19 Barbados that benefits all and not a privileged few. It is about making trade and investment work for our people.
Dr. Ronnie Yearwood is an attorney-at-law and Lecturer in Law at The University of the West Indies, Cave Hill Campus. Alicia Nicholls is a trade researcher with the Shridath Ramphal Centre for International Trade Law, Policy & Services of The UWI. Learn more about the SRC at www.shridathramphalcentre.com.