Home' Trinidad and Tobago Guardian : January 19th 2017 Contents JANUARY 19 • 2017 guardian.co.tt BUSINESS GUARDIAN
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IT outsourcing---a comparative advantage
We have been told by our Government
that India has offered to help us de-
velop an ICT industry, recommended
by many, in our trek to a diversified
economy. India has indeed developed
a comparative advantage in the pro-
duction of software via outsourcing requirements of clients
and this presumably is what they are willing to share.
But first, what is a comparative advantage?
The crux of this argument is that any country has limited
resources that can be put into providing goods and services;
this even includes its ability to deploy robots.
Consider a simple example; one country, A, can produce
goods X and Y but the return on good Y is much higher than
that on X.
Consider also country, B, that can also produce goods X and
Y but both at a higher cost than country A. Trade between these
countries will see country A maximising the use of its scarce
resources by providing generally good Y and importing good X
from country B even though it can produce this good cheaper
than country B. Hence in this trade agreement country B is
said to have a comparative advantage in product X.
Let us now consider the production of software in which
India has made a name for itself. The fundamental concept
is that software can be used for a large range of things; from
providing more efficient business systems to managing driv-
erless cars or running production plants.
Hence there are two parts of the production process of
such software; one is the conceptualisation and design of the
system and its detailed specification, the other is the coding
(programming) of the required software based on the client's
specifications. If one were to separate the production of such
a system into two goods, using the previous discussion, India
has a comparative advantage in coding while the client that
outsources to India makes higher returns on conceptualisation,
design and specifications in the production of the final product.
As a result of this division of software production the cli-
ent that outsources to India tends to be more advanced in the
economic development process since it has to depend for mar-
ket share on continued innovation, on acquiring and creating
knowledge. This is not to say that the client cannot do its own
coding but it is more efficient and financially rewarding to use
its resources otherwise in this production process.
The question then arises of whether we wish to also develop
this comparative advantage in software coding given our very
limited human resources as a major plank of our diversifica-
For this we need to examine the allied concept of competitive
advantage; a business advantage introduced by Prof Michael
Porter. This is defined as the ability of a company to provide
the same value as its competitors but at a lower price or charge
higher prices by providing greater value through differentiation.
Competitive advantage results from matching core com-
petencies, particularly knowledge and innovation based, to
We in T&T will be severely limited as to the availability of
highly skilled human resources. The optimum choice then in
the diversification of our economy is to use our limited re-
sources (human and capital) to produce maximum returns.
Hence the choice to exploit a comparative advantage in IT as
already defined does not maximise the returns on our limited
resources. Our foresighting exercise, the choice of economic
activities for diversification, should veer more to competitive
MARY K KING
In a note published in Barbados Sun-
day Sun, Barbados Today and Wired
Jamaica: "Devaluation---a bad idea"
(October 16 and 18, 2016 respective-
ly), I concluded after considering
Barbados' structure of economic
production and trade that devaluation was a
bad idea to counter fiscal and balance of pay-
ments difficulties. Rather, measures to elimi-
nate inefficiencies and enhance productivity
stood a better chance of lifting the economy
out of the doldrums with less negative impact,
particularly on the mass of the population.
Impact of such policy measures is not im-
mediate. Yet merely their existence and public
perception of robust, committed and durable
intent has a way of boosting confidence. Fact
is, the mischief hampering efficiency and pro-
ductivity gain has a lot to do with behaviours
other than pure economics.
Economic theory may guide us on what must
be achieved. How to get there, however, often
involves political decisions, goodwill and in-
tent. The latter necessitate commitment and
more importantly consent, buy-in among the
Consent shall remain unavailable if hardly
anybody wishes to debate publicly, much less
actually tackle these malignant limitations.
They relate to institutional arrangements and
behaviours that apparently---as if by default---
assume status of change-resistant norms by
both government and private sector.
These may be summed up quickly:
1.Frustrating, time and resource draining
procedures fuelled both by inaction, bu-
reaucracy unpreparedness and partisan polit-
ical considerations (inevitable in our system?)
on the part of government and
2.On the part of the private sector, too
strong a desire for arrangements effec-
tively eliminating risk -- the syndrome 'keep
your cake having already eaten it' or, as US
liberals would deem it: corporate welfare.
On the part of consumers and workers, one
might cite attitude; apparently stoic accept-
ance of inconvenience elevated to the rank of
'inevitable' plus, an understandable, though
debilitating resistance to change.
In the column referenced above there's this:
a "potentially perverse feature of devaluation.
Speculation and expectations are ubiquitous
elements in foreign exchange demand. Today,
unlike Jamaica in its period of fiscal and bal-
ance of payments difficulties foreign exchange
is neither hoarded, nor fetches a street price
premium in Barbados. Should devaluation
alter national resolve and confidence among
the population that the currency is solid,
these motivations may assume dominance.
Expectations of currency realignment work
like self-fulfilling prophesy. Merchants aban-
don available credit facilities and pre-purchase
foreign exchange while consumers hoard for-
Well, there's been no devaluation but spec-
ulation and the trek through self-fulfilling
prophesy have begun. In Guyana traders and
businesses have been swapping Barbados and
T&T dollars for foreign exchange: US dollars.
A December 9, report in the Guyana Guard-
ian noted after the Bank of Guyana ceased
trading those currencies: "local banks and
traders are no longer accepting the Barbados
or TT dollar, which has now created a slow-
ly building glut of both currencies that may
eventually become stuck in the hands of many
businesses and travellers who would eventually
become desperate to exchange both currencies
for lesser than its international market value
Voila! Effective devaluation based on per-
ception and expectations. Hitherto an im-
portant element of T&T capital's interest in
Barbados as investment location was the strong
Barbados dollar. The enduring peg meant hold-
ings were similar to US dollars. Etched in stone?
No. But perception and expectations were; for
the time being.
Consider a wee bit of recent history; not a
bad thing. Prior to USA's unipolar dominance
as single super power, some back-and-forth
still evident, Charles De Gaulle's Finance Min-
ister Valéry Giscard d'Estaing aptly described
the world's dollar standard as an "exorbitant
privilege" the USA enjoys. Firms, banks, central
banks held and still hold not only currency but
also US Treasury bonds. Today Central banks
hold about US$5 trillion. Barbados enjoys no
Fact is, whereas three-quarter of all US$100
bills circulate outside continental United
States, foreigners commonly have no store-
of-value use for Barbados dollars. Guyanese
and T&T "foreigners" did.
The Barbados dollar achieved status as a
stable abode of purchasing power, its value
perceived as having fixity for the foreseeable
future; a safe haven for savings.
Absent immediate effective policy shift,
robustly and conscientiously implemented,
this is about to change, irrevocably, for the
Cautionary note: beware seemingly benev-
olent friends bearing gifts, particularly if look
and smell mimic gold, frankincense and myrrh.
Op-ed page columnist and consultant economist
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