The World Around Us
February 4, 2022
From Crisis to Transformation: Part 2

As Winston Churchill, former British Prime Minister, was working to help form the United Nations (UN) after World War II (WWII), he famously said, “Never let a good crisis go to waste”. Churchill’s insight on human nature can also be applied to the current state of the world which seems to be lurching from one crisis to another.

I primarily want to focus on economic transformation, especially in the context of small open economies. Last week I wrote about the challenges which are unique to these economies, such as lack of economic and export diversification, susceptibility to natural disasters and several others. I also promised to expand on how growing national savings can play a role in helping to foster economic transformation.

In simple terms, national savings refer to the difference between what a country earns and what it spends. The national savings rate is an indicator of a nation’s economic health and can lead to investments in critical areas such as healthcare, infrastructure and job creation.

The challenge for many small open economies is that their persistent challenges often make savings difficult. However, difficult does not equal impossible. Economic diversification, export growth and tax reform can all go a far way towards enhancing national savings and drive economic transformation.

One way to boost economic diversification is by linking domestic producers of goods and services with foreign investors. For example, domestic farmers and industries could be selling to hotels. However, the challenge is that local producers in small economies may fall short of quality standards or not be able to produce in a manner to guarantee supply on a consistent basis.

This is where they can be provided with financial and technical capacity support to meet quality standards or to integrate technology and know-how into boosting production.

Expanded domestic production can lead to surplus production for export and this is where export growth and diversification come into the frame. When there are more exports, it means that there is a higher level of output from a country’s factories and farms, as well as a greater number of people who are being employed. These people also represent more taxable income for the state. Exports also earn foreign exchange which is vital to prop up central bank reserves.

On taxation, it might be prudent for small open economies to focus on reforming their tax codes. For example, revenue foregone, including through waivers, thresholds, incentives, and exceptions can number in the teens as a percentage of Gross Domestic Product (GDP) per year for many small open economies. Incentives can play a huge role in investment promotion and attraction.

While such incentives are not necessarily bad, the World Bank argues that it is important to maintain a rules-based approach rather than a discretionary one. According to the World Bank, this is especially important in small economies where aggregate public and national savings rates remain low. In this context, it becomes all the more important for small open economies to plug gaps in their tax codes in the hope of addressing their savings deficits.

Going back to the issue of investment promotion and attraction for example, an alternative approach to tax incentives could be reforming the domestic regulatory environment to remove bottlenecks to doing business. This means simplifying and expediting the procedures for starting a business, acquiring permits and overall, cutting red tape. Some investors (both local and foreign) may prioritise these kinds of reforms over receiving tax incentives.

Finally, crises, especially those of global proportions, can detract from the strategic priorities of economic transformation in countries which must contend with one crisis after another. However, many crises also open up opportunities to rebuild, reimagine, reform and transform. The novel coronavirus (COVID-19) pandemic for instance, has revealed where many countries have fallen behind and where they need to focus in terms of building forward better and ushering in a new era of economic transformation.

Joel K Richards is a Vincentian national living and working in Europe in the field of international trade and development.
Email: [email protected]